<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 1997
REGISTRATION NO. 333-21223
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROOKS FIBER PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 43-1656187
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</TABLE>
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425 WOODS MILL ROAD SOUTH, SUITE 300
TOWN & COUNTRY, MISSOURI 63017
(314) 878-1616
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID L. SOLOMON
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
425 WOODS MILL ROAD SOUTH, SUITE 300
TOWN & COUNTRY, MISSOURI 63017
(314) 878-1616
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
JOHN P. DENNEEN, ESQ.
BRYAN CAVE LLP
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102
(314) 259-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The
securities registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 14, 1997
10,000,000 SHARES
BROOKS FIBER PROPERTIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
BROOKS LOGO ---------------------
This Prospectus relates to 10,000,000 shares of Common Stock, par value
$0.01 per share (the "Common Stock"), of Brooks Fiber Properties, Inc. (the
"Company") that may be offered and issued by the Company from time to time in
connection with acquisitions by the Company of other businesses and properties.
It is anticipated that shares of Common Stock issued in any such acquisition
generally will be valued at a price reasonably related to the market value of
the Common Stock at or around the time of agreement on the terms of an
acquisition or delivery of the shares.
This Prospectus also relates to offers and sales from time to time of
shares of Common Stock issued by the Company in any such acquisition that may be
reoffered to the public by persons who may be deemed to be underwriters thereof.
Such shares may be sold directly by such persons in brokerage transactions or
may be sold by underwriters for such persons. The Company will not receive any
of the proceeds from the sale of any shares sold by selling stockholders or
their underwriters.
SEE "RISK FACTORS" ON PAGES 13 TO 18 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is listed on the Nasdaq National Market under the symbol
"BFPT." On March 12, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $22.25 per share. See "Price Range of Common
Stock."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[MAP OF THE UNITED STATES INDICATING LOCATIONS
OF THE REGISTRANT'S NETWORKS IN OPERATION
AND UNDER CONSTRUCTION.]
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information, including the Company's consolidated
financial statements and notes thereto, contained herein. Unless otherwise
noted, references to the "Company" are to Brooks Fiber Properties, Inc., a
Delaware corporation, and its consolidated subsidiaries. Capitalized terms used
in this Prospectus which are not otherwise defined herein have the respective
meanings ascribed to them in the Glossary included as Annex A hereto.
THE COMPANY
The Company is a leading full service provider of competitive local
telecommunications services, commonly referred to as a competitive local
exchange carrier ("CLEC"), in selected markets within the United States (see
"The Competitive Local Telecommunications Industry"). The Company acquires and
constructs its own state-of-the-art fiber optic networks and facilities and
leases network capacity from others to provide long distance carriers ("IXCs"),
Internet Service Providers ("ISPs"), wireless carriers and business, government
and institutional end users with an alternative to the incumbent local exchange
companies (the "ILECs") for a broad array of high quality voice, data, video
transport and other telecommunications services.
The Company has completed the first year of its entry into the fully
competitive switched services or local exchange market. The initial performance
from the Company's entry into switched services has yielded results, both in
terms of lines connected and revenues received, that are substantially in excess
of the Company's expectations. As a result, the Company has revised its capital
deployment plans to allow for an increased level of demand-driven capital
spending necessary to take full advantage of the opportunities presented in the
switched services portion of the marketplace. The Company has revised its
network development plans to (i) increase the geographic reach and robustness of
its networks to allow the Company to serve a significantly higher percentage of
the market by extending its networks to serve most, if not all, of the ILECs'
central offices in its markets and (ii) more rapidly deploy switches with full
capabilities for local dial tone and switched access termination and origination
services. Through its equity and debt financings to date, the Company has raised
approximately $800 million to fund the Company's acquisition and development of
its initial 30 networks, including funds necessary for the expansion of such
networks in accordance with the Company's capital deployment plans described
above. The Company intends to fund the Company's expansion to 40 networks by the
end of 1997 from existing cash balances and the net proceeds of additional
financings to be obtained in the future and through joint ventures. See
"Financing Plan" below.
As of February 28, 1997, the Company had systems in 36 cities, consisting
of systems in operation in 23 cities and under construction in 13 cities. Seven
of the Company's networks under construction are expected to become operational
by the end of the second quarter of 1997 and six by year-end 1997. Networks are
considered operational when they are able to begin providing services to
customers. The Company's networks are located in three regions -- the Eastern
Region, Central Region and Western Region. See "Business of the Company --
Cities Served." The Company specifically targets second and third tier markets
(those with populations ranging from 250,000 to two million) with attractive
demographic, economic, competitive and telecommunications demand
characteristics, as well as selected first tier markets. The Company's networks
are generally designed to access at least 70% to 80% of the identified business,
government and institutional end user revenue base and the IXC facilities
("Points of Presence" or "POPs") and substantially all of the central offices of
the ILECs within their markets. In accordance with the pro-competitive
provisions of the Telecommunications Act of 1996, as of February 28, 1997, the
Company had established interconnection agreements with ILECs for 29 of its 36
networks, and the Company was also certified as a CLEC in 30 of its 36 networks.
At December 31, 1996, the Company had a total of 20 digital telephone switches
installed serving a total of 24 of its networks.
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<PAGE> 5
Switches have been deployed to serve all of the Company's operating networks.
The Company has increased the number of networks in operation or under
construction from 11 at December 31, 1994 to 36 at February 28, 1997. At
December 31, 1996, the Company had a total of 1,059 route miles of optical fiber
cable installed, 516,743 voice grade equivalent (VGE) circuits in service,
21,013 CLEC lines installed and 883 on-net and 1,238 off-net buildings
connected.
The Company plans to have systems in operation or under construction in a
total of 40 cities by the end of 1997 and 50 cities by the end of 1998. The
Company expects its expansion into additional cities will be accomplished by the
acquisition of existing networks as well as the construction of new networks.
The Company has recently concluded (i) a joint venture for the construction of
three networks located in Maine and New Hampshire and (ii) agreements for the
acquisition of two networks located in Utah and Nevada and certain operating
rights in Idaho. See "-- Recent Developments." For a discussion of the steps the
Company takes in acquiring and developing new networks, see "Business of the
Company -- Network Acquisition, Development and Design" and "-- Network
Construction." See also "Risk Factors -- Significant Future Capital
Requirements; Substantial Indebtedness," "-- Risks Associated with
Implementation of Growth Strategy" and "-- Risks Associated with Possible
Acquisitions."
The Company believes that there are attractive return opportunities for
CLECs in second and third tier markets due to the combination of (i) continuing
pro-competitive regulatory changes that have increased the addressable market
for CLEC services and (ii) the competitive dynamics which, until 1994, focused
CLEC network development primarily in larger markets. See "Business of the
Company -- CLEC Market Potential," "The Competitive Local Telecommunications
Industry" and "Regulatory Overview."
The Company's annualized revenues, based on December 1996 revenues, were
$73.4 million, as compared with total revenues in 1996 of $45.6 million, total
revenues in 1995 of $14.2 million ($23.1 million on a pro forma basis giving
effect to the acquisition of Brooks Telecommunications Corporation ("BTC") on
January 2, 1996 and the acquisition of City Signal, Inc. (the "City Signal
Acquisition") on January 31, 1996) and total revenues of $2.8 million in 1994,
the Company's first full year of operation. The Company's operations have
resulted in earnings (losses) before minority interests, interest, taxes,
depreciation and amortization (EBITDA) of ($2.7) million for the year ended
December 31, 1994, ($4.4) million for the year ended December 31, 1995 and
($14.5) million for the year ended December 31, 1996. As of December 31, 1996,
the Company had an accumulated deficit of $57.5 million. As of December 31,
1996, the Company had cash, cash equivalents and marketable securities of $444.2
million, total assets of $879.6 million, long-term debt (net of current portion)
of $552.8 million and paid-in capital of $349.3 million. See "Capitalization."
Initially, the Company's revenues were derived primarily from end user to
end user private line connections and from a variety of access services
including: (i) access between IXCs, (ii) access between end users and IXCs,
(iii) collocated special access and (iv) collocated POP to ILEC switched access
transport. The Company is expanding its revenue base by entering new markets, by
continuing to develop and add to its existing systems and by continuing to add
capabilities to offer switched services and local dial tone, centrex, switched
access origination and termination services and desktop products. The Company is
also adding capabilities to provide other enhanced services, such as high speed
video conferencing, frame relay and ATM-based packet transport services and
Internet access products, in all of its operating networks by the end of 1997.
See "Business of the Company -- Current Products and Services" and "-- Planned
Products and Services."
The Company has assembled an experienced management, sales and operations
team with extensive experience and strong contacts within the telecommunications
industry. See "Management."
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<PAGE> 6
CLEC MARKET POTENTIAL
Industry sources have estimated that the 1995 aggregate revenues of all
ILECs approximated $102 billion of which approximately $89 billion was derived
from switched services. Initially, CLECs were able to compete for only the
non-switched special access/private line services portion of this market (which
accounted for an estimated $8.6 billion of ILEC revenues in 1995). Accordingly,
the development of competitive networks occurred initially in larger
metropolitan areas that have proportionately greater revenue potential for this
limited portion of the local exchange market. However, since February 1994, as a
result of actions by the FCC requiring ILECs to allow CLECs to connect their
networks to the ILECs' networks (the "Interconnection Decisions"), CLECs have
also been permitted to compete for the collocated special access and switched
access transport/termination services portion of this market (which together
accounted for an estimated $13.8 billion of ILEC revenues in 1995). This has
enhanced the opportunities for the development of competitive networks in second
and third tier cities, which constitute a significant portion of the local
exchange market. In addition, most states have taken regulatory and legislative
action to open their markets to local exchange competition. The Company expects
that continuing pro-competitive regulatory changes, including those mandated by
the Telecommunications Act of 1996, together with increasing customer demand,
will create more opportunities to introduce additional services, expand the
Company's networks and address a larger customer base. The Company also expects
that access revenues from IXCs will increase as the IXCs move their access
business away from the ILECs (which are seeking the regulatory approvals
necessary to compete with the IXCs in providing long distance service) to
competitive providers of local telecommunications services. On October 15, 1996,
the United States Court of Appeals for the Eighth Circuit issued a partial stay,
pending a hearing on the merits, of FCC rules that had been scheduled to come
into effect on October 1, 1996 that set forth the amounts that ILECs can charge
CLECs and other telecommunications providers for access to the ILEC's networks.
However, in this ruling, which applies solely to pricing issues and the
so-called "pick and choose" rules, the Court did not stay the effectiveness of
the FCC rules requiring interconnection. As a result, the stay is not expected
to have any material effect on the Company's existing interconnection agreements
with ILECs or the pricing provisions thereof. See "Regulatory Overview --
Federal Regulation."
CORPORATE STRATEGY
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs, ISPs, wireless carriers
and business, government and institutional end users in selected cities by
offering superior products with excellent customer service at prices below those
charged by the ILECs. The principal elements of the Company's strategy include:
TARGET SECOND AND THIRD TIER MARKETS. The Company believes that
continuing pro-competitive regulatory changes and the broadening range of
services that can be offered by CLECs present attractive opportunities for
new CLEC entrants in second and third tier markets where there are
typically fewer CLEC competitors than in first tier markets and where the
ILECs generally have placed a lower priority on installing fiber optic
systems comparable to those being installed by the Company. As an early
entrant in selected second and third tier markets, the Company believes it
can attain a leadership position by securing needed franchises and
rights-of-way, installing robust state-of-the-art CLEC networks and
facilities (i.e., networks which are capable of reaching at least 70% to
80% of identified business end-users in the market and most, if not all, of
the ILEC's central offices) and establishing customer relationships with
IXCs, ISPs, wireless carriers and business, government and institutional
end users that will enable it to take advantage of the attractive potential
growth rates for local exchange service revenues in those markets. The
Company is also pursuing opportunities in selected first tier markets in
conjunction with operating agreements with the Company's major IXC
customers (see "Build on strategic relationships" below).
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<PAGE> 7
AGGRESSIVELY PURSUE SWITCHED SERVICES OPPORTUNITY. The
Telecommunications Act of 1996 mandates that ILECs throughout the U.S.
enter into arrangements with competitors such as the Company for central
office collocation and unbundling of local services. The Company believes
that implementation of these and other pro-competitive policies creates
favorable opportunities to pursue more aggressively the provision of local
switched services. At December 31, 1996, the Company had a total of 20
digital telephone switches installed serving a total of 24 of its operating
networks, and the Company plans to leverage its networks and customer
relationships by offering local dial tone, switched access termination and
origination services, centrex and desktop products in all of its networks.
The Company has increased the number of CLEC lines in service from 3,187 at
December 31, 1995 (on a pro forma basis giving effect to the City Signal
Acquisition) to 21,013 at December 31, 1996, with annualized CLEC revenues
increasing from $2.5 million based on December 1995 revenues to $17.4
million based on December 1996 revenues. See "Business of the Company --
Current Products and Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide flexible, enhanced services that
complement its switch-based services. Such enhanced services include, among
others, high speed video conferencing, frame relay and ATM-based packet
transport services and Internet access products. The Company is currently
offering such services in certain markets and expects to offer such
services in all of its operating networks by the end of 1997. The Company
also plans to continue to upgrade and add to its systems and services as
technology and regulations permit. See "Business of the Company -- Planned
Products and Services."
CONTINUE TO BUILD OUT EXISTING SYSTEMS. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "--Build on strategic
relationships" below) will enable it to more rapidly develop and expand its
systems, add to its service offerings and establish the strong customer
relationships necessary to solidify its competitive position in its
selected markets.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company has
achieved its long-held strategic objective of having systems in operation
or under construction in a total of 30 cities by the end of 1996. The
Company plans to have systems in operation or under construction in a total
of 40 cities by the end of 1997 and a total of 50 cities by the end of
1998. The Company's expansion into additional cities is expected to be
accomplished by the acquisition of existing networks as well as the
development of new networks. See "Business of the Company -- Network
Acquisition, Development and Design" and "-- Network Construction." By
adding networks, the Company believes it can increase revenues and obtain
economies of scale in its operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
strategy, (1) the Company and MCImetro Access Transmission Services, Inc.
("MCImetro"), a wholly-owned subsidiary of MCI Communications Corporation
("MCI"), have entered into agreements which provide that, until September
30, 2001, the Company will be MCImetro's preferred provider of certain
local access services in a number of the Company's markets and pursuant to
which MCImetro has acquired 958,720 shares of the Company's Common Stock,
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(2) the Company has concluded a national preferred vendor agreement with
AT&T Communications, Inc. ("AT&T Communications"), a wholly-owned
subsidiary of AT&T Corp. ("AT&T"), pursuant to which the Company has become
AT&T Communications' preferred supplier of local access services in most of
the Company's markets, and (3) in February 1997, the Company concluded an
agreement with AT&T pursuant to which the Company will provide switched
access origination and termination of AT&T's long distance customer calls
through the Company's local networks in most of the Company's markets. The
Company believes preferred vendor relationships with IXCs provide
opportunities to leverage its partners' sales channels and market support
to sell the Company's products and services and expand the Company's
potential revenue base. In addition, the Company believes that
relationships with IXCs facilitate its entry into new markets by providing
access between the IXCs and their customers. The Company has organized a
national account marketing organization to manage such relationships. The
Company believes this marketing effort, along with its number of cities
served, financial resources and telecommunications expertise, position it
well to develop and maintain these strategic relationships. See "Business
of the Company -- Strategic Relationships."
LEVERAGE UPON GLA'S SIGNIFICANT TELECOMMUNICATIONS INFRASTRUCTURE
CAPABILITIES. GLA International, Inc. ("GLA"), a wholly-owned subsidiary of
the Company, offers a full range of consulting, management, engineering and
information system solutions for telecommunications companies. GLA provides
a full range of network engineering, construction, design and strategic
planning services, as well as financial and management software products,
including specifically designed software for billing systems, toll rating,
plant records and financial applications. GLA's capabilities also serve as
an internal source for the telecommunications infrastructure support needed
for the Company's CLEC business.
RECENT DEVELOPMENTS
In the third quarter of 1996, the Company completed two acquisitions of
long distance service providers for small and medium-sized business customers in
California to complement its existing long distance and facilities management
resale businesses. Effective July 1, 1996, the Company acquired the stock of ALD
Communications, Inc. ("ALD"), a switchless reseller of long distance services
and a shared tenant service provider of telecommunications services primarily to
customers in the San Francisco, California area with aggregate annualized
revenues of approximately $6.4 million, based on August 1996 results. Effective
September 1, 1996, the Company also acquired Bittel Telecommunications
Corporation ("Bittel"), a switch-based long distance reseller serving the San
Francisco and Los Angeles markets with annualized revenues of approximately $9
million, based on July 1996 results. By acquiring ALD and Bittel, the Company
not only added businesses that complement its own long distance and facilities
management resale businesses but was also able to increase its end user sales
force.
The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue opportunities, through both the retention of
existing customers and the addition of new customers. To pursue such
opportunities, on June 25, 1996, the Company formed a strategic alliance with
Verio, Inc., formerly known as World-Net Access, Inc. ("Verio"), a consolidator
of ISPs. The Company has invested a total of $20 million for a 25.5%
fully-diluted interest in Verio, and it is possible that the Company may commit
additional funds in furtherance of this strategic alliance. The Company intends
that both companies will seek ways to work together to provide customer oriented
Internet and Intranet communications solutions. The Company plans to develop and
offer a wide range of Internet-related services to users of Verio's national ISP
network, including various dial-up and dedicated Internet access options.
In accordance with the provisions of the agreements between the Company and
MCImetro (see "Corporate Strategy -- Build on strategic relationships" above),
on October 10, 1996, MCImetro
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exchanged the agreed value of its investments in subsidiaries of the Company for
958,720 shares of the Company's Common Stock.
On November 7, 1996, the Company raised net proceeds of approximately
$217.2 million through the sale of $400.0 million aggregate principal amount of
11 7/8% Senior Discount Notes due November 1, 2006 (the "11 7/8% Senior Discount
Notes"). See "Financing Plan -- Debt Financing" below.
On November 12, 1996, AT&T Credit Corporation ("AT&T Credit") exchanged the
agreed value of its investments in certain subsidiaries of the Company made in
connection with certain loans to the Company (see "Financing Plan -- Debt
Financing" below) for an aggregate of 234,260 shares of the Company's Common
Stock.
On February 7, 1997, the Company concluded definitive agreements for the
acquisition of the Phoenix FiberLink assets and networks in operation and under
construction in Salt Lake City, Utah and Reno, Nevada, together with Phoenix
FiberLink's operating rights in Boise, Idaho. The Salt Lake network
interconnects locations in the greater Salt Lake City, Utah area with
approximately 66 route miles of optical fiber cable in operation or under
construction. In Reno, Phoenix FiberLink interconnects locations in the greater
Reno, Nevada area with approximately 31 route miles of optical fiber cable plant
in operation or under construction. The Company plans to interconnect the Reno
network with the Company's existing 24 mile network in Reno. In Boise, Phoenix
FiberLink has performed the initial design and development for the construction
and operation of a 21-mile fiber optic telecommunications network. The
definitive agreements provide for the purchase price to be partially paid
through the issuance by the Company of an aggregate of 600,000 shares of Common
Stock valued at $26.2125 per share. The transaction is subject to regulatory
approvals.
On February 25, 1997, the Company and MaineCom Services, Inc. ("MaineCom"),
a subsidiary of Central Maine Power Company, formed a joint venture company,
owned 60% by the Company and 40% by MaineCom, for the purposes of constructing,
owning, operating and developing networks initially in Portland, Maine and
Nashua and Manchester, New Hampshire and other markets in Maine and New
Hampshire as may be agreed upon by the Company and MaineCom in the future.
FINANCING PLAN
The Company believes its financing plan will enable it to implement the
pace and scope of its business strategy. To date, the Company has raised
financing primarily from the following sources:
EQUITY CAPITAL. Through its May 1996 initial public offering (the
"IPO") and two previous rounds of private equity financing, the Company
raised approximately $292.3 million. Total contributed capital as of
December 31, 1996 of $349.3 million reflects such public and private
financing as well as equity capital received in connection with the City
Signal Acquisition and the merger with BTC, and the issuance of 1,192,980
shares in exchange for minority investments in the Company's subsidiaries
and 1,569,599 shares upon exercise of warrants and options. In connection
with an underwritten public offering on February 5, 1997 by certain of the
Company's stockholders of 6,723,429 shares of Common Stock (the "Secondary
Offering"), the Company raised net proceeds of approximately $24.0 million
through the sale of 1,008,514 shares of Common Stock issued upon exercise
of an option by the underwriters to cover over-allotments. See "Business of
the Company -- Strategic Relationships," "Capitalization," "Management --
Executive Compensation -- Stock Option Plan" and "Certain Relationships and
Related Transactions."
DEBT FINANCING. On November 7, 1996, the Company completed the
issuance and sale of the 11 7/8% Senior Discount Notes, for which the
Company received proceeds net of underwriting discounts of approximately
$217.2 million (the "11 7/8% Senior Discount Note Offering"). On February
26, 1996, the Company completed the issuance and sale of $425.0 million
aggregate
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<PAGE> 10
principal amount of 10 7/8% Senior Discount Notes due March 1, 2006 (the
"10 7/8% Senior Discount Notes" and, together with the 11 7/8% Senior
Discount Notes, the "Senior Discount Notes"), for which the Company
received proceeds net of underwriting discounts of approximately $241.0
million. The Company has also obtained secured financing under a line of
credit from AT&T Credit, which totals $50.0 million (the "AT&T Credit
Facility"), and a $10 million secured revolving line of credit for a
subsidiary from Fleet National Bank (the "Bank Credit Facility"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Historically, the Company has funded in advance its expected capital needs
for network construction and acquisition, as well as its needs for the
development and expansion of its networks. Following initial market entry, the
Company's capital deployment plans for the development and expansion of its
networks have been largely demand driven, including capital spending necessary
to take full advantage of the opportunities presented in the switched services
portion of the marketplace. The Company recently revised its network development
plans to provide for the Company to (i) increase the geographic reach and
robustness of its networks to allow the Company to serve a significantly higher
percentage of its markets by extending its networks to serve most, if not all,
of the ILEC's central offices in its markets and (ii) more rapidly deploy
switches with full capabilities for local dial tone and switched access
termination and origination services. The Company's estimate of capital spending
during 1997 to fund the development and expansion of the Company's existing
networks is approximately $400 million. Such capital needs, including, the
Company's necessary working capital, can be funded from the Company's existing
cash balances.
The Company's longer-term strategy contemplates that the Company will have
networks serving a total of 50 cities in operation or under construction by the
end of 1998, which will require substantial additional capital. The Company's
expansion into additional cities is expected to be accomplished by the
acquisition of existing networks as well as the development of new networks. The
Company will continue to evaluate additional revenue opportunities in each of
its markets and other strategic initiatives, and, as attractive additional
opportunities may develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such opportunities,
such as costs required to extend a network or install additional electronics to
meet specific customer requirements. The Company expects to meet its additional
capital needs with the proceeds from the issuance and sale of additional equity
securities, additional borrowings under existing and future credit facilities
and joint ventures. However, there can be no assurance that the Company will be
able to generate or raise sufficient capital to enable it to fully realize all
of its strategic objectives.
The Company's expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower. See "Risk Factors --
Significant Future Capital Requirements; Substantial Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ACQUISITIONS
Consistent with its acquisition strategy, the Company continually evaluates
possible acquisitions of additional telecommunications systems. From time to
time, the Company may enter into binding or nonbinding letters of intent, or
definitive agreements, to acquire particular businesses or properties. The
shares of Common Stock offered by this Prospectus (and other securities
convertible into, or exercisable for, shares of Common Stock) may be offered and
issued in connection with such acquisitions. The consideration offered by the
Company in such acquisitions, in addition to the shares of Common Stock offered
by this Prospectus, may include cash, debt or other securities (which may be
convertible into, or exercisable for, shares of Common Stock of the Company
covered by this Prospectus), and assumption by the Company of liabilities of the
9
<PAGE> 11
businesses acquired. The Company has not received and does not expect to receive
any cash proceeds (other than working capital of acquired businesses) in
connection with any such issuances of Common Stock.
It is contemplated that the terms of acquisitions will be determined by
negotiations between the Company and the owners and operators of the businesses
or properties to be acquired, with the Company taking into account the past and
potential earning power and growth of the businesses or properties acquired and
other relevant factors, and it is anticipated that shares of Common Stock issued
in acquisitions will generally be valued at prices reasonably related to the
market value of the Common Stock either at the time the terms of the acquisition
are tentatively agreed upon or at or about the time or times of delivery of the
shares or other securities.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
are forward-looking statements that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as the
Company's plans to have systems in operation or under construction in a total of
40 cities by the end of 1997 and 50 cities by the end of 1998 and its
expectations for required future capital expenditures, are only predictions;
actual events or results may differ materially as a result of risks facing the
Company. Such risks include, but are not limited to, the Company's ability to
access markets, identify, finance and complete suitable acquisitions, design
fiber optic backbone routes, install cable and facilities, including switching
electronics, and obtain rights-of-way, building access rights and any required
governmental authorizations, franchises and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions, as well as favorable
regulatory, legislative and judicial developments.
THE OFFERING
Common Stock offered................ 10,000,000 shares
Common Stock outstanding(1)......... 32,672,579 shares
Nasdaq National Market symbol....... BFPT
- ---------------
(1) As of February 28, 1997; excludes 3,244,821 shares of Common Stock issuable
upon exercise of stock options and warrants outstanding at February 28,
1997, of which 1,662,288 shares were subject to warrants and options
exercisable within 60 days at a weighted average exercise price of $14.48
per share. See "Description of Capital Stock."
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors" on pages 13 through 18.
ADDRESS AND TELEPHONE NUMBER
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
is (314) 878-1616.
10
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER OPERATING DATA
The summary financial data presented below (other than the pro forma data)
as of and for the years ended December 31, 1996, 1995 and 1994 are derived from
and qualified by reference to the audited consolidated financial statements of
the Company contained herein. The Company's consolidated financial statements as
of December 31, 1996, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1996, have been audited by KPMG Peat Marwick LLP,
independent auditors. All of the summary financial data should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and notes thereto contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA AND RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service revenue.......................... $ 2,809 $ 14,160 $ 45,574
Costs and expenses:
Service costs............................................. 1,557 7,177 21,468
Selling, general and administrative expenses.............. 3,966 11,405 38,596
Depreciation and amortization............................. 663 4,118 16,296
------- ---------- ----------
6,186 22,700 76,360
Loss from operations........................................ (3,377) (8,540) (30,786)
Interest and other income (expense), net.................... (598) (2,096) (14,647)
------- ---------- ----------
Net loss before minority interests........................ (3,975) (10,636) (45,433)
------- ---------- ----------
Minority interests(1)..................................... 78 1,085 1,590
------- ---------- ----------
Net loss.................................................. $(3,897) $ (9,551) $ (43,843)
======= ========== ==========
Pro forma net loss per share(2)............................. -- $ (.49) $ (1.71)
======= ========== ==========
Pro forma weighted average number of shares
outstanding(2)............................................ -- 19,523,584 25,627,328
======= ========== ==========
OTHER DATA:
EBITDA(3)................................................. $(2,714) $ (4,422) $ (14,490)
Capital expenditures, including acquisitions of
businesses, net of cash................................. 42,362 41,518 221,520
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1996 1996 1996
------------ --------- -------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 59,913 $253,796 $256,224 $203,034 $261,880
Marketable securities............................ -- 25,159 150,178 126,634 182,304
Working capital.................................. 57,913 264,772 402,920 325,266 435,225
Total assets..................................... 146,610 449,135 633,825 637,350 879,581
Long-term debt, less current portion............. 43,977 298,529 306,391 314,440 552,810
Paid-in capital.................................. -- 145,569(4) 330,963(4) 331,179(4) 349,341(4)
Total stockholders' equity(5).................... 93,455 125,264 300,535 290,759 291,834
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1996 1996 1996
---- ---- --------- -------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation................... 5 11 13 18 22 23
Cities under construction............. 6 10 12 8 8 7
On-net buildings connected............ 62 216 495 644 734 883
Route miles........................... 107 262 506 705 787 1,059
Fiber miles........................... 6,437 17,111 26,659 43,152 50,572 71,292
VGE circuits(6)....................... 59,208 122,617 165,122 243,171 358,640 516,743
Switches installed.................... -- 1 3 9 17 20
CLEC lines in service................. -- 3,187(7) 5,802 9,226 13,107 21,013
Employees............................. 89 165 456 571 711 789
</TABLE>
- ---------------
(1) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries, all of which were exchanged for
an aggregate of 1,192,980 shares of Common Stock during the fourth quarter
of fiscal 1996.
(2) Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the May 1996 initial public offering price of $27.00
per share, and stock options and warrants granted with exercise prices
below the initial public offering price during the twelve-month period
preceding the date of the initial filing of the Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. Subsequent to this period, the weighted average
number of shares was based on Common Stock outstanding and does not include
common stock equivalents as their inclusion would be anti-dilutive.
(3) EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
(4) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(5) Amount represents paid-in capital less accumulated deficit. See note (4)
above.
(6) Voice grade equivalent circuits.
(7) On a pro forma basis giving effect to the City Signal Acquisition.
12
<PAGE> 14
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its businesses before purchasing the shares of Common Stock offered hereby.
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
The Company was formed in November 1993. At January 1, 1996, only three of
the Company's networks that the Company acquired had been in operation for more
than 24 months. Prospective investors, therefore, have limited historical
financial information about the Company upon which to base an evaluation of the
Company's performance and an investment in shares of Common Stock of the
Company. Given the Company's limited operating history, there is no assurance
that it will be able to generate sufficient cash flow to service its debt and to
compete successfully in the telecommunications business.
The development of the Company's businesses and the acquisition,
installation and expansion of its networks require significant expenditures, a
substantial portion of which are made before any revenues may be realized. Such
capital expenditures are expected to increase as the Company decides to pursue
opportunities created by the accelerated pace of regulatory changes designed to
open local exchange markets to CLEC competition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business of the Company -- CLEC Market Potential." These
expenditures, together with the associated early service costs, result in
negative cash flow and operating losses until an adequate revenue base may be
established. There can be no assurance that an adequate revenue base will be
established in each of the Company's systems. The Company's operations have
resulted in earnings (losses) before minority interests, interest, taxes,
depreciation and amortization (EBITDA) of ($2.7) million for the year ended
December 31, 1994, ($4.4) million for the year ended December 31, 1995 and
($14.5) million for the year ended December 31, 1996. As of December 31, 1996,
the Company had an accumulated deficit of approximately $57.5 million. EBITDA is
a measure commonly used in the telecommunications industry and is presented to
assist in an understanding of the Company's operating results. It is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles. Certain of the expenditures are
expensed as incurred, while certain other expenditures are capitalized. The
Company will continue to incur expenditures in connection with the acquisition,
development and expansion of its networks, services and customer base. There can
be no assurance that the Company will achieve or sustain profitability or
generate sufficient positive cash flow to service its debt.
SIGNIFICANT FUTURE CAPITAL REQUIREMENTS; SUBSTANTIAL INDEBTEDNESS
Expansion of the Company's existing networks and services, the acquisition
and development of new networks and services and the funding of initial
operating losses will require significant capital expenditures. The Company
plans to have systems in operation or under construction in a total of 40 cities
by the end of 1997 and 50 cities by the end of 1998. The Company has deployed
switches serving substantially all of the Company's operating networks. The
Company is also adding capabilities to provide enhanced services such as high
speed video conferencing, frame relay and ATM-based packet transport services
and Internet access products and expects to offer such services in all of its
operating networks by the end of 1997. The Company currently intends to fund its
expansion to 40 networks and the deployment of switches in all of such networks
with full capabilities for local dial tone and switched access termination and
origination services, from the Company's existing cash balances and the net
proceeds of additional financings to be obtained in the future and through joint
ventures. The Company's growth into 50 cities and additional funds to support
other strategic initiatives will require substantial additional capital. The
Company will continue to evaluate additional revenue opportunities in each of
its markets and, as attractive additional opportunities may develop, the Company
plans to make additional capital investments in
13
<PAGE> 15
its networks that might be required to pursue such opportunities. The Company
expects to meet such additional capital needs with additional borrowings under
existing and future credit facilities, proceeds from the sale of additional
equity securities and joint ventures. There can be no assurance, however, that
the Company will be successful in raising sufficient additional debt or equity
capital on terms that it will consider acceptable or that the Company's
operations will produce positive consolidated cash flow in sufficient amounts.
Failure to raise and generate sufficient funds may require the Company to delay
or abandon some of its planned future expansion or expenditures, which could
have a material adverse effect on the Company's growth and its ability to
compete in the telecommunications services industry.
The Company's expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower.
At December 31, 1996, (i) the total amount of outstanding liabilities of
the Company (parent only), including trade payables, was $565.7 million, of
which $50 million represented secured obligations, and (ii) the total amount of
outstanding liabilities of the Company's subsidiaries, including trade payables,
was $22.1 million, of which $755,000 represented secured obligations. The
Company expects to fund at least a portion of its capital needs through
additional borrowings, and there can be no assurance as to the Company's ability
to service its existing or future indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
HOLDING COMPANY STRUCTURE
The Company is a holding company which derives substantially all of its
revenues from its subsidiaries. As such, the Company is dependent to some extent
upon dividends and other payments from its subsidiaries to generate the funds
necessary to meet its cash obligations. The ability of the Company's
subsidiaries to make such payments will be subject to, among other things, the
availability of sufficient surplus funds and restrictive covenants in debt
agreements that may restrict the ability of certain subsidiaries to pay
dividends to the Company. However, the Company does not believe that such
restrictions will have a material impact on the Company's ability to meet its
cash obligations. See "-- No Dividends" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY
The expansion and development of the Company's operations will depend,
among other things, on the Company's ability to assess markets, identify,
finance and complete suitable acquisitions, design fiber optic network backbone
routes, install cable and facilities, including switches, and obtain
rights-of-way, building access rights and any required government
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions. As a result, there can be no
assurance that the Company will be able successfully to expand its existing
networks or acquire or develop new networks in a timely manner in accordance
with its strategic objectives.
The Company expects to continue to enhance its systems in order to offer
its customers switched access termination and origination services and local
dial tone, centrex and desk top products, as well as other enhanced services in
all of its systems as quickly as practicable and as permitted by applicable
regulations. The Company believes its ability to offer, market and sell these
additional products and services will be important to the Company's ability to
meet its long term strategic growth objectives, but is dependent on the
Company's ability to obtain the needed capital, favorable regulatory,
legislative and judicial developments and the acceptance of such products and
services by the Company's customers. No assurance can be given that the Company
will be able to obtain such capital or that such developments or acceptance will
occur.
14
<PAGE> 16
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company expects a substantial part of its future growth will come from
acquisitions. The acquisition of additional systems will depend on the Company's
ability to identify suitable acquisition candidates, to negotiate acceptable
terms for their acquisition and to finance any such acquisitions. The Company
will also be subject to competition for suitable acquisition candidates. Any
acquisitions, if made, could divert the resources and management time of the
Company and would require integration with the Company's existing networks and
services. As a result, there can be no assurance that any such acquisitions will
occur or that any such acquisitions, if made, would be made in a timely manner
or on terms favorable to the Company or would be successfully integrated into
the Company's operations.
COMPETITION
In each of the cities served by the Company's networks, the services
offered by the Company compete principally with the services offered by the ILEC
serving that area. ILECs have long-standing relationships with their customers,
have the potential to subsidize competitive services from monopoly service
revenues, and benefit from favorable state and federal regulations. While the
FCC's Interconnection Decisions and the Telecommunications Act of 1996 provide
increased business opportunities to CLECs such as the Company, they also provide
the ILECs with increased pricing flexibility for their services and other
regulatory relief, which could also have a material adverse effect on CLECs,
including the Company. If the ILECs are allowed by regulators to lower their
rates for their services, engage in substantial volume and term discount pricing
practices for their customers, or seek to charge CLECs substantial fees for
interconnection to the ILECs' networks, the income of CLECs, including the
Company, could be materially adversely affected.
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including other CLECs, AT&T, MCI,
Sprint Corporation ("Sprint"), WorldCom, Inc. ("WorldCom") and other IXCs, cable
television companies, electric utilities, microwave carriers, wireless telephone
system operators and private networks built by large end users. In January 1994,
MCI announced that its MCImetro unit would invest more than $2.0 billion in
fiber optic rings and local switching equipment in major metropolitan markets in
the United States to provide direct connection to its customers and to provide
alternative local telephone services to other IXCs. The recently announced
acquisition of MCI by British Telecommunications could increase the resources
available to MCI for the above purposes. AT&T has also indicated its intention
to offer local telecommunications services in certain U.S. markets, either
directly or in conjunction with CLECs or cable operators, and WorldCom and MFS
Communications Company, Inc. ("MFS Communications"), a major CLEC, completed a
merger on December 31, 1996. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among RBOCs, or among CLECs in second and third tier cities, or
transactions between telephone companies and cable companies outside of the
telephone company's service area, or between IXCs and CLECs, could give rise to
significant new competitors.
The Company believes that various legislative initiatives, including the
Telecommunications Act of 1996, as well as a recent series of completed and
proposed transactions between ILECs, IXCs and cable companies, increase the
likelihood that barriers to local exchange competition will be removed more
quickly than had earlier been anticipated. The introduction of such competition,
however, also means that ILECs may be authorized to provide long distance
services under provisions of the Telecommunications Act of 1996 more quickly
than had earlier been anticipated. When ILECs are permitted to provide such
services, they will ultimately be in a position to offer single source service.
See "Regulatory Overview."
The Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business.
15
<PAGE> 17
Many of the Company's current and potential competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. See "Competition" for
more detailed information on the competitive environment faced by the Company.
DEPENDENCE ON BUSINESS FROM IXCS
For the year ended December 31, 1996, approximately 22% of the Company's
consolidated revenues were attributable to access services provided to IXCs.
Approximately 13% of such consolidated revenues were attributable to services
provided to MCI and its affiliates. The loss of access revenues from IXCs in
general or the loss of MCI as a customer could have a material adverse effect on
the Company's business. See "Business of the Company -- Strategic Relationships"
and "-- Sales and Marketing -- Wholesale Customers."
In addition, the Company's growth strategy assumes increased revenues from
IXCs following the deployment of switches on its networks and the provision of
switched access origination and termination services. There is no assurance that
the IXCs will continue to increase their utilization of the Company's services,
or will not reduce or cease their utilization of the Company's services, which
could have a material adverse effect on the Company.
REGULATION
The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of return
regulation, nor is it currently required to obtain FCC authorization for the
installation, acquisition or operation of its network facilities. However, the
FCC has determined that non-dominant carriers, such as the Company and its
subsidiaries, are required to file interstate tariffs on an ongoing basis. The
Company's subsidiaries that provide intrastate services are also generally
subject to certification and tariff filing requirements by state regulators.
Challenges to these tariffs by third parties could cause the Company to incur
substantial legal and administrative expenses. Although the trend in federal and
state regulation appears to favor increased competition, no assurance can be
given that changes in current or future regulations adopted by the FCC or state
regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. In particular, the Company's belief that the entire $102 billion local
exchange market will open to CLEC competition depends upon continued favorable
pro-competitive regulatory changes, and the ability of the Company to compete in
these new market segments may be adversely affected by the greater pricing
flexibility and other regulatory relief granted to ILECs under the
Telecommunications Act of 1996. The partial stay of recent FCC rules that set
forth the amounts that ILECs can charge CLECs for access to the ILEC's networks
may slow the pace of open competition initiatives and result in individual
states having a more prominent role in the opening of local exchange markets to
competition. However, the Company believes that the partial stay will not have
any material adverse effect on the Company because the Company has in effect (or
expects to have in effect after state PUC arbitrations expected to be completed
by early 1997) interconnection agreements with the ILECs in all of its markets.
See "Regulatory Overview" for more detailed information on the regulatory
environment in which the Company operates.
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
In order to acquire and develop its networks, the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
that local governmental authorities treat telecommunications carriers in a
competitively neutral, non-discriminatory manner, and that most utilities,
including most ILECs and electric companies, afford CLECs access to their poles
and conduits and rights-of-way at reasonable rates
16
<PAGE> 18
on non-discriminatory terms and conditions. There can be no assurance that the
Company will be able to maintain its existing franchises, permits and rights or
to obtain and maintain the other franchises, permits and rights needed to
implement its business plan on acceptable terms. Although the Company does not
believe that any of the existing arrangements will be cancelled, or will not be
renewed, as needed, cancellation or non-renewal of certain of such arrangements
could materially adversely affect the Company's business in the affected city.
In addition, the failure to enter into and maintain any such required
arrangements for a particular network, including a network which is already
under construction, may affect the Company's ability to develop that network.
See "Business of the Company -- Network Construction."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future these
changes will neither materially affect the continued use of optical fiber
telecommunications networks nor materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
businesses of the Company cannot be predicted. Thus, there can be no assurance
that technological developments will not have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. See "Management." The Company believes
that its ability to manage its planned growth successfully will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. None of the Company's key executives has a written employment
agreement or non-compete agreement with the Company, nor does the Company
maintain key person life insurance on such persons. See "Management" for
detailed information on the Company's management and directors.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON
FUTURE MARKET PRICES
Sales of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds or complete acquisitions through future
equity issuances. At the request of the representatives of the Underwriters of
the Secondary Offering, all shares of Common Stock (including shares issuable
upon exercise of outstanding options and warrants to purchase shares of Common
Stock) held by the selling stockholders upon completion of the Secondary
Offering are subject to contractual agreements pursuant to which such shares
cannot be sold, offered for sale or otherwise disposed of until July 30, 1997
without the prior written consent of the designated representative of the
Underwriters, except in certain non-public transactions in which the acquiror or
acquirors agree(s) to such restrictions. Such stockholders hold an aggregate of
approximately 21.65% of the outstanding Common Stock. As a result,
notwithstanding possible earlier eligibility for sale under the provisions of
Rule 144 under the Securities Act, shares subject to such restrictions will not
be saleable until such restrictions expire or their terms are waived by the
designated representative of the Underwriters. Assuming the designated
representative of the Underwriters does not earlier release such stockholders
from such restrictions, on July 30, 1997, an additional 6,994,337 shares will
become freely tradeable, and 3,147,282 restricted shares will become eligible
for sale pursuant to Rule 144, subject to the volume limitations thereof. From
September 24, 1997 through November 15, 1997, an additional 2,667,045 restricted
shares will become eligible for sale pursuant to Rule 144, subject to the volume
limitations thereof.
17
<PAGE> 19
NO DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock for
the foreseeable future, and the ability of the Company to pay dividends on the
Common Stock is restricted by certain covenants in the Senior Discount Notes.
The Company anticipates that it will reinvest its earnings, if any, in the
Company's businesses. See "Dividend Policy."
AUTHORIZED BUT UNISSUED STOCK; ANTI-TAKEOVER PROVISIONS
At February 28, 1997, the Company's Board of Directors had the authority to
issue approximately 9.75 million additional shares of Common Stock which had not
been reserved for future issuance pursuant to employee benefit plans,
outstanding warrants and pending acquisitions and 990,012 shares of undesignated
preferred stock and to determine the price, rights, preferences and privileges
of those preferred shares without any further vote or action by the
stockholders. On February 19, 1997, the Company's Board of Directors approved
and recommended for approval by the Company's stockholders at the 1997 Annual
Meeting scheduled to be held on April 29, 1997 authorization for the issuance of
an additional 100 million shares of Common Stock. The issuance of such shares,
while potentially providing desirable flexibility in connection with possible
future acquisitions, equity financings and other corporate purposes, might have
a dilutive effect on earnings per share and on the equity ownership of holders
of the Company's Common Stock and could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company has adopted a Stockholders
Protection Rights Plan, and is subject to the anti-takeover provisions of
Section 203 of the General Corporation Law of the State of Delaware which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Furthermore, the
Company's Restated Certificate of Incorporation provides that the Board of
Directors is divided into three classes with the directors serving staggered
three-year terms. Moreover, most of the Company's existing indebtedness and
employee stock plans are subject to acceleration in the event of a
change-in-control of the Company. Such agreements and provisions could have the
effect of delaying, deferring or preventing a change-in-control of the Company
by increasing the aggregate cost to potential investors of an acquisition of the
Company. See "Description of Capital Stock -- Authorized Stock," "-- Delaware
Law and Certain Charter Provisions" and "-- Preferred Stock Purchase Rights."
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996:
<TABLE>
<CAPTION>
ACTUAL
------
<S> <C>
CASH AND CASH EQUIVALENTS................................... $261,880,000
MARKETABLE SECURITIES....................................... $182,304,000
------------
TOTAL CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES... $444,184,000
============
LONG-TERM DEBT
11 7/8% Senior Discount Notes due 2006.................... $229,109,000
10 7/8% Senior Discount Notes due 2006.................... 273,379,000
Other long-term debt (less current portion)............... 50,322,000
------------
Total.................................................. $552,810,000
COMMON STOCK, SUBJECT TO REDEMPTION OPTION, 2,016,000
SHARES(1)................................................. 25,200,000
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value, 50,000,000 shares
authorized, 29,066,139 issued and outstanding(2)....... 291,000
Series C Junior Participating Preferred Stock, $0.01 par
value, 50,000 authorized, none issued or
outstanding(3)......................................... --
Additional paid-in capital(4)............................. 323,850,000
Accumulated deficit....................................... (57,507,000)
------------
TOTAL STOCKHOLDERS' EQUITY(5)............................... $291,834,000
------------
TOTAL CAPITALIZATION........................................ $844,644,000
============
</TABLE>
- ---------------
(1) Shown as Common Stock, subject to redemption option, because the holder of
such shares has the option to require the Company to repurchase all or any
of such shares at a price of $12.50 per share on or before February 1, 1998.
The holder of such shares has not indicated to the Company that it has any
current intention to exercise such option. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(2) Common Stock outstanding excludes 3,160,046 shares of Common Stock issuable
upon exercise of stock options and warrants outstanding at December 31,
1996, of which 1,722,060 shares were subject to warrants and options
exercisable within 60 days. See "Management -- Executive
Compensation -- Stock Option Plan," "Certain Relationships and Related
Transactions" and "Description of Capital Stock."
(3) Reserved for issuance upon the exercise of the Company's Preferred Stock
Purchase Rights pursuant to the terms set forth in the Company's Rights
Agreement dated as of February 29, 1996.
(4) Additional paid-in capital represents the amount of capital in excess of par
value.
(5) Total stockholders' equity includes Common Stock subject to redemption.
19
<PAGE> 21
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "BFPT." The following table sets forth the high and low sale prices of
the Common Stock as reported by the Nasdaq National Market for each of the
quarters since the Company's May 1996 IPO.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ------ ------
<S> <C> <C>
Second Quarter.............................................. $36.50 $27.75
Third Quarter............................................... 34.00 27.25
Fourth Quarter.............................................. 34.25 25.50
<CAPTION>
1997
- ------------------------------------------------------------
<S> <C> <C>
First Quarter (through March 12, 1997)...................... 30.00 21.25
</TABLE>
On March 12, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $22.25. As of February 28, 1997, there were
approximately 280 stockholders of record of the Common Stock, including
participants in security position listings.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. The ability of the Company to pay dividends is restricted by covenants
contained in the Senior Discount Notes.
The Company is a holding company whose principal assets are the stock of
its operating subsidiaries. The principal internal sources of funds for the
Company are distributions from its subsidiaries. The ability of the Company's
subsidiaries to make such payments will be subject to, among other things, the
availability of sufficient funds and restrictive covenants in debt agreements
applicable to certain of such subsidiaries. However, the Company does not
believe that any such restrictions have had or will have any material impact on
the Company's ability to meet its cash obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
20
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND
OTHER OPERATING DATA
The selected financial data presented below (other than the pro forma data)
as of and for the years ended December 31, 1996, 1995 and 1994 are derived from
and qualified by reference to the audited consolidated financial statements of
the Company contained herein. The Company's consolidated financial statements as
of December 31, 1996, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1996, have been audited by KPMG Peat Marwick LLP,
independent auditors. All of the selected financial data should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and notes thereto contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---- ---- ----
(AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA AND RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service revenue.......................... $ 2,809 $ 14,160 $ 45,574
Costs and expenses:
Service costs............................................. 1,557 7,177 21,468
Selling, general and administrative
expenses................................................ 3,966 11,405 38,596
Depreciation and amortization............................. 663 4,118 16,296
------- ---------- ----------
6,186 22,700 76,360
Loss from operations........................................ (3,377) (8,540) (30,786)
Interest and other income (expense), net.................... (598) (2,096) (14,647)
------- ---------- ----------
Net loss before minority interests........................ (3,975) (10,636) (45,433)
Minority interests(1)..................................... 78 1,085 1,590
------- ---------- ----------
Net loss.................................................. $(3,897) $ (9,551) $ (43,843)
======= ========== ==========
Pro forma net loss per share(2)............................. $ -- $ (.49) (1.71)
======= ========== ==========
Pro forma weighted average number of shares
outstanding(2)............................................ -- 19,523,584 25,627,328
======= ========== ==========
OTHER DATA:
EBITDA(3)................................................. $(2,714) $ (4,422) $ (14,490)
Capital expenditures, including acquisitions of
businesses, net of cash................................. 42,362 41,518 221,520
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1996 1996 1996
------------ --------- -------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 59,913 $253,796 $256,224 $203,034 $261,880
Marketable securities.................... -- 25,159 150,178 126,634 182,304
Working capital.......................... 57,913 264,772 402,920 325,266 435,225
Total assets............................. 146,610 449,135 633,825 637,350 879,581
Long-term debt, less current portion..... 43,977 298,529 306,391 314,440 552,810
Paid-in capital.......................... -- 145,569(4) 330,963(4) 331,179(4) 349,341(4)
Total stockholders' equity(5)............ 93,455 125,264 300,535 290,759 291,834
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1996 1996 1996
---- ---- --------- -------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation......................... 5 11 13 18 22 23
Cities under construction................... 6 10 12 8 8 7
On-net buildings connected.................. 62 216 495 644 734 883
Route miles................................. 107 262 506 705 787 1,059
Fiber miles................................. 6,437 17,111 26,659 43,152 50,572 71,292
VGE circuits(6)............................. 59,208 122,617 165,122 243,171 358,640 516,743
Switches installed.......................... -- 1 3 9 17 20
CLEC lines in service....................... -- 3,187(7) 5,802 9,226 13,107 21,013
Employees................................... 89 165 456 571 711 789
</TABLE>
- ---------------
(1) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries, all of which were exchanged for
an aggregate of 1,192,980 shares of Common Stock during the fourth quarter
of fiscal 1996.
(2) Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the May 1996 initial public offering price of $27.00
per share, and stock options and warrants granted with exercise prices
below the initial public offering price during the twelve-month period
preceding the date of the initial filing of the Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. For the subsequent period, the weighted average
number of shares was based on Common Stock outstanding and does not include
common stock equivalents as their inclusion would be anti-dilutive.
(3) EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
(4) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(5) Amount represents paid-in capital less accumulated deficit. See note (4)
above.
(6) Voice grade equivalent circuits.
(7) On a pro forma basis giving effect to the City Signal Acquisition.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
herewith.
OVERVIEW
The Company was founded in 1993 and has rapidly become a leading
facilities-based provider of competitive local telecommunications services in
selected markets within the United States. The Company competes with local
exchange carriers by providing high quality, integrated local telecommunications
services over fiber optic digital networks to meet the voice, data and video
transmission needs of its customers. The Company's customers are principally
inter-exchange carriers (IXCs), internet service providers (ISPs), wireless
carriers, telecommunications-intensive business, government and institutional
end users, and residential customers. The Company offers these customers
technologically advanced local telecommunications services as well as superior
customer service, flexible pricing and route diversity.
The Company's goal is to become the primary full-service provider of
competitive local telecommunications services to its customers in selected
cities by offering superior products with excellent customer service at prices
below those charged by the ILECs. The principal elements of the Company's
strategy include targeting selected U. S. markets with an emphasis on second-
and third-tier markets, aggressively pursuing switched services opportunities,
further building out existing systems, and expanding service offerings. The
Company provides these services in an expanding number of U. S. markets. As of
February 28, 1997, the Company has networks in operation or under construction
which serve a total of 36 U. S. cities. The Company plans to expand its network
operations to have systems in operation or under construction in a total of 40
cities by the end of 1997 and 50 cities by the end of 1998. As of December 31,
1996, the Company has a total of 20 digital telephone switches installed in its
operating networks and plans to leverage its networks and customer relationships
by offering local dial tone, switched access termination and origination
services, centrex and desktop products. As of December 31, 1996, the Company
offers such services and products in substantially all of its operating networks
and expects to offer such services and products in all of its currently
operating networks by the end of the second quarter of 1997. The Company is also
expanding its capabilities to provide flexible enhanced services that complement
its switch-based services. Such enhanced services include, among others, high
speed video conferencing, frame relay and ATM-based packet transport services,
and internet access products. The Company is currently offering such services in
certain markets and expects to offer such services in all of its operating
networks by the end of 1997.
Through December 31, 1996, the Company's growth, including its capital
expenditure requirements, acquisition financing and working capital, has been
principally funded by two senior discount note offerings during 1996, the
Company's initial public offering in May of 1996, the Company's $50 million
credit facility and two private equity offerings completed prior to 1996.
In order to capitalize on the competitive dynamics of the changing IXC/ILEC
relationships, the Company has established close business alliances with major
IXCs, including joint ventures and preferred vendor relationships. In accordance
with this strategy, the Company and MCImetro Access Transmission Services, inc.
(MCImetro), a wholly-owned subsidiary of MCI Communications Corporation (MCI),
have entered into agreements which provide that, until September 30, 2001, the
Company will be MCImetro's preferred provider of certain local access services
in a number of the Company's markets and pursuant to which MCImetro has acquired
an investment in 958,720 shares of the Common Stock. Also, in December 1995, the
Company concluded a national preferred vendor agreement with AT&T
Communications, Inc. (AT&T Communications), a wholly-owned subsidiary of AT&T
Corp. (AT&T), pursuant to which the Company has become AT&T Communications'
preferred supplier of local access services in most of the Company's markets.
During February 1997, the Company and AT&T announced the expansion of this
relationship to
23
<PAGE> 25
include several of the markets in which the Company is in the process of
acquiring or constructing networks. In addition, the Company's relationship was
further expanded in a new agreement between the Company and AT&T whereby AT&T
will begin utilizing the Company's networks to originate and terminate the calls
of AT&T customers served by the Company's networks. The Company believes
preferred vendor relationships with IXCs provide opportunities to leverage its
partners' sales channels and market support to sell the Company's products and
services and expand the Company's potential revenue base. In addition, the
Company believes that relationships with IXCs facilitate its entry into new
markets by providing access between the IXCs and their customers.
On January 31, 1996, the Company acquired City Signal, Inc., which included
networks in operation or under construction in four cities in Michigan and Ohio,
including an installed switch in Grand Rapids, Michigan. In addition, effective
January 2, 1996, Brooks Telecommunications Corporation (BTC), a founding
stockholder of the Company and the previous owner of GLA International (GLA),
was merged into the Company. GLA, a wholly-owned subsidiary of the Company,
offers a full range of consulting, management, engineering and information
system solutions for telecommunications companies. GLA's capabilities also serve
as an internal source for the telecommunications infrastructure support needed
to facilitate the Company's network growth and penetration of the competitive
local exchange company (CLEC) business.
In July 1996, the Company acquired ALD Communications, Inc. (ALD), a
switchless reseller of long distance services and provider of shared tenant
services in the Bay area of San Francisco and, effective in September 1996,
acquired Bittel Telecommunications Corporation (Bittel), a switch-based reseller
of long distance services in Los Angeles and the San Francisco Bay area. By
acquiring ALD and Bittel, the Company not only added businesses that compliment
its own long distance and facilities management resale operations but was also
able to increase its end-user sales force.
In addition, in February 1997 the Company formed a joint venture for the
construction of three networks located in Maine and New Hampshire. The Company
has also signed definitive agreements related to the acquisition of networks
located in Utah and Nevada, and certain operating rights in Idaho. This
transaction is subject to regulatory approval.
The development of the Company's businesses and the construction,
acquisition and expansion of its networks require significant expenditures, a
substantial portion of which is incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate customer base may be established.
However, as this customer base grows, the Company expects incremental revenues
can be added within operating networks with minimal additional expense,
providing significant contributions to cash flow. The Company also incurs
ongoing capital expenditures with respect to both existing and new systems which
are directly related to the installation of new revenue-producing services.
RESULTS OF OPERATIONS
The following summary provides revenue, income (loss) from operations and
EBITDA(1) of the Company for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................. 45,574 14,160 2,809
Income (loss) from operations............................. (30,786) (8,540) (3,377)
EBITDA.................................................... (14,490) (4,422) (2,714)
</TABLE>
- ---------------
(1) EBITDA consists of net loss before minority interest, interest, income
taxes, depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with generally accepted
24
<PAGE> 26
accounting principles. See the Company's consolidated financial statements
and notes thereto appearing elsewhere herein.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
The Company's revenues increased to $45.6 million for 1996 from $14.2
million during 1995, an increase of $31.4 million or 221%. Total annualized
monthly revenues increased to approximately $73.4 million based on December 1996
revenues from $15.5 million based on December 1995 revenues. The increase in
revenues reflects the impact of the Company's acquisition and development
activities, including an increase in the number of networks in operation to 23
from 11 in 1995, and increased utilization of the Company's network facilities
arising from the sales of additional services to current and new customers.
While access revenues were the most significant contributor to the Company's
revenue growth for 1996, the Company's entry into local switched services, in
Grand Rapids, Michigan during the first quarter of 1996 and in additional
markets during the fourth quarter of 1996, was also a factor. Current annualized
monthly local switched service revenues, based on December 1996 revenues, are
$17.4 million. Local switched service revenues for the year ended December 31,
1996, totaled $7.8 million.
Network utilization as reflected in the number of on-net buildings
connected to the Company's networks increased 309% during 1996 to 883 as
compared to 216 at December 1995. The Company's penetration of buildings to
serve additional customers is further augmented by 1,238 off-net buildings
resulting in total buildings served of 2,121 at December 31, 1996. VGEs in
service increased 321% to 516,743 VGEs as of December 31, 1996, as compared with
122,617 VGEs at the end of 1995. As reflected in CLEC lines in service, network
utilization increased to 21,013 lines in service at year-end 1996, as compared
to 3,187 lines in service on January 31, 1996 in the Company's acquired Grand
Rapids operations. Network development as measured by operational networks has
increased to 23 with these networks covering 1,059 route miles at year-end 1996,
an increase of 304% from the 262 route miles in service at December 31, 1995.
Fiber miles also increased to 71,292 from the 17,111 at December 31, 1996, an
increase of 317%. In addition, the Company's aggressive switch deployment plans
have enabled the Company to deploy switches to serve 24 of the Company's markets
by year-end 1996.
COSTS AND EXPENSES
Service costs increased to $21.5 million or 47% of telecommunications
services revenue in 1996 from $7.2 million or 51% of telecommunications services
revenue in 1995. The increase was due primarily to the impact of the Company's
acquisition and development activities, including increasing costs associated
with the Company's rapidly growing local exchange services in Grand Rapids and
the Company's expanding long distance resale operations. Total service costs
directly related to providing local exchange services increased $5.1 million in
1996. The increase in total service costs also includes an increase of $6.8
million related to the direct operating costs of the Company's long distance
resale operations. Service costs primarily represent the portion of total
operating expenses paid to third parties for unbundled loop charges and other
local and long distance service costs, including right-of-way fees. Also
included are salaries and benefits associated with the technical operations of
the networks and other network costs.
The Company's selling, general and administrative expenses (SG&A) for the
year ended December 31, 1996 were $38.6 million, as compared with SG&A expenses
of $11.4 million for the year ended December 31, 1995. The increase was
principally due to the increasing number and continued expansion of the
Company's networks, including added personnel costs and marketing activities
related to the introduction of switched services. There is typically a period of
higher SG&A expense and a lag time in the generation of revenues following the
acquisition and development of
25
<PAGE> 27
the Company's networks. Management expects SG&A expenses to continue to increase
in 1997 as the Company continues to expand its networks, services and marketing
activities.
Depreciation and amortization expense increased to $16.3 million for the
year ended December 31, 1996, from $4.1 million for the year ended December 31,
1995 as a result of the continued expansion of the Company's networks and the
Company's acquisitions.
INTEREST INCOME (EXPENSE)
Interest expense totaling $31.2 million was recorded during the year ended
December 31, 1996, as compared to interest expense of $3.7 million for the year
ended December 31, 1995. The primary contributor to the substantial increase in
interest expense as compared to the prior year is non-cash interest expense
totaling $29.8 million primarily attributable to accretion of the Company's
senior discount notes (see Liquidity and Capital Resources) issued during 1996.
Interest of $2.0 million was capitalized for the year ended December 31, 1996,
related to network construction projects. For the years ended December 31, 1996
and 1995, interest income totaling $16.5 million and $1.6 million, respectively,
was derived from the Company's available cash and cash equivalents and
marketable securities.
NET LOSS
For the reasons stated above, the Company's net loss before minority
interest increased to $45.4 million in 1996, from $10.6 million in 1995.
Minority interests in net losses, representing minority investors' interests in
certain of the Company's subsidiaries, totaled $1.6 million and $1.1 million for
the years ended December 31, 1996 and 1995, respectively. As a result, the
Company's net loss for 1996 was $43.8 million as compared to a net loss of $9.6
million for 1995.
EBITDA
Earnings before interest, taxes, depreciation, amortization and minority
interest (EBITDA) decreased to ($14.5) million for the year ended December 31,
1996, from ($4.4) million for the year ended December 31, 1995, a decrease of
$10.1 million. The decrease reflects the increasing service and SG&A expenses
noted above resulting from the acquisition, development and expansion of the
Company's networks in order to pursue the opportunities provided by offering the
full array of local exchange services.
Since its inception in November 1993, the development of the Company's
business has required substantial capital investments and has resulted in
substantial net losses. The acquisition of networks, procurement of
rights-of-way and start-up costs of new networks will continue to represent a
large portion of the Company's funding requirements during the Company's
continued expansion. The Company expects to have networks operating or under
development in a total of 40 cities by the end of 1997 and in 50 cities by the
end of 1998. The costs related to the acquisition and development of new
systems, along with the varying degrees of maturity of these systems, will
materially affect the comparability of the Company's financial results from one
period to another and any assessment of the Company's operating performance.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE
The Company's revenues increased to $14.2 million for the year ended
December 31, 1995 from $2.8 million for the year ended December 31, 1994, an
increase of 407%. Annualized monthly revenues increased to approximately $15.5
million based on the results for the month of December 1995 from $11.9 million
based on December 1994 results. These increases reflect the impact of the
Company's acquisition and development activities as well as increased
utilization of the Company's network facilities arising from the sales of
additional services to current and new customers.
26
<PAGE> 28
Network capacity as reflected in VGEs in service increased to 122,617 VGEs as of
December 31, 1995, as compared to 59,208 VGEs as of December 31, 1994.
COSTS AND EXPENSES
Service costs increased to $7.2 million for the year ended December 31,
1995 from $1.6 million for the year ended December 31, 1994. Service costs as a
percentage of telecommunications services revenues declined to approximately 51%
for the year ended December 31, 1995 as compared to approximately 55% for the
year ended December 31, 1994.
The Company's SG&A expenses for the year ended December 31, 1995 were $11.4
million, as compared with SG&A expenses of $4.0 million for the year ended
December 31, 1994. The increase was principally due to the increasing number and
continued expansion of the Company's competitive access networks and related
marketing activities.
Depreciation and amortization expense increased to $4.1 million for the
year ended December 31, 1995, from $663,000 for the year ended December 31, 1994
as a result of the Company's acquisitions and the continued expansion of the
Company's networks.
INTEREST INCOME (EXPENSE)
Interest expense totaling $3.7 million was recorded during the year ended
December 31, 1995, as compared to interest expense of $693,000 for the year
ended December 31, 1994, as a result of the incurrence of secured indebtedness
to finance the acquisition and development of certain of the Company's
operations. For the year ended December 31, 1995 and 1994, interest income
totaling $1.6 million and $95,000, respectively, was derived from the Company's
available cash balances.
NET LOSS
For the reasons stated above, the Company's net loss before minority
interest increased to $10.6 million for the year ended December 31, 1995, from
$4.0 million for the year ended December 31, 1994. Minority interests in net
losses, representing minority investors' interests in certain of the Company's
subsidiaries, totaled $1.1 million and $78,000 for the years ended December 31,
1995 and 1994, respectively. As a result, the Company's net loss for 1995 was
$9.6 million as compared to a net loss of $3.9 million for 1994.
EBITDA
EBITDA decreased to ($4.4) million for the year ended December 31, 1995,
from ($2.7) million for the year ended December 31, 1994, a decrease of $1.7
million. The decrease reflects the increasing operating and SG&A expenses noted
above resulting from the acquisition, development and expansion of the Company's
networks.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $5.0 million at December 31, 1993
to $879.6 million at December 31, 1996. This growth has principally been funded
by stock offerings in 1993 and 1995, the Company's IPO during 1996, the two
offerings of Senior Discount Notes during 1996 and a secured credit facility.
The Company's current assets of $470.2 million at December 31, 1996, including
cash and cash equivalents and marketable securities of $444.2 million, exceeded
current liabilities of $34.9 million, providing working capital of $435.3
million as compared to $57.9 million at December 31, 1995. Network and equipment
totaled $306.5 million at December 31, 1996 as compared to $53.2 million at
December 31, 1995.
The Company's operating activities used net cash of $17.3 million in the
year ended December 31, 1996, and $2.6 million in the year ended December 31,
1995. The increase in cash used by operating activities was primarily due to the
increased loss from operations incurred related to the
27
<PAGE> 29
acquisition, development, and expansion of the Company's networks which is
offset by increased depreciation and amortization and non-cash interest expense
associated with the Company's debt facilities. The increase in cash used was
also due to supporting increased levels of accounts receivable and other current
assets resulting from an expanding customer base and increased interest
receivable on the Company's investments.
On February 26, 1996, the Company issued $425.0 million aggregate principal
amount of 10 7/8% Senior Discount Notes due March 1, 2006, and on November 7,
1996, issued $400.0 million aggregate principal amount of 11 7/8% Senior
Discount Notes due November 1, 2006 (the "Senior Discount Notes"). The Company
received gross proceeds of approximately $475 million, and proceeds net of
underwriting fees of approximately $458 million. No cash payments of interest
are required on the senior discount notes until September 1, 2001.
On May 2, 1996, the Company sold 7,385,331 shares of the Company's common
stock in an initial public offering ("IPO") at a price of $27.00 per share.
Gross proceeds from this offering totaled approximately $199.4 million and
proceeds net of underwriting discounts and advisory fees and expenses totaled
approximately $185.2 million.
In connection with the City Signal acquisition, the seller has an option to
require the Company to repurchase 2,016,000 shares of the Company's common stock
issued in the City Signal acquisition at a price of $12.50 per share on or
before February 1, 1998.
In June 1996, the Company and MCImetro entered into an agreement pursuant
to which MCImetro acquired a minority interest in the Company's Sacramento,
California network and made an additional investment in the San Jose joint
venture company. In connection with these agreements, MCImetro made additional
cash investments totaling $8.0 million. On October 10, 1996, MCImetro exchanged
this investment along with its initial investment made in September 1995 for
approximately 3.2% of the Company's common stock.
As of December 31, 1996, outstanding indebtedness under an AT&T Credit
Facility is $50.0 million. Amounts borrowed bear interest at the 90-day
commercial paper rate plus 4.0% per annum (9.46% at December 31, 1996), payable
quarterly. Terms of the AT&T Credit Facility further provide for interest-only
payments through December 31, 1997, and a six-year principal and interest payout
period thereafter. In addition, the Company has borrowed $100,000 under a $10
million Bank Credit Facility. Terms of the Bank Credit Facility provide for a
wholly-owned subsidiary of the Company to borrow up to $10 million from time to
time prior to June 30, 1997. Additional terms provide for interest-only payments
through August 31, 1997, and a 4.5 year principal and interest payout period
thereafter.
Subsequent to December 31, 1996, the Company completed a secondary offering
of 6,723,429 shares of common stock at a price of $25.00 per share. All of these
shares were sold by existing shareholders, and the Company did not receive any
proceeds from the sale of these shares. In conjunction with the offering, the
Company granted the underwriters an over-allotment option at $25.00 per share.
This option was fully exercised by the underwriters, and an additional 1,008,514
shares were issued. Gross proceeds to the Company totaled approximately $25.2
million, and proceeds net of underwriting discounts totaled approximately $24.0
million.
In June 1996, the Company formed a strategic alliance with Verio, Inc.,
formally known as World-Net Access, Inc., and has made a $20 million convertible
preferred stock investment for a 25.5% fully-diluted interest in Verio, and it
is possible that the Company may commit additional funds in furtherance of its
strategic alliance. Verio is a privately-held consolidator of ISPs. The Company
intends for both companies to seek ways to work together and provide
customer-oriented internet and intranet communications solutions.
The competitive local telecommunications services business is a
capital-intensive business. The Company's operations have required and will
continue to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's operating networks;
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(ii) the expansion and improvement of the Company's operating systems, including
the installation of capabilities to provide other enhanced services; (iii) the
design, construction and development of additional networks; and (iv)
acquisitions as an alternative to constructing networks, adding customers or
introducing additional services. For the years ended December 31, 1996 and 1995,
the Company's capital expenditures, primarily for installation of digital
telephone switches, expansion of existing networks, and design, construction and
development of new networks, totaled $217.2 million and $27.6 million,
respectively. Cash used for acquisitions in 1996 and 1995 totaled $4.3 million
and $13.9 million, respectively.
In response to the demand initially encountered for its services, the
Company will continue its aggressive capital deployment plans for the
development and expansion of its existing networks to allow for an increased
level of demand-driven capital spending to take full advantage of the
opportunities presented by offering a full array of local exchange services. The
Company's network development plans provide for the Company to (i) increase the
geographic reach and robustness of its networks to allow the Company to serve a
significantly higher percentage of its markets by extending its networks to
serve most, if not all, of the ILEC's central offices in its markets, and (ii)
more rapidly deploy switches with full capabilities for local dial tone and
switched access termination and origination services. The Company estimates that
it will spend $400 million during 1997 to fund these capital needs, and such
amounts may be funded from the Company's existing cash resources.
The Company's strategic plan calls for having systems in operation or under
development in a total of 50 cities by the end of 1998, which will require
substantial additional capital. The Company expects this expansion into
additional cities to be accomplished by the acquisition of existing networks as
well as the development of new networks. The Company will continue to evaluate
additional revenue opportunities in its existing markets and other strategic
initiatives, and as such opportunities may develop, the Company plans to make
additional capital investments in its networks that may be required to pursue
such opportunities, such as costs required to extend a network or install
additional telecommunications equipment to meet specific customer requirements.
Due to the number and variability of the factors which could affect the amount
of capital that will be required for such purposes, the Company cannot provide a
reasonable estimate of such additional capital needs. For example, the size of a
particular network to be developed or acquired and the types of electronics
installed can impact significantly the amount of capital required. Similarly,
the potential cost of acquiring additional networks is not determinable, and it
is possible that the Company could acquire existing networks using a variety of
financing alternatives. The Company expects to meet such additional capital
needs with the proceeds from existing and future credit facilities and other
borrowings and the proceeds from sales of additional equity securities and joint
ventures. However, there can be no assurance that the Company will be able to
raise or generate sufficient funds to enable it to meet its strategic
objectives. There can be no assurance that actual expenditures will not be
significantly higher or lower.
The Company intends to preserve financial flexibility in order to react to
the rapidly evolving telecommunications marketplace and new opportunities. The
Company will continue to take advantage of favorable financing arrangements,
including the sale of debt or equity securities in the public or private
markets, to maintain this flexibility.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical facts are
forward-looking statements that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as the
Company's plans to have systems in operation or under construction in a total of
50 cities by the end of 1998 and its plans to offer switched and enhanced
services in all of its markets by the end of 1997, are only predictions; actual
events or results may differ materially as a result of risks facing the Company.
Such risks include, but are not limited to, the Company's ability to
successfully market its services to current and new customers, access markets,
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identify, finance and complete suitable acquisitions, design fiber optic
backbone routes, install cable and facilities, including switching electronics,
and obtain rights-of-way, building access rights and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions, as well as favorable regulatory,
legislative and judicial developments.
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BUSINESS OF THE COMPANY
OVERVIEW OF THE COMPANY
The Company, founded in November 1993, is a leading full service provider
of competitive local telecommunications services to IXCs, ISPs, wireless
carriers and business, government and institutional end users in selected cities
within the United States. The Company is organized as a holding company with
individual operating subsidiaries which focus on specific market segments.
Through its operating subsidiaries, the Company acquires and constructs its own
state-of-the-art digital optical fiber telecommunications networks and
facilities and leases network capacity from others to provide IXCs, ISPs,
wireless carriers and business, government and institutional end users with an
alternative source for a broad array of high quality voice, data and other
telecommunications services. Certain of the Company's subsidiaries located in
California currently provide single source integrated local and long distance
telecommunications services and facilities management for medium and small
businesses utilizing the facilities of other providers. Through GLA, the Company
provides a full range of consulting, network engineering and construction,
strategic planning, infrastructure planning and design and information system
services and solutions for the Company and a wide variety of other
telecommunications providers. Through the Company's strategic alliance with
Verio, a consolidator of ISPs, the Company plans to develop and offer a wide
range of Internet-related services to users of Verio's national ISP network,
including various dial-up and dedicated Internet access options.
The Company's networks are organized to take advantage of ongoing
technological, competitive and regulatory changes. The Company sells its
services primarily to IXCs, ISPs, wireless carriers and business, government and
institutional customers who are high volume users of telecommunications
services. Expenditures by IXCs for access connections to their customers
represent their largest single expense and are estimated by industry sources to
represent as much as 45% of the revenues generated by long distance calls.
Through the deployment of state-of-the-art fiber optic networks and switches,
the Company is able to provide the IXCs served by its networks with high
quality, reliable services at prices less than those the regulated ILECs
currently charge. The Company can expand its capabilities to offer these
services beyond the locations served by its networks by interconnecting its
facilities with the facilities of the ILECs, IXCs and other providers of
telecommunications services.
For financial information regarding the Company, see the financial
statements and related notes listed under "Index to Consolidated Financial
Statements."
CORPORATE STRATEGY
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs, ISPs, wireless carriers
and business, government and institutional end users in selected cities by
offering superior products with excellent customer service at prices below those
charged by the ILECs. The principal elements of the Company's strategy include:
TARGET SECOND AND THIRD TIER MARKETS. The Company believes that
continuing pro-competitive regulatory changes and the broadening range of
services that can be offered by CLECs present attractive opportunities for
new CLEC entrants in second and third tier cities where there are typically
fewer CLEC competitors than in first tier markets and where the ILECs
generally have placed a lower priority on installing fiber optic systems
comparable to those being installed by the Company. As an early entrant in
selected second and third tier cities, the Company believes it can attain a
leadership position by securing needed franchises and rights-of-way,
installing robust state-of-the-art CLEC networks and facilities (i.e.,
networks which are capable of reaching at least 70% to 80% of identified
business end users in the market and most, if not all, of the ILEC's
central offices) and establishing customer relationships with IXCs,
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ISPs, wireless carriers and business, government and institutional end
users that will enable it to take advantage of the attractive potential
growth rates for local exchange service revenues in those markets. The
Company is also pursuing opportunities in several first tier markets (those
with populations of over two million) in conjunction with operating
agreements with the Company's major IXC customers (see "Build on strategic
relationships" below).
AGGRESSIVELY PURSUE SWITCHED SERVICES OPPORTUNITY. The
Telecommunications Act of 1996 mandates that ILECs throughout the U.S.
enter into arrangements with competitors such as the Company for central
office collocation and unbundling of local services. The Company believes
that implementation of these and other pro-competitive policies creates
favorable opportunities to pursue more aggressively the provision of local
switched services. At December 31, 1996, the Company had a total of 20
digital telephone switches installed serving a total of 24 of its operating
networks, and the Company plans to leverage its networks and customer
relationships by offering local dial tone, switched access termination and
origination services, centrex and desktop products in all of its networks.
The Company has increased the number of CLEC lines in service from 3,187 at
December 31, 1995 (on a pro forma basis giving effect to the City Signal
Acquisition) to 21,013 at December 31, 1996, with annualized CLEC revenues
increasing from $2.5 million based on December 1995 revenues to $17.4
million based on December 1996 revenues. See "-- Current Products and
Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide enhanced services that complement its
switch-based services. Such enhanced services include, among others, high
speed video conferencing, frame relay and ATM-based packet transport
services and Internet access products. The Company is currently offering
such services in certain markets and expects to offer such services in all
of its operating networks by the end of 1997. The Company also plans to
continue to upgrade and add to its systems and services as technology and
regulations permit. See "-- Planned Products and Services."
CONTINUE TO BUILD OUT EXISTING SYSTEMS. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "-- Build on strategic
relationships" below) will enable it to more rapidly develop and expand its
systems, add to its service offerings and establish the strong customer
relationships necessary to solidify its competitive position in its
selected markets.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. During 1996, the
Company achieved its long-stated goal of having systems in operation or
under construction in a total of 30 cities by the end of 1996. The Company
plans to have systems in operation or under construction in a total of 40
cities by the end of 1997 and a total of 50 cities by the end of 1998. The
Company's expansion into additional cities is expected to be accomplished
by the acquisition of existing networks as well as the development of new
networks. See "Business of the Company -- Network Acquisition, Development
and Design" and "-- Network Construction." By adding networks, the Company
believes it can increase revenues and obtain economies of scale in its
operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
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strategy, (1) the Company and MCImetro have entered into agreements which
provide that, until September 30, 2001, the Company will be MCImetro's
preferred provider of certain local access services in a number of the
Company's markets and pursuant to which MCImetro has acquired 958,720
shares of the Company's Common Stock (see "-- Strategic Relationships"
below), (2) the Company has concluded a national preferred vendor agreement
with AT&T Communications, pursuant to which the Company has become AT&T
Communications' preferred supplier of local access services in most of the
Company's markets, and (3) in February 1997, the Company concluded an
agreement with AT&T pursuant to which the Company will provide switched
access origination and termination of AT&T's long distance customer calls
through the Company's local networks in most of the Company's markets. The
Company believes preferred vendor relationships with IXCs provide
opportunities to leverage its partners' sales channels and market support
to sell the Company's products and services and expand the Company's
potential revenue base. In addition, the Company believes that
relationships with IXCs facilitate its entry into new markets by providing
access between the IXCs and their customers. The Company has organized a
national account marketing organization to manage such relationships. The
Company believes this marketing effort, along with its number of cities
served, financial resources and telecommunications expertise, position it
well to develop and maintain these strategic relationships. See "--
Strategic Relationships."
LEVERAGE UPON GLA'S SIGNIFICANT TELECOMMUNICATIONS INFRASTRUCTURE
CAPABILITIES. GLA, a wholly-owned subsidiary of the Company, offers a full
range of consulting, management, engineering and information system
solutions for telecommunications companies. GLA provides a full range of
network engineering, construction, design and strategic planning services,
as well as financial and management software products, including
specifically designed software for billing systems, toll rating, plant
records and financial applications. GLA's capabilities also serve as an
internal source for the telecommunications infrastructure support needed
for the Company's CLEC business.
CLEC MARKET POTENTIAL
DEVELOPMENT OF LOCAL EXCHANGE SERVICES. The first CAPs, which were the
predecessors of today's CLECs, were established in the mid-1980's to serve the
increasing demand for telecommunication services by the IXCs and business,
finance, government, education and healthcare entities by providing competitive
alternatives to the ILECs in non-switched special access and private line
services. The deregulation of the U.S. telecommunications industry, rapid
changes in technology and the increasingly information intensive nature of the
U.S. economy have significantly expanded the role of telecommunications for
these entities. Industry sources estimate that voice traffic of such end users
is growing at a rate of approximately seven percent per year, while data
communications are growing at three to five times this rate due to the increase
in computerized transactions processing and video applications, the movement to
distributed data processing, the rise of decentralized management structures and
the growing demand for Internet access services, which require the transmission
of large amounts of information with speed, accuracy and reliability.
The present structure of the telecommunications industry has evolved
largely as a result of increased market demand, deregulation, the implementation
of new technologies and increased competition. The rapid development of fiber
optic and digital electronics technologies has encouraged the growth of cost
effective alternatives to the monopolistic position of the ILECs in many of the
local exchange markets. In particular, the IXCs, which industry sources estimate
may pay as much as 45% of their total revenues in local access charges, have
supported competition in the local exchange markets.
Initially, CAPs were permitted to provide only non-switched special access
and private line services. The FCC's Interconnection Decisions in 1992 and 1993
granted CAPs the right to interconnect their private networks to the ILEC
networks to provide collocated special access and switched access transport
services, which enabled CAPs to access new customers and new markets without
physically expanding their networks.
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The pace of regulatory change in the telecommunications industry has
continued to accelerate with the adoption of the Telecommunications Act of 1996
which provides, among other things, for a national template under which, when
implemented, CLECs will be able to provide competitive services on a more equal
basis with the ILECs by further opening local exchange markets to competition
and pre-empting anti-competitive state laws. The Company believes the following
attributes of the Telecommunications Act of 1996 will have certain positive
effects on the Company's operations:
- Market access. Opening all U.S. markets to local competition.
- Network interconnections. Enabling the Company to more fully interconnect
its networks with ILECs and other carriers to allow the Company to reach
customers not physically connected to its own networks in a more cost
effective manner.
- Number portability. Enabling customers to retain their existing phone
numbers in the event they choose to switch local service providers. The
Company considers number portability to be a significant factor which can
positively influence a customer's decision to purchase service from the
Company.
- Reciprocal compensation. Ensuring fair and reciprocal rates under which
other carriers and the Company compensate one another for calls made to
their customers or, in the alternative, not charge one another for calls
made by customers from one network to the other. The Company expects such
reciprocal compensation arrangements to improve its operating margins over
time.
ENTRY INTO SWITCHED SERVICES. The Company believes that the CLEC business
is positioned for dramatic growth. Of the $32 billion of access fees paid by
IXCs to the ILECs in 1994, CLECs accounted for only $294 million or less than
1%. The Company expects that the entry of the ILECs into the long distance
business will increase these penetration rates as IXCs may seek alternatives to
the ILECs as sources of access to their customers. Most states have taken
regulatory and legislative action to open local communications markets to local
exchange competition and co-carrier status. The Company also expects continuing
pro-competitive regulatory changes, including those mandated by the
Telecommunications Act of 1996, together with increasing customer demand, will
create more opportunities for CLECs to introduce additional services, expand
their networks and address a larger customer base. These changes permit CLECs to
offer local dial tone, centrex, desk top and other enhanced services. The
Company believes that these changes afford CLECs the potential to grow
significantly over the next several years. However, there is no assurance that
such regulatory and other industry trends will continue or that future
regulatory developments will be favorable to CLECs.
Until recently, the Company's capital expenditure programs were directed
primarily toward the construction and acquisition of new networks and the
purchase of related equipment. While the Company intends to continue these
activities, it is also accelerating the expansion of its existing networks,
including more rapid deployment of switches and ILEC central office
interconnections, in order to take advantage of its developing demand-based
opportunities in those networks. Accordingly, the Company has increased the
number of CLEC lines in service from 3,187 at December 31, 1995 (on a pro forma
basis giving effect to the City Signal Acquisition) to 21,013 at December 31,
1996, with annualized CLEC revenues increasing from $2.5 million based on
December 1995 revenues to $17.4 million based on December 1996 revenues.
See "The Competitive Local Telecommunications Industry," "Competition" and
"Regulatory Overview" below.
CURRENT PRODUCTS AND SERVICES
SPECIAL AND SWITCHED ACCESS AND PRIVATE LINE SERVICES. The Company
currently provides several types of special and switched access and private line
services to its IXC and end-user
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customers. Historically, CAPs such as the Company were able to offer only
non-switched special access and private line services which involved the
installation of dedicated lines to provide the following types of communications
links:
- POP-to-POP Special Access -- Telecommunications lines linking the POPs of
one IXC or the POPs of different IXCs in a market, allowing these POPs to
exchange transmissions for transport to their final destinations.
- End-User/IXC Special Access -- Telecommunications lines between an end
user, such as a large business, and the local POP of its selected IXC.
- Private Line -- Telecommunications lines connecting various locations of
one or more customers' operations, suitable for transmitting voice and
data traffic internally.
The Interconnection Decisions allowed CAPs to provide a broader range of
services by enabling them to access additional customers through connections
with the ILECs' networks. These services include:
- Collocated Special Access -- A dedicated line carrying switched
transmissions from the IXC POP, through the ILEC's central office to the
end user.
- Collocated POP-to-ILEC Switched Access Transport -- A dedicated line
carrying switched transmissions from the ILEC's central office to an IXC's
POP.
To provide these services, the Company offers various types of highly
reliable, dedicated fiber optic lines that operate at different speeds and
handle varying amounts of traffic to provide tailor-made solutions to its
customers' needs.
- DS-0 -- A dedicated line service that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits
of bandwidth per second (a voice grade equivalent circuit). This service
offers a basic low capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
- DS-1 -- A high speed channel typically linking high volume customer
locations to IXCs or other customer locations. Used for voice
transmissions as well as the interconnection of Local Area Networks
("LANs"), DS-1 service accommodates transmission speeds of up to 1.544
megabits per second, the equivalent of 24 voice-grade equivalent circuits.
The Company offers this high-capacity service for customers who need a
larger communications pipeline.
- DS-3 -- This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second, which is equivalent to 28
DS-1 circuits or 672 voice grade equivalent circuits. This is a digital
service used by IXCs for central office connections and by some large
commercial users to link multiple sites.
SWITCH-BASED SERVICES. The Company has added and is continuing to add
capabilities to provide local dial tone and switched access termination and
origination services to its networks. As of December 31, 1996, the Company had
20 advanced, state-of-the-art switches installed serving a total of 24 of its
networks, including one switch acquired in connection with the City Signal
Acquisition.
Most states have taken regulatory and legislative action to open local
communications markets to various degrees of local exchange competition and
co-carrier status. As of February 28, 1997, the Company had established
interconnection arrangements with ILECs for 29 of its 36 networks. The Company
expects that continuing pro-competitive regulatory changes, including those
mandated by the Telecommunications Act of 1996, together with increasing
customer demand, will create more opportunities to introduce additional services
and expand the Company's networks to
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address a larger customer base. See "-- CLEC Market Potential," "-- Planned
Products and Services" and "Regulatory Overview."
CENTREX AND LONG-DISTANCE RESALE. Retail business customers in LATAs served
by the Company's subsidiaries in California can acquire centrex and
long-distance services direct from the Company. The Company's subsidiaries
purchase those services in bulk from the ILEC and the IXCs and provide their
retail customers with a single source of integrated local and long distance
telecommunications services and facilities management at a discount from the
published retail ILEC tariff rates. By using centrex service instead of a
private branch exchange ("PBX") to direct their telecommunications traffic,
customers can avoid the large investment in equipment required and the fixed
costs associated with maintaining a PBX network infrastructure. The Company's
centrex service allows medium to small business customers who lack the size or
resources to support their own PBX to benefit from a sophisticated
telecommunications system. The Company's acquisitions of ALD, TNS and Bittel in
1996 have complemented its long-distance resale services directed to such
customers.
CONSULTING SERVICES. Through GLA, the Company provides a full range of
consulting, management, engineering and information system solutions for
telephone, cable television and power companies, wireless providers and other
telecommunications infrastructure owners and operators in the United States and
elsewhere. GLA significantly expanded its capabilities through the acquisition
of Design Extenders, Inc. in January 1994 and its acquisition of Graphic Data
Solutions, a telecommunications software and mapping firm, in January 1995.
Following is a brief description of the services offered by each of GLA's
divisions:
CONSULTING SERVICES. Provides specialized consulting services to
telephone, cable television and other telecommunications providers. GLA
consulting professionals combine extensive experience in telecommunications
and cable network technology for support of a wide variety of assignments
that include engineering planning, network design, strategic planning,
opportunity and technical assessments, plus project management and due
diligence initiatives. In addition to its management consulting services,
GLA also provides field services that support outside plant design,
engineering and construction management. Efforts include field survey and
design, project engineering and engineering project management, plus
central office equipment and outside plant installation services.
DESIGN EXTENDER. One of the industry's leaders in providing
engineering, design and mapping services for hybrid fiber-coax systems,
serving large cable television systems operators. Services include systems
design and analysis, as-built and strand mapping, and digitizing.
TELEDATA. Provides engineering and CAD services for the conversion of
telecommunications systems, maps and drawings for use with applications on
clients' automated mapping/ facilities management/geographical information
systems (AM/FM/GIS).
TELEMAP. Designs AM/FM/GIS software products for clients engaged in
designing telecommunications networks.
TELESYSTEMS. Designs and installs financial and management software
products for telecommunications companies. Products include software for
billing systems, toll rating, plant records and financial applications.
PLANNED PRODUCTS AND SERVICES
The Company is expanding its capabilities to provide enhanced services,
such as high speed video conferencing, Internet access, frame relay and
ATM-based packet transport services. The Company is currently offering such
services in certain markets and expects to have such capabilities in all of its
operating networks by the end of 1997. These capabilities will enable the
Company to offer a variety of enhanced services where the transport function is
combined with a specific
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application to provide an integrated turnkey solution to its customer's voice,
data and video transmission requirements. These enhanced services include
applications such as LAN-to-LAN interconnect services, packet transport
services, high speed video conferencing, Internet access, frame relay, remote
database access and backup services, and fractional bandwidth services,
utilizing both the Company's networks and switching as well as facilities and
services provided by others. This will enable the Company to provide a customer
with all of its business lines and offer a wide range of switched-based
value-added services, such as directory and operator assistance, audio and video
conferencing, calling cards, 800-numbers, voice mail, Internet access and other
enhanced services.
STRATEGIC RELATIONSHIPS
From time to time, the Company has held discussions with other
communications entities concerning the establishment of possible strategic
relationships, including transactions involving preferred vendor relationships
and equity investments in the Company and one or more of its subsidiaries.
Effective September 1995, a subsidiary of the Company formed a
majority-owned joint venture with MCImetro to operate and significantly expand
the Company's existing network in San Jose, California and its environs. The
joint venture company operates the network and provides the Company and MCImetro
with the network services needed for their respective customers.
On May 30, 1996, the Company and MCImetro entered into an amendment to the
Company's master service agreement with MCImetro which provides that, until
September 30, 2001, the Company will be MCImetro's preferred provider of certain
local access services in a number of the Company's markets at a discount to
prevailing optimized ILEC rates for comparable circuits. Under the amended
master service agreement, MCImetro has agreed to purchase from the Company, with
certain provisos, all of MCImetro's required local access in specified markets
for new end-user services (and, at MCImetro's election, existing end user
services), and has given the Company a right of first refusal on a
circuit-by-circuit basis to provide other access services required by MCImetro
in such markets. The Company and MCImetro also entered into a subscription
agreement on June 24, 1996 pursuant to which MCImetro acquired a 15% interest in
the Company's Sacramento, California network for $4.5 million and MCImetro
invested an additional $3.5 million in the San Jose joint venture company. In
accordance with the provisions of the agreements between the Company and
MCImetro, on October 10, 1996 MCImetro (i) exchanged the agreed value of its
September 1995 investment in the San Jose network and (ii) exchanged the agreed
value of its June 1996 investments in both networks for an aggregate of 958,720
shares of the Company's Common Stock.
In December 1995, the Company and AT&T Communications signed a national
preferred vendor agreement pursuant to which the Company has become AT&T
Communications' preferred supplier of dedicated special access, switched access
transport and switched business and residential line services in most of the
Company's markets. The agreement provides that the Company will provide such
services to AT&T Communications at a discount to the tariffed or published ILEC
rates. In February 1997, the Company and AT&T announced an expansion of this
relationship to include several of the new markets in which the Company is in
the process of acquiring or constructing networks. The Company is currently
providing certain services under the agreement in 20 markets and expects to add
additional services in these markets and to add additional markets during 1997.
Based on the plans currently being implemented by the Company and AT&T
Communications and the level of services that the Company provided in 1996
pursuant to this agreement, the Company currently expects that its 1997 revenues
from this national vendor agreement will not exceed 10% of the Company's total
revenues for 1997. The Company's provision of existing services in any
additional markets and additional services is subject to the mutual agreement of
the Company and AT&T Communications with respect to each market, including
satisfactory completion of network validation tests. As a result, there is no
assurance that the national vendor agreement will be
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extended to cover additional markets and services. See "Risk Factors --
Dependence on Business from IXCs."
In February 1997, the Company concluded an agreement with AT&T pursuant to
which the Company will provide switched access origination and termination of
AT&T's long distance customer calls through the Company's local networks in most
of the Company's markets.
The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue opportunities, through both the retention of
existing customers and the addition of new customers. To pursue such
opportunities, on June 25, 1996 the Company formed a strategic alliance with
World-Net, a privately-held development stage company founded to form a national
Internet Service Provider network. The Company has committed a total of $20
million for a 25.5% fully-diluted interest in World-Net and it is possible that
the Company will decide to commit additional funds in furtherance of this
strategic alliance. The Company intends that both companies will seek ways to
work together to provide customer-oriented Internet and Intranet communications
solutions. The Company plans to develop and offer a wide range of
Internet-related services to users of World-Net's national ISP network,
including various dial-up and dedicated Internet access options.
CITIES SERVED
In January 1994, the Company completed its first acquisition, an operating
system in Springfield, Massachusetts and rights of way for the development of
networks in Hartford, Connecticut and Providence, Rhode Island, where networks
have been constructed by the Company and are operational. In October 1994, the
Company acquired an operating system serving Sacramento, a system under
construction in San Jose, and a local and long distance resale operation based
in San Francisco, California that serves small to medium sized businesses in the
San Francisco Bay area. The San Jose network was activated during December 1994
and has been expanded into Sunnyvale and Santa Clara, California. A 37-mile
expansion of the San Jose network is being completed, which will extend the
current 32-mile network into Milpitas and Palo Alto, California. See "--
Strategic Relationships" above.
During 1994, the Company also developed business plans and obtained
right-of-way agreements and the necessary operating rights to construct networks
in Oklahoma City, Oklahoma, and Little Rock, Arkansas. These networks, which
added a total of 46 route miles to the Company's networks, became operational
during the first half of 1995.
During March 1995, the Company acquired the assets of a 105-mile CAP
network in Tulsa, Oklahoma. Also during 1995, the Company commenced the
construction of networks in Bakersfield, Fresno and Stockton, California,
Albuquerque, New Mexico, Knoxville, Tennessee, Jackson, Mississippi, Reno,
Nevada and Tucson, Arizona, all of which are now operational.
Effective January 31, 1996, the Company acquired the business of City
Signal, a CLEC with a 208 mile network in Grand Rapids, Michigan, an operating
network in Lansing, Michigan and networks under construction in Ann Arbor,
Michigan and Toledo, Ohio. Also during 1996, the Company commenced the
construction of networks in White Plains, New York, Stamford, Connecticut,
Kansas City, Missouri, Springfield, Missouri and San Mateo, California, all of
which are expected to be operational by the end of the second quarter of 1997.
Since January 1, 1997, the Company has commenced construction of networks in
Long Island, New York and Minneapolis/ St. Paul, Minnesota which are expected to
be operational by year end 1997.
On February 25, 1997, the Company and MaineCom formed a joint venture
company, owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, owning, operating and developing networks initially in Portland,
Maine and Nashua and Manchester, New Hampshire and other markets in Maine and
New Hampshire as may be agreed upon by the Company and MaineCom in the future.
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<PAGE> 40
Subsidiaries of the Company currently have systems in operation or under
construction in the following cities:
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
- ----------------------- -----------------------
CITY SERVED CURRENT ANNOUNCED
----------- ------- ---------
<S> <C> <C>
EASTERN REGION
Springfield, Massachusetts............................ 0 0
Providence, Rhode Island.............................. 2 1
Hartford, Connecticut................................. 3 0
Grand Rapids, Michigan................................ 0 0
Lansing, Michigan..................................... 0 1
Traverse City, Michigan............................... 0 0
Toledo, Ohio(1)....................................... 0 1
White Plains, New York(1)............................. 1 0
Stamford, Connecticut(1).............................. 1 0
Long Island, New York(1).............................. 1 1
Portland, Maine(1)(2)................................. 0 1
Nashau, New Hampshire(1)(2)........................... 1 0
Manchester, New Hampshire(1)(2)....................... 0 0
CENTRAL REGION
Oklahoma City, Oklahoma............................... 2 0
Tulsa, Oklahoma....................................... 0 1
Little Rock, Arkansas................................. 2 1
Tucson, Arizona....................................... 2 0
Albuquerque, New Mexico............................... 2 0
Knoxville, Tennessee.................................. 0 2
Jackson, Mississippi.................................. 1 1
Kansas City, Missouri(1).............................. 1 1
Springfield, Missouri(1).............................. 0 1
Minneapolis, Minnesota(1)............................. 2 1
St. Paul, Minnesota(1)................................ 0 0
WESTERN REGION
Sacramento, California................................ 1 1
San Jose, California.................................. 2 0
Sunnyvale, California................................. 2 0
Santa Clara, California............................... 2 0
Stockton, California.................................. 0 0
Fresno, California.................................... 0 1
Bakersfield, California............................... 0 1
Milpitas, California.................................. 2 0
Palo Alto, California................................. 2 0
San Mateo, California(1).............................. 2 0
Reno, Nevada(1)....................................... 0 1
San Francisco, California(3).......................... N/A N/A
</TABLE>
- ---------------
(1) Networks under construction.
(2) Majority-owned joint venture.
(3) Facilities management operations serving the San Francisco Bay area.
On February 7, 1997, the Company concluded definitive agreements for the
acquisition of the Phoenix FiberLink assets and networks in operation and under
construction in Salt Lake City, Utah and Reno, Nevada, together with Phoenix
FiberLink's operating rights in Boise, Idaho. The Company plans to interconnect
the Reno network with the Company's existing network in Reno. The transaction is
subject to regulatory approvals.
The Company believes its regional aggregation strategy will yield economies
of scale in service costs and allow service-affecting decisions to occur closer
to its customers.
NETWORK ACQUISITION, DEVELOPMENT AND DESIGN
Before determining to acquire or construct a network in a particular city,
the Company's corporate development staff reviews the demographic, economic,
competitive and telecommuni-
39
<PAGE> 41
cations demand characteristics of the city, including its location, the
concentration of potential business, government and institutional end user
customers, the economic prospects for the area, available data regarding IXC and
end user demand and actual and potential CLEC competitors. Market demand is
estimated on the basis of market research performed by Company personnel and
others, utilizing a variety of data including estimates of the number of
interstate access and intrastate private lines in the city based primarily on
FCC reports and commercial data bases.
If a particular city targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel design a network targeted to provide access to 70% to 80% of
the identified business, government and institutional end user revenue base, to
the IXC POPs and the ILEC's principal central office(s) in the city, utilizing a
"self-healing" optical fiber ring architecture (build-out to 100% of the
identified end users is not considered to be cost-effective in most cases
because a portion of the demand is located in low density areas). Concurrently,
the Company's corporate development personnel visit the location of the proposed
network to begin discussions with city officials, right-of-way providers, IXCs
and potential end user customers.
Based on the data developed during these preliminary studies and visits, in
connection with either an acquisition or the construction of a network,
including estimates of the costs for fiber optic cable, transmission and other
electronic equipment, engineering, distribution and construction, building
entrance requirements and right-of-way acquisition, the Company develops
detailed financial estimates based on the anticipated demand for the Company's
current services (at present, the financial estimates prepared by the Company
for this purpose generally do not include potential future revenues for certain
enhanced products and services, which the Company plans to offer in all of its
operating networks by the end of 1997; see "-- Planned Products and Services").
If the financial estimates meet or exceed the Company's minimum rate of return
thresholds using a discounted cash flow analysis, the Company's corporate
development personnel prepare a detailed business and financial plan for the
proposed network, including competitive, regulatory and right-of-way analyses.
In the case of acquisitions, Company personnel perform due diligence in
order to determine if the city and network involved meet the foregoing
development and construction criteria. The ability of the Company to acquire
suitable additional systems will be subject to competition for acquisition
candidates.
NETWORK CONSTRUCTION
When the Company decides to build a network, the Company's corporate
development staff obtains any needed city authorizations. In some cities, a
construction permit is all that is required. In other cities, a license
agreement or franchise may also be required. Such licenses and franchises are
generally for a term of limited duration. The Telecommunications Act of 1996
requires that local governmental authorities treat telecommunications carriers
in a competitively neutral, non-discriminatory manner. The Company's current
licenses and franchises expire in different years, ranging from 2000 to 2010.
City franchises often require payment of franchise taxes which in some cases can
be included as part of customer charges for use of the network. The Company's
corporate development staff also finalizes arrangements for needed
rights-of-way. The Company strives to obtain rights-of-way on favorable terms
that afford the opportunity to expand the networks as business develops.
Rights-of-way are typically leased under multi-year agreements with renewal
options and are generally non-exclusive. The Company leases underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
most utilities, including most ILECs and electric companies, to afford CLECs
access to their poles and conduits and rights-of-way at reasonable rates on
non-discriminatory terms and conditions.
The Company's networks are constructed to cost-effectively access areas of
significant end user telecommunications traffic, as well as the POPs of most
IXCs and the principal ILEC central
40
<PAGE> 42
offices in the city. The Company establishes general requirements for network
design which are then provided to an engineering firm that renders drawings of
the contemplated network and the required deployment. Construction and
installation services are provided by independent contractors selected through a
competitive bidding process. Company personnel provide project management
services, including contract negotiation and supervision of the construction,
testing and certification of all facilities. The construction period for a new
network varies depending upon the number of route miles to be installed, the
initial number of buildings targeted for connection to the network, the general
deployment of the network and other factors. Networks that the Company has
installed to date generally have become operational within four to six months
after the beginning of construction.
EQUIPMENT SUPPLY
The Company purchases fiber optic cable and transmission and other
electronic equipment from Lucent Technologies, Inc. (formerly AT&T Network
Systems) and other suppliers at prevailing market prices. The Company expects
that fiber optic cable, equipment and supplies for the construction and
development of its networks will continue to be readily available from Lucent
Technologies, Inc. and other suppliers as required. In August 1995, the Company
entered into an agreement with Lucent Technologies, Inc. under which, as of
December 31, 1996, it has accepted delivery of 16 state-of-the-art 5ESS(R)-2000
switches.
CONNECTIONS TO CUSTOMER LOCATIONS
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate at
the Company's central node. Signals are sent through a network backbone to the
central node simultaneously on both primary and alternate protection paths. Most
buildings served have a discreet Company presence (referred to as a "remote
node") located in the building. Within each building, Company-owned internal
wiring connects the Company's remote node to the customer premises. Customer
equipment is connected to Company-provided electronic equipment generally
located in the remote node where customer transmissions are digitized, combined
and converted to an optical signal. The traffic is then transmitted through the
network backbone to the Company's central node where originating traffic can be
reconfigured for routing to its ultimate destination on the network.
The Company locates its remote node electronic equipment either in a room
leased from the building owner or on a customer's premises. Leasing space from a
building owner enables the Company to share electronic equipment among multiple
customers, causes little interruption for customers during installation and
maintenance and allows the Company to introduce new services rapidly and at low
incremental cost. For these reasons, the Company believes that leasing or
otherwise controlling equipment rooms in buildings served is desirable and has
therefore chosen to establish such arrangements where possible. When the Company
is unable to lease space from the building owner, the Company generally utilizes
space provided by the customer at no cost to the Company.
SALES AND MARKETING
The Company seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: wholesale and retail.
Wholesale customers consist of IXCs and information service providers such as
commercial data processing service providers and ISPs. Retail customers are
composed primarily of businesses, government and institutional
telecommunications users that have high volume dedicated telecommunications
requirements and, to a lesser extent, include residential customers for switched
services. Services are offered in accordance with tariffs filed with the FCC for
interstate services and state regulatory authorities for intrastate services.
Since they are classified by the FCC as non-dominant carriers, the Company's
subsidiaries do not have to cost-justify their rates and in certain cases may
enter into customer and product specific arrangements.
41
<PAGE> 43
WHOLESALE CUSTOMERS. The Company currently targets the major IXCs, such as
AT&T, MCI, Sprint, WorldCom and Frontier, and major information service
providers on a national basis. The Company believes that it can effectively
compete to provide access products (i.e., DS-1, DS-3, frame relay, ATM and
Internet hub servers) to these target customers in the cities in which it
operates based on price, reliability, state-of-the-art technology, route
diversity, ease of ordering and customer service. The Company provides
POP-to-POP and POP-to-end user non-switched access services and switched access
termination and origination services at prices below those the regulated ILECs
currently charge. The Company strives to establish close working relationships
with its IXC customers through "electronic bonding" of its operations with those
of the IXCs. Electronic bonding provides a seamless integration of the Company's
networks with the IXC's network which enables the IXC to access service, billing
and other data direct from the Company's networks and permits the IXC to enter
automated service requests (ASRs) electronically through the integrated network.
Wholesale customers are currently marketed by national account
representatives since the major IXCs and information service providers have
established national or regional groups to manage and coordinate their
purchasing of access services. These groups assess CLECs not only upon price,
quality, service and ease of provisioning in a particular market, but also upon
size, scope of operations and financial stability in order to maximize the
leverage of their CLEC relationships. The Company focuses on serving its IXC
customers in all of the Company's cities with a view to establishing national
preferred vendor relationships.
For the year ended December 31, 1996, approximately 22% of the Company's
consolidated revenues were attributable to access services provided to IXCs
pursuant to numerous individual service orders. Approximately 13% of such
consolidated revenues were attributable to services provided to MCI and its
affiliates pursuant to more than 200 individual service orders. The loss of
access revenues from IXCs in general or the loss of MCI as a customer could have
a material adverse effect on the Company's business.
IXC customers typically place individual service orders for specific
circuits for the Company to provide private line or local access services under
master service agreements which do not obligate the customer to any level of
business. Most of such current service orders can be terminated by the customer
on 60 days or less notice, subject, in certain cases, to specified termination
liabilities. However, as indicated above under "-- Strategic Relationships," the
Company has entered into a national preferred vendor agreement with AT&T
Communications under which the Company has become AT&T Communications' preferred
supplier of certain specified services in most of the Company's markets, and has
entered into an amendment to its master service agreement with MCImetro which
provides that, until September 30, 2001, the Company will be MCImetro's
preferred supplier of local access services in a number of the Company's
markets. Information service providers typically commit to a service agreement
for a term of up to three to five years which is either renegotiated or, with
certain contracts, automatically renewed for successive one-year periods or
converted to a month-to-month arrangement at the end of the contract term. The
Company's wholesale rates are sometimes based on published tariffs, which are
subject to revision from time to time, based upon changes in the published
tariffs. The Company believes that it is well positioned to serve the IXCs and
information service providers and generally has good relationships with its IXC
and information service provider customers.
RETAIL CUSTOMERS. The Company primarily targets four retail customer
segments -- government, finance, health care and education -- all of which have
high volume telecommunications requirements. The Company is currently providing
these customers private line services such as point-to-point communications,
dedicated DS-Os, DS-1s and DS-3s, dedicated high-speed Internet access, local
dial tone and switched access termination and origination services. The Company
is currently introducing frame relay and ATM-based packet transport capabilities
and will have the capability to offer a wide range of switch-based, value added
services, such as directory and operator assistance, audio and video
conferencing, calling cards, 800-numbers, voice mail and
42
<PAGE> 44
enhanced fax, Internet access and a variety of native speed LAN-to-LAN and FDDI
transport services, as well as high quality video transport. These services
provide customers with cost effective data transmission and access to services
such as the Internet. ATM-based packet transport capabilities will also provide
a vehicle for launching future services such as ultra high speed data and
compressed video transport.
The Company believes that it can effectively compete for business,
government, institutional and other end user customers based upon price,
reliability, product diversity, service and custom solutions to the customer's
needs. The Company offers such services to retail customers at prices below
those currently offered by the regulated ILECs. In addition, the Company's
self-healing optical rings ("SONET") provide reliability which the Company
believes is generally superior to the reliability provided by many of the ILECs
in second and third tier cities.
Retail customers are currently marketed through Company direct sales
representatives in each city. The national sales organization also provides
support for the local sales groups and develops new product offerings and
customized telecommunications applications and solutions which address the
specific requirements of particular customers. In addition, the Company markets
its products through advertisements, trade journals, media relations, direct
mail and participation in trade conferences.
Retail customers typically commit to a service agreement for a term of
three to five years which is either renegotiated or automatically converted to a
month-to-month arrangement at the end of the contract term. Retail contracts are
generally at fixed rates. The Company believes that it has generally good
relationships with its retail customers.
CONSULTING CUSTOMERS. GLA's sales and marketing efforts are directed
towards a wide variety of telephone, cable television and power companies,
wireless providers and other telecommunications infrastructure owners and
operators in the United States and elsewhere. GLA offers multi-faceted solutions
to customers' telecommunications infrastructure requirements utilizing its
varied technical and engineering expertise to offer a complete package of
consulting, field service and information systems support. GLA's engineering and
technical personnel include professionals who have significant technical and
engineering expertise in most of the critical voice, video, data and wireless
telecommunications technologies.
NETWORK OPERATIONS
The Company's networks consist of fiber optic digitally-based
communications paths which allow for high-speed, high quality transmission of
voice, data and video communications. The Company typically installs backbone
fiber optic cables containing either 96 or 144 fiber strands, which have
significantly greater bandwidth carrying capacity than traditional analog copper
cables. Using current electronic transmitting devices, a single pair of glass
fibers on the Company's networks can transmit up to 32,256 simultaneous voice
conversations, whereas a typical pair of wires in a traditional analog copper
cable installed in many current ILEC networks can currently carry only a maximum
of 24 simultaneous voice conversations. The Company expects that continuing
developments in compression technology and multiplexing equipment will increase
the capacity of each fiber, thereby providing more bandwidth carrying capacity
at relatively low incremental cost.
The Company offers end-to-end fully protected fiber services utilizing
SONET ring architecture which routes customer traffic simultaneously in both
directions around the ring to provide protection against fiber cuts. Back-up
electronics for high-speed circuits become operational in the event of failure
of the primary components adding further redundancy to the Company's systems.
The Company's networks are monitored seven days per week, 24 hours per day
by the Company's NOC Centers (Network Operations Control Centers) in St. Louis,
Missouri and Grand
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<PAGE> 45
Rapids, Michigan. The NOC Centers provide a single point of contact for network
monitoring, troubleshooting and dispatching, as well as capabilities for
"electronic bonding" with customers.
With full time monitoring, service problems are detected, diagnosed and, in
most cases, repaired remotely from the NOC Centers, typically before they
adversely affect the Company's customer and often before the customer even
notices a problem. The NOC Centers provide real-time alarm status and
performance information for each of the Company's networks around the country.
They also afford improved disaster recovery to customers through remote circuit
provisioning and cross-connect features.
CORPORATE OFFICE
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
at those offices is (314) 878-1616.
NETWORK FACILITIES AND OFFICES
The Company leases network hub sites and other facility locations and sales
and administrative offices in each of the cities in which it has operations.
During the year ended December 31, 1996, rental expense for such locations and
offices totaled $3.2 million. At December 31, 1996, minimum future rental
payments under noncancelable leases covering the Company's locations, offices
and other equipment totaled $25.7 million. The Company owns a 23 acre parcel of
land in Town & Country, Missouri, on which it is constructing its new corporate
headquarters building. A wholly-owned subsidiary of the Company owns a 42,000
square foot office building in Grand Rapids, Michigan that houses a switch, NOC
Center and office facilities.
EMPLOYEES
At December 31, 1996, the Company had approximately 789 full-time
employees. None of the Company's employees is represented by a union or covered
by a collective bargaining agreement. The Company believes it has a highly
capable and motivated work force with whom relations are good. In connection
with the construction and maintenance of its fiber optic networks, the Company
uses third-party contractors, some of whose employees may be represented by
unions or covered by collective bargaining agreements.
LEGAL PROCEEDINGS
On September 22, 1995, GST Tucson Lightwave, Inc. ("Lightwave") was
permitted to intervene in litigation originally filed by Brooks Fiber
Communications of Tucson, Inc., a wholly-owned subsidiary of the Company ("BFC
Tucson"), styled Brooks Fiber Communications of Tucson, Inc. v. City of Tucson,
cause No. CIV 95-655-TUC-RMB, U.S. District Court, District of Arizona. On
October 2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company
and Tucson Electric Power Company ("TEP"), charging BFC Tucson, the Company and
TEP with violations of antitrust laws, all of which alleged violations stem from
an agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive
rights, for one year, to utilize certain of TEP's rights of way. The original
causes of action have been settled; however, the counterclaim by Lightwave is
currently still pending. The counterclaim seeks treble damages, attorneys' fees,
costs (all in an unspecified amount) and such other relief as the court deems
proper. The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
From time to time the Company or a subsidiary of the Company is named as a
defendant in routine lawsuits incidental to its business. Based on the
information currently available, the Company believes that none of such current
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company.
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<PAGE> 46
THE COMPETITIVE LOCAL TELECOMMUNICATIONS INDUSTRY
LONG DISTANCE SERVICES
The 1982 court-directed breakup of AT&T (the "Divestiture") specifically
provided for competition in the long distance segment of the market, but
prohibited the RBOCs from entering the inter-LATA long distance market.
Competitors in the long distance market now include AT&T, MCI, Sprint, WorldCom,
Frontier and numerous other smaller inter-exchange carriers. These long distance
carriers provide only the interconnection between local telephone networks and
pay access charges to the ILECs for originating and terminating the calls
carried by the IXC. By 1992, it is estimated that more than one-third of the
nation's long distance market was controlled by competitors of AT&T. Following
the Divestiture, service levels in the long distance market have improved,
product offerings have increased and prices for long distance service generally
have declined, all of which has resulted in increased consumer demand and
significant market growth for long distance services.
LOCAL EXCHANGE SERVICES
In contrast to the long distance telecommunications inter-exchange market,
the local exchange market, until recently, has remained the domain of the ILECs
as the result of regulatory policy. ILECs include the seven RBOCs and their 22
Bell operating company subsidiaries ("BOCs"), the GTE operating companies,
United Telecom Corp. and approximately 1,000 other independent local exchange
carriers. It is estimated that 1995 ILEC revenues approximated $102 billion
nationally, including Local Exchange Services. In general, the ILECs connect end
users within a LATA and also provide the local portion of most long distance
calls. The ILECs are required to serve all residential and business users within
restricted geographic areas defined by the LATAs. The market for Local Exchange
Services consists of a number of distinct services and related charges that
include:
1. Switched Local and Private Line Services -- The basic dial tone,
centrex and private line services;
2. Long Distance Access Services -- The access services provided by
the ILECs to IXCs for the local origination or termination of long distance
telephone calls; and
3. Intra-LATA Long Distance Services -- Long distance calls
originating and terminating within a LATA.
Traditionally, the ILECs' costs of providing certain Switched Local
Services have been subsidized by Long Distance Access Services and Intra-LATA
Long Distance.
The following schematics illustrate the general structure of a CLEC network
and an IXC long distance network.
CLEC NETWORK
<TABLE>
<CAPTION>
<S><C>
Voice On-Net Internet LEC Off-Net
Customer Provider Local Customer
Video Exchange Locations
Carrier Brooks Fiber
Data On-Net Hub/Switch
Customer
Long
Distance
Carrier(s)
IXC IXC
Network Network
</TABLE>
<PAGE> 47
LONG DISTANCE NETWORK
LEC LEC
Central Central
Office Office
Long Distance Carrier
Points of Presence ("POPs")
Originating
Customer Terminating
CLEC Customer
Network
CLEC
Hub/Switch
COMPETITIVE PROVIDERS OF LOCAL EXCHANGE SERVICES
Although the Divestiture did not mandate competition in the local exchange
market, the rapid development of fiber optic and digital electronic technologies
has encouraged the growth of cost effective alternatives to the monopolistic
position of the ILECs in many of the local exchange markets. In addition, the
IXCs have lobbied for competition in the local exchange markets due to the
significant fees paid by IXCs to the ILECs. Industry sources estimate that local
access charges paid by IXCs equal as much as 45% of the long distance industry's
total revenues.
The first CAPs were established in the mid-1980s to provide nonswitched
special access and private line services in direct competition with the ILECs.
Initially, CAPs could compete effectively only for the $8.6 billion special
access and private line services portion of the local exchange market. These
services were provided to customers in buildings physically connected to
separate, privately-owned CAP networks. Within this framework, the CAPs offered
three types of special access and private line services:
1. Special access long distance carrier connections. High capacity
lines used to transmit telecommunications voice and data between the Points
of Presence of an IXC or from one IXC to another ("POP to POP-Special
Access");
2. Special access, end user to IXC connections. Medium to high
capacity lines to connect business, government and institutional end users
to IXCs ("POP to End User-Special Access"); and
3. Private line, end user to end user connections. Low to medium
capacity lines used to interconnect multiple customer locations ("End User
to End User Private Line").
In September 1992, the FCC ordered the RBOCs and all but one of the larger
ILECs (those having in excess of $100 million in gross annual revenues) to
provide interconnection in the ILECs' central offices to any competitive access
provider seeking such interconnection for the provision of interstate special
access services. The FCC also ordered the ILECs to file interconnection tariffs
by February 1993; these tariffs became effective in June 1993. This decision
granted CLECs the right to interconnect their private networks to the networks
of the ILECs, thereby enabling the CLECs to access new customers and new markets
without physically expanding their networks ("Collocated Special Access").
Initially, the FCC's new rules were restricted to the provision of the $2.5
billion interstate collocated special access services portion of the local
exchange market.
In August 1993, the FCC adopted rules for switched access transport
services, which largely mirror the FCC's special access rules. Switched access
transport is an identical service to special access except that it connects with
a ILEC central office at one end and carries traffic to an IXC POP that has been
switched by the ILEC at the central office. This represents a $4.3 billion
portion of the local exchange market. The FCC ordered the larger ILECs to file
new tariffs reflecting interconnection by CLECs by November 1993; these tariffs
became effective in February 1994 for switched access transport ("Collocated
Switched Access Transport").
In the August 1993 decision, the FCC issued additional rulings concerning
expanded interconnection for competitive access services. First, the FCC
reaffirmed its Special Access Order adopted
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<PAGE> 48
in September 1992, in which the FCC ordered the larger ILECs to allow CLECs
interconnection with ILECs for special access. The FCC also reaffirmed its
"Fresh Look" policy which allows certain customers who have entered into
long-term contracts with ILECs for access services to terminate those agreements
with only limited termination charges. This policy is intended to allow local
competitive access providers to penetrate a market more quickly since it permits
end users to move their telecommunications traffic to the competitive provider
with minimal transfer costs.
The FCC also granted ILECs additional pricing flexibility for switched
access services in the form of zone density pricing similar to zone density
pricing allowed for special access interconnection. In addition, the FCC allowed
the local exchange carriers to offer volume discounts and term discounts,
subject to certain limitations.
In total, the FCC's Interconnection Decisions permitted CLECs to compete
for an additional $13.8 billion portion of the local exchange market (including
$7.0 million of switched access termination).
The Telecommunications Act of 1996, which contains provisions that mandate
local and long distance telecommunications services competition, was enacted
into law on February 8, 1996 (see "Regulatory Overview"). The FCC has issued and
will issue further orders under the Telecommunications Act of 1996, many of
which, if not all, will likely be appealed by one or more affected parties to
the U.S. Court of Appeals and U.S. Supreme Court. In addition, the
Telecommunications Act of 1996 may be amended in 1997 or subsequent years.
Therefore, the Company is unable to determine the final form and impact of
existing and future legislation, and the regulatory and judicial actions under
such legislation.
In addition to the federal initiatives and rulings, most states have now
taken regulatory and legislative action to open local telecommunications markets
to local exchange competition and co-carrier status. The Company is deploying
switches on its networks as rapidly as possible and plans to have switches
serving all of its operating networks by the end of the second quarter of 1997.
When the first CAP networks were built in the 1980s, they could compete
effectively only for the approximately $8.6 billion special access and private
line services portion of the local exchange market (POP to POP Special Access,
POP to End User Special Access and End User to End User Private Line). Beginning
in 1994, after the FCC's Interconnection Decisions, which allowed CAPs to
provide Collocated Special Access, Collocated Switched Access Transport and,
with the installation of a switch, Switched Access Termination services, CAPs
were allowed to compete for an additional estimated $13.8 billion portion of the
market. If regulatory and other industry trends continue, the Company believes
that ultimately the entire approximately $102 billion total U.S. market may be
open to competition as CLECs deploy switches capable of providing the full array
of local exchange services and as state public utility commissions ("PUCs")
authorize CLECs to provide full local telecommunications services.
47
<PAGE> 49
The following chart illustrates the potential CLEC revenue opportunities,
based on the total 1995 local exchange revenues, both before and after a CLEC
deploys a switch in its local network.
CLEC POTENTIAL REVENUE OPPORTUNITIES*
<TABLE>
<CAPTION>
TOTAL 1995 U.S. LOCAL
EXCHANGE MARKET
($ BILLIONS)
---------------------
<S> <C> <C>
Access/Private Line Services (Non-Switched)
1. POP to POP -- Special Access................................ $ 2.0
2. POP to End User -- Special Access........................... 2.6
3. End User to End User -- Private Line........................ 4.0
4. Collocated Special Access................................... 2.5
5. Collocated Switched Access Transport........................ 4.3
Switched Services
6. Switched Access Termination................................. 7.0
7. Switched Access Origination................................. 4.7
8. End User Common Line Access Charge
(Business).................................................. 5.9
(Residential)............................................... 5.4
9. Co-Carrier Switched Local Services (centrex)
(Business).................................................. 23.0
10. Co-Carrier Switched Local Services
(Residential)............................................... 20.8
11. Intralata Toll and Other.................................... 17.6
12. Unclassified "other"........................................ 2.0
--------
Total U.S. Market................................................ $101.8
========
</TABLE>
- ---------------
* Source: Paradigm Resources, Inc. Includes data for Tier 1, Tier 2, Tier 3 and
all other markets.
48
<PAGE> 50
COMPETITION
As noted above, the regulatory environment continues to promote competition
as the FCC has set the industry on an open competition course with its
Interconnection Decisions. Most state regulatory authorities have followed the
FCC's lead by requiring co-carrier status for CLECs and ILEC open network
scenarios. In addition, the Company believes that the recently enacted
Telecommunications Act of 1996 and regulatory and court orders at the federal
level may further accelerate the open competition process.
ILECS
In each city served by its networks, the Company faces, and expects to
continue to face, significant competition from the ILECs, which currently
dominate their local telecommunications markets. As competition in the local
exchange market proceeds, the Company believes that a fundamental division
between the needs of business/governmental/institutional end users and
residential end users will drive the creation of differentiated
telecommunications services and service providers. The Company believes that the
IXCs, ISPs, wireless carriers and business, governmental and institutional end
users on which it focuses will have distinct requirements including maximum
reliability, consistent high quality transmissions, capacity for high speed data
transmissions, diverse routing, responsive customer service and continuous
attention to service enhancement and new service development.
The Company competes with the ILECs for these customers in its markets on
the basis of price, reliability, state-of-the-art technology, product offerings,
route diversity, ease of ordering and customer service. However, the ILECs have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that the Company, in some
cases, is not currently allowed by regulators to offer. The Company has sought,
and will continue to seek, to achieve parity with the ILECs in order to become
able to provide a full range of local telecommunications services. The CLEC
industry continues to challenge, before federal and state regulators, many
advantages which exist because of the ILECs' historical status, but there can be
no assurance that the CLEC industry will succeed in these endeavors. See
"Regulatory Overview" for additional information concerning the regulatory
environment in which the Company operates.
Existing competition for private line, special access and local exchange
services is based primarily on quality, capacity and reliability of network
facilities, customer service, response to customer needs, service features and
price, and is not based on any proprietary technology. As a result of the
comparatively recent installation of the Company's fiber optic networks, its
dual path architectures and the state-of-the-art technology used in its
networks, the Company may have cost and service quality advantages over some
currently available ILEC networks. Moreover, because of its customer service
orientation and its focus on business, governmental and institutional customers,
the Company believes that, in general, it provides more attention and
responsiveness to its customers than do its ILEC competitors. The Company also
believes it will be able to successfully compete with the ILECs in the cities
served by its networks because the Company believes the ILECs have generally
been less focused on competition in second and third tier cities and,
accordingly, place a lower priority on replacing their existing copper cable
systems in those cities.
Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the Interconnection
Decisions. The Telecommunications Act of 1996 also provides further regulatory
flexibility for ILECs to allow them to respond to competition. If the ILECs
continue to lower rates and/or engage in substantial volume and term discount
pricing practices for their customers, there would be downward pressure on
certain rates which the Company charges, which pressure could adversely affect
the Company's profitability. If regulatory decisions permit the ILECs to charge
CLECs substantial fees for interconnection to the ILECs' networks or afford
ILECs other
49
<PAGE> 51
regulatory relief, such decisions could also have a material adverse effect on
CLECs, including the Company. However, the Company believes this effect will be
more than offset by the increased revenues available as a result of access to
off-net customers provided through interconnection with ILEC networks and the
continuing shift by IXCs to purchasing their access services from CLECs instead
of ILECs.
The Company believes that various legislative initiatives, including the
recently enacted Telecommunications Act of 1996, as well as a recent series of
completed and proposed transactions between ILECs, IXCs and cable companies
increase the likelihood that barriers to local exchange competition will be
removed. The introduction of such competition, however, also means that ILECs
will be authorized to provide long distance services under the provisions of the
Telecommunications Act of 1996. When ILECs are permitted to provide such
services, they will ultimately be in a position to offer single source service.
On January 2, 1997, Ameritech filed an application with the FCC for authority to
provide inter-LATA long distance services in Michigan which the FCC must grant
or deny within 90 days of filing.
The entry of ILECs into the long distance business is expected to have a
profound impact on existing market relationships. The Company expects that this
will cause the existing long distance providers to increasingly turn to CLECs to
gain access to their customers.
CLECS AND OTHER COMPETITORS
The Company also faces, and expects to continue to face, competition from
other CLECs and other potential competitors in certain of the cities in which
the Company offers its services, some of which competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. However the Company
believes that, as a result of its strategy to operate in second and third tier
cities, where there are generally fewer CLEC competitors, and to pursue the
establishment of strategic relationships with the major IXCs, combined with its
own capital, technical and management resources, these competitors will not pose
an untenable threat.
In addition to the ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, and private networks built by
large end users. Previous impediments to certain utility companies entering
telecommunications markets under the Public Utility Holding Company Act of 1935
were removed by the Telecommunications Act of 1996.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. MCI announced in January 1994 that its MCImetro unit would invest more
than $2 billion to build in fiber optic rings and local switching equipment in
major metropolitan markets to provide direct connection to its customers and to
provide alternative local telephone services to other IXCs. The recently
announced acquisition of MCI by British Telecommunications could increase the
resources available to MCI for the above purposes. The Company believes that
this affirms the opportunity in the CLEC industry and the Company's decision to
focus on lower tier cities. Since the Company is focusing on different markets,
it does not expect to compete directly against MCImetro in most of its markets,
and it may provide complementary markets to certain MCImetro markets. See
"Business of the Company -- Strategic Relationships" for information concerning
the existing and proposed contractual relationships between the Company and
MCImetro. AT&T and Sprint have also indicated their intention to offer local
telecommunications services to certain U.S. markets, either directly or in
conjunction with CLECs or cable operators, and WorldCom and MFS Communications
completed a merger on December 31, 1996 which will enable WorldCom to offer a
"one-stop shopping" combination of long distance and local exchange services.
50
<PAGE> 52
Cable television companies are upgrading their networks with fiber optics
and installing facilities to provide fully interactive transmission of broadband
voice, video and data communications. Cable company-controlled CLECs, such as
Teleport and U.S. West/Time Warner, historically have possessed certain
advantages over other CLECs in the provision of competitive access services
resulting from certain rights in favor of the cable television companies to use
third-party rights-of-way and to obtain building access at advantageous costs,
and possible cost advantages as a result of statutorily-prescribed limits on the
amounts that electric utilities and ILECs may charge cable companies for use of
utility-owned poles and conduits. However, the Telecommunications Act of 1996
contains provisions that require most utilities, including most ILECs and
electric companies, to afford CLECs access to their poles and conduits and
rights-of-way at reasonable rates on non-discriminatory terms and conditions.
Recent court decisions invalidating the FCC's prohibition of cross-ownership of
cable companies and telephone companies in the same local service territory
could permit ILECs to compete with cable television companies in the provision
of cable television service in residential markets. However, the Company
believes that the convergence of these industries will not be a direct threat
because their focus is oriented on residential customers rather than the
business customers which the Company targets.
Electric utilities may install fiber optic telecommunications cable to
allow remote meter reading, peak load monitoring, customer service and
interactive billing. The Telecommunications Act of 1996 facilitates the
provision of telecommunications services by electric utilities over those
networks.
Cellular and PCS providers may also be a source of competitive local
telephone service. However, the Company believes wireless operators will be
large users of CLEC access services to transport their calls among their radio
transmitter/receiver sites through networks that avoid the ILECs with whom they
compete.
The Company also competes with equipment vendors and installers, and
telecommunications management companies, with respect to certain portions of its
business.
Many of the Company's existing and potential competitors have financial,
personnel and other resources significantly greater than those of the Company.
However, the Company believes that its strategy of targeting second and third
tier cities, its capital, technical and management resources and its orientation
toward IXCs and other commercial telecommunications users will enable it to
achieve its strategic objectives.
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<PAGE> 53
REGULATORY OVERVIEW
OVERVIEW
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they are used
to originate or terminate intrastate communications. Local governments sometimes
impose franchise or licensing requirements on CLECs and regulate street opening
and construction activities. The Company actively supports additional regulatory
reform at all levels to further open telecommunications markets to competition.
THE TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, which is comprehensive federal
telecommunications legislation affecting all aspects of the telecommunications
industry. The Telecommunications Act of 1996 establishes a national policy that
promotes local exchange competition. At the heart of the Telecommunications Act
of 1996 is the requirement that local and state barriers to entry into the local
exchange market be removed. The Telecommunications Act of 1996 establishes
uniform standards under which the FCC and state commissions are to implement
local competition and co-carrier arrangements in the local exchange market. The
Telecommunications Act of 1996 also imposes significant obligations on the RBOCs
and other ILECs, including the obligation to interconnect their networks with
the networks of competitors. Each ILEC would be required not only to open its
network but also to unbundle their network elements and services in order that
competitors may purchase only those elements and services that they require. The
pricing of these unbundled network elements and services, which is uncertain and
will depend, among other things, upon regulatory and judicial developments, will
determine whether it is economically attractive for CLECs, IXCs and others to
use these elements and services. ILECs will be required to make available for
resale to new entrants all services they offer end user customers on a retail
basis. The Telecommunications Act of 1996 also imposes requirements on ILECs to
provide reciprocal call termination and telephone number portability.
The Telecommunications Act of 1996 also provides, among other things, that
the RBOCs and other ILECs satisfy a competitive checklist, providing the Company
and other competitors the services and facilities necessary to offer local
switched services. Under the Telecommunications Act of 1996, the FCC is directed
to interpret and clarify these terms. The FCC has engaged in rulemaking
proceedings to establish these arrangements, which will ultimately be
implemented by the state telecommunications or regulatory commissions (see
"State Regulation" below). The following table summarizes the key factors of the
legislatively mandated competitive checklist, often referred to as "co-carrier
status," being pursued by the Company with the FCC and with state regulators and
the anticipated effect of these factors on the Company's ability to provide
fully competitive services on an economically efficient and technically feasible
basis.
<TABLE>
<CAPTION>
CHECKLIST ITEM DEFINITION ANTICIPATED EFFECT
-------------- ---------- ------------------
<S> <C> <C>
Interconnection.............. Efficient network interconnection to Allows CLECs to service customers not
transfer calls back and forth between directly connected to their networks
ILECs and competitive networks
(including 911, 0+, directory
assistance, etc.)
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
CHECKLIST ITEM DEFINITION ANTICIPATED EFFECT
-------------- ---------- ------------------
<S> <C> <C>
Local Loop Unbundling........ Allows competitors to selectively Reduces the capital and service costs
gain access at cost-based rates to of CLECs to serve customers not
ILEC wires from central offices to directly connected to their networks
customers' premises
Reciprocal Compensation...... Mandates reciprocal compensation for Improves CLEC margins for local
local traffic exchange between ILECs service
and competitors
Number Portability........... Allows customers to change local Allows customers to switch to CLEC
carriers without changing numbers. provided local service without
True portability allows incoming changing phone numbers
calls to be routed directly to a
competitor. Interim portability
allows incoming calls to be routed
through the ILEC to a competitor at
the economic equivalent of true
portability
Access to Phone Numbers...... Mandates assignment of new telephone Allows CLECs to provide telephone
numbers to CLEC customers numbers to new customers on the same
basis as the ILEC
</TABLE>
The RBOCs' incentive to comply with the opening under the
Telecommunications Act of 1996 of the local exchange market to competition
derives from the Act's provisions allowing the removal of the current ban on
RBOC provision of interLATA toll service and equipment manufacturing. This ban
will only be removed after the RBOC demonstrates to the FCC, in consultation
with the Department of Justice and the relevant state commissions, that the RBOC
has met the requirements of the competitive checklist, which details the basic
co-carrier requirements, and the FCC concludes that RBOC entry into long
distance is in the public interest. The RBOC must also generally show that it
has entered into an approved interconnection agreement with at least one
unaffiliated, facilities-based competitor in some portion of a state before
offering long distance service in that jurisdiction. In early 1997, Ameritech
filed and withdrew two applications with the FCC for authority to provide
inter-LATA long distance service in Michigan under the Telecommunications Act of
1996, and has announced that it will again file an application in March 1997,
which the FCC must grant or deny within 90 days of filing.
While state-by-state regulatory activity has to date brought co-carrier
arrangements or initiatives to various degrees of completion in most states, the
Telecommunications Act of 1996 is intended to accelerate the process and create
a competitive environment in all markets, eliminating state and local statutory
and regulatory barriers to entry. This preemption of state laws barring local
competition and the relaxation of regulatory restraints should enhance the
Company's ability to expand its service offerings nationwide.
The Company, as a facilities-based, multi-market competitive provider
already active in emerging co-carrier environments, stands to benefit from the
Telecommunications Act of 1996. In addition to providing the Company with a
national framework to achieve co-carrier status in local exchange markets, the
Telecommunications Act of 1996 permits CLECs with less than 5% of nationwide
prescribed access lines to offer single source combined packages of local and
long distance services. AT&T, MCI and Sprint may not bundle in a RBOC's
territory their local services resold from a RBOC and long distance service
until the RBOC is authorized to enter the inter-LATA long distance market or for
three years, whichever event occurs earlier.
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<PAGE> 55
The Telecommunications Act of 1996, by removing barriers to entry into the
local exchange market and at the same time enabling multiple carriers to compete
with the Company in the provision of telecommunications services, ultimately
allowing the RBOCs and large IXCs to offer their own packages of single source
local/long distance services, substantially increases the competition the
Company will face.
The Telecommunications Act of 1996 also creates a new Federal-State Joint
Board for the purpose of making recommendations to the FCC regarding the
implementation of a largely revised universal service program. All
telecommunications carriers, including the Company, that provide interexchange
services are required to contribute, on an equitable and nondiscriminatory
basis, to the preservation and advancement of universal service pursuant to a
specific and predictable universal service mechanism to be established by the
FCC. The Company is unable to predict the final formulas for universal service
contributions or its own level of contribution.
The Telecommunications Act of 1996 in some sections is self-executing, but
in most cases the FCC must issue regulations that identify specific requirements
before the Company and its competitors can proceed to implement the changes that
the Telecommunications Act of 1996 prescribes. The FCC already has commenced
several of these rulemaking proceedings. In addition, the Telecommunications Act
of 1996 retains for individual state utility commissions authority to impose
their own regulation of local exchange services so long as such regulation is
not inconsistent with the requirements of the Telecommunications Act of 1996.
The Company is unable to predict the final form of such regulation and its
potential impact on the market.
FEDERAL REGULATION
The FCC has adopted a "forbearance" policy for non-dominant carriers, such
as the Company and its subsidiaries, under which no prior approval is needed for
network construction or acquisition, and only minimal tariff and reporting
requirements are in effect. In their provision of certain services, ILECs in
most markets are regulated by the FCC as dominant carriers.
As a result of rulings announced by the FCC in September 1992 and August
1993 (the "Interconnection Decisions"), the Company is able to offer interstate
special access and switched access transport services to virtually every
business and government end user in the metropolitan areas which the Company
elects without being directly connected to such customers. The Interconnection
Decisions enabled CLECs to compete for transport of switched long distance calls
between ILEC central offices and long distance carrier POPs. At the same time
the ILECs were granted greater pricing flexibility for those services. Portions
of the Interconnection Decisions are likely to be further reviewed and addressed
by the FCC as it construes the federal legislation.
In March 1995, a major CLEC introduced an initiative before the FCC calling
for the nationwide unbundling of the "local loops" controlled by the ILECs in
order to make those facilities available on a cost-based basis to all eligible
local service providers, including the Company, following initiation of local
competition. The local loop is the part of the ILEC networks that physically
connects the customer's premises to the central office and is used to receive
and originate local and long distance calls. The Company has simultaneously
pursued similar initiatives before individual state regulatory commissions and
has obtained orders or entered into agreements with ILECs to obtain unbundled
loops in a number of states. The FCC has addressed local loop unbundling and
related unbundling issues in connection with its interpretation of the
Telecommunications Act of 1996.
In July 1995, the FCC took two actions related to the assignment of
telephone numbers, first mandating that responsibility for administering and
assigning local telephone numbers be transferred from the RBOCs and a few other
ILECs to a neutral entity, and second, proposing a regulatory structure under
which a wide range of number portability issues would be resolved. The FCC is
expected to address those and other number portability issues in connection with
its ongoing interpretation of the Telecommunications Act of 1996. On July 2,
1996 the FCC issued an order regarding interim and permanent number portability
indicating that rates charged by ILECs to CLECs
54
<PAGE> 56
for interim portability should be minimal and that permanent number portability
should be available in the top 100 U.S. markets by the end of 1997. In September
1996, the FCC designated the members of the North American Numbering Council,
which will advise the FCC on numbering issues. On November 18, 1996, one RBOC
filed a complaint in the U.S. Court of Claims requesting compensation for costs
of interim portability which it claims were a violation of its Fifth Amendment
rights under the U.S. Constitution and not allowed by the FCC.
In September 1995, the FCC issued a Notice of Proposed Rulemaking which
proposes rules that, among other things, would increase ILEC pricing flexibility
and deregulation as competition increases.
During 1996 the FCC has taken several actions with respect to competitive
local telecommunications pursuant to the Telecommunications Act of 1996.
On August 1, 1996, the FCC issued an order amending its pole attachment
rules to be pursuant to the Telecommunications Act of 1996 by requiring
utilities, including ILECs and most electric companies, to make poles, conduit
and rights-of-way available to telecommunications carriers, including CLECs, at
reasonable cost and on a nondiscriminatory basis. Several utilities have
appealed the FCC order to the U.S. Court of Appeals, which has not yet issued a
decision.
On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, IXCs and state PUCs regarding several provisions
of the Telecommunications Act of 1996, to be applicable in the event that
parties to interconnection agreements cannot agree on certain terms and the
state PUCs issue orders containing arbitrated results. The rules include, among
other things, FCC guidance on: (1) discounts for end-to-end resale of ILEC local
exchange services (which the FCC has suggested should be in a range of 17% to
25%); (2) availability of unbundled local loops and other unbundled ILEC network
elements; (3) the use of "total element long run incremental cost" (TELRIC) in
the pricing of these unbundled network elements; (4) average default proxy
prices for unbundled local loops in each state; (5) mutual compensation rates
for termination of ILEC/CLEC local calls; (6) an access charge transition plan
that: (a) leaves access charges unchanged with respect to situations involving
resale of ILEC local exchange services; (b) leaves all access charges in place
with respect to situations involving use of ILEC unbundled switching and other
network elements to provide local exchange services, except for 25% of the
"transport interconnection charge" (TIC); and (c) permits avoidance of access
charges only when the ILEC switch is not utilized; and (7) the ability of CLECs
and other interconnectors to opt into portions of interconnection agreements
negotiated by ILECs with other parties on a most favored nation (or "pick and
choose") basis.
The FCC issued on December 24, 1996 a Notice of Proposed Rule Making (NPRM)
regarding future changes to access charges and a Report and Order implementing
changes to the ILEC price cap rules. The NPRM generally asked for comments on
two approaches for a transition of access charges to cost-based levels -- a
"market-based" approach with a phase-in of ILEC deregulation depending upon the
level of local competition, and a "prescriptive" approach under which the FCC
would specify the timing and nature of changes to existing rate levels. The NPRM
also asked for comments on changes to the access charge rate structure as well.
The Report and Order eliminated the price cap's lower service band indices and
substantially eased the requirements necessary for the introduction of new
services. In addition, the Federal-State Joint Board on Universal Service
consisting of FCC and state commissioners made its recommendations on the
implementation of the universal service provisions of the Telecommunications Act
of 1996 on November 7, 1996 and on November 18, 1996 the FCC issued a public
notice requesting comments on these recommendations. Under the
Telecommunications Act of 1996, the FCC must act on these recommendations by
May, 1997 and has stated that it intends to announce new access charge rules
within the same time frame.
55
<PAGE> 57
The Company envisions that the FCC will initiate many additional
proceedings, as a result of the enactment of federal legislation, defining and
construing the terms and conditions of the various components necessary for
local competition. Many, if not all, of the FCC orders under the federal
legislation will likely be appealed by one or more affected parties to the U.S.
Court of Appeals and U.S. Supreme Court. In addition, the Telecommunications Act
of 1996 may be amended in 1997 or subsequent years. Accordingly, the Company is
unable to determine the final form and impact of existing and future
legislation, and the regulatory and judicial actions under such legislation.
COURT APPEALS
Various parties, including ILECs and state PUCs, filed appeals from the
FCC's August 8, 1996 order to various U.S. Courts of Appeal, and several parties
petitioned the FCC and the courts to stay the effectiveness of the FCC rules
included in the FCC's order, pending a ruling on the appeals. Many of the
appeals were transferred to the Eighth Circuit U.S. Court of Appeals. On
November 18, 1996, several members of Congress filed an amicus curiae brief in
support of the appeals of the FCC order. On December 30, 1996, several other
members of Congress filed an amicus curiae brief supporting the FCC order.
The FCC has not stayed its own order. However, on October 15, 1996, the
Eighth Circuit U.S. Court of Appeals issued an order containing a partial stay,
pending the court's ruling on the various appeals. The order imposed the partial
stay on: (1) the use of TELRIC in the pricing of unbundled ILEC network elements
and the resulting default proxy prices; and (2) the "pick and choose"
provisions. The remainder of the FCC's August 8, 1996 order remains in effect.
On November 12, 1996, the U.S. Supreme Court declined to overturn the stay. The
Eighth Circuit U.S. Court of Appeals held arguments on the various appeals in
January 1997.
The Company believes the partial stay will not have any material adverse
effect on the Company because the Company already has in effect interconnection
agreements with the ILECs, or expects to have such agreements in effect after
state PUC arbitrations, in substantially all of its markets by early 1997, under
the provisions of The Telecommunications Act of 1996, which have not been
stayed, and which specifically require ILECs to enter into interconnection
agreements and require state PUCs to arbitrate such agreements within certain
time frames. The stay of the FCC rules does not delay the implementation of the
Act by the parties and by the state PUCs, but rather suspends the guidance that
the FCC sought to provide the parties and the state PUCs in the portions of the
rules that were stayed.
STATE REGULATION
The Company's offering of switched local exchange services may be
classified as intrastate and therefore subject to state regulation. The Company
is certified as a CLEC in 30 of its 36 networks. State authorizations vary in
the scope of the intrastate services permitted. The Company is in the process of
seeking to expand the scope of its intrastate certification in various
jurisdictions, a process which will depend upon regulatory action in the
individual states. State laws and regulations that prohibit or have the effect
of prohibiting, local and long distance telecommunications competition are
preempted under the Telecommunications Act of 1996.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services which are classified as intrastate. In
some states, the Company's tariff can list a range of prices for particular
services, and in others, such prices can be set on an individual customer basis.
The Company is not subject to price cap or to rate of return regulation in any
state in which it currently provides services.
Under the Telecommunications Act of 1996, implementation of the Company's
plans to compete in local markets is and will continue to be, to a certain
extent, controlled by the individual states. The Company continues to support
efforts at the state government level to more quickly implement competition in
their markets under the new federal law and to permit CLECs to operate on the
same
56
<PAGE> 58
basis and with the same rights as the ILECs, sometimes referred to as
"co-carrier status." As of December 31, 1996, most states have taken regulatory
and legislative action to open local communications markets to local exchange
competition and co-carrier status. When co-carrier status is granted in a
particular state, CLECs would expect to realize lower costs for providing
intrastate switched local exchange services in that state.
The Company has established interconnection agreements with ILECs for 29 of
its 36 networks. The Telecommunications Act of 1996 requires ILECs to enter into
interconnection agreements with CLECs and other competitors and requires state
PUCs to arbitrate such agreements within certain time frames. US West in New
Mexico is the only RBOC in the Company's operating markets with which the
Company does not have an interconnection agreement, and the Company is in
binding arbitration with US West in New Mexico which is scheduled to be
completed by early 1997. While the Telecommunications Act of 1996 mandates the
implementation of interconnection arrangements, there can be no assurance that
such negotiations will enable the Company to secure its desired co-carrier
arrangements in a timely fashion or for appropriate rates and terms.
LOCAL GOVERNMENT AUTHORIZATIONS
In certain locations, the Company is required to obtain local franchises,
licenses or other operating rights and street opening and construction permits
to install and expand its fiber optic networks. In some of the areas where the
Company provides network services, the Company's subsidiaries pay license or
franchise fees based on a percent of gross revenues or on a per linear foot
basis. There is no assurance that certain cities that do not impose fees will
not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels.
The Telecommunications Act of 1996 prohibits local governmental authorities
from discriminating among telecommunications carriers and mandates competitively
neutral treatment.
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company were forced to remove
its fiber from the streets or abandon its network in place, such termination
would have a material adverse effect on the Company's subsidiary in that
metropolitan area and could have a material adverse effect on the Company.
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<PAGE> 59
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Robert A. Brooks(1)........................ 64 Chairman; Director
James C. Allen(1,4)........................ 50 Vice Chairman & Chief Executive Officer;
Director
D. Craig Young(4).......................... 43 President & Chief Operating Officer; Director
John C. Shapleigh.......................... 47 Executive Vice President, Regulatory and
Corporate Development
David L. Solomon........................... 37 Executive Vice President & Chief Financial
Officer
John K. Brooks............................. 35 Senior Vice President and President-JB Telecom,
Inc.
Gregory J. Christoffel..................... 48 Senior Vice President & General Counsel
Marilou Crum............................... 49 Senior Vice President, Marketing and Carrier/
Reseller Sales
Jim A. Moffit.............................. 51 Senior Vice President and Managing Director-GLA
International
Mark W. Senda.............................. 38 Senior Vice President, Operations
Waymon R. Tipton........................... 39 Senior Vice President, Corporate Communications
and Strategic Development
Gerard J. Howe............................. 41 Vice President, Finance, and Senior Vice
President & Chief Financial Officer-JB Telecom,
Inc.
NON-MANAGEMENT DIRECTORS
Robert F. Benbow(3)........................ 61 Director
William J. Bresnan(1,3,5).................. 63 Director
Jonathan M. Nelson(1,2,4,5)................ 40 Director
G. Jackson Tankersley, Jr.(1,2,4,5)........ 47 Director
Ronald H. Vander Pol(3).................... 44 Director
Carol deB. Whitaker(2,4)................... 43 Director
</TABLE>
- -------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Finance Committee
(5) Member of Board Governance Committee
EXECUTIVE OFFICERS
ROBERT A. BROOKS, CHAIRMAN. Mr. Brooks has been Chairman of the Company
since its formation in November 1993. Mr. Brooks was founder and previously
served as Chairman of the Board and CEO of BTC. Mr. Brooks has 39 years
experience as an entrepreneur, business planner and developer, cable system
operator, investor, engineer, consultant, project manager, expert witness and
management advisor in cable television and broadband telecommunications. Mr.
Brooks was a founder and Chairman for ten years of Cencom Cable Associates,
which was founded in 1982 with initial capitalization of approximately $300,000
and was purchased in 1991 by Crown Media (a Hallmark affiliate) in a transaction
valued at approximately $1 billion. Mr. Brooks previously served as a Director
of OneComm and Chem Design Corporation. He has a B.S.E.E. from Northeastern
University and currently is a member of its Corporation. Mr. Brooks currently
serves as a member of President's Council of St. Louis University and is a
Registered Professional Engineer, a Member of N.S.P.E., a Senior Member of
I.E.E.E. and an inducted member of the prestigious Cable Television Pioneers
Club.
JAMES C. ALLEN, VICE CHAIRMAN, CEO. Mr. Allen has been Vice Chairman and
CEO of the Company since its formation in November 1993. Mr. Allen previously
served as President and COO of BTC. Mr. Allen has 25 years experience as an
entrepreneur, business planner and developer,
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<PAGE> 60
cable system operator, financier, expert witness and advisor in cable television
and broadband telecommunications. Mr. Allen was a founder and President, CFO and
COO of Cencom Cable Associates, Vice President of Operations of Telcom
Engineering, Inc., a telecommunications engineering and consulting firm with
clients in both the telephone and cable television industries, Vice President of
Operations of United Cable Television, Divisional Manager of Continental
Telephone Corporation, and Vice President for Finance of National Communications
Service Corporation. He served as Chief Financial and Chief Operating Officer of
David Lipscomb University, from which he holds a B.S. degree.
D. CRAIG YOUNG, PRESIDENT, COO. Mr. Young has served as President and COO
of the Company since April 1995. Mr. Young has 16 years experience in the
telecommunications industry. He served as Vice President-Sales Operations,
Custom Business Services of Ameritech, Inc. from 1993 to 1995; Vice
President-Sales and Service, Business and Government Services of U.S. West
Communications, Inc. from 1992 to 1993; Vice President-Sales, Large Business
Service from 1989 to 1992; and Vice President and General Manager-U.S. West
Information Systems from 1986 to 1988. Mr. Young's responsibilities at
Ameritech, Inc. and U.S. West Communications, Inc. included the management of
all voice and data sales, engineering and pricing activities for large
commercial and government end users, and full P&L responsibility for more than
$650 million in revenue and direction of a work force of more than 400
employees. Prior to that he served as President of Executone Information
Systems, a franchise distributor of voice products. He joined the Company in
1995. He has a B.S., Business Administration/Marketing degree from California
State University and has attended the Executive Management Program at Columbia
University.
JOHN C. SHAPLEIGH, EXECUTIVE VICE PRESIDENT, REGULATORY AND CORPORATE
DEVELOPMENT. Mr. Shapleigh has been Executive Vice President in charge of the
Company's regulatory and corporate development activities since its formation in
November 1993. Mr. Shapleigh has 22 years of entrepreneurial, management,
regulatory, government policy and legal experience. He is the immediate past
Chairman and previously served for two years as President of the Association for
Local Telecommunications Services (ALTS), the national trade association for
competitive local telecommunications companies. He also served for one year as
Associate Administrator of the National Telecommunications and Information
Administration (NTIA) in the U.S. Department of Commerce, a key federal
telecommunications policy position where he directed NTIA TELECOM 2000: Charting
the Course for a New Century, a comprehensive review of 18 telecommunications,
mass media and information industries, including telephone, television and cable
television, three years as Vice President and General Counsel of LDX Net and
WilTel, developers of regional fiber optic telephone networks, positions
involving the negotiation of over $100 million in debt financing agreements and
oversight of all federal, state and local regulatory matters, and three years as
Commissioner, then Chairman, of the Missouri Public Service Commission. He has
an A.B. degree from Dartmouth College (Senior Honors) and a J.D. degree from the
Washington University School of Law (Law Quarterly). He is a recipient of the
President's Award of the Missouri Bar Association.
DAVID L. SOLOMON, EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER. Mr.
Solomon has 13 years experience in financial management and reporting, auditing
and business advisory services with KPMG Peat Marwick LLP, most recently as
partner. Responsibilities included working with SEC registrants including
participation in initial public offerings, equity offerings, debt offerings and
required filings. Clients served included organizations in the banking, thrift,
insurance, and real estate industries. He joined the Company as Senior Vice
President and CFO and has previously served as Secretary and Chief Financial
Officer of BTC in 1994. He is a member of the American Institute and Tennessee
Society of CPAs. He has a Bachelor of Science degree from David Lipscomb
University.
JOHN K. BROOKS, SENIOR VICE PRESIDENT, AND PRESIDENT - JB TELECOM, INC. Mr.
Brooks has over 11 years of entrepreneurial, cable TV system management,
marketing and regulatory experience. He was Vice President of Operations of
Cencom Cable Associates, Inc. from 1983 until Cencom was
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<PAGE> 61
acquired by a subsidiary of Hallmark Cards, Inc. in 1991. Previous positions
with Cencom included Corporate Vice President - Operations; Regional Vice
President - Operations; Corporate Vice President - Government and Public
Relations; Assistant Vice President - Marketing and Programming; and South
Carolina State Manager - Cable Operations. Mr. Brooks has also been involved in
cable system acquisition due diligence, financing and franchise negotiations. He
holds a B.A. in Political Science from the University of Missouri and is a
former officer and director of the Missouri Cable Television Association. Mr.
Brooks served as Senior Vice President of Corporate Development of BTC from 1992
to 1994, as Executive Vice President of Operations of the Company from 1994 to
1995, and as President of JB Telecom, Inc. (formerly a subsidiary of BTC, which
became a subsidiary of the Company in January 1996) from 1995 to present. He has
served as Senior Vice President of the Company since February 1996.
MARILOU CRUM, SENIOR VICE PRESIDENT, MARKETING AND CARRIER/RESELLER
SALES. Ms. Crum joined the Company as Senior Vice President, Marketing and
Carrier/Reseller Sales, in July 1996 and has over 20 years of management
experience within the telecommunications industry in sales, marketing and
product management. Ms. Crum is a former Vice President of National Accounts of
WilTel and was responsible for establishing and directing their National
Accounts program on a nationwide basis for both network services and customer
premises equipment. Prior to joining WilTel in 1987, Ms. Crum managed the
Central Region National Accounts organization for AT&T. In addition, Ms. Crum
was responsible for Product Marketing, Technical Support and Strategic Account
Marketing for this same region at AT&T. Prior to joining AT&T in 1983, Ms. Crum
also held a number of management positions beginning in 1976 with Southwestern
Bell in the areas of sales, technical support, interstate network services, and
product marketing. Ms. Crum has a B.S. degree from the University of Missouri.
GREGORY J. CHRISTOFFEL, SENIOR VICE PRESIDENT & GENERAL COUNSEL. Mr.
Christoffel has been Senior Vice President and General Counsel of the Company
since February 1996. Mr. Christoffel has 21 years of legal, regulatory and
management experience, principally in the telecommunications industry. He served
as former General Attorney for Mergers & Acquisitions and International Business
of Southwestern Bell Corporation. His experience at Southwestern Bell included
structuring and executing several industry-leading acquisitions in cellular
telephone, cable television and foreign telecommunications privatizations, as
well as extensive participation in critical legal proceedings before the Federal
District Court enforcing the Divestiture Decree and before the Federal
Communications Commission in proceedings regarding regulatory reform. Early in
his career, he served as First Assistant Public Counsel, representing the
consumer interest in rate proceedings before the Missouri Public Service
Commission, and as Assistant Attorney General in the Antitrust Division of the
Missouri Attorney General's office. In private practice, Mr. Christoffel served
his firm as managing partner and provided corporate, securities and transaction
counsel for a variety of companies involved in telecommunications equipment
manufacturing, domestic and foreign SMR wireless service and other
telecommunications businesses. Mr. Christoffel joined the Company in 1996 after
serving as the President of Brooks Telecommunications International, Inc.,
responsible for overseeing the development of a broadband integrated services
digital network in a joint venture in Guangzhou, China. Mr. Christoffel holds an
A.B. (Classical) in philosophy and languages from St. Louis University School of
Philosophy and Letters and a J.D. cum laude from St. Louis University School of
Law (Law Journal, Woolsack).
JIM A. MOFFIT, SENIOR VICE PRESIDENT, AND MANAGING DIRECTOR - GLA
INTERNATIONAL. Mr. Moffit has 26 years experience as a financial officer,
business and financial planner, specialist in regulatory matters, accountant,
expert witness, consultant and auditor, including 24 years with a large
independent telephone company and an international accounting firm. Mr. Moffit
was President of Contel Corporation Central Region for four years until Contel
was merged into GTE in 1991. Other positions with Contel included five years as
Vice President-Financial Director, Western Region; two years as Assistant Vice
President-Revenue Requirements, Western Region; four years as Assistant Vice
President-Financial Planning, Western Region; and five years as corporate chief
accountant.
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<PAGE> 62
Mr. Moffit also spent four years on the audit staff of Arthur Andersen. He holds
a B.S., Accounting degree, with honors, from Northeast Missouri State University
and an MBA from Washington University. Mr. Moffit also has a CPA and is licensed
to practice accounting in Missouri. He was named as one of the
telecommunications industry's "Rising Stars" by Telephony Magazine in 1989. He
has served the Company in various positions since its formation in 1993 and was
an executive officer of BTC from 1991 to 1993.
MARK W. SENDA, SENIOR VICE PRESIDENT, OPERATIONS. Mr. Senda joined the
Company as Senior Vice President, Operations, effective January 1, 1997, and has
over 13 years experience in the telecommunications industry. From September 1995
until December 1996, he served as Vice President, North American Operations, of
MFS Global Network Services, Inc., where he was responsible for the installation
and maintenance of all products, services and infrastructure covering five
regions. Mr. Senda was also Senior Vice President, Network Services, from 1994
to September 1995, Vice President, Operations, from 1993 to 1994, and Regional
Director, Operations, from 1992 to 1993, of MFS Telecom, Inc. From 1983 to 1992,
Mr. Senda held various operations and project management positions with MCI. He
received a B.S. from the State University of New York and an M.A. from Rutgers
University.
WAYMON R. TIPTON, CFA, SENIOR VICE PRESIDENT, CORPORATE COMMUNICATIONS AND
STRATEGIC DEVELOPMENT. Mr. Tipton joined the Company as Senior Vice President,
Corporate Communications and Strategic Development, in August 1996 and has over
15 years experience in investment banking, investment consulting, and
institutional equity and fixed income securities sales. He was previously Senior
Vice President, founder, and manager of the Investment Banking Division of a
major regional bank specializing in acquisition and project financing. Mr.
Tipton was previously Senior Managed Accounts Consultant and partner with the
leading consulting group in PaineWebber. Prior thereto, he was regional
institutional securities salesman with Shearson-Lehman Bros. for intermediate
sized money managers, insurance companies, trust departments, and high net worth
individuals. Mr. Tipton is a holder of the Chartered Financial Analyst
designation, and received an MBA from the Owen Graduate School of Management of
Vanderbilt University and a B.A. from Vanderbilt University.
GERARD J. HOWE, VICE PRESIDENT, FINANCE, AND SENIOR VICE PRESIDENT & CHIEF
FINANCIAL OFFICER - JB TELECOM, INC. Mr. Howe has over 18 years experience in
the telecommunications industry in the areas of financial, regulatory,
information processing, and human resource management. Mr. Howe previously
served as Vice President-Chief Financial Officer of SBC CableComms, U.K., a
joint venture between SBC Communications and Cox Communications, from 1993 to
1995. SBC CableComms provided cable television and competitive local telephone
services in seven franchise areas encompassing 1.4 million homes throughout
England. In that position, Mr. Howe was responsible for financial reporting,
planning and budgeting, treasury operations, corporate development, and tax
planning and compliance, as well as for regulatory and legislative affairs. Mr.
Howe served as Vice President-Chief Financial Officer from 1990 to 1993 and as
Senior Vice President-Customer Services from 1995 to 1996 for Southwestern Bell
Yellow Pages. In addition to the aforementioned positions, Mr. Howe also held
various positions in the treasury, regulatory, audit and information systems
organizations of SBC and Southwestern Bell Telephone Company. He joined the
Company on June 1, 1996. Mr. Howe has a B.S. from Southern Illinois University
and an MBA from St. Louis University.
NON-MANAGEMENT DIRECTORS
ROBERT F. BENBOW, DIRECTOR. Mr. Benbow is a Vice President of Burr, Egan,
Deleage & Co. and a General Partner in certain funds affiliated with Burr, Egan,
Deleage & Co. He joined that firm in 1990. He previously spent 22 years with the
Bank of New England, N.A. where he was Senior Vice President responsible for
special industries lending in the areas of media, project finance and energy. He
holds a B.S. in Finance/Economics from the University of Illinois. He serves as
a director
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<PAGE> 63
of ST Enterprises, Ltd., a local exchange telephone company; Datamarine
International; Golden Sky Services, Inc.; Incom Communications Corp.; U.S. One
Communications Corp.; and Teletrac, Inc.
WILLIAM J. BRESNAN, DIRECTOR. Mr. Bresnan is President and founder of
Bresnan Communications, Inc., a company that operates cable systems and/or
provides telephony services in five U.S. states as well as Poland and Chile. He
has been involved in the telecommunications industry since 1958. Mr. Bresnan was
president of Teleprompter Corporation, which at one time was the nation's
largest cable television company, and later was Chairman and Chief Executive
Officer of Group W Cable, Inc., a subsidiary of Westinghouse Electric
Corporation. He is a director of United Video Satellite Group, Inc., which is a
publicly traded company. Mr. Bresnan also serves as a director of numerous
organizations, including National Cable Television Association, C-Span, Cable in
the Classroom, Cable Television Laboratories, the Foundation for Minority
Interests in Media, the National Cable Television Center and Museum, and the
Cable Television Advertising Bureau.
JONATHAN M. NELSON, DIRECTOR. Mr. Nelson is a managing general partner of
Providence Ventures, L.P., which is the general partner of the general partner
of Providence Media Partners L.P. ("PMP"). Mr. Nelson is co-chairman of
Providence Ventures Inc., which is the management company for PMP. He joined
that firm in 1990. Mr. Nelson is also president and chief executive officer of
Providence Equity Partners Inc., the management company of Providence Equity
Partners L.P. (together with PMP, "Providence") and a managing director of
Narragansett Capital, Inc. ("Narragansett"), the management company for three
separate equity investment funds. Affiliates of Providence and Narragansett have
equity investments in cellular telephone, paging, wireless data, PCS, cable
television and broadcast businesses. Mr. Nelson is currently a director of
Wellman, Inc., Western Wireless Corporation and numerous privately-held
companies affiliated with Providence or Narragansett. Mr. Nelson received a
Master of Business Administration from the Harvard Business School in 1983 and a
Bachelor of Arts from Brown University in 1977.
G. JACKSON TANKERSLEY, JR., DIRECTOR. Mr. Tankersley is a co-founder and
General Partner of The Centennial Funds ("Centennial"). He joined that firm in
1981. He also serves as the President and Chief Executive Officer of Centennial
Holdings, Inc., which manages Centennial. Since the formation of Centennial in
1981, it has specialized its investment activities in the electronic
communications industries. Previously, Mr. Tankersley served as a vice president
of Continental Illinois Venture Corporation and Continental Illinois Equity
Corporation, the private equity investment arms of Continental Illinois Corp. He
has served on a number of the boards of directors of various public and private
portfolio investments of Centennial. Mr. Tankersley received a B.A. degree (high
honors) from Denison University and an M.B.A. from The Amos Tuck School of
Business Administration at Dartmouth College.
RONALD H. VANDER POL, DIRECTOR. Mr. Vander Pol has been a participant in
the telecommunications industry for the last 16 years. In 1982, he founded
Teledial America, Inc., a long distance reseller. He started Digital Signal,
Inc., a fiber optic provider, in 1986 and City Signal, Inc., a competitive
access provider, in 1989 (see "Summary -- Recent Developments" and "Certain
Relationships and Related Transactions"). Since then, Mr. Vander Pol has started
two additional long distance companies, Teledial of North Carolina and ATS
Network Services in Tennessee. He holds a bachelor's degree from Calvin College
in Grand Rapids, Michigan.
CAROL DEB. WHITAKER, DIRECTOR. Ms. Whitaker has almost 20 years of
investment banking and operating experience with both corporations and Wall
Street firms. Ms. Whitaker is Chairman of Whitko & Company, a Denver based
investment banking and management consulting firm. Previous positions included
Chief Executive Officer of W.W. Comm, Inc., a start-up company exploring
videotelecommunications opportunities; acting Chief Financial Officer for
OneComm Corp., an emerging wireless communications company; and Vice President
of Development for Rifkin & Associates, Inc., a privately owned cable television
owner and operator, with responsibility for acquisition financing. Ms. Whitaker
has a B.A. in Economics from Colorado College and an M.B.A. from the University
of Chicago.
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-------------------------
Officers are elected by and serve at the discretion of the Board of
Directors. John K. Brooks is the son of Robert A. Brooks. There are no other
family relationships among the directors and executive officers of the Company.
The Board of Directors has an Executive Committee, a Finance Committee, an
Audit Committee, a Compensation Committee and a Board Governance Committee. The
Compensation Committee is comprised of Messrs. Tankersley (Chairman) and Nelson
and Ms. Whitaker. Directors are not compensated for their services as directors
but are reimbursed for expenses incurred in connection with Board and committee
meetings attended.
The By-laws of the Company provide for a Board of Directors consisting of
12 directors. At the present time there is one vacancy. Each of the directors,
other than Messrs. Bresnan, Vander Pol, Young and Tankersley and Ms. Whitaker,
has served since the formation of the Company in November 1993. Messrs. Young
and Tankersley have served as directors since April 1995 and December 1995,
respectively. Messrs. Bresnan and Vander Pol have served as directors since May
22, 1996, and Ms. Whitaker was elected on October 15, 1996. The current
directors have been elected to serve until the expiration of the term of the
class to which he or she has been elected and until their respective successors
are elected and qualified or until their earlier death, resignation or removal.
The Class I directors, whose term expires in 1997, are Messrs. Benbow and
VanderPol and Ms. Whitaker; the Class II directors, whose term expires in 1998,
are Messrs. Allen, Bresnan and Young; and the Class III directors, whose term
expires in 1999, are Messrs. Brooks, Nelson and Tankersley.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the fiscal
years ended December 31, 1996 and 1995 concerning the compensation earned by the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company during such fiscal year for services in all
capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(2) ($)(3) OPTIONS(#)(4) ($)(5)
------------------ ---- ------ ------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks............ 1996 $300,000 $120,000 -- 100,000 $ --
Chairman of the Board 1995 250,000(1) 50,000 -- 60,000 --
James C. Allen.............. 1996 $275,000 $110,000 -- 100,000 $4,750
Vice Chairman & Chief 1995 225,000(1) 50,000 -- 60,000 4,500
Executive Officer
D. Craig Young.............. 1996 $200,000 $ 80,000 -- 20,000 $2,000
President & Chief Operating 1995 129,619(6) 50,000 -- 200,000 --
Officer
David L. Solomon............ 1996 $180,000 $ 72,000 -- 100,000 $4,638
Executive Vice President & 1995 165,000 45,000 -- 60,000 3,300
Chief Financial Officer
John C. Shapleigh........... 1996 $152,000 $ 50,000 -- 80,000 $3,172
Executive Vice President- 1995 146,000 25,000 -- 0 2,920
Regulatory and Corporate
Development
</TABLE>
- ---------------
(1) Includes compensation paid by Brooks Telecommunications Corp. ("BTC") under
a Management and Services Agreement between the Company and BTC. Effective
upon the merger of BTC into the Company on January 2, 1996, the Company pays
all of the compensation of Messrs. Brooks and Allen. During the period from
January 2, 1996 to August 31, 1996, the
63
<PAGE> 65
Company made the services of Mr. Brooks available to Brooks Telecommunications
International Inc. on a part-time, as needed basis. See "Certain Relationships
and Related Transactions."
(2) Represents bonuses earned in the reported year, which were paid in the
following year. The payment of bonuses is at the discretion of the
Compensation Committee of the Board of Directors.
(3) The value of incidental personal perquisites furnished by the Company to the
named executive officers during 1996 and 1995 did not exceed the lesser of
$50,000 or 10% of the total of annual salary and bonus reported for such
named executive officers.
(4) Represents shares of Common Stock subject to compensatory stock options
granted during 1996 and 1995.
(5) Represents contributions made by the Company on behalf of the executive
officers under the Company's 401(k) Plan during 1996 and 1995.
(6) Hired on April 5, 1995.
STOCK OPTION PLAN. Pursuant to the Company's 1993 Stock Option Plan, the
Board of Directors is authorized to grant options and stock appreciation rights
covering up to 3,400,000 shares of Common Stock of the Company. As of February
28, 1997, options for an aggregate of 636,016 shares at $4.00 per share, 304,370
shares at $6.60 per share, 696,667 shares at $12.50 per share, 483,308 shares at
$25.50 per share, 109,500 shares at $25.625 per share, 130,000 shares at $27.00
per share, 80,000 shares at $29.50 per share, 184,000 shares at $32.00 per share
and 50,000 shares at $33.75 per share were outstanding under the Company's 1993
Stock Option Plan and an aggregate of 161,100 shares at $11.35 per share were
outstanding under the Stock Option Plan of BTC assumed upon effectiveness of the
merger with BTC on January 2, 1996. Options held by the CEO and each of the
other executive officers named in the Summary Compensation Table are as follows:
Mr. Brooks -- 100,000 shares at $12.50 and 93,441 shares at $25.50; Mr. Allen --
100,000 shares at $12.50 and 106,309 shares at $25.50; Mr. Young -- 133,333
shares at $4.00, 20,000 shares at $12.50 and 35,752 shares at $25.50; Mr.
Solomon -- 13,333 shares at $4.00, 40,000 shares at $6.60, 100,000 shares at
$12.50 and 39,019 shares at $25.50; and Mr. Shapleigh -- 80,000 shares at $12.50
and 70,787 shares at $25.50; All options become fully vested upon a
change-in-control of the Company, as defined in such options. The following
table presents certain information concerning stock options granted to the CEO
and each of the other named executive officers during 1996. The exercise price
for all of the grants of stock options was the fair market value of the Common
Stock on the date of grant as determined by the Compensation Committee of the
Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------------- ANNUAL RATES OF STOCK
PERCENT OF PRICE APPRECIATION FOR
NUMBER OF TOTAL OPTIONS OPTION TERM(1)
SECURITIES UNDERLYING GRANTED TO EXERCISE OR -----------------------
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME (#) FISCAL YEAR ($/SH) DATE(2) ($) ($)
---- --------------------- ------------- ----------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks...... 100,000 7.64% $12.50 02/19/06 $786,118 $1,992,178
James C. Allen........ 100,000 7.64 12.50 02/19/06 786,118 1,992,178
D. Craig Young........ 20,000 1.53 12.50 02/19/06 157,223 398,435
David L. Solomon...... 100,000 7.64 12.50 02/19/06 786,118 1,992,178
John C. Shapleigh..... 80,000 6.11 12.50 02/19/06 628,895 1,593,742
</TABLE>
- ---------------
(1) The dollar amounts under the 5% and 10% columns are the result of
calculations required by the rules of the Securities and Exchange Commission
and, therefore, are not intended to forecast possible future appreciation,
if any, of the Common Stock price. The amounts shown reflect the difference
between the appreciation and the exercise price at the assumed annual rates
of appreciation through the tenth anniversary of the dates of grant.
(2) All options vest in one-third increments on the first, second and third
anniversaries of the date of initial grant.
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<PAGE> 66
The following table sets forth certain information with respect to the CEO
and each of the other named executive officers regarding the value of their
unexercised options held as of December 31, 1996. No options were exercised
during 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(1) DECEMBER 31, 1996(2)
-------------------------------- ------------------------------
NAME EXERCISABLE(3) UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Robert A. Brooks..................... 157,020 100,000 $2,947,933 $1,300,000
James C. Allen....................... 175,540 100,000 3,209,891 1,300,000
D. Craig Young....................... 66,667 153,333 1,433,341 3,126,660
David L. Solomon..................... 65,187 153,333 1,213,399 2,324,660
John C. Shapleigh.................... 129,260 80,000 2,711,029 1,040,000
</TABLE>
- ---------------
(1) Includes substituted options issued upon the effectiveness of the merger
with BTC on January 2, 1996.
(2) Reflects the difference between the exercise price and $25.50 per share.
(3) All of such options were exercised as of January 1, 1997.
1996 EMPLOYEE STOCK PURCHASE PLAN. In February 1996, the Company
established an Employee Stock Purchase Plan (the "ESPP") to provide employees of
the Company with an opportunity to purchase Common Stock through payroll
deductions. Under the ESPP, up to 500,000 shares of Common Stock have been
reserved for issuance, subject to certain antidilution adjustments. The ESPP
became effective at the time of the Company's initial public offering of Common
Stock in May 1996. The ESPP is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code. The first
offering period under the ESPP is from May 1996 through April 30, 1997. The
Board of Directors will have authority to authorize up to four annual offering
periods thereafter. The ESPP terminates on April 30, 2001. Eligible employees
may participate in the ESPP by authorizing payroll deductions during an offering
period within a percentage range determined by the Board of Directors.
Initially, the amount of authorized payroll deductions will be not less than 1%
nor more than 10% of an employee's cash compensation during an offering period,
but not more than $25,000 per year. Amounts withheld from payroll are applied at
the end of each offering period to purchase shares of Common Stock. Participants
may withdraw their contributions at any time before stock is purchased, and in
the event of withdrawal such contributions will be returned to the participants
with interest. The purchase price of the Common Stock is equal to 85% of the
lower of (i) the market price of Common Stock immediately before the beginning
of the applicable offering period or (ii) the market price of Common Stock at
the end of each offering period. All expenses incurred in connection with the
implementation and administration of the ESPP will be paid by the Company.
401(K) PLAN. The Company has a 401(k) savings and retirement plan (the
"401(k) Plan") which covers substantially all employees of the Company. All
employees of the Company who are 21 years of age or older are eligible to
participate in the 401(k) Plan upon completion of twelve months of service. The
401(k) Plan allows participants to agree to certain salary deferrals which the
Company allocates to the participant's plan account. These amounts may not
exceed statutorily mandated annual limits set forth in Sections 401(k), 404 and
415 of the Internal Revenue Code. Participants are also eligible to receive
Company matching contributions each year in an amount up to 50% of the
participant's contribution up to a maximum of 4% of such participant's annual
compensation. All contributions to a participant's plan account are subject to
limitations imposed on retirement plans generally and 401(k) plans in
particular. The Company's contributions will generally vest over a five-year
period. Distribution of a participant's account under the 401(k) Plan may be
made at retirement, death, permanent disability or other termination of
employment in a lump-sum form of payment. Participant's may withdraw amounts
from their plan accounts after attainment of age 59 1/2 or in the event of
proven financial hardship, and may also take loans against their plan account
balances.
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EMPLOYMENT, CONSULTING AND NON-COMPETITION AGREEMENT. The Company and
Robert A. Brooks entered into an Employment, Consulting and Non-Competition
Agreement as of March 11, 1997 (the "Brooks Agreement") which provides for the
employment of Mr. Brooks as Chairman of the Board of Directors through December
31, 1997. The Brooks Agreement also provides for each of a consulting term with
Mr. Brooks commencing at the expiration of the employment term and expiring on
December 31, 2002. The Brooks Agreement provides for payments of a salary of
$400,000 for 1997 and an annual bonus for 1997 of not less than $400,000 and
consulting fees for each of 1998 and 1999 of $250,000, consulting fees for each
of 2000 and 2001 of $200,000 and a consulting fee for 2002 of $150,000. During
the employment term, Mr. Brooks is also eligible to participate in all incentive
compensation plans and other employee benefits provided to the Company's
executive officers.
The Brooks Agreement also contains a non-competition provision restricting
Mr. Brooks from competing with the Company within the United States until
December 31, 2002. In consideration for agreeing to these restrictions, the
Company shall pay Mr. Brooks $250,000 in each of 1998 and 1999, $200,000 in each
of 2000 and 2001 and $150,000 in 2002.
If Mr. Brooks' employment or consulting arrangement is terminated by the
Company for any reason (other than a "Good Cause Event" as defined in the Brooks
Agreement), the Company will (a) continue his medical insurance benefits and (b)
pay him a lump sum payment equal to the present value of his employment
compensation and consulting fees not yet paid. If such payments would be subject
to an excise tax under the Internal Revenue Code, Mr. Brooks would be entitled
to receive additional payments equal to the excise tax imposed. If the
employment or consulting period is terminated by Mr. Brooks' death, his
beneficiaries shall be entitled to 50% of all then unpaid employment, consulting
and non-competition payments. All such payments continue without reduction in
the event of Mr. Brooks' disability.
If Mr. Brooks resigns within one year after a Change of Control (as defined
in the Brooks Agreement), the Company will (a) continue his medical insurance
benefits and (b) pay him a lump sum equal to the present value of his then
unpaid employment compensation and consulting fees. Such payments are subject to
reduction to the extent they exceed the amounts deductible by the Company for
federal income tax purposes because of Section 280G of the Internal Revenue
Code.
As long as Mr. Brooks remains the beneficial owner of not less than 200,000
shares of Common Stock, the Company has agreed in the Brooks Agreement to use
its best efforts to cause his nomination and election as a director of the
Company. During the employment and consulting periods, Mr. Brooks will continue
to be entitled to his existing personal perquisites.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was founded in November 1993 by BTC, executives and other
employees of BTC and the Company and a group of venture capital investors who
provided its initial $40.8 million of equity capital. As the Company's founding
shareholder, BTC received 1,162,800 founder's shares of the Company's Common
Stock and founder's warrants exercisable at $220.00 per share to purchase 81,600
shares of the Company's Series A-1 Convertible Preferred Stock (representing
1,632,000 shares of Common Stock on an as-converted basis at $11.00 per share).
BTC also invested $635,000 in the Company's first round financing to acquire
6,350 shares of the Company's Series A-1 Convertible Preferred Stock and
$1,000,065 in the Company's second round financing to acquire 6,061 shares of
Series A-2 Convertible Preferred Stock. On a fully diluted basis, these
securities represented a total of approximately 14.2% of the Company's capital
stock outstanding on January 2, 1996.
Pursuant to an Agreement and Plan of Merger dated December 19, 1995 between
BTC and the Company, BTC was merged into the Company on January 2, 1996,
securities of the Company held by BTC were cancelled and the former holders of
BTC's Common Stock, BTC's Preferred Stock, Convertible Notes, and options and
warrants to purchase BTC Common Stock received shares of the Company's Common
Stock, warrants to purchase shares of the Company's Series A-1 Convertible
Preferred Stock ("Preferred Stock Warrants") and in-the-money options and
warrants to purchase shares of the Company's Common Stock which, at January 2,
1996, represented an aggregate of approximately 18.5% of the fully diluted
shares of Common Stock of the Company, and out-of-the-money warrants to acquire
an additional 3.3% of the Company's fully diluted Common Stock on such date.
Certain of the executive officers, directors and stockholders of the Company
named in tables under "Principal and Selling Stockholders" below were also
executive officers, directors and/or stockholders of BTC prior to the merger and
received, as a result of the merger, an aggregate of 690,720 shares of the
Company's Common Stock, Preferred Stock Warrants exercisable on an as converted
basis for 520,100 shares of the Company's Common Stock, 164,760 in-the-money
Common Stock options, 55,540 in-the-money Common Stock warrants and 117,320
out-of-the-money Common Stock warrants, including approximately 149,280 shares
of the Company's Common Stock and Preferred Stock Warrants exercisable on an as
converted basis for approximately 115,400 shares of the Company's Common Stock
in exchange for an aggregate of 94,106 shares of BTC Common Stock acquired since
January 1, 1994 for a total of $2,579,261. See "Management" and "Principal and
Selling Stockholders."
The terms of the merger reflected an agreed value for the Company's Common
Stock of $12.50 per share (as adjusted for the 20-for-1 Common Stock split
effected concurrently with the merger). The transactional value was mutually
determined by the Company and BTC after consultation with their respective
financial advisors. At a valuation of $12.50 per share, BTC's holdings of the
Company's securities were valued at $22.6 million (accounting for approximately
60% of BTC's total value) and BTC's other assets, comprised primarily of the GLA
consulting business, were valued at approximately $13.8 million. At a price of
$12.50 per share, BTC's fully diluted equity was valued at approximately $36.4
million. In exchange for all of the outstanding securities of BTC, the Company
issued 2,167,360 shares of the Company's Common Stock (representing 756,340
incremental shares) valued at approximately $27.1 million, 81,597 Preferred
Stock Warrants valued at approximately $5.0 million, 375,860 in-the-money Common
Stock warrants and options, and 758,980 out-of-the-money Common Stock warrants.
Pursuant to the terms of a Management and Services Agreement dated as of
November 10, 1993 between the Company and BTC (which was cancelled upon
effectiveness of the merger), BTC had assigned and made available to the Company
the services of the Company's Chief Executive Officer on an as-needed basis and
the services of BTC's Chief Executive Officer to act as Chairman of the Board of
the Company, and had provided, at BTC's principal executive offices, sufficient
office space and support services for the Company's principal executive offices,
for a fee of $250,000 per annum, plus the Company's proportionate share of rent,
utilities and telephone expenses. Pursuant
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to a Consulting Agreement, GLA provided network engineering, design and other
services to the Company. During the year ended December 31, 1995, the Company
paid BTC and GLA a total of $1,478,000 pursuant to such arrangements.
Pursuant to the terms of a Management and Services Agreement dated as of
January 2, 1996 between the Company and Brooks Telecommunications International,
Inc. ("BTI", a company spun-off to the stockholders of BTC prior to its merger
with the Company), the Company had agreed to assign and make available to BTI,
on a part-time, as needed basis, the services of its Chairman to act as Chairman
and Chief Executive Officer of BTI and to provide to BTI sufficient office space
and support services to conduct its business, for a fee of $150,000 per annum
plus BTI's proportionate share of rent, utilities, telephone and other
out-of-pocket expenses. The agreement was terminated effective August 31, 1996.
Centennial Holdings IV, L.P. ("Holdings IV") and Centennial Holdings, Inc.
("CHI") are investors in World-Net and have invested a total of $13.3 million
for a 20.1% fully diluted interest in World-Net. G. Jackson Tankersley, Jr. is
an individual General Partner of the sole General Partner of Centennial IV and
an executive officer and director of CHI.
As a result of the City Signal Acquisition, Ronald H. Vander Pol received
2,240,000 shares of the Company's Common Stock. In connection with the Company's
IPO, 224,000 of such shares were sold. Mr. Vander Pol has the option to require
the Company to repurchase any or all of the remaining 2,016,000 shares at a
price of $12.50 per share on or before February 1, 1998.
In March 1995, the Company paid to Whitko & Company, an investment banking
and management consulting firm of which Carol deB. Whitaker is chairman, a fee
of $292,000 for consulting services provided to the Company in connection with
the acquisition of certain assets by the Company. No continuing consulting
relationship exists between Whitko & Company and the Company. The Company
believes that the terms and conditions of such services were no less favorable
to the Company than those that would have been available to the Company in
comparable, arm's-length relationships with unaffiliated persons.
Certain of the executive officers named in the Summary Compensation Table
are indebted to the Company on 6% notes payable on December 31, 1997 which were
delivered by such executive officers to evidence their respective obligations to
reimburse the Company for amounts of income tax withholding payments made by the
Company with respect to their stock option exercises on January 1, 1997. Amounts
outstanding under such notes as of February 28, 1997 were as follows: Robert A.
Brooks -- $956,572; James C. Allen -- $1,041,610; D. Craig Young -- $465,119;
David L. Solomon -- $393,748; and John C. Shapleigh -- $879,729. None of such
individuals was indebted to the Company during the fiscal year ended December
31, 1996, and the respective amounts owed to the Company as of February 28, 1997
are the highest amounts such executive officers have owed to date.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of February 28, 1997 by
(i) each person or entity who is known by the Company to beneficially own 5% or
more of the Company's Common Stock, (ii) each of the executive officers named in
the Summary Compensation Table, (iii) each of the Company's directors and (iv)
all of the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
BENEFICIALLY COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED OUTSTANDING(1)
------------------------ ---------------- --------------
<S> <C> <C>
5% Stockholders and Affiliated Directors
Putnam Investments, Inc. ................................ 2,284,448(2) 6.99%
One Post Office Square
Boston, MA 02109
Fidelity Investments, Inc................................ 2,072,000 6.34%
82 Devonshire Street
Boston, MA 02109
Ronald H. Vander Pol (Director).......................... 2,056,000(3) 6.29%
7228 Kenowa Ave., S.W.
Byron Center, MI 49315
Other Directors and Named Executives
G. Jackson Tankersley, Jr. (Director).................... 1,470,871(4) 4.49%
Robert F. Benbow (Director).............................. 1,063,638(5) 3.26%
Jonathan M. Nelson (Director)............................ 899,075(6) 2.75%
Robert A. Brooks (Named Executive and Director).......... 853,666(7) 2.59%
James C. Allen (Named Executive and Director)............ 388,549(8) 1.18%
John C. Shapleigh (Named Executive)...................... 328,437(9) 1.00%
David L. Solomon (Named Executive)....................... 143,607(10) *
D. Craig Young (Named Executive and Director)............ 160,318(11) *
William J. Bresnan (Director)............................ 51,634(12) *
Carol deB. Whitaker (Director)........................... 20,000(13) *
Directors and executive officers as a group (18
persons)............................................... 6,377,248(14) 19.02%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent.
(1) Percentages are determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
(2) Includes (i) 2,225,548 shares of Common Stock beneficially owned by Putnam
Investment Management, Inc. ("PIM") and (ii) 58,900 shares of Common Stock
beneficially owned by The Putnam Advisory Company, Inc. ("PAC"). Putnam
Investments, Inc., a wholly-owned subsidiary of Marsh & McLennen Companies,
Inc., wholly owns PIM and PAC, each of which is a registered investment
adviser.
(3) Includes (i) 1,587,500 shares of Common Stock held by Ronald H. Vander Pol
and (ii) 468,500 shares of Common Stock held by Rushing Wind Ltd., Mr.
Vander Pol's private foundation. Mr. Vander Pol has the option to require
the Company to repurchase up to 2,016,000 of such shares at a price of
$12.50 per share on or before February 1, 1998.
(4) Represents (i) 844,520 shares beneficially owned by Centennial Fund IV,
L.P. ("Centennial IV"), including 827,860 shares of Common Stock and
warrants to purchase 16,660 shares of Common Stock, (ii) 593,670 shares
beneficially owned by Centennial Fund III, L.P. ("Centennial III"),
including 542,250 shares of Common Stock and warrants to purchase 51,420
shares of Common Stock, (iii) 21,560 shares beneficially owned by Holdings
IV, (iv) 5,400 shares beneficially owned by CHI, (v) 298 shares held by The
Tankersley Family Limited Partnership ("Tankersley LP") and (vi) 1,833
shares of Common Stock and 3,700
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shares of Common Stock subject to an option which is exercisable within 60
days owned by G. Jackson Tankersley, Jr.
Mr. Tankersley is (i) an individual General Partner of each of Centennial
Holdings III, L.P. ("Holdings III") and Holdings IV which serves as the
sole General Partner of Centennial III and Centennial IV, respectively,
(ii) an executive officer and director of CHI and (iii) an individual
General Partner of Tankersley LP. As the sole General Partner of Centennial
III, Holdings III may be deemed to be the indirect beneficial owner of
Centennial III's shares by virtue of its authority to make investment
decisions regarding the voting and disposition of shares directly
beneficially owned by Centennial III (such decisions are made by the
majority decision of a three member Investment Committee of Holdings III on
which Mr. Tankersley serves). As the sole General Partner of Centennial IV,
Holdings IV may be deemed to be the indirect beneficial owner of Centennial
IV's shares by virtue of its authority to make investment decisions
regarding the voting and disposition of shares directly beneficially owned
by Centennial IV (such decisions are made by the majority decision of a
six-member Investment Committee of Holdings IV on which Mr. Tankersley
serves). Holdings III does not own directly any shares of Common Stock.
Mr. Tankersley disclaims beneficial ownership of all shares of the
Company's Common Stock (i) directly or indirectly owned by Centennial III
or Holdings III, (ii) directly or indirectly owned by Centennial IV or
Holdings IV, (iii) directly or indirectly owned by CHI and (iv) directly or
indirectly owned by Tankersley LP. Each of Centennial III and Holdings III
disclaims beneficial ownership of all shares directly beneficially owned by
Centennial IV; each of Centennial IV and Holdings IV disclaims beneficial
ownership of all shares directly beneficially owned by Centennial III; and
all members of the Holdings III and Holdings IV Investment Committees
disclaim beneficial ownership of shares directly beneficially owned by
Centennial III and Centennial IV, respectively. In addition, the officers
and directors of CHI disclaim beneficial ownership of shares directly
beneficially owned by CHI, and the General Partners of Tankersley LP
disclaim beneficial ownership of shares directly beneficially owned by
Tankersley LP.
(5) Represents shares beneficially owned by entities to which Burr, Egan,
Deleage & Co., of which Mr. Benbow is a Vice President, directly or
indirectly provides investment advisory services. Includes (i) 1,052,568
shares of Common Stock held by Alta V Limited Partnership and (ii) 11,070
shares of Common Stock held by Customs House Partners. The respective
general partners of Alta V Limited Partnership and Customs House Partners
exercise sole voting and investment power with respect to the shares owned
by such funds. The principals of Burr, Egan, Deleage & Co. are general
partners of Alta V Management Partners, L.P. (which is a general partner of
Alta V Limited Partnership) and Customs House Partners. As general partners
of such funds, they may be deemed to share voting and investment powers for
the shares held by the funds. The principals of Burr, Egan, Deleage & Co.
disclaim beneficial ownership of all such shares held by the foregoing
funds, except to the extent of their proportionate pecuniary interests
therein. Mr. Benbow is a Vice President of Burr, Egan, Deleage & Co. and
general partner of Alta V Management Partners, L.P. (which is the general
partner of Alta V Limited Partnership). As a general partner of the fund,
he may be deemed to share voting and investment powers for the shares held
by the fund. He disclaims beneficial ownership of all such shares held by
the aforementioned fund except to the extent of his proportionate pecuniary
interests (if any) therein. He does not directly own any securities of the
Company.
(6) Includes (i) 868,885 shares of Common Stock held by Providence Media
Partners, L.P. and (ii) 30,190 shares of Common Stock held by Jonathan M.
Nelson. Mr. Nelson is a managing general partner of Providence Ventures,
L.P., which is the general partner of the general partner of Providence
Media Partners, L.P. Mr. Nelson disclaims beneficial ownership of shares
beneficially owned by Providence Media Partners L.P.
(7) Includes (i) 591,892 shares of Common Stock, warrants to purchase 107,200
shares of Common Stock and 126,794 shares of Common Stock subject to
options which are
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exercisable within 60 days held by Robert A. Brooks and (ii) 11,940 shares
of Common Stock held by The Brooks Foundation, of which Mr. Brooks is a
trustee.
(8) Represents 248,277 shares of Common Stock, warrants to purchase 260 shares
of Common Stock, 139,642 shares of Common Stock subject to options which
are exercisable within 60 days owned by Mr. Allen and 370 shares of Common
Stock owned by Mr. Allen's wife. Mr. Allen disclaims beneficial ownership
of the shares owned by his wife.
(9) Includes (i) 188,911 shares of Common Stock and 97,454 shares of Common
Stock subject to options which are exercisable within 60 days held by John
C. Shapleigh, (ii) 24,802 shares of Common Stock and warrants to purchase
520 shares of Common Stock held by John C. Shapleigh's Individual
Retirement Account, (iii) 12,120 shares of Common Stock held by John C.
Shapleigh Holdings, L.P., of which Mr. Shapleigh is the General Partner and
(iv) 4,630 shares of Common Stock owned by Anne T. Shapleigh, wife of Mr.
Shapleigh. Mr. Shapleigh disclaims beneficial ownership of the shares owned
by Mrs. Shapleigh.
(10) Represents 57,902 shares of Common Stock, warrants to purchase 20 shares of
Common Stock and 85,685 shares of Common Stock subject to options which are
exercisable within 60 days.
(11) Includes (i) 2,420 shares of Common Stock and 109,086 shares of Common
Stock subject to options which are exercisable within 60 days held by D.
Craig Young, (ii) 26,449 shares of Common Stock held by D. Craig Young and
Joan L. Young JTWROS, (iii) 833 shares of Common Stock held by D. Craig
Young's Individual Retirement Account, (iv) 19,620 shares of Common Stock
held by The Joan L. Young Revocable Trust, of which Joan L. Young, the wife
of D. Craig Young, is trustee, (v) 550 shares of Common Stock held by Joan
L. Young's Individual Retirement Account, (vi) 680 shares of Common Stock
held by the Andrew G. Young Trust and (vii) 680 shares of Common Stock held
by the Troy D. Young Trust. Andrew G. Young and Troy D. Young are children
of D. Craig Young. Mr. Young disclaims beneficial ownership of the shares
owned by The Joan L. Young Revocable Trust, Joan L. Young's Individual
Retirement Account, the Andrew G. Young Trust and the Troy D. Young Trust.
(12) Represents 47,934 shares of Common Stock and an option to purchase 3,700
shares of Common Stock which is exercisable within 60 days.
(13) Represents an option to purchase 20,000 shares of Common Stock which is
exercisable within 60 days.
(14) Excludes 1,465,448 shares beneficially owned directly by Centennial IV,
Centennial III, Holdings IV, CHI and Tankersley LP, as set forth in
footnote (5), above.
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DESCRIPTION OF CAPITAL STOCK
The Company is incorporated under the laws of the State of Delaware.
Accordingly, the rights of holders of the Company's Common Stock, Preferred
Stock, warrants and options are governed by the General Corporation Law of the
State of Delaware (the "DGCL") and by the Company's Restated Certificate of
Incorporation and By-laws. The following summary of such rights is qualified in
its entirety by reference to the DGCL and the Restated Certificate of
Incorporation and By-laws of the Company. Copies of such documents will be
provided to any stockholder upon request.
AUTHORIZED STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.01 per share ("Common Stock"), and 1,040,012 shares of Preferred Stock,
par value $0.01 per share ("Preferred Stock"). Of the Common Stock, 49,669,100
shares are designated Voting Common Stock and 330,900 Shares are designated
Non-Voting Common Stock. No shares of Non-Voting Common Stock are currently
outstanding. Of the Preferred Stock, 50,000 shares are designated Series C
Junior Participating Preferred Stock and the remainder of the Preferred Stock
has the status of authorized and unissued shares of Preferred Stock subject to
issuance from time to time as new series of Preferred Stock created by
resolution of the Board of Directors. The shares of Series C Junior
Participating Preferred Stock are issuable upon exercise of the Preferred Stock
Purchase Rights issued under the Company's Shareholder Protection Rights Plan
(see "--Preferred Stock Purchase Rights" below).
At February 28, 1997, the 32,672,579 outstanding shares of the Company's
Common Stock were held of record by approximately 280 stockholders, including
participants in security position listings. At such date, (i) 409,860 shares of
Common Stock were subject to outstanding warrants at a weighted average exercise
price of $20.99 per share, (ii) 2,834,961 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $15.40 per share and
(iii) warrants and options to purchase 1,662,288 shares were exercisable within
60 days at a weighted average exercise price of $14.48 per share.
The warrants and options are subject to adjustment from time to time in
order to prevent dilution of the exercise rights granted thereunder resulting
from (i) any subdivision or combination of the stock subject thereto, (ii) any
reorganization, reclassification, consolidation or merger of the Company or any
sale of the Company's assets, (iii) certain other dilutive events determined by
the Board of Directors of the Company to be dilutive in nature and of the type
for which adjustment should be made and (iv) in the case of the warrants, the
issuance of options, convertible securities or rights to purchase stock,
warrants, securities or other property to the holders of Common Stock, at prices
below the exercise prices thereof.
REDEMPTION
There are no redemption or sinking fund provisions applicable to the Common
Stock.
LIQUIDATION
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of holders of any Preferred Stock
then outstanding.
NO CUMULATIVE VOTING
There is no cumulative voting. Therefore, the holders of a majority of the
shares of Common Stock voted in an election of directors will be able to elect
all of the directors then standing for election, subject to any rights of the
holders of any outstanding Preferred Stock.
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DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all future earnings, if any, to support
its growth strategy and does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy."
STOCKHOLDER ACTION WITHOUT A MEETING AND POWER TO CALL SPECIAL MEETINGS
Under the DGCL, any corporate action which may be taken at any annual or
special meeting of stockholders may be taken without a meeting by the written
consent of not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting if a meeting were held to approve
such action. The DGCL further provides that prompt notice of any action taken
without a meeting must be given to all stockholders who have not consented. The
Company's By-laws provide that special meetings of the Company's stockholders
may be called by any two members of the Board of Directors or by the Chairman of
the Board.
BOARD OF DIRECTORS
The number of directors which constitutes the entire Board of Directors of
the Company is twelve (12). The Company's Restated Certificate of Incorporation
provides for three classes of directors having staggered terms of office with
each director elected to serve a three year term. See "Management."
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS
Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to a corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. The
Company believes that such a provision is beneficial in attracting and retaining
qualified directors, and, accordingly, the Company's Restated Certificate of
Incorporation includes a provision eliminating liability for monetary damages
for any breach of fiduciary duty as a director, except: (1) for any breach of
the duty of loyalty to the Company or its stockholders; (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (3) for any transaction from which the director derives an
improper personal benefit; and (4) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
DGCL. Thus, pursuant to Delaware law, directors of the Company are not insulated
from liability for breach of their duty of loyalty (requiring that, in making a
business decision, directors act in good faith and in the honest belief that the
action is taken in the best interests of the Company) or for claims arising
under the federal securities laws. The foregoing provisions of the Company's
Restated Certificate of Incorporation may reduce the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breaches of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefitted the Company and its stockholders. Further, the Company's
Restated Certificate of Incorporation contains provisions for the
indemnification of and advancing of expenses to directors and officers to the
full extent permitted by law. The Company has insurance with a policy limit of
$10 million for the benefit of its officers and directors insuring such persons
against certain liabilities, including certain liabilities under the securities
laws.
VOTE REQUIRED FOR AMENDMENTS
The Company's Restated Certificate of Incorporation requires the
affirmative vote of the holders of record of outstanding shares representing at
least 66 2/3% of all the outstanding capital stock of the Company entitled to
vote generally in the election of directors to amend, alter, change or repeal,
or adopt any provision or provisions inconsistent with, Article Fourth of the
Restated Certificate of Incorporation, which sets forth the authorized capital
stock of the Company and the terms thereof.
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The Restated Certificate of Incorporation of the Company allows the Board
of Directors to adopt, amend, or repeal the By-laws, subject to the right of the
Company's stockholders entitled to vote with respect thereto to adopt, amend or
repeal the By-laws. The By-laws provide that they may be altered, amended or
repealed by (i) the affirmative vote of at least 66 2/3% of the members of the
Board of Directors present at a meeting at which a quorum is present or (ii) the
holders of 66 2/3% of the issued and outstanding shares of stock entitled to
vote generally at a meeting of stockholders, voting as a single class. This
provision would enable holders of more than 33 1/3% of the voting power to
prevent an amendment to the By-laws by the stockholders even if it were favored
by the holders of a majority of the voting stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the DGCL requires that certain types of business
combinations (including mergers, combinations, and sales or other dispositions
of significant assets of a corporation) may not be accomplished with an
interested stockholder (generally, any person holding 15% or more, directly or
indirectly through affiliates or associates, of the issued and outstanding
shares of voting stock of a corporation) within three years of the date the
person became an interested stockholder unless: (i) prior to such date the Board
of Directors of the corporation approved of the business combination or
transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock (excluding shares of stock owned by persons who
are both directors and officers, and by certain employee stock plans); or (iii)
on or subsequent to such date, the business combination is approved by the Board
of Directors and by the affirmative vote of stockholders holding at least
66 2/3% of the issued and outstanding voting stock of the corporation. Section
203 is applicable to the Company.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
At February 28, 1997, approximately 9.75 million additional authorized
shares of Common Stock which have not been reserved for future issuance pursuant
to employee benefit plans, outstanding warrants and pending acquisitions and
990,012 authorized shares of Preferred Stock are available for issuance by the
Company at such times and under such circumstances as may be determined by the
Board of Directors, and, in the case of the Preferred Stock, with such
designations, rights and preferences as may be determined by the Board of
Directors. On February 19, 1997, the Company's Board of Directors approved and
recommended for approval by the Company's stockholders at the 1997 Annual
Meeting scheduled to be held on April 29, 1997 authorization for the issuance of
an additional 100 million shares of Common Stock. Such shares will be available
for possible future acquisitions, equity financings and other corporate
purposes, and might be issued at such times and under such circumstances as to
have a dilutive effect on earnings per share and on the equity ownership of
holders of the Company's Common Stock. The ability of the Company's Board of
Directors to issue additional shares of stock could enhance the Board's ability
to negotiate on behalf of stockholders in a takeover situation but could also be
used by the Board to make a change in control more difficult and could increase
the ability of the Board to continue current management. At present, there are
no pending proposals for the issuance of any such additional authorized shares.
PREFERRED STOCK PURCHASE RIGHTS
Under the Company's Stockholders Protection Rights Plan (the "Rights
Plan"), the Board of Directors has declared and paid a dividend of one Preferred
Stock Purchase Right (a "Right") for each outstanding share of Common Stock.
Except as set forth below, each Right, when exercisable, entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series C
Junior Participating Preferred Stock, $.01 par value (the "Series C Preferred
Stock"), at a price of $100.00 per one one-thousandth of a share (the "Purchase
Price"), subject to adjustment. The terms of the Rights are set forth in the
Rights Agreement between the Company and Boatmen's
74
<PAGE> 76
Trust Company, as Rights Agent (the "Rights Agreement"), and the summary of the
terms of the Rights set forth herein is qualified in its entirety by reference
to the Rights Agreement.
Currently, no separate Rights certificates represent the Rights. Until the
earlier of (i) 10 business days following the first to occur of (a) a public
announcement by the Company or an Acquiring Person (defined below) that, without
the prior written consent of the Company, a person or group of affiliated or
associated persons, other than the Company or subsidiaries or employee benefit
or compensation plans of the Company (an "Acquiring Person"), has acquired, or
obtained the right to acquire, 20% or more of the voting power of all securities
of the Company then outstanding and generally entitled to vote for the election
of directors of the Company ("Voting Power"), or (b) the date on which the
Company first has notice or otherwise determines that a person has become an
Acquiring Person (the "Stock Acquisition Date"), or (ii) 10 business days (or
such later date as may be determined by the Board of Directors prior to the time
that any person becomes an Acquiring Person) after the date that a tender offer
or exchange offer is first published or sent, without the prior written consent
of a majority of the Board of Directors, that will result in any person owning
20% or more of the Voting Power (the earlier of the dates in clause (i) or (ii)
above being called the "Distribution Date"), the Rights will be evidenced by the
Company's outstanding Common Stock certificates. Notwithstanding the foregoing,
an Acquiring Person shall not include any person or group who inadvertently
becomes the beneficial owner of 20% or more of the Voting Power, as long as such
person or group promptly enters into an irrevocable commitment to, and promptly
does, divest enough shares to get below the 20% threshold.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferable only in connection with the transfer of the Company's
Common Stock. Until the Distribution Date (or earlier redemption, termination or
expiration of the Rights), newly issued Common Stock certificates will contain a
notation incorporating the Rights Agreement by reference. Until the Distribution
Date (or earlier redemption, termination or expiration of the Rights), the
surrender for transfer of any of the Company's outstanding Common Stock
certificates will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate. As soon as practicable following
the Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Company's Common Stock
as of the close of business on the Distribution Date and such separate
certificates alone will then evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on February 28, 2006, unless such date is extended or unless earlier
redeemed or exchanged by the Company, as described below.
The Purchase Price payable, the number and identity of shares of Series C
Preferred Stock or other securities or property issuable upon exercise of the
Rights and the number of Rights outstanding are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series C Preferred Stock,
(ii) upon the issuance to holders of Series C Preferred Stock of rights or
warrants to subscribe for shares of Series C Preferred Stock or securities
convertible into Series C Preferred Stock at less than the then current market
price of the Series C Preferred Stock, or (iii) upon the distribution to holders
of Series C Preferred Stock of evidences of indebtedness or cash (excluding
regular periodic cash dividends out of earnings or retained earnings of the
Company), assets (other than a dividend payable in Series C Preferred Stock) or
convertible securities, subscription rights or warrants (other than those
referred to above).
The number of outstanding Rights and the number of one one-thousandths of a
share of Series C Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a subdivision, combination or
consolidation of the Common Stock or a stock dividend on the Common Stock
payable in Common Stock occurring, in any such case, prior to the Distribution
Date.
75
<PAGE> 77
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares will be issued (other than fractions
which are integral multiples of one one-thousandth of a share of Series C
Preferred Stock). In lieu of fractional shares, an adjustment in cash will be
made based on the market price of the stock on the last trading date prior to
the date of exercise.
In the event that, following the Distribution Date, (i) the Company
consolidates with or merges with or into any person, (ii) any person
consolidates with or merges with or into the Company, and the Company continues
or survives such merger and, in connection with such merger, all or part of the
Common Stock is changed into or exchanged for stock or securities of another
person or cash or any other property or (iii) the Company (or one or more of its
subsidiaries) sells or transfers 50% or more of the Company's assets or earning
power (in one transaction or a series of transactions), proper provision shall
be made so that each holder of a Right shall thereafter have the right to
receive, upon the exercise of such Right and payment of the Purchase Price, that
number of shares of common stock of the surviving or purchasing company (or, in
certain cases, one of its affiliates) which at the time of such transaction
would have a market value of two times the Purchase Price (such right being
called the "Merger Right").
In the event that any person shall become an Acquiring Person ("Flip-in
Event"), proper provision shall be made so that each holder of a Right will
thereafter have the right to receive upon exercise that number of shares (or
fractional shares) of Common Stock (or, in certain cases, equivalent securities)
having a market value of two times the Purchase Price (such right being called
the "Subscription Right"). However, the Rights will not become exercisable
following a Flip-in Event as described above until such time as the Rights are
no longer redeemable by the Company as described below.
Any Rights that are beneficially owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person will become null and void upon
the occurrence of any of the events giving rise to the exercisability or the
Subscription Right or the Merger Right, and any holder of such Rights will have
no right to exercise such Rights from and after the occurrence of such an event
insofar as they relate to the Subscription Right or the Merger Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the Voting Power
and prior to the acquisition by such person or group of 50% or more of the
Voting Power, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which have become void), in
whole or in part, at an exchange ratio of one share of Common Stock, or one
one-thousandth of a share of Series C Preferred Stock (or of a share of the
Company's Preferred Stock having equivalent rights, preferences and privileges),
per Right (subject to adjustment).
At any time prior to the Distribution Date, the Company may elect to redeem
the Rights in whole, but not in part, at a price of $0.001 per Right as adjusted
to reflect any stock split, stock dividend or similar transaction. Upon the
effective date of the redemption, the right to exercise the Rights will
terminate and the only right thereafter of the holders of Rights will be the
right to receive the redemption price. The Company shall promptly and publicly
disclose any such redemption and provide notice of such redemption to Rights
holders within 10 days after the Board action. However, any failure to give, or
defect in, such disclosure will not affect the validity of such redemption.
The Series C Preferred Stock purchasable upon exercise of the Rights will
not be redeemable and will be junior to any other series of Preferred Stock the
Company may issue (unless otherwise provided in the terms of such stock). Each
share of Series C Preferred Stock will have a preferential dividend in an amount
equal to the greater of $10.00 per share or 1,000 times any dividend declared on
each share of Common Stock. In the event of liquidation, the holders of Series C
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $1,000 per share (plus any accrued but unpaid dividends) and, after payment
of an equivalent amount to holders of the Common Stock, to share ratably and
proportionately with the Common Stock in the distribution of any remaining
76
<PAGE> 78
assets. Each share of Series C Preferred Stock will have 1,000 votes, voting
together with the shares of Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each share of Series C Preferred Stock will be entitled to receive
1,000 times the amount and type of consideration received per share of Common
Stock. The rights of the Series C Preferred Stock as to dividends, liquidation
and voting, and in the event of mergers and consolidations, are protected by
customary anti-dilution provisions. Fractional shares of Series C Preferred
Stock in integral multiples of one one-thousandth of a share of Series C
Preferred Stock will be issuable; however, the Company may elect to distribute
depositary receipts in lieu of such fractional shares. In lieu of fractional
shares other than fractions that are multiples of one one-thousandth of a share,
an adjustment in cash will be made based on the market price of the Series C
Preferred Stock on the last trading date prior to the date of exercise.
Because of the nature of the Series C Preferred Stock's voting, dividend
and liquidation features, the value of the one one-thousandth of a share of
Series C Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Common Stock.
The Board of Directors of the Company retains a broad ability to amend or
supplement the Rights Agreement without the consent of the holders of the
Rights, including amendments to extend the expiration date of the rights and
lower the threshold for exercisability of the Rights from 20% to not less than
the greater of (i) any percentage greater than the largest percentage of the
Voting Power then known to the Company to be beneficially owned by any person or
group of affiliated or associated persons (other than subsidiaries or employee
benefit or compensation plans of the Company), and (ii) 10%, except that from
and after such time as any person becomes an Acquiring Person no such amendment
may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
Shareholders may, depending upon the circumstances, recognize taxable
income in the event that the Rights become exercisable for Series C Preferred
Stock or other consideration as set forth above.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
without a condition to such an offer that a substantial number of the Rights be
acquired or the Rights be redeemed or otherwise not apply. The Company's ability
to amend the Rights Agreement may, depending upon the circumstances, increase or
decrease the anti-takeover effects of the Rights. The Rights do not prevent the
Board of Directors of the Company from approving in advance any merger or other
business combination since the Rights may be redeemed by the Board of Directors
as described above.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is The Boatmen's Trust Company
("Boatmen's Trust"), St. Louis, Missouri.
77
<PAGE> 79
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Bryan Cave LLP, St. Louis, Missouri and for the Underwriters by
Sullivan & Cromwell, New York, New York. John P. Denneen, Esq., a member of
Bryan Cave LLP, is Secretary of the Company and its subsidiaries. Mr. Denneen
and two other members of Bryan Cave LLP own an aggregate of 49,426 shares of
Common Stock of the Company, and one of such members owns an option to purchase
22,220 shares of Common Stock at $11.35 per share.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and each of the three years ended December 31, 1996 included in
this Prospectus have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as stated in their report appearing herein.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Such reports, proxy and information statements and other information
filed by the Company with the Commission, may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Room 1400, 75 Park Place, New York, New York 10007 and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60601-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois at the prescribed rates. The Commission maintains a
Web site (http://www.sec.gov.) that contains reports, proxy and information
statements and other information filed electronically by the Company with the
Commission through its Electronic Data Gathering, Analysis and Retrieval (EDGAR)
System. Shares of the Company's Voting Common Stock, $0.01 par value per share,
are listed on the Nasdaq National Market under the symbol "BFPT" and copies of
the aforementioned materials may be inspected at the office of the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
78
<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF BROOKS FIBER PROPERTIES, INC.
<S> <C>
(a) Independent Auditors' Report................................ F-2
(b) Consolidated Balance Sheets at December 31, 1996, and
1995........................................................ F-3
(c) Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994............................ F-4
(d) Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994........ F-5
(e) Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................ F-6
(f) Supplemental Schedule of Non-Cash Financing and Investing
Activities.................................................. F-7
(g) Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brooks Fiber Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Brooks
Fiber Properties, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Brooks Fiber
Properties, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
February 12, 1997, except
for Note 7, which is as
of February 25, 1997
F-2
<PAGE> 82
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $261,880,000 $ 59,913,000
Marketable securities, at cost, market value of
$182,190,000........................................... 182,304,000 --
------------ ------------
444,184,000 59,913,000
Accounts receivable, net.................................. 13,989,000 2,003,000
Other current assets...................................... 11,989,000 1,183,000
------------ ------------
Total current assets................................... 470,162,000 63,099,000
Networks and equipment, at cost............................. 306,455,000 53,172,000
Less accumulated depreciation and amortization............ 16,114,000 3,130,000
------------ ------------
Networks and equipment, net............................... 290,341,000 50,042,000
Investment in minority-owned venture........................ 20,000,000 --
Other assets, net........................................... 99,078,000 33,469,000
------------ ------------
$879,581,000 $146,610,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,511,000 $ 4,397,000
Accrued liabilities....................................... 17,915,000 789,000
Other current liabilities................................. 10,511,000 --
------------ ------------
Total current liabilities.............................. 34,937,000 5,186,000
------------ ------------
Long-term debt, net of current portion...................... 552,810,000 43,977,000
Minority Interests.......................................... -- 3,992,000
Common stock, subject to redemption, $.01 par value,
2,016,000 and 0 shares issued and outstanding............. 25,200,000 --
Shareholders' equity:
Preferred stock, 1,040,012 shares authorized:
Convertible preferred stock, Series A-1, $.01 par
value;
0 and 396,000 shares issued and outstanding.......... -- 39,600,000
Convertible preferred stock, Series A-2, $.01 par
value;
0 and 419,705 shares issued and outstanding.......... -- 65,596,000
Convertible preferred stock, Series B-1, $.01 par
value;
0 and 12,000 shares issued and outstanding........... -- 1,200,000
Convertible preferred stock, Series B-2, $.01 par
value;
0 and 4,545 shares issued and outstanding............ -- 711,000
Common stock, $.01 par value, 50,000,000 shares
authorized, 29,066,139 and 1,162,800 shares issued and
outstanding............................................ 291,000 12,000
Additional paid-in capital................................ 323,850,000 --
Accumulated deficit....................................... (57,507,000) (13,664,000)
------------ ------------
Total shareholders' equity............................. 266,634,000 93,455,000
------------ ------------
$879,581,000 $146,610,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 83
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues........................................ $ 45,574,000 $ 14,160,000 $ 2,809,000
Expenses:
Service costs................................. 21,468,000 7,177,000 1,557,000
Selling, general and administrative
expenses................................... 38,596,000 11,405,000 3,966,000
Depreciation and amortization................. 16,296,000 4,118,000 663,000
------------ ------------ -----------
76,360,000 22,700,000 6,186,000
------------ ------------ -----------
Loss from operations.......................... (30,786,000) (8,540,000) (3,377,000)
Other income (expense):
Interest income............................... 16,539,000 1,608,000 95,000
Interest expense.............................. (31,186,000) (3,704,000) (693,000)
------------ ------------ -----------
Loss before minority interest................. (45,433,000) (10,636,000) (3,975,000)
Minority interests in share of loss............. 1,590,000 1,085,000 78,000
------------ ------------ -----------
Net loss...................................... $(43,843,000) $ (9,551,000) $(3,897,000)
============ ============ ===========
Net loss per share............................ $ (1.71) $ (0.49)
============ ============
Weighted average number of shares
outstanding................................ 25,627,328 19,523,584
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 84
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
------------------------------------------------- ------------------------------------------
SERIES A-1 SERIES A-2 SERIES B-1 SERIES B-2
----------------------- ----------------------- --------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994........... 396,000 $ 39,600,000 -- -- 12,000 $ 1,200,000 -- --
Subscriptions receivable, payments
and reclassifications............. -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, December 31, 1994......... 396,000 39,600,000 -- -- 12,000 1,200,000 -- --
Issuance of Series A-2 preferred
stock............................. -- -- 419,705 $ 65,596,000 -- -- -- --
Issuance of Series B-2 preferred
stock............................. -- -- -- -- -- -- 4,545 $ 711,000
Net loss........................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, December 31, 1995......... 396,000 39,600,000 419,705 65,596,000 12,000 1,200,000 4,545 711,000
Merger with BTC:
-- issuance of common stock....... -- -- -- -- -- -- -- --
-- conversion of preferred stock
to common stock................ (6,350) (635,000) (6,061) (1,000,000) -- -- -- --
Issuance of Series A-2 preferred
stock............................. -- -- 6,060 997,000 -- -- -- --
Warrants exercised................. 9,940 109,000 -- -- -- -- -- --
Initial public offering:
-- issuance of common stock....... -- -- -- -- -- -- -- --
-- common stock, subject to
redemption, exchanged for
common stock................... -- -- -- -- -- -- -- --
-- conversion of preferred stock
to common stock................ (399,590) (39,074,000) (419,704) (65,593,000) (12,000) (1,200,000) (4,545) (711,000)
Options exercised.................. -- -- -- -- -- -- -- --
Warrants exercised................. -- -- -- -- -- -- -- --
Conversion of minority interest in
Subsidiaries to common stock...... -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, December 31, 1996......... -- $ -- -- $ -- -- $ -- -- $ --
======== ============ ======== ============ ======= =========== ====== =========
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
------ ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994........... 1,162,800 $ 12,000 $ -- $(35,750,000) $ (216,000) $ 4,846,000
Subscriptions receivable, payments
and reclassifications............. -- -- -- 35,750,000 -- 35,750,000
Net loss........................... -- -- -- -- (3,897,000) (3,897,000)
---------- -------- ------------ ------------- ------------ ------------
Balance, December 31, 1994......... 1,162,800 12,000 -- -- (4,113,000) 36,699,000
Issuance of Series A-2 preferred
stock............................. -- -- -- -- -- 65,596,000
Issuance of Series B-2 preferred
stock............................. -- -- -- -- -- 711,000
Net loss........................... -- -- -- -- (9,551,000) (9,551,000)
---------- -------- ------------ ------------- ------------ ------------
Balance, December 31, 1995......... 1,162,800 12,000 -- -- (13,664,000) 93,455,000
Merger with BTC:
-- issuance of common stock....... 756,340 8,000 9,447,000 -- -- 9,455,000
-- conversion of preferred stock
to common stock................ 248,220 2,000 1,633,000 -- -- --
Issuance of Series A-2 preferred
stock............................. -- -- -- -- -- 997,000
Warrants exercised................. -- -- -- -- -- 109,000
Initial public offering:
-- issuance of common stock....... 7,385,331 74,000 185,149,000 -- -- 185,223,000
-- common stock, subject to
redemption, exchanged for
common stock................... 224,000 2,000 2,798,000 -- -- 2,800,000
-- conversion of preferred stock
to common stock................ 16,527,920 165,000 106,413,000 -- -- --
Options exercised.................. 70,474 1,000 356,000 -- -- 357,000
Warrants exercised................. 1,489,185 15,000 7,681,000 -- -- 7,696,000
Conversion of minority interest in
Subsidiaries to common stock...... 1,201,869 12,000 10,373,000 -- -- 10,385,000
Net loss........................... -- -- -- -- (43,843,000) (43,843,000)
---------- -------- ------------ ------------- ------------ ------------
Balance, December 31, 1996......... 29,066,139 $291,000 $323,850,000 $ -- $(57,507,000) $266,634,000
========== ======== ============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 85
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (43,843,000) $ (9,551,000) $ (3,897,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 16,296,000 4,118,000 663,000
Non-cash interest expense................ 29,787,000 3,814,000 135,000
Minority interests....................... (1,590,000) (1,085,000) (78,000)
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable.................... (7,931,000) (593,000) (576,000)
Accounts payable and accrued
expenses............................ (384,000) 623,000 3,955,000
Other, net............................. (9,587,000) 114,000 (133,000)
------------- ------------ ------------
Net cash provided by (used in)
operating activities........... (17,252,000) (2,560,000) 69,000
------------- ------------ ------------
Cash flows from investing activities:
Purchase of networks and equipment.......... (217,230,000) (27,577,000) (6,693,000)
Purchase of marketable securities........... (358,598,000) -- --
Maturity of marketable securities........... 176,294,000 -- --
Increase in other assets.................... (11,831,000) (2,026,000) (769,000)
Payment for acquisitions, net of cash
acquired................................. (4,290,000) (13,941,000) (35,669,000)
Investment in minority-owned venture........ (20,000,000) -- --
------------- ------------ ------------
Net cash used in investing
activities..................... (435,655,000) (43,544,000) (43,131,000)
------------- ------------ ------------
Cash flows from financing activities:
Issuances of common stock................... 193,260,000 -- --
Issuance of preferred stock and
subscriptions receivable payments, net... 1,106,000 84,107,000 21,781,000
Proceeds from minority investments.......... 7,991,000 4,088,000 1,067,000
Proceeds from long-term debt................ 477,772,000 10,760,000 29,268,000
Long-term debt issuance cost................ (19,197,000) -- --
Repayment of long-term debt and capital
leases................................... (5,797,000) -- --
Other financing activities.................. (261,000) (1,733,000) (1,337,000)
------------- ------------ ------------
Net cash provided by financing
activities..................... 654,874,000 97,222,000 50,779,000
------------- ------------ ------------
Net increase in cash.......................... 201,967,000 51,118,000 7,717,000
Cash, beginning of period..................... 59,913,000 8,795,000 1,078,000
------------- ------------ ------------
Cash, end of period........................... $ 261,880,000 $ 59,913,000 $ 8,795,000
============= ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest...... $ 1,399,000 $ 132,000 $ 408,000
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 86
SUPPLEMENTAL SCHEDULE
OF NON-CASH FINANCING
AND INVESTING ACTIVITIES
Significant non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of tangible assets acquired, net of
cash acquired.................................. $ 41,614,000 5,958,000 15,037,000
Fair value of intangible assets acquired.......... 36,159,000 8,323,000 20,757,000
Liabilities assumed............................... (36,028,000) (340,000) (125,000)
Common stock issued............................... (37,455,000) -- --
------------ ---------- ----------
Cash paid for acquisitions, net of cash
acquired..................................... $ 4,290,000 13,941,000 35,669,000
============ ========== ==========
Capitalized non-cash interest on network
construction projects............................. $ 1,994,000 -- --
============ ========== ==========
</TABLE>
F-7
<PAGE> 87
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Brooks Fiber
Properties, Inc. (BFP) and its wholly-owned subsidiaries (the Company). The
Company, through its subsidiaries, is a leading provider of competitive local
telecommunications services in selected cities within the United States. The
Company competes with local exchange carriers by providing high quality,
integrated local telecommunications services over fiber optic digital networks
to meet the voice, data and video transmission needs of its customers. The
Company's customers are principally inter-exchange carriers (IXCs), internet
service providers (ISPs), wireless carriers, telecommunications-intensive
business, government and institutional end users, and residential customers. The
Company offers these customers technologically advanced local telecommunications
services as well as superior customer service, flexible pricing and route
diversity.
The Company was founded on November 10, 1993, by Brooks Telecommunications
Corporation (BTC) and a group of venture capital investors who, along with BTC
and management of the Company, provided initial equity capital of $40.8 million.
As the Company's founding shareholder, BTC received 1,162,800 founder's shares
of the Company's common stock and founder's warrants to purchase an additional
81,600 shares of the Company's preferred stock (convertible into 1,632,000
shares of common stock).
Pursuant to an Agreement and Plan of Merger between BTC and the Company,
BTC was merged into the Company on January 2, 1996, and the securities of the
Company held by BTC were canceled. Following the merger, the former holders of
BTC's common stock, preferred stock, convertible notes, and options and warrants
received shares of the Company's common stock, options and warrants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of all
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
The Company considers cash equivalents as all highly liquid securities
purchased with a maturity of three months or less.
MARKETABLE SECURITIES:
Marketable securities consist of treasury bills and notes, commercial
paper, and repurchase agreements with maturities beyond three months but less
than twelve months.
FINANCIAL INSTRUMENTS:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of marketable securities and
accounts receivable. Concentrations of credit risk of marketable securities are
limited as the Company invests in short-term, investment grade securities.
CONCENTRATION OF CREDIT RISK:
For purposes of segment reporting, management believes the Company operates
in the telecommunications industry. Concentrations of credit risk with respect
to accounts receivable are
F-8
<PAGE> 88
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
limited due to the dispersion of the Company's customer base among different
industries and geographic areas and remedies provided by terms of contracts and
statutes. One long distance carrier customer accounted for 13% and 24% of total
revenues for the years ended December 31, 1996 and 1995, respectively.
NETWORKS AND EQUIPMENT:
Networks and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to the installation and expansion
of the Company's networks. Leasehold improvements are amortized using the
straight-line method over their useful life or lease term, whichever is shorter.
Generally, provisions for depreciation are provided using the straight-line
method over the estimated useful lives beginning in the year an asset is put
into service as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Telecommunications networks................................. 8-25
Electronics and related equipment........................... 8
Office equipment and furniture.............................. 5-7
Leasehold improvements and other equipment.................. 5-10
Buildings................................................... 40
</TABLE>
OTHER ASSETS:
Goodwill is being amortized using the straight-line method over 25 years
from the dates of acquisition. The Company reviews the carrying amount of
goodwill periodically to determine whether any impairment has occurred in the
value of such assets. The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations or liquidity.
Direct incremental costs incurred in the organization and development of
new networks, including the costs associated with negotiating rights-of-way,
obtaining legal/regulatory authorizations, and developing network design, are
deferred and amortized over five years. Pre-operating costs representing
substantially all direct incremental non-development costs incurred during the
pre-operating phase of a newly constructed network are amortized over five-year
periods commencing with the start of operations.
Costs of the Company's interest rate cap arrangements purchased under the
terms of debt facilities are deferred and amortized over the contractual period
of the underlying interest rate cap arrangements.
Costs incurred in connection with securing the Company's debt facilities,
including commitment, legal and other such costs, are deferred and amortized
over the term of the financing.
F-9
<PAGE> 89
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION:
The Company recognizes revenue on local telecommunications services in the
month such services are provided. Revenues and associated costs of facilities
management services are recognized as services are provided.
INCOME TAXES:
The Company accounts for income taxes in accordance with the
asset/liability method. Deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities given the provisions of the enacted tax laws.
STOCK OPTION PLAN:
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
later years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
LOSS PER SHARE:
Loss per share has been computed using the number of shares of common stock
and common stock equivalents outstanding. The weighted average number of shares
used in computing loss per share was 25,627,328 and 19,523,584 for the years
ended December 31, 1996 and 1995, respectively. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, shares issued and stock
options and warrants granted at prices below the initial public offering price
of the Company's common stock on May 2, 1996, of $27.00 per share during the
twelve-month period preceding the date of the Company's initial filing of the
Registration Statement for such offering have been included in the calculation
of common stock equivalent shares using the treasury stock method as if they
were outstanding for all of 1995 and for the entire six-month period ended June
30, 1996. Subsequent to this period, the weighted average number of shares was
based on common stock outstanding and does not include common stock equivalents
as their inclusion would be anti-dilutive.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE> 90
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of cash on hand and all highly liquid
securities with insignificant interest rate risk and original maturities of
three months or less at the date of acquisition. Accordingly, the carrying value
is a reasonable estimate of fair value.
MARKETABLE SECURITIES:
Marketable securities, as defined in Note 2, are stated at cost, adjusted
for discount accretion and premium amortization. The securities in the Company's
portfolio are classified as held to maturity as management has the intent and
ability to hold those securities to maturity. The carrying value and fair value
of marketable securities at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
U. S. Treasury securities..................... $ 56,737,000 $ 56,703,000
Corporate debt securities..................... 125,567,000 125,487,000
------------ ------------
Total marketable securities................... $182,304,000 $182,190,000
============ ============
</TABLE>
The Company had unrealized gains of $4,000 and unrealized losses of
$118,000 related to the above marketable securities held at December 31, 1996.
ACCOUNTS RECEIVABLE:
Accounts receivable are reflected net of an allowance for doubtful accounts
of $740,000 and $76,000 at December 31, 1996 and 1995, respectively. The net
carrying value of accounts receivable approximates fair value due to the terms
of the underlying receivables.
INVESTMENT IN MINORITY-OWNED VENTURE:
The investment in minority-owned venture represents an investment in
convertible preferred stock of Verio, Inc., formerly known as World-Net Access,
Inc. (Verio). Verio is a development stage company, and the underlying
securities are not readily marketable. The investment is carried at cost, and
management believes there is no impairment of the underlying value of the
securities.
LONG-TERM DEBT:
As of December 31, 1996, the fair value of long-term debt approximated
carrying value.
In conjunction with certain of the long-term debt agreements, the Company
purchased interest rate cap arrangements under which, if the 90-day commercial
paper rate rises above 7.5%, the Company will receive payments to offset the
higher interest rates on long-term debt. These payments, if any, will be
recorded as reductions of interest expense. As of December 31, 1996, the Company
had notional amounts of interest rate caps totaling $4,752,000 and $30,551,000
related to contract periods from October 1996 through October 2001, and January
1997 through January 2002, respectively. Notional amounts decrease during the
contract period. As of December 31, 1996, the carrying value, net of
amortization, and fair value of the interest rate cap arrangements approximated
$1,498,000 and $469,000, respectively.
F-11
<PAGE> 91
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NETWORKS AND EQUIPMENT
Networks and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Telecommunications networks...................... $170,687,000 $30,158,000
Electronics and related equipment................ 85,050,000 20,174,000
Office equipment and furniture................... 22,625,000 2,435,000
Leasehold improvements and other equipment....... 14,456,000 405,000
Land and buildings............................... 13,637,000 --
------------ -----------
306,455,000 53,172,000
Less accumulated depreciation.................... 16,114,000 3,130,000
------------ -----------
$290,341,000 $50,042,000
============ ===========
</TABLE>
As of December 31, 1996 and 1995, networks and equipment include
$21,875,000 and $4,469,000, respectively, of networks in progress that were not
in service and, accordingly, have not been depreciated.
5. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Goodwill......................................... $ 65,648,000 $29,129,000
Debt issuance costs.............................. 20,437,000 1,559,000
Organization, development and pre-operating
costs.......................................... 13,756,000 2,341,000
Interest rate cap arrangements................... 1,511,000 1,511,000
Rights-of-way and other.......................... 3,604,000 581,000
------------ -----------
104,956,000 35,121,000
Less accumulated amortization.................... 5,878,000 1,652,000
------------ -----------
$ 99,078,000 $33,469,000
============ ===========
</TABLE>
Amortization charged to expense for the years ended December 31, 1996 and
1995 was $4,226,000 and $1,356,000, respectively.
F-12
<PAGE> 92
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
10 7/8% Senior discount notes, due March 1,
2006........................................... $273,379,000 $ --
11 7/8% Senior discount notes, due November 1,
2006........................................... 229,109,000 --
Credit Facility at a variable rate (approximately
9.46% at December 31, 1996).................... 50,000,000 43,877,000
Other long-term debt............................. 756,000 100,000
------------ -----------
553,244,000 43,977,000
Less: Current portion............................ 434,000 --
------------ -----------
$552,810,000 $43,977,000
============ ===========
</TABLE>
THE SENIOR DISCOUNT NOTES:
On February 26, 1996, the Company issued $425 million aggregate principal
amount of 10 7/8% Senior Discount Notes due March 1, 2006 (the 10 7/8% Senior
Discount Notes), and on November 7, 1996, issued $400 million aggregate
principal amount of 11 7/8% Senior Discount Notes due November 1, 2006 (the
11 7/8% Senior Discount Notes), from which the Company received gross proceeds
of $250 million and $225 million, respectively. The 10 7/8% Senior Discount
Notes and 11 7/8% Senior Discount Notes (the Senior Discount Notes) will not
require the payment of interest until March 1, 2001, and November 1, 2001,
respectively; however, the Company may elect to commence the payment of interest
at any time prior to that date. Thereafter, interest will be payable
semi-annually until maturity.
On or after March 1, 2001, and November 1, 2001, the Senior Discount Notes
will be redeemable at the option of the Company, in whole or in part from time
to time, at the following prices (expressed in percentages of the principal
amount at the stated maturity), if redeemed during the 12 months beginning March
1 and November 1, respectively, of the years indicated below, in each case
together with interest accrued to the redemption date.
<TABLE>
<CAPTION>
10 7/8% SENIOR 11 7/8% SENIOR
DISCOUNT NOTES DISCOUNT NOTES
-------------- --------------
<S> <C> <C>
2001....................................... 104.50% 105.94%
2002....................................... 103.00% 103.96%
2003....................................... 101.50% 101.98%
2004 and thereafter........................ 100.00% 100.00%
</TABLE>
In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the Senior
Discount Notes as stipulated in the note agreements. The Senior Discount Notes
are senior unsecured obligations of the Company and are subordinated to all
current and future indebtedness of the Company's subsidiaries, including trade
accounts payable.
F-13
<PAGE> 93
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CREDIT FACILITY:
The Company's Amended and Restated Loan and Security Agreement dated as of
October 1, 1996 (Credit Facility) with AT&T Credit Corporation (AT&T Credit)
provides financing for the acquisition and construction of telecommunications
networks, the purchase of equipment related to the construction and operation of
the networks, and working capital. As of December 31, 1996, outstanding
indebtedness under the Credit Facility is $50.0 million. Amounts borrowed bear
interest at the 90-day commercial paper rate plus 4.0% per annum, payable
quarterly. Terms of the Credit Facility further provide for interest-only
payments through December 31, 1997, and a six-year principal and interest payout
period thereafter. Borrowings are secured by the assets and stock of certain of
the Company's subsidiaries.
OTHER:
Other long-term debt includes $100,000 related to a $10 million credit
facility with a commercial bank (Bank Credit Facility) and $656,000 related to
certain capitalized leases. Terms of the Bank Credit Facility provide for a
wholly-owned subsidiary of the Company to borrow amounts up to $10 million from
time to time prior to June 30, 1997. Terms of the Bank Credit Facility further
provide for interest-only payments through August 31, 1997, a 4.5 year principal
and interest payout and final maturity of all loans no later than June 30, 2002.
The aforementioned credit agreements contain certain restrictive and
financial covenants, including limitations on the ability of the Company and its
subsidiaries to declare and pay dividends, incur additional indebtedness,
dispose of assets, issue additional capital stock, make loans and advances, and
the maintenance of certain financial ratios and minimum annualized operating
cash flow. At December 31, 1996, the Company was in compliance with the terms of
these covenants.
Maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 2,680,000
1999........................................................ 5,072,000
2000........................................................ 7,528,000
2001........................................................ 10,028,000
Thereafter.................................................. 527,502,000
------------
$552,810,000
============
</TABLE>
7. ACQUISITIONS AND JOINT VENTURES
Pursuant to an Agreement and Plan of Merger between BTC and the Company,
BTC was merged into the Company on January 2, 1996, and the securities of the
Company held by BTC were canceled. Following the merger, the former holders of
BTC's common stock, preferred stock, convertible notes, options and warrants
received shares of the Company's common stock, options and warrants. After the
consideration of the shares of the Company held by BTC at the time of
acquisition, the Company issued 756,340 shares of common stock valued at $12.50
per share and certain options and warrants. Intangible assets of approximately
$6.4 million were recorded as a result of this acquisition.
On January 31, 1996, the Company acquired City Signal, Inc., a provider of
competitive access and local exchange services in Michigan and Ohio, and certain
related assets. In connection with the acquisition, the Company issued
approximately 2.2 million shares of common stock and assumed certain specified
liabilities. Intangible assets of approximately $13.1 million were recorded as a
F-14
<PAGE> 94
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
result of this acquisition. In addition, the Company granted the seller the
option to require the Company to repurchase any or all of such shares at a price
of $12.50 per share on or before February 1, 1998. In conjunction with the
Company's initial public offering, the holder of such shares sold 10% of such
shares. Accordingly, approximately 2.0 million shares remain subject to
redemption.
On March 15, 1995, the Company acquired 100% of the assets of PSC of
Oklahoma (PSO), a 105-mile competitive access network in Tulsa, Oklahoma.
Effective July 1, 1996, the Company acquired 100% of the stock of ALD
Communications, Inc. (ALD), a switchless reseller of long distance services, and
Tenant Network Services, Inc. (TNS), a wholly-owned subsidiary of ALD which acts
as a shared tenant service provider of telecommunications services, both of
which provide their services primarily to customers in the San Francisco,
California area. Also, effective September 1, 1996, the Company acquired 100% of
the stock of Bittel Telecommunications Corporation (Bittel), a switch-based
reseller of long distance services primarily to customers in the San Francisco
and Los Angeles, California areas. In connection with the aforementioned
acquisitions, the Company has an obligation totaling $10 million due during
January, 1997, which is included in other current liabilities at December 31,
1996.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired companies
have been included in the Company's consolidated financial statements since the
effective dates of acquisition. The following unaudited condensed pro forma
information presents the results of operations of the Company for the years
ended December 31, 1996 and 1995 as if the above transactions had occurred on
January 1, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenue......................................... $ 54,515,000 $ 34,844,000
Loss before minority interest................... $(46,410,000) $(20,125,000)
</TABLE>
The unaudited pro forma information is provided for informational purposes
only and is not necessarily indicative of the results of operations that would
have occurred had the purchases been made on January 1, 1995, or of the future
anticipated results of operations of the combined companies.
In June 1996, the Company formed a strategic alliance with Verio, Inc.,
formerly known as World-Net Access, Inc. (Verio), and to date has made a $20
million convertible preferred senior investment for a 25.5% fully-diluted
interest in Verio. The investment in Verio is classified as Investment in
Minority-Owned Venture on the Company's consolidated balance sheet. Verio is a
privately-held consolidator of ISPs.
On October 24, 1996, the Company and MaineCom Services, Inc. (MaineCom), a
subsidiary of Central Maine Power Company, entered into a letter of intent to
form a joint venture company, to be owned 60% by the Company and 40% by
MaineCom, for the purposes of constructing, owning, operating and developing
networks initially in Portland, Maine and Nashua and Manchester, New Hampshire
and other markets in Maine and New Hampshire as may be agreed upon by the
Company and MaineCom in the future.
F-15
<PAGE> 95
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
COMMON STOCK:
Effective January 2, 1996, the Company's Board of Directors authorized a
20-for-1 split for each share of common stock and adjusted all outstanding
common stock options and warrants accordingly. All share data presented within
the consolidated financial statements have been revised to reflect the 20-for-1
stock split.
On May 2, 1996, the Company completed its initial public offering of
7,385,331 shares of common stock at a price of $27.00 per share. Gross proceeds
from this offering totaled approximately $199.4 million, and proceeds net of
underwriting discounts, advisory fees and expenses totaled approximately $185.2
million.
The Company's authorized common stock consists of 50,000,000 shares, of
which 49,669,100 shares are designated as voting common stock and 330,900 shares
are designated as non-voting stock. No shares of non-voting common stock are
outstanding. A total of 14,358,155 authorized shares of common stock, which have
not been reserved for issuance upon exercise of warrants and options and under
employee stock plans are available for issuance from time to time and under such
circumstances as may be determined by the Board of Directors.
In connection with the Agreement and Plan of Merger between the Company and
BTC on January 2, 1996, the Company issued options and warrants to certain of
the shareholders and employees of BTC for the purchase of 1,134,840 shares of
the Company's common stock at prices of $11.35 to $31.04 per share.
In June 1996, the Company and MCImetro Access Transmission Services, Inc.
(MCImetro) entered into an agreement pursuant to which MCImetro acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million, and
invested an additional $3.5 million in the Company's majority-owned San Jose,
California joint venture company, formed in September 1995 between the Company
and MCImetro to operate and expand the Company's existing networks in San Jose
and its environs. In accordance with the provisions of the agreements between
the Company and MCImetro, on October 10, 1996, MCImetro exchanged the agreed
value of these investments and its September 1995 investment in the San Jose
joint venture company for 958,720 shares of the Company's common stock.
On November 12, 1996, AT&T Credit exchanged the agreed value of its
minority investments in certain subsidiaries of the Company made in connection
with borrowings under the Credit Facility for an aggregate of 234,260 shares of
the Company's common stock.
Stock warrant activity for the years ended December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
------ ---------------
<S> <C> <C>
Balance, January 1, 1995........................ 1,632,000 $11.00
Granted....................................... 192,340 $8.25
----------
Balance, December 31, 1995...................... 1,824,340 $8.25-$11.00
Issued........................................ 814,520 $11.35-$31.04
Exercised..................................... (2,228,940) $8.25-$22.17
Canceled...................................... (60) $8.25
----------
Balance, December 31, 1996...................... 409,860 $11.35-$31.04
========== =============
</TABLE>
F-16
<PAGE> 96
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREFERRED STOCK:
The Company's authorized preferred stock consists of 1,040,012 shares, of
which 50,000 shares are designated Series C Junior Participating Preferred Stock
and reserved for issuance in connection with the Rights described below. The
remainder of the preferred stock has the status of authorized and unissued
shares of preferred stock subject to issuance from time to time as a new series
of preferred stock created by resolution of the Board of Directors. At December
31, 1996, there was no preferred stock outstanding.
STOCKHOLDER RIGHTS PLAN:
In February 1996, the Company adopted a Shareholders Protection Rights Plan
(Rights Plan) and distributed a dividend of one Preferred Stock Purchase Right
(Right) (collectively the Rights). The Rights expire on February 28, 2006. The
Rights generally will be exercisable and transferable apart from the common
stock only after the tenth day following public disclosure that a person or
group has acquired beneficial ownership of 20% or more of the voting power of
the Company's stock or the tenth business day after the date on which a person
commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 20% or more of the voting power of the Company's
stock of the Company. Thereafter, each holder of a Right will be entitled to
purchase shares of common stock of the Company having a value equal to twice the
Right's exercise price.
In addition, if, after any person or group has become a 20%-or-more
stockholder, the Company is involved in a merger or other business combination
transaction with another person or group in which its common stock is changed or
converted, or sells 50% or more of its assets or earning power to another person
or group, each Right will entitle its holder to purchase shares of common stock
of such other person or group having a value of twice the Right's exercise
price.
At any time prior to the time the Rights become exercisable, the Company is
generally entitled to redeem the Rights at $.01 per Right.
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN:
The Company's 1993 Stock Option Plan (the Plan) authorizes the granting of
options and stock appreciation rights covering up to 3,400,000 shares of common
stock. Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant and generally vest over a period of three
years from the date of grant.
F-17
<PAGE> 97
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for the Plan for the years ended December 31, 1996,
and 1995 is as follows:
<TABLE>
<CAPTION>
PRICE PER
NUMBER SHARE
------ ---------
<S> <C> <C>
Balance, January 1, 1994.......................... 580,000 $ 4.00
Granted......................................... 460,000 $ 4.00
Canceled........................................ (120,000) $ 4.00
---------
Balance, January 1, 1995.......................... 920,000 $ 4.00
Granted......................................... 875,000 $ 4.00-$ 6.60
Canceled........................................ (143,340) $ 4.00-$ 6.60
---------
Balance, December 31, 1995........................ 1,651,660 $ 4.00-$ 6.60
Granted......................................... 1,313,000 $12.50-$33.75
Exercised....................................... (70,474) $ 4.00-$ 6.60
Canceled........................................ (144,000) $ 6.00-$12.50
---------
Balance, December 31, 1996........................ 2,750,186 $ 4.00-$33.75
=========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss -- as reported.......................... $(43,843,000) $(9,551,000)
Net loss -- pro forma............................ (46,825,000) (9,847,000)
Net loss per share -- as reported................ (1.71) (0.49)
Net loss per share -- pro forma.................. (1.83) (0.50)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of three years and compensation cost for options granted prior to January
1, 1995 is not considered.
The fair value of each options grant for both 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: expected volatility of
37.2%, risk-free interest rate of 6.1%, expected life of 5 years; and an
expected dividend yield of 0.0%.
The pro forma information is provided for informational purposes only and
is not necessarily indicative of the results of operations that would have
occurred or of the future anticipated results of operations of the Company.
EMPLOYEE STOCK PURCHASE PLAN:
In February 1996, the Company established an Employee Stock Purchase Plan
(the ESPP) to provide employees of the Company with an opportunity to purchase
common stock through payroll deductions. Under the ESPP, up to 500,000 shares of
common stock have been reserved for
F-18
<PAGE> 98
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
issuance, subject to certain antidilution adjustments. The ESPP became effective
at the time of the Company's initial public offering of common stock in May
1996. The first offering period under the ESPP is from May 1996 through April
30, 1997. The Board of Directors will have authority to authorize up to four
annual offering periods thereafter. The ESPP terminates on April 30, 2001.
Initially, the amount of authorized payroll deductions will be not less than 1%
nor more than 10% of an employee's cash compensation during an offering period,
but not more than $25,000 per year.
401(K) PLAN:
The Company has a 401(k) Plan which covers substantially all employees of
the Company. Employees of the Company who are 21 years of age or older are
eligible to participate in the 401(k) Plan upon completion of twelve months of
service, at which time they may voluntarily contribute a percentage of
compensation. Participants are eligible to receive Company matching
contributions each year in an amount up to 50% of the participant's contribution
up to a maximum of 4% of such participant's annual compensation. The Company's
matching contributions for 1996 and 1995 were $181,000 and $69,000,
respectively.
10. RELATED PARTY TRANSACTIONS
During November 1993, the Company entered into a management agreement with
BTC pursuant to which BTC agreed to provide certain services to the Company. The
management agreement commenced upon the Company's first acquisition (January 31,
1994). The management agreement provided for payment by the Company to BTC of a
fee equal to $250,000 per year adjusted annually beginning in 1996 and
subsequent years for inflation, plus the Company's proportionate share of rent
and support services. Furthermore, BTC charged BFP for consulting services and
certain expenses incurred, plus the Company's proportionate share of rent and
support services. Aggregate expenses related to services provided by BTC during
1995 totaled $1,478,000. Concurrent with the Agreement and Plan of Merger
between BTC and the Company on January 2, 1996, the management agreement was
canceled.
11. INCOME TAXES
The Company files its income tax return on a consolidated basis. No
provision for income taxes was recorded for 1996, 1995, or for any prior
periods. A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance for the entire portion of the net deferred
income tax asset. The valuation allowance increased by $20.6 million and $4.4
million for 1996 and 1995, respectively.
The actual income tax expense for the years ended December 31, 1996, 1995
and 1994 differs from the "expected" income tax expense, computed by applying
the U. S. Federal corporate tax rate of 35% to income before income taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax
expense.......................... $(15,345,000) $(3,343,000) $(1,364,000)
Non-utilization of net operating
loss............................. 14,150,000 2,691,000 1,272,000
Amortization of goodwill........... 579,000 258,000 60,000
Minority interest.................. 557,000 380,000 27,000
Other, net......................... 59,000 14,000 5,000
------------ ----------- -----------
$ -- $ -- $ --
============ =========== ===========
</TABLE>
F-19
<PAGE> 99
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996 and 1995, temporary differences and carryforwards
that give rise to deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards......................... $ 35,040,000 $ 6,358,000
Other.......................................... 611,000 52,000
------------ -----------
Gross deferred income tax assets............... 35,651,000 6,410,000
Less valuation allowance....................... (26,573,000) (6,011,000)
------------ -----------
Net deferred income tax asset.................. 9,078,000 399,000
Deferred income tax liabilities:
Tangible and intangible assets................. (9,078,000) (399,000)
Net deferred income tax liabilities............ (9,078,000) (399,000)
------------ -----------
Net deferred income taxes...................... $ -- $ --
</TABLE>
As of December 31, 1996, net operating loss carryforwards totaling $87.6
million expire in years 2008-2012 if not utilized in future income tax returns.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space and other equipment at various locations
under operating leases. Rent expense totaled $3,150,000 and $688,000 for 1996
and 1995, respectively. Future minimum rental payments under non-cancelable
operating leases at December 31, 1996, were as follows:
<TABLE>
<S> <C>
1997........................................................ $ 4,328,000
1998........................................................ 3,602,000
1999........................................................ 3,252,000
2000........................................................ 2,637,000
2001........................................................ 2,343,000
Thereafter.................................................. 9,508,000
-----------
Total minimum lease payments................................ $25,670,000
</TABLE>
On September 22, 1995, GST Tucson Lightwave, Inc. (Lightwave) was permitted
to intervene in litigation originally filed by Brooks Fiber Communications of
Tucson, Inc., a wholly-owned subsidiary of the Company (BFC Tucson). On October
2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company and
Tucson Electric Power Company (TEP) charging BFC Tucson, the Company and TEP
with violations of antitrust laws, all of which alleged violations stem from an
agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive rights,
for one year, to utilize certain of TEP's rights of way. The original causes of
action have been settled; however, the counterclaim by Lightwave is currently
still pending. The counterclaim seeks treble damages, attorneys' fees, costs
(all in an unspecified amount) and such other relief as the court deems proper.
The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
13. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED)
The following table presents unaudited quarterly operating results for 1995
and 1996. The Company believes that all necessary adjustments have been included
in the amounts stated below
F-20
<PAGE> 100
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements and notes thereto. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1995 1996
--------------------------------- ------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--- --- --- --- --- --- --- ---
($ IN 000S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. 3,023 3,489 3,797 3,851 6,795 8,409 12,943 17,427
Loss from
operations......... (1,644) (1,805) (2,181) (2,910) (5,121) (7,074) (7,605) (10,986)
Other expense, net... (712) (825) (396) (163) (2,043) (3,296) (2,837) (6,471)
------ ------ ------ ------ ------ ------- ------- -------
Loss before minority
interest........... (2,356) (2,630) (2,577) (3,073) (7,164) (10,370) (10,442) (17,457)
Minority interest.... 142 176 271 496 523 615 451 --
------ ------ ------ ------ ------ ------- ------- -------
Net loss............. (2,214) (2,454) (2,306) (2,577) (6,641) (9,755) (9,991) (17,457)
====== ====== ====== ====== ====== ======= ======= =======
Loss per share
applicable to
common
shareholders....... (.11) (.13) (.12) (.13) (.35) (.40) (.35) (.58)
====== ====== ====== ====== ====== ======= ======= =======
EBITDA(1)............ (899) (797) (1,061) (1,665) (2,693) (3,908) (3,340) (4,549)
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and minority interests. EBITDA is commonly used
in the communications industry to analyze companies on the basis of
operating performance, leverage and liquidity. EBITDA is not intended to
represent cash flows for the periods. See Consolidated Statement of Cash
Flows.
14. SUBSEQUENT EVENTS
On February 4, 1997, the Company completed a secondary offering of
6,723,429 shares of common stock at a price of $25.00 per share. All of the
6,723,429 shares offered were sold by existing shareholders of the Company, and
the Company did not receive any proceeds from the sale of these shares. In
conjunction with the offering, the underwriters were granted an over-allotment
option by the Company to purchase additional shares at $25.00 per share. This
option was fully exercised by the underwriters, and an additional 1,008,514
shares were issued by the Company. Gross proceeds to the Company from this
offering totaled approximately $25.2 million, and proceeds net of underwriting
discounts totaled approximately $24.0 million.
On February 7, 1997, the Company signed definitive agreements to acquire
100% of the stock of certain companies related to Phoenix Fiberlink, Inc.
(Phoenix), a provider of competitive access and internet services in Utah and
Nevada. The definitive agreements provide for the purchase price to be paid
through the issuance by the Company of an aggregate of 600,000 shares of common
stock valued at current market value and cash. The transaction is subject to
regulatory approvals.
On February 25, 1997, the Company and MaineCom Services, Inc. (MaineCom), a
subsidiary of Central Maine Power Company, formed a joint venture company, owned
60% by the Company and 40% by MaineCom, for the purposes of constructing,
owning, operating and developing networks initially in Portland, Maine, and
Nashua and Manchester, New Hampshire, and other markets in Maine and New
Hampshire as may be agreed upon by the Company and MaineCom in the future.
F-21
<PAGE> 101
ANNEX A
GLOSSARY
ACCESS CHARGES -- The fees paid by long distance carriers to ILECs or CLECs
for originating and terminating long distance calls on their local networks.
AIN (ADVANCED INTELLIGENT NETWORK) -- A term indicating a network
architecture concept with three basic elements: (i) Signal Control Points
(SCPs)-computers that hold data bases in which customer-specific information is
used by the network to route calls stored; (ii) Signal Switching Points (SSPs)
digital telephone switches which can communicate with SCPs and ask them for
customer-specific instructions as to how the call should be completed; and (iii)
Signal Transfer Points (STPs)-packet switches that shuttle messages between SSPs
and SCPs.
ATM (ASYNCHRONOUS TRANSFER MODE) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM-based packet transport was
specifically developed to allow switching and transmission of mixed voice, data
and video (sometimes referred to as "multi-media" information) at varying rates.
The ATM format can be used by many different information systems, including
LANs.
BROADBAND -- Broadband communications systems can transmit large quantities
of voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television station
signal that transmits high resolution audio and video signals into the home.
Broadband connectivity is also an essential element for interactive multimedia
applications.
CAP (COMPETITIVE ACCESS PROVIDER) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
CENTRAL OFFICES -- The switching centers or central switching facilities of
the ILECs.
CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who don't have the size or the
funds to support their own on-site PBX.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A CAP that also provides
Switched Local Services, such as local dial tone and centrex.
CO-CARRIER STATUS -- A relationship between a CLEC and an ILEC that affords
each entity the same access to and right on the other's network, and that
provides access and services on an equal basis.
COLLOCATION -- The ability of a CLEC such as the Company to connect its
network to the ILEC's central offices. Physical collocation occurs when a CLEC
places its network connection equipment inside the ILEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the ILEC permits a CLEC to connect its network to the ILEC's central offices on
comparable terms, even though the CLEC's network connection equipment is not
physically located inside the central offices.
A-1
<PAGE> 102
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the ILEC's public switched network).
DESK TOP PRODUCTS -- Desk top products are the various types of
telecommunications equipment located in the offices of end user customers for
individual access to voice, data and video telecommunications services.
DIALING PARITY -- Dialing Parity is among the many issues related to the
telecommunications industry that are being debated for federal legislation.
Essentially, customers should be able to have 1+ and O+ service no matter which
local or long distance carrier they choose. For example, when MCI first got into
the long distance business, customers had to dial a ten digit prefix before the
number they were calling. This was considered unacceptable to many in the
industry who favor "dialing parity."
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a significant improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video, and data.
DIVERSE ROUTING -- A telecommunications network configuration in which
signals are transported simultaneously along two different paths so that if one
cable is cut, traffic can continue in the other direction without interruption
to its destination. The Company's networks generally provide diverse routing.
DOMINANT CARRIER -- A carrier found by the FCC to have market power - i.e.,
the power to control prices for its services.
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
FACILITIES MANAGEMENT -- Management, operation, maintenance, staffing and
support of telecommunications networks or systems.
FCC -- Federal Communications Commission
FDDI (FIBER DISTRIBUTED DATA INTERFACE) -- Based on fiber optics, FDDI is a
100 megabit per second local area network technology used to connect computers,
printers, and workstations at very high speeds. FDDI is also used as backbone
technology to interconnect other LANs.
FIBER MILE -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route miles" below.
FIBER OPTICS -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet is said to have more bandwidth capacity
than copper cable the size of a telephone pole.
FIBER OPTIC RING NETWORK -- Most CLECs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self- healing" optical fiber ring
architecture known as SONET.
A-2
<PAGE> 103
FRAME RELAY -- Frame Relay is a high speed data packet switching service
used to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service is
ideal for connecting LANS, but is not appropriate for voice and video
applications due to the variable delays which can occur. Frame Relay was
designed to operate at higher speeds on modern fiber optic networks.
HUBS -- Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
ILEC -- (Incumbent Local Exchange Carrier) -- The incumbent carrier
providing Local Exchange Services.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK) -- A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high speed data
file transfer, desk top videoconferencing, telepublishing, telecommuting,
telepresence learning (distance learning), remote collaboration (screened
sharing), data network linking and home information services.
ISP -- Internet Service Provider
INTERCONNECTION DECISIONS -- Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or end
user seeking such interconnection for the provision of interstate special access
and switched access transport services.
INTER-LATA LONG DISTANCE -- Inter-LATA long distance calls are calls that
pass from one LATA to another. Typically, these calls are simply referred to as
"long distance" calls. At present, the RBOCs are prohibited from providing
Inter-LATA long distance service within their service areas.
INTRA-LATA LONG DISTANCE -- lntra-LATA long distance calls, also known as
short haul calls, are those calls that originate and terminate within the same
LATA. Although most states allow some form of Intra-LATA competition, dialing
parity still does not exist, and very little ILEC intra-LATA revenue has been
won by competitors.
IXC -- Inter-Exchange Carriers, usually referred to as long distance
providers. There are many facilities-based IXCs including AT&T, MCI, WorldCom,
Sprint and Frontier, as well as a select few CLECs that are authorized for IXC
service.
KILOBIT -- One thousand bits of information. The information-carrying
capacity (i.e., bandwidth of a circuit may be measured in "kilobits per
second").
LANS -- (Local Area Networks) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS -- The geographically defined Local Access and Transport Areas in
which LECs are authorized by the MFJ to provide local exchange services. These
LATAs roughly reflect the population density of their respective states
(California has 11 LATAs while Wyoming has only one). There are 164 LATAs in the
United States.
LOCAL COMPETITION -- The term "local competition" describes the events in
the local arena to afford true "co-carrier" status to CLECs. Specifically, the
ILECs, who once had a monopoly on local exchange telephone service, are
beginning to experience competition at the local level from CLECs and other
providers of local exchange services. Critical issues such as number
portability, dialing parity, reciprocal compensation arrangements, and number
assignments must be negotiated in order to ensure that true co-carrier status is
achieved for CLECs.
A-3
<PAGE> 104
LOCAL EXCHANGE AREAS -- A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.
LOCAL EXCHANGE SERVICES -- Local Exchange Services generally refers to all
services provided by an ILEC or CLEC including local dial tone, centrex and Long
Distance Access Services. Sometimes also referred to as Local Telephone Services
and Local Telecommunications Services.
LOCAL TELECOMMUNICATIONS OR LOCAL TELEPHONE SERVICES -- See Local Exchange
Services.
LONG DISTANCE ACCESS SERVICES -- Long Distance Access Services are the
services provided by an ILEC or CLEC to a long distance company that connect the
IXC POP to end users, including Special Access Services and Switched Access
Services.
LONG DISTANCE CARRIERS OR IXCS (INTEREXCHANGE CARRIERS) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Major long distance carriers include AT&T, MCI, Sprint,
WorldCom and Frontier, but may also include resellers of long distance capacity.
MEGABIT -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MFJ (MODIFIED FINAL JUDGMENT) -- The MFJ was an agreement made in 1982
between AT&T and the Department of Justice which forced the breakup of the old
Bell System. This judgment, also known as the Divestiture of AT&T, established
seven separate Regional Bell Operating Companies (RBOCs) and created two
distinct segments of telecommunications service: local and long distance. This
laid the groundwork for intense competition in the long distance industry, but
essentially created seven separate regionally-based local exchange service
monopolies. The MFJ has been superseded by The Telecommunications Act of 1996.
MULTIPLEXING -- An electronic or optical process that combines a number of
lower speed transmission lines into one high-speed line by splitting the total
available bandwidth into narrower bands (frequency division) or by allotting a
common channel to several different transmitting devices one at a time in
sequence (time division). This is essentially a high-tech solution to a shortage
of capacity.
NETWORK SYSTEMS INTEGRATION -- Involves the creation of a turnkey
telecommunications network including (i) route and site selection and obtaining
rights of way and legal authorizations to install the network; (ii) design and
engineering of the system, including technology and vendor assessment and
selection, determining fiber optic circuit capacity, and establishing
reliability/ flexibility standards; and (iii) project and construction
management, including contract negotiations, purchasing and logistics,
installation as well as testing and construction management.
NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
NUMBER PORTABILITY -- The ability of an end user to change local exchange
carriers while retaining the same telephone number. If number portability does
not exist, customers will have to change phone numbers when they change local
exchange carriers. This is considered to be anti-competitive because customers
are reluctant to change numbers, since they may lose business or confuse those
people trying to call them. It is currently being ascertained whether or not
number portability is technologically and economically feasible, and over what
time frame it can be implemented.
OFF-NET -- a customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with an ILEC
network.
ON-NET -- a customer that is physically connected to one of the Company's
networks.
A-4
<PAGE> 105
PBX -- A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PCS -- Personal communications service. A type of wireless telephone system
that uses light, inexpensive handheld sets and communicates via low power
antennas.
PHYSICAL COLLOCATION -- Physical Collocation occurs when a CLEC places its
own network connection equipment inside the ILEC central office. See Virtual
Collocation.
POPS (POINTS OF PRESENCE) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUC (PUBLIC UTILITY COMMISSION) -- A state regulatory body, established in
most states, which regulates utilities, including telephone companies providing
intrastate services.
PRIVATE LINE -- A private, dedicated telecommunications line connecting
different end user locations.
PUBLIC SWITCHED NETWORK -- That portion of an ILEC's network available to
all users generally on a shared basis (i.e. not dedicated to a particular user).
Traffic along the public switched network is switched at the ILEC's central
offices.
RBOCS -- Regional Bell Operating Companies. The seven local telephone
companies established by the MFJ. These RBOCs are prohibited from providing
inter-LATA services within their service areas and from manufacturing
telecommunications equipment.
RECIPROCAL COMPENSATION -- The same compensation from an ILEC to a CLEC for
termination of a local call on the CLEC network, as the CLEC pays the ILEC for
termination of local calls on the ILEC network.
REDUNDANT ELECTRONICS -- A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one device
malfunctions, the signal may continue without interruption.
ROBUST NETWORK -- High capacity networks which are capable of reaching a
significant portion of the identified business end users in the market and most,
if not all, of the ILEC's central offices.
ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
SECOND AND THIRD TIER MARKETS -- Metropolitan markets in the United States
with population bases ranging from 250,000 to two million.
SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of an ILEC or a CLEC
(such as the Company), which lines or circuits run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end user to
its long distance carrier POP. Special access services do not require the use of
switches.
SONET -- Synchronous Optical Network. SONET is the electronics and network
architecture which enables transmission of voice, video and data (multimedia) at
very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by rerouting calls within the network. If the line is cut, the
traffic is simply reversed and sent to its destination around the other side of
the ring.
A-5
<PAGE> 106
SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES -- Switched Access Services are the services
provided by an ILEC or CLEC to a long distance company that use one or more
Switches, in addition to Switched Access Transport, to connect the IXC POP to
end users.
SWITCHED ACCESS ORIGINATION -- Switched Access Origination is that portion
of Switched Access Services relating to a long distance call originated by an
end user and carried over an ILEC or CLEC network to an IXC POP using a Switch.
SWITCHED ACCESS TERMINATION -- Switched Access Termination is that portion
of Switched Access Services relating to a long distance call coming into an end
user over an ILEC or CLEC network from an IXC POP using a Switch.
SWITCHED ACCESS TRANSPORT SERVICES -- Transportation of switched traffic
along dedicated lines between the ILEC central offices and long distance carrier
POPs.
SWITCHED LOCAL SERVICES -- Switched Local Services are services provided by
an ILEC or CLEC using a Switch, including local dial tone and centrex, but not
including Intra-LATA Long Distance or Long Distance Access Services.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network of
an ILEC, CLEC or IXC.
VIRTUAL COLLOCATION -- Virtual Collocation is an alternative to Physical
Collocation in which CLECs connect their equipment to the ILECs facilities from
a remote location and request that the ILEC install the necessary electronics in
its central office which is then leased by the ILEC to the CLEC for charges
which are generally higher than the charges for physical collocation. However,
the CLEC avoids payment of the initial capital costs for the leased facilities
which the CLEC must incur under physical collocation.
VOICE GRADE EQUIVALENT CIRCUIT (VGE) -- One DS-0. One voice grade
equivalent circuit is equal to 64 kilobits of bandwidth per second.
A-6
<PAGE> 107
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL TO, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY OR TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 13
Capitalization............................. 19
Selected Historical and Pro Forma Financial
and Other Operating Data................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 23
Business of the Company.................... 31
The Competitive Local Telecommunications
Industry................................. 45
Competition................................ 49
Regulatory Overview........................ 52
Management................................. 58
Certain Relationships and Related
Transactions............................. 67
Principal Stockholders..................... 69
Description of Capital Stock............... 72
Validity of Common Stock................... 78
Independent Auditors....................... 78
Additional Information..................... 78
Index to Consolidated Financial
Statements............................... F-1
Glossary................................... A-1
</TABLE>
======================================================
======================================================
10,000,000 SHARES
BROOKS FIBER
PROPERTIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------------------------
LOGO
---------------------------------------
======================================================
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following is a summary of Section 145 of the General Corporation Law of
the State of Delaware.
Subject to restrictions contained in the statute, a corporation may
indemnify any person, who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection therewith if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, in connection with any criminal action or
proceeding, had no reasonable cause to believe that such person's conduct was
unlawful. A person who is successful on the merits or otherwise in any suit or
matter covered by the indemnification statute, shall be indemnified and
indemnification is otherwise authorized upon a determination that the person to
be indemnified has met the applicable standard of conduct required. Such
determination shall be made by a majority vote of the board of directors who
were not parties to such action, suit or proceeding, even though less than a
quorum, or if there are no such directors, or if such directors so direct, by
special independent counsel in a written opinion, or by the shareholders.
Expenses incurred in defense may be paid in advance upon receipt by the
corporation of written undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that the recipient is not entitled to
indemnification under the statute. The indemnification provided by statute is
not exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of shareholders or disinterested
directors or otherwise, and shall inure to the benefit of the heirs, executors
and administrators of such person. Insurance may be purchased on behalf of any
person entitled to indemnification by the corporation against any liability
asserted against him or her and incurred in an official capacity regardless of
whether the person could be indemnified under the statute. References to the
corporation include all constituent corporations absorbed in a consolidation or
merger as well as the resulting corporation and anyone seeking indemnification
by virtue of acting in some capacity with a constituent corporation would stand
in the same position as if such person had served the resulting or surviving
corporation in the same capacity.
The Restated Certificate of Incorporation and By-Laws of the Company
provide for indemnification of directors and officers of the Company to the
maximum extent permitted by the General Corporation Law of the State of
Delaware.
The directors and officers of the Company are insured under a policy of
directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See Index to Exhibits.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the registrant of
II-1
<PAGE> 109
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-2
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Town and
Country, State of Missouri, on March 11, 1997.
BROOKS FIBER PROPERTIES, INC.
By: JAMES C. ALLEN
------------------------------------
James C. Allen
Vice Chairman and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James C. Allen and David L. Solomon, and each of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement and any other
documents and instruments incidental thereto, and any registration statement
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming that each of said
attorneys-in-fact and agents and/or either of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 11, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
ROBERT A. BROOKS Director (Chairman of the Board)
- --------------------------------------------
Robert A. Brooks
JAMES C. ALLEN Vice Chairman, Chief Executive Officer
- -------------------------------------------- and Director (Principal Executive Officer)
James C. Allen
D. CRAIG YOUNG President and Director
- -------------------------------------------- (Chief Operating Officer)
D. Craig Young
DAVID L. SOLOMON Executive Vice President and
- -------------------------------------------- Chief Financial Officer
David L. Solomon (Principal Financial and Accounting Officer)
ROBERT F. BENBOW Director
- --------------------------------------------
Robert F. Benbow
WILLIAM J. BRESNAN Director
- --------------------------------------------
William J. Bresnan
JONATHAN M. NELSON Director
- --------------------------------------------
Jonathan M. Nelson
G. JACKSON TANKERSLEY Director
- --------------------------------------------
G. Jackson Tankersley, Jr.
RONALD H. VANDER POL Director
- --------------------------------------------
Ronald H. Vander Pol
CAROL DEB. WHITAKER Director
- --------------------------------------------
Carol deB. Whitaker
</TABLE>
II-3
<PAGE> 111
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated December 19, 1995 between
the Company and Brooks Telecommunications Corporation
(incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (File No. 333-1924) filed
with the Commission on March 4, 1996 (the "IPO Form S-1"))
2.2 Agreement and Plan of Merger dated January 17, 1996 between
the Company, Brooks Fiber Communications of Michigan, Inc.,
City Signal, Inc. and Ronald H. Vander Pol (incorporated by
reference to Exhibit 2.2 to the IPO Form S-1)
3.1(a) Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1(a) to the IPO Form
S-1)
3.1(b) Certificate of Designation of Series C Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1(c)
to the IPO Form S-1)
3.1(c) Certificate of Amendment of Certificate of Incorporation of
the Company dated as of August 20, 1996 (incorporated by
reference to Exhibit 3 to the Company's Quarterly Report on
Form 10-Q, as amended, for the Period Ended September 30,
1996 (File No. 0-28036) filed with the Commission on
November 14, 1996 (the "September 30, 1996 Form 10-Q")
3.2 By-laws of the Company, as amended on February 19, 1997.
4.1 Form of Exchange Note (included in Exhibit 4.2).
4.2 Rights Agreement dated February 29, 1996 between the Company
and The Boatmen's Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.2 to the IPO Form
S-1)
4.3 Amended and Restated Stockholders Agreement dated as of June
15, 1995 (incorporated by reference to Exhibit 4.3 to the
IPO Form S-1)
4.4 Amended and Restated Registration Rights Agreement dated as
of June 15, 1995 (incorporated by reference to Exhibit 4.4
to the IPO Form S-1)
4.5 Indenture dated as of February 26, 1996 between the Company
and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.6 to the IPO Form S-1)
4.6 Indenture dated as of November 7, 1996 between the Company
and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-1 (File No. 333-16495) filed with the
Commission on November 20, 1996 (the "Secondary Offering
Form S-1"))
4.7 Amended and Restated Loan and Security Agreement dated as of
October 1, 1996 among AT&T Credit Corporation, the Company
and certain subsidiaries of the Company (incorporated by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-4 (File No. 333-18503) filed with
Commission on December 20, 1996)
4.8 The Company has not filed certain instruments with respect
to long-term debt since the total amount of securities
authorized thereunder does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of any such
agreement to the Commission upon request.
*5.1 Opinion of Bryan Cave LLP regarding the validity of the
Common Stock
</TABLE>
II-4
<PAGE> 112
<TABLE>
<C> <S>
10.1 1993 Stock Option Plan of the Company, as amended on December 23, 1996.
10.2 Form of Non-Qualified Stock Option Agreement under the Company's 1993 Stock Option Plan (incorporated
by reference to Exhibit 10.2 to the IPO Form S-1)
10.3 1996 Employee Stock Purchase Plan of the Company (incorporated by reference to Exhibit 10.3 to the
IPO Form S-1)
10.4 1993 Stock Option Plan of Brooks Telecommunications Corporation ("BTC") (incorporated by reference to
Exhibit 10.4 to the IPO Form S-1)
10.5 Form of Substituted Non-Qualified Stock Option Agreement under BTC's 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the IPO Form S-1)
10.6 Option Agreement dated as of January 31, 1996 between the Company and Ronald H. Vander Pol
(incorporated by reference to Exhibit 10.6 to the IPO Form S-1)
10.7 Employment, Consulting and Non-Competition Agreement dated as of March 11, 1997 between the Company
and Robert A. Brooks
11.1 Statement Re Computation of Per Share Earnings (incorporated by reference to Exhibit 11 to the
September 30, 1996 Form 10-Q)
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Secondary Offering Form
S-1)
*23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
*24.1 Power of Attorney
</TABLE>
- -------------------------
* To be filed by amendment.
II-5
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
BROOKS FIBER PROPERTIES, INC.
AS OF FEBRUARY 19, 1997
<PAGE> 2
BY-LAWS
OF
BROOKS FIBER PROPERTIES, INC.
TABLE OF CONTENTS
PAGE
ARTICLE I Offices ...................................................... 1
Section 1.1. Registered Office...................................... 1
Section 1.2. Other Offices.......................................... 1
ARTICLE II Meetings of Stockholders...................................... 1
Section 2.1. Place.................................................. 1
Section 2.2. Annual Meetings........................................ 1
Section 2.3. Special Meetings....................................... 1
Section 2.4. Notice of Meetings..................................... 1
Section 2.5. Adjournments........................................... 2
Section 2.6. List of Stockholders................................... 2
Section 2.7. Quorum................................................. 2
Section 2.8. Organization........................................... 3
Section 2.9. Proxies; Voting........................................ 3
ARTICLE III Board of Directors............................................ 4
Section 3.1. General Powers......................................... 4
Section 3.2. Number and Term of Office.............................. 4
Section 3.3. Resignation, Removal and Vacancies..................... 4
Section 3.4. Meetings............................................... 4
Section 3.5. Compensation........................................... 6
Section 3.6. Nominations............................................ 6
ARTICLE IV Committees.................................................... 7
Section 4.1. Committees............................................. 7
Section 4.2. Meetings and Quorum.................................... 7
ARTICLE V Officers...................................................... 7
Section 5.1. Election and Appointment; Term of Office............... 7
Section 5.2. Resignation; Removal; Vacancies........................ 7
i
<PAGE> 3
PAGE
Section 5.3. Duties and Functions................................... 8
ARTICLE VI Books and Records............................................. 10
ARTICLE VII Shares and Their Transfer; Fixing Record Dates................ 10
Section 7.1. Certificates for Stock................................. 10
Section 7.2 Transfer Agents and Registrars; Facsimile Signatures... 10
Section 7.3. Stock Record........................................... 10
Section 7.4. Transfer of Stock...................................... 10
Section 7.5 Lost, Stolen, Destroyed, or Mutilated Certificates..... 11
Section 7.6. Record Dates........................................... 11
ARTICLE VIII Corporate Seal................................................ 11
ARTICLE IX Fiscal Year................................................... 12
ARTICLE X Indemnification............................................... 12
ARTICLE XI Amendments.................................................... 13
ii
<PAGE> 4
BY-LAWS
OF
BROOKS FIBER PROPERTIES, INC.
ARTICLE I
OFFICES
SECTION 1.1. REGISTERED OFFICE. The registered office of the Corporation in
the State of Delaware shall be located at 1013 Centre Road, City of Wilmington,
County of New Castle, Delaware, 19805. The name of the registered agent in
charge thereof is Corporation Service Company.
SECTION 1.2 OTHER OFFICES. The Corporation may also have offices at such
other places within or without the State of Delaware as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE. Meetings of stockholders shall be held at such place,
within or without the State of Delaware, as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting.
SECTION 2.2 ANNUAL MEETINGS. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on the second Tuesday of April if
not a legal holiday, and if a legal holiday then on the next day following which
is not a legal holiday, at 10:00 A.M., or at such other date and time as shall
be designated from time to time by the Board of Directors and stated in the
notice of the meeting.
SECTION 2.3 SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes may be called by any two (2) members of the Board of
Directors or by the Chairman of the Board of the Corporation, to be held at such
place, either within or without the State of Delaware, and at such date and time
as shall be designated in the notice of the meeting.
SECTION 2.4 NOTICE OF MEETINGS. Except as otherwise expressly required by
law, written notice of each meeting of the stockholders shall be given not less
<PAGE> 5
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed given when deposited in the United States mail, postage
prepaid, directed to the stockholder at the stockholder's address as it appears
on the records of the Corporation. Every such notice shall state the place, date
and hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. A written waiver of notice, signed by
the person entitled thereto, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting in
person or by proxy shall constitute a waiver of notice of such meeting, except
when the person attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
SECTION 2.5. ADJOURNMENTS. Any meeting of the stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
SECTION 2.6 LIST OF STOCKHOLDERS. At least ten (10) days before every
meeting of the stockholders, the Secretary or other officer of the Corporation
who shall have charge of the stock ledger of the Corporation shall prepare and
make, or cause the preparation and making of, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. Such list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 2.7 QUORUM. At each meeting of the stockholders, except as
otherwise expressly required by law or by the Certificate of Incorporation of
the Corporation, the holders of a majority of the voting power of the issued and
outstanding shares of each class of stock of the Corporation entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business. For purposes of the foregoing, two or
more classes or series of stock shall be considered a single class if the
holders thereof are entitled to vote together as a single class at the meeting.
In the absence of a quorum at any such meeting or any adjournment thereof, any
officer entitled to preside at, or to act as secretary of, such meeting may
adjourn the meeting from time to time in the manner provided in Section 2.5 of
these By-laws, until stockholders holding the amount of stock requisite for a
quorum shall be present in person or by proxy.
2
As amended 2/19/97
<PAGE> 6
SECTION 2.8 ORGANIZATION. At each meeting of the stockholders, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(a) the Chairman of the Board;
(b) the Vice Chairman of the Board;
(c) the President;
(d) any other officer of the Corporation designated by the Board of
Directors to act as chairman of such meeting and to preside thereat if
both of the above-named officers shall be absent from such meeting; or
(e) in the absence of any of the foregoing, a stockholder of record of the
Corporation who shall be chosen chairman of such meeting by a majority
in voting power of the stockholders present in person or by proxy at
the meeting and entitled to vote thereat.
The Secretary, or, if the Secretary shall be presiding over the meeting in
accordance with the provisions of this Section or if the Secretary shall be
absent from such meeting, the person (who shall be an Assistant Secretary, if an
Assistant Secretary, shall be present thereat) whom the chairman of such meeting
shall appoint, shall act as secretary of such meeting and keep the minutes
thereof.
SECTION 2.9. PROXIES; VOTING. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for
such stockholder by proxy, but no such proxy shall be voted or acted upon after
three (3) years from its date, unless the proxy provides for a longer period. A
duly executed proxy shall be irrevocable if it states that it is irrevocable and
if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation. Voting at meetings of the
stockholders need not be by written ballot and need not be conducted by
inspectors unless otherwise provided in these By-laws or unless so directed by
the chairman of the meeting or unless the holders of a majority of the voting
power of the outstanding shares of all classes of stock entitled to vote thereon
present in person or by proxy at such meeting shall so determine. At all
meetings of the stockholders for the election of directors, a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors shall be sufficient to elect. All
other elections and questions shall, unless otherwise provided by law or by the
Certificate of Incorporation of the Corporation or a Certificate of Designation
thereunder, or these By-laws, be decided by the vote of the holders of a
majority of the voting power of the outstanding shares of the Corporation's
stock entitled to
3
As amended 2/19/97
<PAGE> 7
vote thereon present in person or by proxy at the meeting, voting as a single
class, provided that (except as otherwise required by law or by the Certificate
of Incorporation of the Corporation) the Board of Directors may require a larger
vote upon any election or question.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.
SECTION 3.2. NUMBER AND TERM OF OFFICE. The number of directors which shall
constitute the whole Board of Directors shall be twelve (12). The Board of
Directors shall be divided into three classes, each class having such number of
directors and serving such term as is provided in Article Tenth of the Restated
Certificate of Incorporation of the Corporation and by law. At each annual
meeting of the stockholders of the Corporation, the directors of one class shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
SECTION 3.3. RESIGNATION, REMOVAL AND VACANCIES. Any director may resign at
any time by giving written notice of his resignation to the Board of Directors
or to the Chairman of the Board or the Secretary of the Corporation. Any such
resignation shall take effect upon receipt unless specified to be effective at
some other time and, unless otherwise specified therein, no acceptance of such
resignation shall be necessary to make it effective. A director may be removed
with or without cause by the holders of a majority of the shares of stock
entitled to vote for the election of directors, provided, that, if the director
to be removed has been designated to serve by a stockholder or group of
stockholders pursuant to the terms of a stockholders agreement between the
Corporation and the holders of at least a majority of the stock entitled to vote
for the election of directors, such stockholder or group of stockholders has
voted in favor of the removal of such director. Any vacancy by reason of death,
resignation, removal or otherwise may be filled by the holders of a majority of
the stock entitled to vote for the election of directors to fill such vacancy or
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director so elected, each to hold office until the next annual
meeting of stockholders and until his or her successor shall have been elected
and qualified or until his or her earlier death, resignation or removal;
provided, that, if a director whose vacancy is to be filled has been designated
to serve by a stockholder or group of stockholders pursuant to the terms of a
stockholders agreement between the Corporation and the holders of at least a
majority of the stock entitled to vote for the election of directors, the
candidate chosen to fill such vacancy shall be a candidate designated by such
stockholder or group of stockholders.
4
As amended 2/19/97
<PAGE> 8
SECTION 3.4. MEETINGS.
(A) ANNUAL MEETINGS. As promptly as practicable after each annual election
of directors, the Board of Directors shall meet for the purpose of organization,
the election of officers and the transaction of other business.
(B) REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such times and places as the Board of Directors shall from time to time
determine.
(C) SPECIAL MEETINGS. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board or by any two (2) members of
the Board of Directors. Any and all business may be transacted at a special
meeting which may be transacted at a regular meeting of the Board of Directors.
(D) PLACE OF MEETING. The Board of Directors may hold its meetings at such
place or places within or without the State of Delaware as the Board of
Directors may from time to time by resolution determine or as shall be
designated in the notice of meeting.
(E) NOTICE OF MEETINGS. Notice of the annual and other regular meetings of
the Board of Directors or of any adjourned meeting need not be given. Notice of
special meetings of the Board of Directors, or of any meeting of any committee
of the Board of Directors, shall be given to each director, or member of such
committee, at least five (5) business days before the day on which such meeting
is to be held, if by mail, and at least two (2) business days before the time of
the meeting, if by telegraph, cable, telex, telecopy or telephone, or if
delivered personally. Such notice shall include the time and place of such
meeting. A written waiver of notice, signed by the director, whether before or
after such meeting shall be deemed equivalent to notice. Attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
except when the director attends the meeting for the express purposes of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
(F) QUORUM AND MANNER OF ACTING. A majority of the directors then in office
shall be present in person at any meeting of the Board of Directors in order to
constitute a quorum for the transaction of business at such meeting. In the
absence of a quorum for any such meeting, a majority of the directors present
thereat may adjourn such meeting from time to time until a quorum shall be
present. The vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors unless the vote of
a greater number of directors or any specified number of such Institutional
Directors shall be required by the Certificate of Incorporation of the
Corporation, these By-laws or any Stockholders Agreement between the Corporation
and the holders of at least a majority of the stock entitled to vote for the
election of directors.
(G) ACTION BY COMMUNICATIONS EQUIPMENT. The directors, or the members of
any committee of the Board of Directors, may participate in a meeting of the
Board of
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Directors, or of such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute presence in
person at such meeting.
(H) ACTION BY CONSENT. Any action required or permitted to be taken at any
meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the Board of Directors or such committee, as
the case may be, consent thereto in writing, and such writing is filed with the
minutes of the proceedings of the Board of Directors or such committee.
(I) ORGANIZATION. At each meeting of the Board of Directors, the Chairman
of the Board, or, if the Chairman of the Board shall be absent from a meeting,
any director chosen by a majority of the directors present thereat, shall act as
chairman of the meeting and preside thereat. The Secretary or, in the absence of
the Secretary, any person (who shall be an Assistant Secretary, if an Assistant
Secretary shall be present thereat) whom the chairman shall appoint shall act as
secretary of such meeting and keep the minutes thereof.
SECTION 3.5. COMPENSATION. The Board of Directors may provide that the
Corporation shall reimburse directors for any expenses incurred on account of
attendance at any meeting of the Board of Directors or any committee thereof,
and may otherwise fix the compensation of directors. Nothing herein shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor or limit the authority of the Board of Directors
to fix such compensation.
SECTION 3.6. NOMINATIONS. Only persons who are nominated in accordance with
the following procedures shall be eligible for election by the stockholders as
Directors. Nominations of persons for election as Directors of the Corporation
may be made at a meeting of stockholders at which Directors are being elected
(i) by or at the direction of the Board of Directors and/or by or at the
direction of any committee or person authorized or appointed by the Board of
Directors or (ii) by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 3.6. Any nomination other than those governed by clause
(i) of the preceding sentence shall be made pursuant to timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 50 days prior to the meeting; provided, however, that
in the event that less than 60 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
10th day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice to the
Secretary shall set forth (i) the name, age, business address and residence of
any such person, (ii) the principal occupation or employment of such person,
(iii) the class and number of any shares of the Corporation or any subsidiary of
the Corporation which are beneficially owned by such person, and (iv) any other
information relating to such person that is required to be disclosed in
solicitations for proxies for election of Directors pursuant to any then
existing rule or regulation promulgated under the Securities Exchange Act of
1934, as
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amended; and (b) as to the stockholder giving the notice (i) the name and record
address of such stockholder and (ii) the class and number of shares of the
Corporation which are beneficially owned by such stockholder. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of such
proposed nominee as a Director. No person shall be eligible for election as a
Director unless nominated as set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if the chairman should so determine, the chairman shall
so declare to the meeting and the defective nomination shall be disregarded.
ARTICLE IV
COMMITTEES
SECTION 4.1. COMMITTEES. The Board of Directors may designate one or more
committees, each committee to consist of three (3) or more directors and to have
such duties and functions permitted by law as shall be provided in such
resolution.
SECTION 4.2. MEETINGS AND QUORUM. Each Committee shall meet as often as may
be deemed necessary and expedient at such times and places as shall be
determined by such Committee. At all meetings of any Committee, a majority of
the members thereof shall constitute a quorum and the vote of a majority of all
of the members thereof at a meeting at which a quorum is present shall be the
act of such Committee. The Chairman of the Board or, in his absence, any other
member of any Committee selected by a majority of the members present shall
preside at the meetings of any Committee.
ARTICLE V
OFFICERS
SECTION 5.1. ELECTION AND APPOINTMENT; TERM OF OFFICE. The officers of the
Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a
President, one or more Vice Presidents (the number thereof to be determined from
time to time by the Board of Directors), a Treasurer and a Secretary. Each such
officer shall be elected by the Board of Directors at its annual meeting and
shall hold office until the next annual meeting of the Board of Directors and
until his or her successor is elected or until his or her earlier death,
resignation or removal in the manner hereinafter provided. The Board of
Directors may elect or appoint such other officers (including one or more
Assistant Treasurers and one or more Assistant Secretaries) as it deems
necessary who shall have such authority and shall perform such duties as the
Board of Directors may prescribe. If additional officers are elected or
appointed during the year, each of them shall hold office until the next annual
meeting of the Board of Directors at which officers
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are regularly elected or appointed and until his or her successor is elected or
appointed or until his or her earlier death, resignation or removal in the
manner hereinafter provided.
SECTION 5.2. RESIGNATION; REMOVAL; VACANCIES.
(A) RESIGNATION. Any officer may resign at any time by giving written
notice to the Chairman of the Board or the Secretary of the Corporation, and
such resignation shall take effect upon receipt unless specified therein to be
effective at some other time (subject always to the provisions of Section 5.2B).
No acceptance of any such resignation shall be necessary to make it effective.
(B) REMOVAL. All officers and agents elected or appointed by the Board of
Directors shall be subject to removal at any time by the Board of Directors with
or without cause.
(C) VACANCIES. A vacancy in any office may be filled for the unexpired
portion of the term in the same manner as provided for election or appointment
to such office.
SECTION 5.3. DUTIES AND FUNCTIONS.
(A) CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all
meetings of stockholders and directors and shall perform such other duties as
the Board of Directors may prescribe.
(B) VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall be the
Chief Executive Officer of the Corporation and shall see that orders and
resolutions of the stockholders and Board of Directors are carried into affect.
Subject to the direction and control of the Board of Directors, the Vice
Chairman of the Board shall have responsibility for the management and control
of the affairs and business of the Corporation and shall perform all duties and
have all powers which are commonly incident to the office of the Chief Executive
Officer, including the power to enter into commitments, execute and deliver
contracts and do and perform all such other acts and things as are necessary and
appropriate in the ordinary course of business to accomplish the Corporation's
business and operations and to manage the day to day business and affairs of the
Corporation. In the absence or incapacity of the Chairman of the Board or the
President, the Vice Chairman of the Board shall perform the duties of the
Chairman of the Board or the President, as the case may be. The Vice Chairman of
the Board may assign such duties to other officers of the Corporation as he or
she deems appropriate.
(C) PRESIDENT. The President shall act under the direction of the Vice
Chairman of the Board. The President shall be the Chief Operating Officer of the
Corporation and shall have such powers and perform such duties as the Board of
Directors or the Vice Chairman of the Board may prescribe.
(D) VICE PRESIDENTS. The Vice Presidents shall have such powers and perform
such duties as the Board of Directors or the Vice Chairman of the Board or the
President may prescribe. One or more Vice Presidents may be given and shall use
as part of his or her title such
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other designations, including, without limitation, the designations "Executive
Vice President" and "Senior Vice President", as the Board of Directors may
designate from time to time. In the absence or incapacity of the Vice Chairman
of the Board and the President, the powers and duties of the President shall be
vested in and performed by such Vice Presidents as have the designation
"Executive Vice President", in the order of their seniority or as otherwise
established by action of the Board of Directors from time to time, or by such
other officer as the Board of Directors or the Vice Chairman of the Board shall
have most recently designated for that purpose in a writing filed with the
Secretary.
(E) TREASURER. The Treasurer shall act under the direction of the Vice
Chairman of the Board. Subject to the direction of the Vice Chairman of the
Board, the Treasurer shall have charge and custody of and be responsible for all
funds and securities of the Corporation and the deposit thereof in the name and
to the credit of the Corporation in such depositories as may be designated by
the Board of Directors or by the Treasurer pursuant hereto. The Treasurer shall
be authorized at any time, and from time to time, by a writing countersigned by
the Vice Chairman of the Board, to open bank accounts in the name of the
Corporation in any bank or trust company for the deposit therein of any funds,
drafts, checks or other orders for the payment of money to the Corporation; and
the Treasurer shall be authorized at any time, and from time to time, by a
writing countersigned by the Vice Chairman of the Board, to authorize and
empower any representative or agent of the Corporation to draw upon or sign for
the Corporation either manually or by the use of facsimile signature, any and
all checks, drafts or other orders for the payment of money against such bank
accounts which any such bank or trust company may pay without further inquiry.
Subject to the direction of the Vice Chairman of the Board, the Treasurer shall
also have charge of the accounting records of the Corporation, shall keep full
and accurate accounts of all receipts and disbursements in books belonging to
the Corporation, shall maintain adequate internal control of the Corporation's
accounts, and may perform such other duties as may be prescribed by the Vice
Chairman of the Board, and by the Board of Directors.
(F) SECRETARY. The Secretary shall act under the direction of the Vice
Chairman of the Board. Subject to the direction of the Vice Chairman of the
Board, the Secretary shall attend all meetings of the Board of Directors and the
stockholders and record the proceedings in a book to be kept for that purpose
and shall perform like duties for committees designated by the Board of
Directors when required. The Secretary shall give or cause to be given notice of
all meetings of the stockholders and special meetings of the Board of Directors.
The Secretary shall affix the seal of the Corporation to all deeds, contracts,
bonds or other instruments requiring the corporate seal when the same shall have
been signed on behalf of the Corporation by a duly authorized officer. The
Secretary shall be the custodian of all contracts, deeds, documents and all
other indicia of title to properties owned by the Corporation and of its other
corporate records (except accounting records).
G. EXECUTION OF DOCUMENTS. The Board of Directors or the Vice Chairman of
the Board shall designate the officers, employees and agents of the Corporation
who shall have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks, notes, drafts and other orders for the payment of money and
other documents in the ordinary course of
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business of the Corporation for and in the name of the Corporation, except when
the execution and delivery thereof shall be expressly delegated by the Board of
Directors or these By-laws to some other officer or agent of the Corporation.
ARTICLE VI
BOOKS AND RECORDS
The books and records of the Corporation may be kept at such places within
or without the State of Delaware as the Board of Directors may from time to time
determine.
ARTICLE VII
SHARES AND THEIR TRANSFER; FIXING RECORD DATES
SECTION 7.1. CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate certifying the number of
shares owned and designating the class of stock to which such shares belong,
which shall otherwise be in such form as the Board of Directors shall prescribe.
Each such certificate shall be signed by, or in the name of the Corporation by,
the Vice Chairman of the Board or the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation. In the event the Corporation is advised in writing of any
agreement or agreements among stockholders of the Corporation relating to
restrictions on the transferability or voting rights of the Corporation's stock,
no certificate for such restricted stock will be issued by the Corporation
unless first imprinted with a legend referring to such agreement or agreements.
SECTION 7.2 TRANSFER AGENTS AND REGISTRARS; FACSIMILE SIGNATURES. The Board
of Directors shall have the power to appoint one or more transfer agents and/or
registrars for the transfer and/or registration of certificates of stock of any
class, and may require that stock certificates shall be countersigned and/or
registered by one or more of such transfer agents and/or registrars. In the case
of certificates for stock of the Corporation countersigned by a transfer agent
of the Corporation and/or registered by a registrar of the Corporation, the
signatures of the officers of the Corporation thereon may be facsimiles of their
respective autograph signatures, and all such stock certificates so
countersigned and/or registered and signed in facsimile as aforesaid shall be as
valid and effective for all purposes as if the facsimile signatures thereon of
such officers were their respective autograph signatures, and notwithstanding
the fact that any such officer whose facsimile signature appears thereon may
have ceased to be such officer at the time when any such stock certificate shall
be actually issued or delivered.
SECTION 7.3. STOCK RECORD. A record shall be kept of the name of the person
owning the stock represented by each certificate for stock of the Corporation
issued, the number of shares represented by each such certificate, and the date
thereof, and, in the case of
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cancellation, the date of cancellation. The person in whose name shares of stock
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes.
SECTION 7.4. TRANSFER OF STOCK. Transfers of shares of the stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by the attorney of such registered holder thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the Corporation, and upon the surrender to the Corporation or a transfer agent
of the Corporation of the certificate or certificates for such shares properly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer.
SECTION 7.5. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The holder
of any stock of the Corporation shall promptly notify the Corporation of any
loss, theft, destruction or mutilation of the certificate therefor. The
Corporation may issue a new certificate for stock in the place of any
certificate theretofore issued by it and alleged to have been lost, stolen,
destroyed or mutilated, and the Board of Directors may, in its discretion,
require the owner of the lost, stolen, destroyed or mutilated certificate or the
legal representative of such owner to give the Corporation a bond in such sum,
limited or unlimited, in such form and with such surety or sureties as the Board
of Directors shall in its discretion determine, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss,
theft, destruction or mutilation of any such certificate or the issuance of any
such new certificate.
SECTION 7.6. RECORD DATES. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of the stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any such other
action. If no record date is fixed: (1) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; (2) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed; and
(3) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
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ARTICLE VIII
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal
Delaware". The seal may be used by causing it or a facsimile to be impressed or
affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of December of
each year, or as otherwise fixed by resolution of the Board of Directors.
ARTICLE X
INDEMNIFICATION
A. Every person who was or is a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person or a person of whom such person is a legal
representative is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation or for its benefit as a director,
officer, employee or agent of any other corporation, or as the representative of
the Corporation in a partnership, joint venture, trust or other entity, shall be
indemnified and held harmless by the Corporation to the fullest extent legally
permissible under the General Corporation Law of the State of Delaware, as
amended from time to time, against all expenses, liabilities and losses
(including attorneys' fees, judgments, fines and amounts paid or to be paid in
settlement) reasonably paid or incurred by such person in connection therewith.
Such right of indemnification shall be a contract right that may be enforced in
any manner desired by such person. Such right of indemnification shall include
the right to be paid by the Corporation the expenses incurred in defending any
such action, suit or proceeding in advance of its final disposition upon receipt
of an undertaking by or on behalf of such person to repay such amount if
ultimately it should be determined that such person is not entitled to be
indemnified by the Corporation under the General Corporation Law of the State of
Delaware. Such right of indemnification shall not be exclusive of any other
right which such directors, officers or representatives may have or hereafter
acquire and, without limiting the generality of such statement, they shall be
entitled to their respective rights of indemnification under the Certificate of
Incorporation of the Corporation or any agreement, vote of stockholders,
provision of law or otherwise, as well as their rights under this Article X.
B. Notwithstanding anything in this Article X to the contrary, no person
shall be indemnified in respect of any claim, action, suit or proceeding
initiated by any such person or
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in which any such person has voluntarily intervened, other than an action
initiated by such person to enforce indemnification rights hereunder or an
action initiated with the approval of a majority of the Board of Directors.
C. The Board of Directors may cause the Corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation or for its benefit as a director, officer, employee or agent of any
other corporation, or as the representative of the Corporation in a partnership,
joint venture, trust or other entity, against any expense, liability or loss
asserted against or incurred by any such person in any such capacity or arising
out of such status, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss.
D. The Board of Directors may adopt further By-laws from time to time with
respect to indemnification and may amend these and such further By-laws to
provide at all times the fullest indemnification permitted by the General
Corporation Law of the State of Delaware, as amended from time to time.
ARTICLE XI
AMENDMENTS
These By-laws may be altered, amended or repealed by (i) the affirmative
vote of at least 66 2/3% of the members of the Board of Directors present at a
meeting at which a quorum is present, or (ii) the holders of 66 2/3% of the
issued and outstanding shares of the Corporation's stock entitled to vote
generally at a meeting of stockholders, voting as a single class.
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<PAGE> 1
EXHIBIT 10.1
BROOKS FIBER PROPERTIES, INC.
1993 STOCK OPTION PLAN
(AS AMENDED DECEMBER 23, 1996)
1. PURPOSE OF THE PLAN.
The Brooks Fiber Properties, Inc. 1993 Stock Option Plan (the "Plan") is
intended as an incentive to, and to encourage ownership of the stock of Brooks
Fiber Properties, Inc. ("Company") by officers, directors and certain key
management employees of the Company and its subsidiaries. It is intended that
certain options granted hereunder will qualify as Incentive Stock Options within
the meaning of Section 422 of the Internal Revenue Code of 1986 as amended (the
"Code") ("Incentive Stock Options") and that other options granted hereunder
will not qualify as Incentive Stock Options.
2. STOCK SUBJECT TO THE PLAN.
(a) Stock Available For Grants of Options and Stock Appreciation Rights
("SARs"). 3,400,000 shares of the $0.01 par value Voting Common Stock of the
Company ("Common Stock") have been allocated to the Plan and will be reserved
for the grant of options or SAR's under the Plan, subject to adjustment under
Paragraph 16.
(b) Reservation of Shares. The Company will allocate and reserve in each
calendar year, a sufficient number of shares of its Common Stock for issue upon
the exercise of options or SAR's granted under the Plan.
(c) Treasury Shares. The Company may, in its discretion, use shares held in
the Treasury under this Plan in lieu of authorized but unissued shares of Common
Stock. If any option shall expire or terminate for any reason without having
been exercised in full, the unpurchased shares subject thereto shall again be
available for the purposes of the Plan. Any shares of Common Stock which are
used as full or partial payment to the Company by an optionee of the purchase
price upon exercise of an option shall again be available for the purposes of
the Plan.
3. ADMINISTRATION.
The Plan shall be administered by the Committee referred to in Paragraph 4
(the "Committee"). Subject to the express provisions of the Plan, the Committee
shall have plenary authority, in its discretion, to determine the individuals to
whom, and the time or times at which, options and SAR's shall be granted and the
number of shares to be subject to each option or SAR. In making such
determinations the Committee may take into account the nature of the services
rendered by the respective individuals, their present and potential
contributions to the Company's success and such other factors as the Committee,
in its discretion, shall deem relevant. Subject to the express provisions of the
Plan, the Committee shall also have plenary authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, to determine
the terms and provisions of the respective stock option and SAR agreements
(which need not be identical) and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee's determinations on
the matters referred to in this Paragraph 3 shall be conclusive. The Committee
may, in its discretion, delegate to the Chief Executive Officer of the Company
(the "CEO") the authority to determine the individuals to whom, and the time or
times at which and terms upon which, options and SAR's shall be granted and the
number of shares to be subject to each option or SAR.
4. THE COMMITTEE.
The Committee shall be appointed by the Board of Directors of the Company
("Board"), which may from time to time appoint members of the Committee in
substitution for members previously appointed and may fill vacancies, however
caused, in the Committee. The Committee may select one of its members as its
Chairman, and shall hold its meetings at such times and places as it may
determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held. The Committee may appoint a secretary, shall
keep minutes of its meetings and shall make such rules and regulations for the
conduct of its business as it shall deem advisable.
5. ELIGIBILITY.
Options (including Incentive Stock Options) and SAR's may be granted to key
management employees of the Company or its subsidiaries (as defined below). The
term "key management employees" is not limited to, but includes, officers who
are employees whether or not they are directors, and employees who are employed
in positions of management and directors, but does not include officers who are
not also executive employees of the Company, or a subsidiary thereof. Options
which are not Incentive Stock Options and SAR's may be granted to officers or
directors of the Company whether or not they are also employees. The term
"subsidiary" shall mean any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if, at the time of the granting
of the option or SAR, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain, or such other meaning as may be hereafter ascribed to it in Section 424
of the Code.
6. OPTION PRICES.
The purchase price of the Common Stock under each Incentive Stock Option
shall not be less than 100% of the fair market value of the stock at the time of
the granting of the option (110% in the case of an Incentive Stock Option
<PAGE> 2
granted to an individual who directly or indirectly owns more than 10% of the
total combined voting power of all classes of stock of the Company or its
parent or any subsidiary corporation at the time the Incentive Stock Option
is granted (a "10% Holder")) and the purchase price of the Common Stock under
each other option shall not be less than 80% of the fair market value of the
stock at the time of the granting of the option. The Committee may adopt such
criterion for the determination of fair market value as it may determine to be
appropriate.
7. PAYMENT OF OPTION PRICES.
The purchase price is to be paid in full upon the exercise of the option,
either (i) in cash, (ii) in the discretion of the Committee, by the tender to
the Company of shares of the Common Stock of the Company, owned by the optionee
and registered in his name, or by reduction of the number of shares of the
Common Stock otherwise issuable upon exercise of the option, in either case
having a fair market value equal to the cash exercise price of the option being
exercised, with the fair market value of such stock to be determined in such
appropriate manner as may be provided for by the Committee or as may be required
in order to comply with, or to conform to the requirements of, any applicable
laws or regulations, or (iii) in the discretion of the Committee, by any
combination of the payment methods specified in clauses (i) and (ii) hereof;
provided, however, that no shares of Common Stock may be tendered in exercise of
an option if such shares were acquired by the optionee through the exercise of
an Incentive Stock Option unless (i) such shares have been held by the optionee
for at least one year and (ii) at least two years have elapsed since such
Incentive Stock Option was granted. The cash proceeds of sales of stock subject
to options are to be added to the general funds of the Company and used for its
general corporate purposes. The shares of Common Stock of the Company received
or credited by the Company as payment of the option price are to be added to the
shares of the Common Stock of the Company available for use for the purposes of
granting options and SAR's under the Plan.
8. OPTION AMOUNTS.
The maximum aggregate fair market value (determined at the time an option
is granted in the same manner as provided for in Paragraph 6 hereof) of the
Common Stock of the Company with respect to which Incentive Stock Options are
exercisable for the first time by any optionee during any calendar year (under
all plans of the Company and its subsidiaries) shall not exceed $100,000.
9. EXERCISE OF OPTIONS.
The term of each option shall be not more than ten (10) years from the date
of granting thereof (five (5) years in the case of an Incentive Stock Option
granted to a 10% Holder) or such shorter period as is prescribed in Paragraph 10
hereof. Within such limit, options will be exercisable at such time or times,
and subject to such restrictions and conditions, as the Committee shall, in each
instance, approve, which need not be uniform for all optionees; provided,
however, that except as provided in Paragraphs 10 and 11 hereof, no option may
be exercised at any time unless the optionee is then an employee or an officer
or director of the Company or a subsidiary and has been so continuously since
the granting of the option. Notwithstanding the foregoing, in the event of a
Change of Control (as hereinafter defined), the Optionee will be entitled to
purchase, at any time thereafter and during the term hereof, the entire number
of shares to which this option relates. The holder of an option shall have none
of the rights of a stockholder with respect to the shares subject to option
until such shares shall be issued to such holder upon the exercise of the
option.
The term "Change of Control" shall mean:
(i) The purchase or other acquisition by any person, entity or group
of persons, within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the Exchange Act") (excluding, for this
purpose, the Company or its subsidiaries or any employee benefit plan of
the Company or its subsidiaries), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
the combined voting power of the Company's then-outstanding voting
securities entitled to vote generally in the election of directors in any
transaction or series of transactions; or
(ii) When individuals who, as of March 31, 1996, constitute the Board
(the "Continuing Directors"), cease for any reason to constitute at least a
majority of the Board, provided that any person who becomes a director
subsequent to the date hereof whose election or nomination for election by
the Company's shareholders, was approved in advance by a vote of at least
three-quarters of the Continuing Directors (other than a nomination of an
individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) shall be, for purposes
of this Paragraph, considered as though such person were a Continuing
Director; or
(iii) Approval by the stockholders of the Company of (a) a
reorganization, merger or consolidation with respect to which persons who
were stockholders of the Company immediately prior to such reorganization,
merger or consolidation do not, immediately thereafter, own more than 65%
of the combined voting power of the voting securities entitled to vote
generally in the election of directors of the reorganized, merged or
consolidated corporation's then-outstanding voting securities, or (b) a
liquidation or dissolution of the Company or of the sale of all or
substantially all of the assets of the Company; or
(iv) Any other event that a majority of the Continuing Directors, in
their sole discretion, shall determine constitutes a Change of Control.
<PAGE> 3
10. TERMINATION OF EMPLOYMENT.
The holder of any option issued hereunder must exercise the option prior to
the holder's termination of service with the Company, or a subsidiary, except
that if the service of an optionee terminates with the consent and approval of
the holder's employer, the Committee in its absolute discretion may permit the
optionee to exercise the option, to the extent that the holder was entitled to
exercise it at the date of such termination of service, at any time within three
(3) months after such termination, but not after ten (10) years from the date of
the granting thereof (five (5) years in the case of an Incentive Stock Option
granted to a 10% Holder). Notwithstanding the foregoing, in the event of the
termination by the Company without Cause of the service of the holder of any
option issued hereunder with the Company, or any subsidiary of the Company,
prior to the time such holder's option is fully exercisable, the Committee may,
in its discretion, permit the optionee to exercise the option for up to the
total number of shares to which it relates at any time prior to the tenth
anniversary of the date of granting of the option. Cause for termination by the
Company of the optionee's service shall be deemed to exist if the Board of
Directors of the Company should determine that the optionee is guilty of any of
the following: (i) fraud; (ii) misappropriation of corporate property or funds;
(iii) embezzlement; (iv) malfeasance in office; (v) misfeasance in office which
is wilful or grossly negligent; or (vi) nonfeasance in office which is wilful or
grossly negligent. If the holder of any option terminates service on account of
disability, the holder may exercise such option to the extent the holder was
entitled to exercise it at the date of such termination at any time within one
(1) year of the termination of employment but not after ten (10) years from the
date of the granting thereof (five (5) years in the case of an Incentive Stock
Option granted to a 10% Holder). For this purpose a person shall be deemed to be
disabled if he or she is permanently and totally disabled within the meaning of
Section 422(c)(6) of the Code, which, as of the date hereof, means that he or
she is unable to engage in any substantial gainful activity by reason of any
medically determined physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a period of
not less than 12 months. A person shall be considered disabled only if he or she
furnishes such proof of disability as the Committee may require. Options granted
under the Plan shall not be affected by any change of employment so long as the
holder continues to be an employee of the Company or a subsidiary. The option
agreements may contain such provisions as the Committee shall approve with
reference to the effect of approved leaves of absence. Nothing in the Plan or in
any option granted pursuant to the Plan shall confer on any individual any right
to continue in the employ of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary thereof to terminate his or
her employment at any time.
11. DEATH.
In the event of the death of an individual to whom an option has been
granted under the Plan, while he or she is employed by the Company (or a
subsidiary) or within three (3) months after termination of service (or one (1)
year in the case of the termination of service of an option holder who is
disabled as above provided) the option theretofore granted may be exercised, to
the extent exercisable at the date of death, by a legatee or legatees under the
option holder's last will, or by personal representatives or distributees, at
any time within a period of one (1) year after death, but not after ten (10)
years from the date of granting thereof (five (5) years in the case of an
Incentive Stock Option granted to a 10% Holder), and only if and to the extent
that the option was exercisable at the date of death.
12. NON-TRANSFERABILITY OF OPTIONS.
Each option granted under the Plan shall, by its terms, be non-transferable
otherwise than by will or the laws of descent and distribution and an option may
be exercised, during the lifetime of the holder thereof, only by such holder.
13. SUCCESSIVE OPTION GRANTS.
Successive option grants may be made to any holder of options under this
Plan.
14. INVESTMENT PURPOSE.
Each option under the Plan shall be granted only on the condition that all
purchases of stock thereunder shall be for investment purposes, and not with a
view to resale or distribution, except that the Committee may make such
provision with respect to options granted under this Plan as it deems necessary
or advisable for the release of such condition upon the registration with the
Securities and Exchange Commission of Common Stock subject to the option, or
upon the happening of any other contingency warranting the release of such
condition.
15. STOCK APPRECIATION RIGHTS.
(a) Grant. The Committee, in its discretion, may grant under the Plan to
key management employees, officers or directors, SAR's for any number of shares.
Each SAR granted shall specify a time period for exercise of such SAR.
In addition, the Committee may grant to an optionee an alternative SAR for
all or any part of the number of shares covered by an option. If an alternative
SAR is granted, the SAR agreement shall specify the options in respect of which
the alternative SAR is granted. Any subsequent exercise of an option by the
holder thereof who also holds an alternative SAR shall reduce the alternative
SAR by the same number of shares as to which the option is exercised. Any
exercise of the alternative SAR shall reduce the holder's option by the same
number of shares as to which the SAR is exercised. An alternative SAR granted to
an option holder shall specify a time period for exercise of such SAR, which
time period may not extend beyond, but may be less than, the time period during
which the corresponding option may be exercised. The failure of the holder of
<PAGE> 4
the alternative SAR to exercise such SAR within the time period specified shall
not reduce the holder's option rights. The Committee may later grant to the
holder of an option that is not an Incentive Stock Option an alternative SAR
covering all or a portion of such shares, provided, however, that the aggregate
amount of all alternative SAR's held by an option holder shall at no time exceed
the total number of shares covered by such holder's unexercised options.
(b) Exercise. A SAR shall be exercised by the delivery to the Company of a
written notice which shall state that the individual elects to exercise his or
her SAR as to the number of shares specified in the notice and which shall
further state what portion, if any, of the SAR award amount (hereinafter
defined) the holder thereof requests be paid in cash and what portion, if any,
the holder requests be paid in Common Stock of the Company. The Committee
promptly shall cause to be paid to such holder the SAR award amount either in
cash, in Common Stock of the Company, or any combination of cash and stock as it
may determine. Such determination may be either in accordance with the request
made by the holder of the SAR or otherwise, in the sole discretion of the
Committee. The SAR award amount is (i) the excess of the price of one share of
the Company's Common Stock on the date of exercise over (A) the per share price
of the Company's Common Stock on the date the SAR was granted or (B) in the case
of an alternative SAR, the per share option price for the option in respect of
which the alternative SAR was granted multiplied by (ii) the number of shares as
to which the SAR is exercised. For the purposes hereof the price of one share of
the Company's Common Stock on the date of exercise and on the date of the grant
shall be determined by the Committee using such criterion as it may determine to
be appropriate.
(c) Other Provisions of Plan Applicable. All provisions of this Plan
applicable to options granted hereunder shall apply with equal effect to SAR's.
Not in limitation of the prior sentence it is expressly provided that no SAR
shall be transferable otherwise than by will or the laws of descent and
distribution and an SAR may be exercised, during the lifetime of the holder
thereof, only by such holder. Any "tandem" SAR (a SAR in which the right to
exercise either an Incentive Stock Option or SAR affects the right to exercise
the other) issued by the Company shall by its terms meet all of the requirements
set forth in regulations 14a.422A-1, A-39 of the Code or any regulation issued
in replacement or amendment thereof.
16. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR CORPORATE ACQUISITIONS.
Notwithstanding any other provisions of the Plan, the option and SAR
agreements may contain such provisions as the Committee shall determine to be
appropriate for the adjustment of the number and class of shares subject to each
outstanding option or SAR, the option prices and SAR award amounts in the event
of changes in the outstanding Common Stock by reason of stock dividends,
recapitalizations, mergers, consolidations, spin-offs, split-offs, split-ups,
combinations or exchanges of shares and the like, and, in the event of any such
change in the outstanding Common Stock, the aggregate number and class of shares
available under the Plan and the maximum number of shares as to which options
and SAR's may be granted to any individual shall be appropriately adjusted by
the Committee, whose determination shall be conclusive. In the event the Company
or a subsidiary enters into a transaction described in Section 424(a) of the
Code with any other corporation, the Committee may grant options or SAR's to
employees or former employees of such corporation in substitution of options or
SAR's previously granted to them upon such terms and conditions as shall be
necessary to qualify such grant as a substitution described in Section 424(a) of
the Code.
17. AMENDMENT AND TERMINATION.
The Board, or the Committee may at any time terminate the Plan, or make
such modifications of the Plan as they shall deem advisable; provided, however,
that the Board or Committee may not, without further approval by the holders of
Common Stock, make any modifications which, by applicable law, require such
approval. No termination or amendment of the Plan may, without the consent of
the optionee to whom any option or SAR shall theretofore have been granted,
adversely affect the rights of such optionee under such option or SAR.
18. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective upon adoption by the Board subject,
however, to its further approval by the stockholders of the Company within one
(1) year from the date of adoption by the Board. Options and SAR's may be
granted before such approval by stockholders but none may be exercised before
the approval but if such approval is not given, such grants shall be void.
19. TIME OF GRANTING OF OPTIONS OR SAR'S.
An option or SAR grant under the Plan shall be deemed to be made on the
date on which the Committee, by formal action of its members duly recorded in
the records thereof, or the CEO, as the case may be, makes an award of an option
or SAR to an eligible employee of the Company or one of its subsidiaries
provided that such option or SAR is evidenced by a written option or SAR
agreement duly executed on behalf of the Company and on behalf of the optionee
within a reasonable time after the date of the Committee or CEO action.
20. TERM OF PLAN.
This Plan shall terminate ten (10) years after the date on which it is
initially approved and adopted by the Board as set forth under Paragraph 18 and
no option or SAR shall be granted hereunder after the expiration of such
ten-year period. Options or SAR's outstanding at the termination of the Plan
shall continue in full force and effect and shall not be affected thereby.
<PAGE> 1
EMPLOYMENT, CONSULTING AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT, CONSULTING AND NON-COMPETITION AGREEMENT ("Agreement") is
made and entered into as of the 11th day of March, 1997, by and between Brooks
Fiber Properties, Inc. ("BFP"), a Delaware corporation, and Robert A. Brooks
("Executive").
WITNESSETH THAT:
WHEREAS, Executive is the founder of BFP and has been elected by the Board
of Directors of BFP to the position of, and has served since inception of BFP
as, Chairman of the Board of Directors;
WHEREAS, Executive possesses executive skills and experience which BFP
believes are of substantial value and importance to the success of BFP's
business operations;
WHEREAS, BFP wishes to assure continuation of the services of Executive in
connection with the conduct of its business; and
WHEREAS, Executive is willing to continue to render service as an employee,
and thereafter as a consultant and Chairman Emeritus, on the terms hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, it is covenanted and agreed as
follows:
1. BFP-Executive Relationship and Executive Duties.
(a) BFP hereby continues the employment of Executive, and Executive
agrees to continue in the employ of BFP for and during the Employment Period.
During the Employment Period, Executive shall serve BFP in the position of
Chairman of the Board of Directors. Subject to general policies established by
the Board of Directors of BFP, Employee shall have all of the rights,
prerogatives, responsibilities, obligations and duties normally attendant to
such executive position. Executive agrees to perform the duties consistent with
such executive position and shall devote his business time, attention and
efforts to the business and affairs of BFP and its subsidiaries on an as needed
basis.
(b) During the Consulting Period, Executive shall serve BFP as a
consultant with a title of Chairman Emeritus. During the Consulting Period,
Executive shall serve on BFP's Board of Directors and provide such consulting
and advisory services to BFP at such time and at such locations or by way of
telephone conference calling as is convenient to Executive (taking into account
other business, charitable, humanitarian and personal activities). Generally,
Executive's consulting and advisory services shall not exceed an average of 20
hours per month.
(c) For both the Employment and Consulting Period, BFP shall provide
Executive with an office and secretarial and administrative assistance
comparable to that provided to BFP's chief executive officer.
2. Compensation for Employment and Consulting Services.
(a) In full consideration for services provided by Executive during
the Employment Period, BFP will, during the Employment Period,
(i) pay or cause to be paid to Executive, and Executive agrees to
accept, compensation consisting of a base salary (payable in regular
installments not less frequently than monthly) of not less than $400,000
per year and a bonus of not less than $400,000 per year.
(ii) provide to Executive medical or health coverage as provided
from time to time to the most senior executive officers of BFP, but in no
event less than currently provided to Executive; and
(iii) provide to Executive customary "fringe" benefits (other
than medical and health benefits) provided by BFP to its most senior
executive officers.
Executive shall also be eligible to participate in all incentive compensation,
bonus plans, deferred compensation, savings, stock option, stock appreciation
and similar type plans generally available, from time to time, to the most
senior executive officers of BFP.
(b) In full consideration for services provided by Executive during
the Consulting Period, BFP will, during the Consulting Period: (i) provide
Executive with the medical and/or health coverage provided for in Section
2(a)(ii); and (ii) pay or cause to be paid to Executive (not less frequently
than monthly), and Executive agrees to accept, a fee per annum equal to the
amounts for the years set forth in the table below:
<TABLE>
<CAPTION>
YEAR OF CONSULTING PERIOD Applicable Annual Fee
-------------------------- ---------------------
<S> <C>
1998 $250,000
1999 $250,000
2000 $200,000
2001 $200,000
2002 $150,000
</TABLE>
Executive shall not be entitled to additional compensation or benefits for
serving as a Director of BFP except to the extent employees of BFP receive
separate compensation or benefits for such service.
<PAGE> 2
3. Term. The Employment Period shall be for a period beginning on the date
hereof and ending on the earlier of (a) December 31, 1997 or(b) the date of any
Permitted BFP Termination, any Permitted Executive Resignation or any other date
mutually agreed to by BFP and Executive. The Consulting Period shall be for a
period beginning on the termination of the Employment Period and ending on the
earlier of (a) December 31, 2002 or (b) the date of any Permitted BFP
Termination or Permitted Executive Resignation occurring after the term of the
Employment Period. In the event of a Permitted BFP Termination or a Permitted
Executive Resignation during the term of the Employment Period, there shall be
no Consulting Period. The Consulting Period may be extended by mutual consent of
the parties with consideration for services as agreed upon.
4. Permitted BFP Termination. The Employment Period, or the Consulting
Period, and all obligations of BFP pursuant hereto, except those provided for in
Section 7 hereof, shall be terminated upon the death of Executive or the
Permanent Disability of Executive. The Employment Period and the Consulting
Period, and all obligations of BFP pursuant hereto, may be terminated by BFP in
the event of the occurrence of a Good Cause Event.
5. Termination Payment.
(a) In the event of a Permitted Executive Resignation (subject to the
provisions of Exhibit A hereto which are incorporated herein by reference), BFP
will:
(i) continue the medical and/or health coverage provided
Executive pursuant to Section 2(a)(ii) of this Agreement through December
31, 2002 at the level then in effect, or provide Executive with a cash
payment in the amount necessary for Executive to purchase equivalent
coverage; and
(ii) pay Executive a lump sum payment equal to the present value
of the compensation and benefits provided for, but not yet paid to
Executive, pursuant to Sections 2(a)(i), 2(a)(iii) and 2(b).
(b) In the event that BFP shall terminate the engagement of Executive
as an employee or consultant for any reason other than in a Permitted BFP
Termination prior to the end of the Consulting Period or materially breach this
Agreement in any other way, BFP will pay or provide to Executive: (i) the
benefits as provided for in Section 5(a) in the event of a Permitted Executive
Resignation; and (ii) a cash payment equal to the present value of the benefits
available to Executive pursuant to Section 9 (based on average use in the
preceding twelve months) for the time remaining in the Employment Period and the
Consulting Period; provided such payment shall not exceed $75,000 per year
remaining in the Employment Period and the Consulting Period. All amounts
payable under this Section 5(b) shall be increased as provided in Exhibit B
hereto which is incorporated herein by reference.
(c) The payments provided for in this Section 5 are in addition to all
benefits or amounts payable under all other agreements between Executive and BFP
and all plans or programs in effect at termination to which Executive is then
entitled. Nothing in this Section 5, or elsewhere in this Agreement is intended,
or shall be construed, to limit or impair Executive's rights to receive benefits
under any and all such other agreements between the parties, or under any and
all such plans or programs.
(d) For purposes of this section, present value shall be determined in
accordance with Section 280G(d)(4) of the Internal Revenue Code.
6. Non-Competition Covenant and Compensation.
(a) Non-Competition. From the date hereof until December 31, 2002,
Executive covenants and agrees with BFP that Executive will not, directly or
indirectly (including consulting and advising), engage in, enter the employ of,
or have any interest in, any other person, firm, corporation or other entity
engaged in any activity competitive with the business of BFP or its subsidiaries
as carried on within the United States of America; provided, however, that
nothing contained herein shall restrict Executive from individually owning 5% or
less of corporate securities of any competitor of BFP or its subsidiaries which
securities are listed on any national securities exchange or traded actively in
the national over-the-counter market, if Executive has no other connection or
relationship with the issuer of such securities. This restriction shall be
applicable only with respect to the United States of America. Notwithstanding
the foregoing, this non-competition covenant shall terminate in the event BFP
shall breach this Agreement or if BFP terminates this Agreement by reason of a
Good Cause Event. In the event BFP breaches this Agreement, Executive shall
continue to receive the payments provided for in Section 6(d) hereof.
(b) Invalidity of Provisions. Executive recognizes the broad scope of
the foregoing covenants, but expressly agrees that they are reasonable in light
of the scope of the business heretofore conducted by BFP. If any court or
tribunal of competent jurisdiction shall refuse to enforce any or all of the
foregoing covenants because they are more extensive (whether as to geographic
area, scope of business or otherwise) than is deemed reasonable, it is expressly
understood and agreed between the parties hereto that such covenant shall not be
void, but that for the purpose of such proceedings and in such jurisdiction, the
restrictions contained herein (whether as to geographic area, scope of business
or otherwise) shall be deemed reduced to the extent necessary to permit
enforcement of the covenants.
(c) Enforcement and Remedy. Executive further acknowledges and agrees
that the damages resulting from any breach of the foregoing covenants may be
intangible in whole or in part and that the injured party is entitled to seek
specific enforcement, injunctive relief and other equitable remedies in addition
to monetary damages and legal remedies.
(d) Compensation. In full consideration for agreeing to the
<PAGE> 3
restrictions contained in this Section 6, BFP will pay Executive, and Executive
agrees to accept, a fee per annum in each of the years as set forth in the table
below:
<TABLE>
<Caption
YEAR OF PAYMENT Applicable Annual Fee
--------------- ---------------------
<S> <C>
1998 $250,000
1999 $250,000
2000 $200,000
2001 $200,000
2002 $150,000
</TABLE>
Payment of such fee shall be made not less frequently than monthly. The fee
provided for herein shall be paid by BFP in addition to amounts payable pursuant
to Sections 2(a), 2(b), 5(a) and 5(b) and whether or not there is a Permitted
Executive Resignation.
7. Compensation in Event of Death or Permanent Disability.
(a) In the event that the Employment Period or Consulting Period is
terminated because of death of Executive, Executive's beneficiary or
beneficiaries designated by him in a notice to BFP or, absent such notice,
employee's estate shall be entitled to (1) 50% of all payments provided in
Sections 2(a), 2(b) and 6(d) through December 31, 2002 and (2) all payments and
benefits in accordance with the regular policies of BFP in force at such time
for such events with respect to a senior executive officer but not less than in
accordance with the regular policies of BFP with respect thereto in force on the
date hereof.
(b) In the event that the Employment Period or Consulting Period is
terminated because of the Permanent Disability of Executive, Executive shall be
entitled to (1) all payments provided in Sections 2(a), 2(b) and 6(d) without
reduction and (2) all payments and benefits in accordance with the regular
policies of BFP in force at such time for such events with respect to a senior
executive officer but not less than in accordance with the regular policies of
BFP with respect thereto in force on the date hereof.
8. Designation of Director. As long as Executive remains the beneficial
owner of not less than 200,000 shares of common stock of BFP, BFP will use its
best efforts to cause (i) the Board Governance Committee of the Board of
Directors to nominate and (ii) the stockholders of BFP to elect Executive (or,
if unable to serve, a person designated by Executive and reasonably acceptable
to the Board Governance Committee) as a director of BFP to serve for the term of
this Agreement.
9. Use of BFP Aircraft; Right of First Refusal.
During the Employment Period and the Consulting Period, Executive shall be
entitled to the use of BFP's current and any replacement aircraft (the "BFP
Aircraft") for business purposes, including trips from Executive's residence to
St. Louis or any other place required to perform his duties as Chairman of the
Board or Consultant as well as for Executive's personal use consistent with such
use thereof permitted for the Chief Executive Officer. The BFP Aircraft shall be
made available at Executive's request, subject to reasonable and normal
maintenance requirements. At times when Executive is not serving as Chairman of
the Board, Executive shall give seven days prior notice for use of the Aircraft.
In the event the BFP Aircraft is not made available for Executive for domestic
(including Canada and Mexico) flights on the date requested or within 72 hours
thereafter, BFP shall provide a comparable aircraft for Executive. Scheduling
for international travel (other than Canada and Mexico) will be done in good
faith taking into consideration the business needs of BFP.
If BFP desires to sell the BFP Aircraft, BFP shall provide Executive with
written notice of (i) its intent to sell, (ii) the proposed transferee and (iii)
the material terms and conditions of such sale ("Transfer Notice"). Executive
shall thereafter have the option to purchase the BFP Aircraft on substantially
the same terms and conditions set forth in the Transfer Notice("Purchase
Option"); provided, however that (i) Executive must notify BFP 30 days after
receipt of the Transfer Notice of Executive's intent to exercise the Purchase
Option (with a closing not more that 60 days after the date of the Transfer
Notice) and (ii) if BFP intends to sell the BFP Aircraft to a dealer in
connection with the purchase of a new aircraft, the purchase price to Executive
shall be the lower of (a) the purchase price set forth in the Transfer Notice
and (b) the fair market value of the BFP Aircraft, as determined by an
independent appraisal firm mutually selected by BFP and Executive.
10. Legal Fees. In the event of any litigation involving this Agreement,
and if Executive is successful in whole or in part in such litigation, BFP will
reimburse Executive for all related legal fees and expenses.
11. Non-Waiver of Rights. The failure to enforce at any time any of the
provisions of this Agreement or to require at any time performance by the other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement, or
any part thereof, or the right of either party thereafter to enforce each and
every provision in accordance with the terms of this Agreement.
12. Invalidity of Provisions. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provisions were omitted.
13. Assignment. This Agreement shall be freely assignable by BFP and shall
inure to the benefit of, and be binding upon BFP, its successors and assigns;
but, being a contract for personal services, neither this Agreement nor any
rights hereunder shall be assigned by Executive.
<PAGE> 4
14. Governing Law. This Agreement shall be interpreted in accordance with
and governed by the laws of the State of Missouri.
15. Amendments. No modification, amendment or waiver of any of the
provisions of this Agreement shall be effective unless in writing specifically
referring hereto and signed by the parties hereto.
16. Notices. Any notice to be given by either party hereunder shall be in
writing and shall be deemed to have been duly given if delivered or mailed,
certified or registered mail, postage prepaid, as follows:
TO BFP: Brooks Fiber Properties, Inc.
425 Woods Mill Road South
St. Louis, MO 63017
Attention: Chief Executive Officer
and to Executive at his address as it appears on the payroll records of BFP, or
to such other address as may have been furnished by either party to the other
party by written notice.
17. Option Vesting. BFP and Executive acknowledge and agree that service to
BFP as a Director shall count as service for vesting purposes under BFP's 1993
Stock Option Plan.
18. Definitions. The following terms, as used herein, shall have the
following meanings:
"Change of Control" means (a) the purchase or other acquisition, within the
meaning of Section 13(d) of the Securities Exchange Act of 1934, in one or a
series of transactions by a person or a group of persons acting in concert, of
beneficial ownership in more than 35% if on or before March 31, 1998, and 25%
thereafter, of the then outstanding voting stock of BFP, (b) the receipt of
proxies for the election of directors in opposition to management's slate of
nominees which proxies aggregate more than 40% of the then outstanding voting
stock of BFP, (c) the sale or issuance of such number of shares of voting stock
of BFP for consideration other than cash in any transaction or series of related
transactions which constitute more than 35% if on or before March 31, 1998, and
25% thereafter, of the outstanding voting power of BFP after giving effect to
such issuance or sale, or (d) the sale or other transfer of all or substantially
all of the assets of BFP.
"Employment Period" means the period set forth in Section 3 hereof.
"Consulting Period" means the period set forth in Section 3 hereof.
"Good Cause Event" shall mean (a) a good faith determination by the Board
of Directors, after written notice (including all relevant documentation of the
matter) to Executive and opportunity by Executive to be heard, that Executive
committed a fraud, misappropriation, embezzlement or theft against or from BFP
or any of its subsidiaries, (b) conviction of Executive of a felony or (c) a
good faith determination of the Board of Directors, after a ninety (90) day
written warning and the opportunity to cure and to be heard by the Board of
Directors, on substantial evidence (a description of which shall be included
with such written warning) that Executive was grossly negligent in carrying out,
or unreasonably refused to serve or carry out, the duties and responsibilities
as provided for in Section 1 hereof.
"Independent Accounting Firm" shall mean a "big-six" accounting firm
designated by BFP and approved by Executive to make the computations provided
for in Section 5 hereof which does no substantial work for either BFP or any
person owning more than 25% of the outstanding voting stock of BFP.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Permanent Disability" shall mean the total inability because of bodily
injury or disease to carry out the duties of Executive provided in Section 1
hereof for a period of six consecutive months.
"Permitted Executive Resignation" shall mean any resignation by Executive
which shall occur within one year after a Change in Control.
"Permitted BFP Termination" means a termination of this Agreement pursuant
to or as permitted by the terms of Section 4 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written in the City of Town &
Country, State of Missouri.
BROOKS FIBER PROPERTIES, INC.
By: /s/ James C. Allen
----------------------------------------
James C. Allen, President
/s/ Robert A. Brooks
---------------------------------------------
Robert A. Brooks
Executive
<PAGE> 5
EXHIBIT A
POTENTIAL REDUCTION IN PAYMENTS PURSUANT SECTION 5(A)
Anything in this Agreement to the contrary notwithstanding but subject to
Section 11 of the Agreement, in the event the Independent Accounting Firm shall
determine that any payment or distribution by BFP to or for the benefit of
Executive pursuant to the terms of Section 5(a) of this Agreement (a "Payment")
would be nondeductible by BFP for Federal income tax purposes because of Section
280G of the Internal Revenue Code, then the aggregate present value of amounts
payable or distributable to or for the benefit of Executive pursuant to this
Agreement (such payments or distributions pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced (but not below
zero) to the Reduced Amount. For purposes of this paragraph, the "Reduced
Amount" shall be an amount expressed in present value which maximizes the
aggregate present value of Agreement Payments without causing any Payment to be
nondeductible by BFP because of said Section 280G of the Internal Revenue Code.
If the Independent Accounting Firm determines that any Payment would be
nondeductible by BFP because of Section 280G of the Internal Revenue Code, BFP
shall promptly give Executive notice to that effect and a copy of the detailed
calculation thereof and of the Reduced Amount, and Executive may then elect, in
his sole discretion, which and how much of the Agreement Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Agreement Payments equals the Reduced Amount), and shall advise BFP
in writing of his election within thirty days of his receipt of notice. If no
such election is made by Executive within such thirty-day period, BFP may elect
which and how much of the Agreement Payments shall be eliminated or reduced (as
long as after such election the aggregate present value of the Agreement Payment
equals the Reduced Amount) and shall notify Executive promptly of such election.
All determinations made by the Independent Accounting Firm under this paragraph
shall be binding upon BFP and Executive and shall be made within 60 days of a
termination of employment of Executive. As promptly as practicable following
such determination and the elections hereunder, BFP shall pay to or distribute
to or for the benefit of Executive such amounts as are then due to Executive
under this Agreement and shall promptly pay to or distribute for the benefit of
Executive in the future such amounts as become due to Executive under this
Agreement.
As a result of the uncertainty in the application of Section 280G of the
Internal Revenue Code at the time of the initial determination by the
Independent Accounting Firm hereunder, it is possible that Agreement Payments
will be made by BFP which should not have been made ("Overpayment") or that
additional Agreement Payments which have not been made by BFP could have been
made ("Underpayment"), in each case, consistent with the calculation of the
Reduced Amount hereunder. In the event that the Independent Accounting Firm,
based upon the assertion of a deficiency by the Internal Revenue Service against
BFP or Executive which the Independent Accounting Firm believes has a high
probability of success, determines that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to Executive which
Executive shall repay to BFP together with interest at the applicable Federal
rate provided for in Section 7872(f)(2) of the Internal Revenue Code; provided,
however, that no amount shall be payable by Executive to BFP if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Internal Revenue Code or if the period of limitations
for assessment of tax under Section 4999 of the Internal Revenue Code against
Executive shall have expired. In the event that the Independent Accounting Firm,
based upon controlling precedent, determines that an Underpayment has occurred,
any such Underpayment shall be promptly paid by BFP to or for the benefit of the
Executive together with interest at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Internal Revenue Code.
<PAGE> 6
EXHIBIT B
POTENTIAL GROSS UP OF PAYMENTS PURSUANT SECTION 5(B)
(A) In the event it shall be determined that any payment or distribution by
BFP to or for the benefit of Executive pursuant to the terms of Section 5(b) of
this Agreement would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code or any interest or penalties with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(B) Subject to the provisions of Subsection (C) of this Exhibit B, all
determinations required to be made under Section 5(b) and this Exhibit B,
including whether a Gross-Up Payment is required and the amount of such Gross-Up
Payment, shall be made by an Independent Accounting Firm which shall provide
detailed supporting calculations both to BFP and Executive within 15 business
days of the date of Executive's termination, if applicable, or such earlier time
as is requested by BFP. The initial Gross-Up Payment, if any, as determined
pursuant to this Exhibit B, shall be paid to the Executive within 5 days of the
receipt of the Independent Accounting Firm's determination. If the Independent
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that he does not need to
report any Excise Tax on his federal income tax return. Any determination by the
Independent Accounting Firm shall be binding upon BFP and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Internal
Revenue Code at the time of the initial determination by the Independent
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by BFP should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event the Executive
receives a final assessment or enters into a closing agreement with the Internal
Revenue Service ("Service") for any tax year that gives rise to an Underpayment,
and the Executive gives notice of such Underpayment pursuant to Subsection (C)
of this Exhibit B, the Independent Accounting Firm shall determine the amount of
the Underpayment that has occurred and give written notice thereof to BFP and
the Executive. Any such Underpayment shall be paid by BFP to or for the benefit
of the Executive within 10 business days after it has received such notice.
(C) The Executive shall notify BFP in writing of any proposed assessment or
proposed adjustment by the Service pursuant to an audit of Executive's federal
income tax return or otherwise, that, if successful, would require the payment
by BFP of a Gross-Up Payment (hereinafter referred to as a "Claim"). Such notice
shall be given as soon as practicable but no later than ten business days after
the earlier of (i) the receipt by the Executive of a written notice of proposed
adjustment from the Service (a "30 day letter") or (ii) the receipt by the
Executive of a statutory notice of deficiency. Such notice of the Executive to
BFP shall include (i) notice of the amount of the proposed assessment or
proposed adjustment which relates to the Claim and the taxable year or years in
which the Claim arises, (ii) the general nature of the Claim and (iii) all
relevant written reports of the Service's Examining Agent relating to the Claim.
Within thirty days of (i) the receipt by the Executive of a final
assessment or (ii) the execution by the Executive and the Service of a closing
agreement, with respect to any tax year of the Executive in which a Claim has
been raised, pursuant to which the Executive is required to pay any amount with
respect to the Claim, the Executive shall provide BFP and the Independent
Accounting Firm with a copy of such assessment or agreement, together with
supporting documents sufficient to determine the amount of such tax liability
that was attributable to the Claim.
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Brooks Fiber Properties, Inc.:
We consent to the use of our reports on Brooks Fiber Properties, Inc.
herein in the registration statement on Form S-4.
KPMG Peat Marwick LLP
St. Louis, Missouri
March 14, 1997
