<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1998
REGISTRATION NO. 333-64079
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
e.spire COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
133 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RILEY M. MURPHY, ESQ.
e.spire COMMUNICATIONS, INC.
133 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4215
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
with copies to:
MARIO PONCE
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3954
(212) 455-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED DISTRIBUTION OF THE SECURITIES
TO THE PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
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. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF PROPOSED PROPOSED
EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
10.625% Senior Notes due 2008.......... $375,000,000 59.989% $224,958,750 $66,363
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy and information statements and other
information with the Securities Exchange Commission (the "Commission" as "SEC").
Such reports, proxy and information statements and other information may be
inspected and copied at the public reference facilities of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the SEC by mail at
prescribed rates, or in certain cases by accessing the SEC's World Wide Web site
at http://www.sec.gov. Requests should be directed to the SEC's Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The Company's Common Stock is quoted on the Nasdaq National Market and
material filed by the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C.
20006.
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth or incorporated by
reference in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. For further information with respect to the Company and the New
Notes offered hereby, reference is made to the Registration Statement. This
Prospectus contains summaries of the material terms and provisions of certain
documents and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Copies of the Registration
Statement and the exhibits thereto may be inspected, without charge, at the
offices of the SEC at the address set forth above.
Certain statements contained in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
including statements regarding the development of the Company's businesses, the
markets for the Company's services and products, the Company's anticipated
capital expenditures, regulatory reform and other statements contained herein
regarding matters that are not historical facts, are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). Because such statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Risk Factors." The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any of the forward-looking statements contained
herein to reflect any change in the Company's expectations, with regard thereto
or any changes in events, conditions or circumstances on which any statement is
based.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed by the Company with the SEC are
hereby incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997;
(ii) the Company's Quarterly Reports on Form 10-QSB for the quarterly
periods ended March 31, and June 30, 1998;
(iii) the Company's Current Reports on Form 8-K, dated January 8,
1998, January 20, 1998 (two reports filed as of this date), January 26,
1998, January 28, 1998, February 3, 1998, March 17, 1998, April 14, 1998,
July 27, 1998 and August 25, 1998; and
i
<PAGE> 3
(iv) the description of the Company's Common Stock contained in its
registration statement on Form 8-A filed with the SEC on December 23, 1994,
including any amendments or reports filed for the purpose of updating such
description.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the Expiration Date to which
this Prospectus relates shall be deemed to be incorporated by reference into
this Prospectus and to be part hereof from the date of filing thereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated herein modifies or replaces such statement.
Any statement so modified or superseded shall not be deemed, in its unmodified
form, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE BY
WRITTEN OR ORAL REQUEST FROM RILEY M. MURPHY, EXECUTIVE VICE PRESIDENT -- LEGAL
AND REGULATORY AFFAIRS, e.spire COMMUNICATIONS, INC., AT THE COMPANY'S EXECUTIVE
OFFICES LOCATED AT 133 NATIONAL BUSINESS PARKWAY, SUITE 200, ANNAPOLIS JUNCTION,
MD 20701, TELEPHONE (301) 617-4200. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 9, 1998.
ii
<PAGE> 4
PROSPECTUS
October 20, 1998
[e.spire LOGO]
e.spire COMMUNICATIONS, INC.
OFFER TO EXCHANGE
ITS 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008 FOR ITS
OUTSTANDING 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
------------------------
e.spire Communications, Inc., a Delaware corporation ("e.spire" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (this "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") to exchange (the "Exchange Offer") up
to $375,000,000 aggregate principal amount at maturity of a new series of its
10.625% Senior Discount Notes due July 1, 2008 (the "New Notes") for up to
$375,000,000 aggregate principal amount at maturity of its outstanding 10.625%
Senior Discount Notes due July 1, 2008 (the "Old Notes") (the "Exchange Offer").
There will be no cash proceeds to the Company from the Exchange Offer.
------------------------
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and thus will not
bear restrictive legends restricting their transfer pursuant to the Securities
Act and (ii) holders of New Notes will not be entitled to certain rights of
holders of the Old Notes, under the Registration Rights Agreement (as defined)
which will terminate upon the consummation of the Exchange Offer. See "The
Exchange Offer -- Consequences of Failure to Exchange." The Old Notes and the
New Notes are sometimes referred to herein collectively as the "Notes."
The Old Notes were issued at a substantial discount from their principal
amount so as to yield gross proceeds of approximately $225.0 million. No
interest will accrue or be payable on the New Notes prior to July 1, 2003.
Thereafter, interest on the New Notes will accrue at a rate of 10.625% per annum
and will be payable in cash semi-annually in arrears on January 1 and July 1 of
each year, commencing January 1, 2004.
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after July 1, 2003 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, thereon to the applicable
redemption date. Prior to July 1, 2001, up to 35% of the aggregate principal
amount of New Notes originally issued will be redeemable at the option of the
Company from the net proceeds of one or more Public Equity Offerings (as defined
herein), at a redemption price equal to 110.625% of the Accreted Value (as
defined herein) thereof. Upon the occurrence of a Change of Control (as defined
herein), the Company is required to offer to purchase all outstanding New Notes
at a price equal to 101% of their Accreted Value on or before July 1, 2003 or
101% of their principal amount plus accrued and unpaid interest to the date of
purchase after July 1, 2003. See "Description of Notes".
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all existing and future senior
unsecured obligations of the Company. The New Notes will be effectively
subordinated to all existing and future indebtedness of the Company's
subsidiaries. The Indenture (as defined herein) will permit the Company and its
subsidiaries to incur additional indebtedness, subject to certain limitations.
See "Description of Notes".
------------------------
The Old Notes were originally issued and sold on July 24, 1998 in
transactions not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act. Accordingly, the Old
Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based on interpretations by the staff of the Securities and Exchange Commission
set forth in no-action letters, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holders have no arrangement with any person to participate in the distribution
of such New Notes and neither such holders nor any other person is engaging in
or intends to engage in a distribution of such New Notes. However the Company
has not sought, and does not intend to seek, its own no-action letter, and there
can be no assurance that the staff of the Securities and Exchange Commission
would make a similar determination with respect to the Exchange Offer. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer where the Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, may be a statutory
underwriter and must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal relating to the
Exchange Offer states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with New Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. e.spire will, for a period of 120 days after the Expiration
Date (as defined herein), make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The New Notes constitute new issues of securities with no established
trading market. Any Old Notes not tendered and accepted in the Exchange Offer
will remain outstanding. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. No assurance can be given as to the liquidity of the trading
market for the Old Notes. See "Risk Factors -- Lack of Public Market for the
Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on November 18, 1998,
unless extended by the Company in its sole discretion (such date as it may be so
extended, the "Expiration Date"). The Company will not extend the Exchange Offer
beyond December 10, 1998. Tenders of Old Notes may be withdrawn at any time
prior to the Expiration Date. The Expiration Offer is subject to certain
customary conditions. See "The Exchange Offer."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES
WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
------------------------
THESE NOTES 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.
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere or incorporated by reference in this Prospectus. Subsequent to June
30, 1996, the Company changed its fiscal year-end from June 30 to December 31.
Accordingly, all data for the fiscal period ended December 31, 1996 are for the
six-month period then ended. Please refer to the "Glossary" for the definitions
of certain capitalized terms used herein and elsewhere in this Prospectus. As
used in this Prospectus, unless the context otherwise requires, "e.spire" or the
"Company" refers to e.spire Communications, Inc. and its subsidiaries.
THE COMPANY
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based integrated communications provider ("ICP") to businesses in
markets primarily in the southern half of the United States. By the end of 1997,
the Company had become one of the first competitive local exchange carriers
("CLECs") to combine the provision of dedicated, local and long distance voice
services with frame relay, asynchronous transfer mode ("ATM") and Internet
services. Having established this suite of telecommunications services which
emphasizes data capabilities in addition to traditional CLEC offerings, the
Company has evolved into an ICP. e.spire seeks to provide customers with
superior service and competitive prices while offering a single source for
integrated communications services designed to meet its business customers'
needs. The Company's facilities-based network infrastructure is designed to
provide services to customers on an end-to-end basis, and, as of June 30, 1998,
was comprised of 1,433 route miles of fiber in its 32 local networks in 19
states, 44 Newbridge ATM switches, 17 Lucent 5ESS switches and approximately
22,000 backbone longhaul miles in its leased coast-to-coast broadband data
network.
With the passage of the federal Telecommunications Act of 1996 (the "FTA"),
the Company has enhanced the scope of its product offerings from dedicated
services to a full range of switched voice, data and Internet services in order
to meet the needs of business end-users, and is expanding its sales, marketing,
customer care and operations support systems ("OSS") capabilities. The Company
introduced local switched voice services, including local exchange services in
late 1996 and long distance services in late 1997. By June 30, 1998, e.spire had
sold 96,405 customer access lines, of which 85,633 were installed, representing
a significant increase over the 9,177 access lines sold as of June 30, 1997.
The Company believes that there is significant unmet demand by businesses
for integrated voice and data services from a single-source communications
provider. In addition, the domestic market for Internet-related business
services is growing rapidly. The Company believes that, through its data and
Internet network, it is well positioned to satisfy these customer demands by
providing its suite of network solutions. This suite of services is integrated
through the Company's Internet access product, which combines its Internet
Service Provider ("ISP") capabilities and ATM, frame relay, and Internet
Protocol ("IP") services. The Company also provides additional Internet-based
and other data custom solutions and value-added services such as web hosting,
managed services and firewall services. The Company's data and Internet products
are currently offered in all of its markets to complement its existing services.
For the year ended December 31, 1997 and the six months ended June 30,
1998, approximately 42% and 39%, respectively of the Company's revenues were
derived from network services, approximately 38% and 32%, respectively, were
derived from data and Internet services and approximately 20% and 30%,
respectively, from switched local and other services. Included in the network
services category of revenues are high capacity dedicated and special access
services, and revenues from ACSI Network Technologies for construction contracts
and long term leases of high capacity systems. For the year ended December 31,
1997 and the six month period ended June 30, 1998, approximately $1.7 million
and $8.1 million is included from these contracts, of which $4.6 million of 1998
revenues was derived from a contract with a single interexchange carrier.
Revenues
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<PAGE> 6
for the year ended December 31, 1997, increased $49.6 million, or 527%, to $59.0
million from $9.4 million for the year ended December 31, 1996. Revenues for the
six months ended June 30, 1998, increased $43.4 million, or 219% to $63.2
million from $19.8 million for the six months ended June 30, 1997. As of June
30, 1998, the Company served over 10,400 telecommunications customers, excluding
internet dial-up customers.
The Company believes that a key factor in the successful implementation of
its strategy and its improved operating performance is the quality of its
management team. In the past 21 months, the Company hired Jack E. Reich as
President and Chief Executive Officer and David L. Piazza as Chief Financial
Officer, complementing Pompliano, the Company's founder and Chairman, and Riley
M. Murphy, the Company's General Counsel. In addition, in February 1998, the
Company hired Ronald E. Spears as Chief Operating Officer. Collectively, these
individuals have an average of 21 years of telecommunications industry
experience. The Company also has significantly increased its marketing and sales
forces during the past year by hiring an additional 151 employees in such
departments. As of June 30, 1998, the Company had a total of 278 employees in
its marketing and sales forces, an increase of over 119% from June 30, 1997.
STRATEGY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. In order to increase penetration in its target markets, build
brand recognition and achieve its strategic objectives, the Company seeks to:
PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES
To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. In 1997,
the Company introduced new voice products such as local dial tone, long
distance, audio conferencing and voice messaging services. In addition, through
the 1997 acquisition of Cybergate, Inc. (the "Cybergate Acquisition"), the
Company also introduced its Internet services and, as of June 30, 1998, served
over 46,000 Internet customers. In late 1997, the Company introduced its data
and Internet products, which it currently offers in all of its markets. In April
1998, the Company also introduced its PLATINUM product, which offers customers
integrated local, long distance, toll free and dedicated Internet access using a
single multi-purpose T1. PLATINUM is available in 20 markets. The Company
believes that its ability to provide one-stop integrated communications services
will enable it to capture a larger portion of its customers' total expenditures
on communication services, and reduce customer turnover.
EXPLOIT RAPIDLY GROWING MARKET FOR DATA SERVICES
The Company believes that the market for data services is one of the
fastest growing segments of the communications market. The Company's suite of
data products consisting primarily of the e.spire family of high-speed Internet
and data products for small and medium-sized businesses, will be transported
over the Company's coast-to-coast, leased broadband data communications network.
The data and Internet products include the following services:
*e.spire INTERNET ACCESS SERVICE: provides customers access to the
Company's Internet data backbone which provides high-quality dedicated and
dial-up Internet connection and IP transport.
*e.spire FRAME RELAY SERVICE: provides capabilities to customers with
varying bandwidth needs and interconnects geographically dispersed networks
and equipment.
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<PAGE> 7
*e.spire ATM SERVICE: provides a solution to local, regional and
national businesses with high bandwidth, delay-sensitive data
communications applications.
*e.spire BUNDLED INTERNET SOLUTIONS: provides turnkey solutions,
including dedicated Internet access, web site hosting, news feeds and other
services.
*e.spire CUSTOM NETWORK SERVICES: includes design, installation,
hardware (such as switches, routers and modems) and configuration of a
customer's network.
*e.spire MANAGED NETWORK SERVICE: provides complete management and
monitoring of all customer equipment and network elements needed to operate
dedicated Internet or frame relay services.
ENHANCE FACILITIES-BASED INFRASTRUCTURE
Expansion of the Company's facilities-based infrastructure will increase
the proportion of communications traffic that is originated and/or terminated on
its network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company uses both an on-net and a resale strategy to capture new
customers, and intends to accelerate migration of traffic onto its own
facilities.
The Company will continue to install voice and data switches, construct
SONET digital local fiber networks and increase the reach of its data backbone.
The Company's expansion decisions are structured to efficiently deploy capital
and are based upon a number of economic factors, including customer demographics
in each market and anticipated cost savings associated with particular
installations. The Company's state-of-the-art infrastructure and high capacity
bandwidth facilitate efficient network expansion. The Company recently announced
plans to expand its local network infrastructure into six additional markets:
Atlanta, Washington, D.C., San Antonio, South Florida, New York and
Philadelphia. In addition, the Company plans to deploy a broadband long-haul
network between New York and Baltimore. Combined, these expansions are
anticipated to increase the network facilities to over 2,200 route miles by year
end. The Company also installed 20 Lucent 5ESS switches as of August 31, 1998
and plans to install an additional 5 by year end.
BUILD MARKET SHARE THROUGH FOCUSED CUSTOMER SALES AND SERVICE
The Company believes that its local, customer-oriented, single
point-of-service sales structure facilitates greater customer care in both the
sales and customer service processes and differentiates e.spire as a
customer-focused telecommunications services provider. In addition to its field
sales force, the Company's major account team targets large national accounts,
and its carrier sales group targets dedicated services to long distance carriers
and ISPs. As of June 30, 1998, the Company had 278 employees in its marketing
and sales forces, an increase of over 119% from June 30, 1997. The Company
supplements its internal marketing and sales force through alternative sales
channels, and had executed 117 sales agency agreements as of June 30, 1998.
The Company currently is implementing an integrated customer care strategy
that emphasizes infrastructure improvements, training of personnel, performance
monitoring and image/brand recognition. The customer care strategy is intended
to provide a heightened level of responsive and cost efficient customer service
across the Company's full range of existing and planned products and services,
with a particular emphasis on operational support and other
information/financial systems. The Company is in the process of supplementing
its customer service effort with an integrated customer care and billing
software platform, differentiating e.spire from its major competitors.
3
<PAGE> 8
EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES
The Company believes that acquisitions of, and joint ventures and other
strategic alliances with, related or complementary businesses in its region will
enable it to more rapidly execute its business plan by providing additional
customers, new products and services, service and technical support and
additional cash flow. For example, the Cybergate Acquisition increased the
Company's penetration of its current markets and accelerated its entry into new
markets by expanding the scope of the Company's Internet product offerings. As
part of its expansion strategy, the Company plans to consider additional
acquisitions, joint ventures and strategic alliances in communications, Internet
access and other related service areas.
RECENT DEVELOPMENTS
1998 COMMON STOCK OFFERING. On April 3, 1998, the Company completed the
offering of 8,100,000 shares of Common Stock at a price of $18.50 per share (the
"1998 Common Stock Offering"). 7,502,418 of such shares were issued and sold by
the Company and 597,582 of such shares were sold by certain stockholders of the
Company. Total net proceeds to the Company from the 1998 Common Stock Offering
and the exercise of certain options and warrants in connection therewith were
approximately $134.2 million.
NAME CHANGE. On April 15, 1998, the Company announced that it had changed
its name from American Communications Services, Inc. to e.spire Communications,
Inc. Effective as of such date, "ESPI" became the Company's new Nasdaq trading
symbol for its common stock.
NETWORK EXPANSION. On June 25, 1998, the Company announced that it intends
to expand its local networks into Atlanta, Washington, D.C., South Florida and
San Antonio, and to extend its existing local networks in 15 of its 32 existing
cities. On August 25, 1998, the Company announced that it intends to deploy
local fiber optic networks in New York City and Philadelphia and expand its ATM
backbone and longhaul capabilities with a broadband fiber network between New
York and the Baltimore-Washington, D.C. area through long term leases of fiber
from Metromedia Fiber Network Inc.
ACSI NETWORK TECHNOLOGIES. The Company recently has begun offering local
telecommunications network construction and related services for carriers and
other businesses through ACSI Network Technologies, a wholly owned subsidiary.
GSCP CREDIT FACILITIES. Goldman Sachs Credit Partners L.P. ("GSCP") has
entered into a commitment letter with the Company to provide senior secured
credit facilities aggregating up to $300.0 million (the "GSCP Credit
Facilities") that are expected to close in the third quarter of 1998. The GSCP
Credit Facilities are expected to consist of (i) a $35.0 million secured term
facility (the "Series A Facility"), the proceeds of which will be used to
refinance the New AT&T Credit Facility and (ii) a $265.0 million secured
purchase money facility (the "Series B Facility"), $40.0 million of which would
be in the form of a term facility (the "Series B Term Facility") and $225.0
million of which would be in the form of a revolving facility (the "Series B
Revolving Facility"). The proceeds of the Series B Facility would be available
to the Company only to provide purchase money financing for the acquisition,
construction and improvement of telecommunications assets of the Company's
operating subsidiaries. See "Description of Certain Indebtedness -- GSCP Credit
Facilities".
4
<PAGE> 9
THE EXCHANGE OFFER
Registration Rights
Agreement;
Effect on Holders........ The Old Notes were sold by e.spire on July 24, 1998
to Goldman, Sachs & Co., Bear, Stearns & Co. Inc.
and ING Furman Selz LLC, as the initial
purchasers (the "Initial Purchasers") pursuant to
a Purchase Agreement dated July 21, 1998 between
e.spire and the Initial Purchasers (the "Purchase
Agreement"). The Initial Purchasers subsequently
sold the Old Notes to qualified institutional
buyers and non-U.S. persons in reliance on Rule
144A and Regulation S, respectively, under the
Securities Act (the "Private Placement").
Pursuant to the Purchase Agreement, e.spire and
the Initial Purchasers entered into a
Registration Rights Agreement dated as of July
24, 1998 (the "Registration Rights Agreement")
which grants the holders of the Old Notes certain
exchange and registration rights. This Exchange
Offer is intended to satisfy such rights.
Therefore, the holders of the New Notes are not
entitled to any exchange or registration rights
with respect thereto. All untendered Old Notes
will continue to be subject to the restrictions
on transfer described under "The Exchange
Offer -- Consequences of Failure to Exchange." To
the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading
market for untendered Old Notes could be
adversely affected. See "The Exchange
Offer -- Purpose and Effect of the Exchange
Offer" and "-- Consequences of Failure to
Exchange" and "Risk Factors -- Lack of Public
Market for the Notes."
The Exchange Offer......... Up to $375,000,000 in aggregate principal amount at
maturity of New Notes will be exchanged for up to
$375,000,000 in aggregate principal amount at
maturity of Old Notes. e.spire will issue the New
Notes to holders on the earliest possible date
following the Expiration Date.
Expiration Date............ 5:00 p.m., New York City time, on November 18, 1998
unless the Exchange Offer is extended by e.spire
in its sole discretion, in which case the term
"Expiration Date" means the latest date and time
to which the Exchange Offer is extended. The
Company will not extend the Exchange Offer beyond
December 10, 1998.
Conditions to the Exchange
Offer.................... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered for exchange. However, the
Exchange Offer is subject to certain customary
conditions, which may be waived by e.spire. See
"The Exchange Offer -- Conditions of the Exchange
Offer." e.spire reserves the right to terminate
the Exchange Offer if any of such conditions have
not been satisfied and to amend the Exchange
Offer at any time prior to the Expiration Date.
Procedures for Tendering
the Old Notes.............. See "The Exchange Offer -- Procedures for
Tendering" and "-- Guaranteed Delivery
Procedures."
5
<PAGE> 10
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Acceptance of the Old Notes
and Delivery of the New
Notes.................... e.spire will accept for exchange any and all Old
Notes which are properly tendered in the Exchange
Offer prior to the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
Certain Tax
Considerations............. For a discussion of certain federal income tax
consequences of the exchange of the Old Notes,
see "Certain Federal Income Tax Considerations."
Exchange Agent............. The Chase Manhattan Bank, the Trustee under the
Indenture (as defined herein), is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. The address
of the Exchange Agent is: 55 Water Street, Room
234, North Building, New York, NY 10041,
Attention: Carlos Esteves. For information with
respect to the Exchange Offer, the telephone
number for the Exchange Agent is (212) 638-0828
and the facsimile number for the Exchange Agent
is (212) 638-7380 or (212) 638-7381
TERMS OF THE NOTES
The Exchange Offer applies to $375,000,000 aggregate principal amount at
maturity of the Old Notes. The Old Notes were issued at a substantial discount
from their principal amount so as to yield gross proceeds of approximately
$225,000,000. The form and terms of the New Notes are the same as the form and
terms of the Old Notes, except that the New Notes will have been registered
under the Securities Act and thus will not bear restrictive legends restricting
their transfer pursuant to the Securities Act.
Maturity Date.............. July 1, 2008.
Interest Payment Dates..... The Notes will accrete (representing the
amortization of original issue discount) at a
rate of 10.625% on a semi-annual bond-equivalent
basis, to an aggregate principal amount at
maturity of $375.0 million by July 1, 2003. No
interest will accrue on the Notes prior to July
1, 2003. The Notes will accrue cash interest at
the rate of 10.625% per annum from July 1, 2003
payable semi-annually in arrears on January 1 and
July 1 of each year, commencing January 1, 2004.
Effective Yield............ 10.625% per annum, computed on a semi-annual
bond-equivalent basis using a 360-day year
comprised of twelve 30-day months and calculated
from July 24, 1998.
Optional Redemption........ The Notes are not redeemable at the Company's
option prior to July 1, 2003. Thereafter the
Notes will be subject to redemption at the option
of the Company, in whole or in part, upon not
less than 30 days' notice, at the redemption
prices set forth herein, plus accrued and unpaid
interest thereon to the applicable redemption
date. See "Description of Notes -- Optional Re-
6
<PAGE> 11
demption". In addition, prior to July 1, 2001, up
to 35% of the aggregate principal amount of Notes
will be redeemable at the option of the Company,
at a redemption price equal to 110.625% of the
Accreted Value on the date of redemption;
provided, however, that, after giving effect to
any such redemption, at least 65% of the
principal amount of the Notes remain outstanding.
See "Description of Notes -- Optional
Redemption".
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Notes shall have the right to require
the Company to repurchase their Notes, in whole
or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to any Change of
Control Payment Date or, if such repurchase is to
be consummated prior to July 1, 2003, 101% of the
Accreted Value thereof, to any Change of Control
Payment Date. See "Description of
Notes -- Repurchase at Option of Holders Upon
Change of Control".
Certain Covenants.......... The Indenture pursuant to which the Old Notes have
been issued and the New Notes will be issued (the
"Indenture") contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined herein) to incur additional indebtedness
and issue preferred stock, pay dividends or
distributions or make investments or make certain
other Restricted Payments (as defined herein),
enter into certain transactions with affiliates,
dispose of certain assets and incur liens. See
"Description of Notes".
Original Issue Discount.... The Old Notes were issued with original issue
discount (that is, the difference between the
stated principal amount at maturity and the issue
price of the Notes) for federal income tax
purposes. Thus, although interest will not accrue
on the Notes prior to July 1, 2003, and there
will be no payments of interest on the Notes
prior to January 1, 2004, original issue discount
will accrue from the issue date and is included
as interest income periodically in a holder's
gross income for federal income tax purposes in
advance of receipt of the cash payments to which
the income is attributable. See "Certain Federal
Income Tax Considerations".
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
RISK FACTORS
Holders of the Old Notes should take into account the specific
considerations set forth under "Risk Factors" as well as the other information
set forth in the Prospectus before tendering Old Notes in exchange for New
Notes.
e.spire is a Delaware corporation. The Company's principal executive
offices are located at 133 National Business Parkway, Suite 200, Annapolis
Junction, Maryland 20701, and its telephone number is (301) 361-4200.
7
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED YEAR ENDED DECEMBER 31, 1997
------------------- DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996(1) 1996(1) ACTUAL AS ADJUSTED(2)
-------- -------- ------------ ------------ --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 389 $ 3,415 $ 6,990 $ 9,417 $ 59,000 $ 59,000
Operating expenses:
Network, development and
operations.................... 3,282 5,265 8,703 11,046 52,881 52,881
Selling, general and
administrative................ 4,598 13,464 20,270 30,656 59,851 59,851
Non-cash stock compensation..... 6,419 2,736 550 2,081 4,274 4,274
Depreciation and amortization... 498 3,078 4,911 7,228 24,131 24,131
-------- -------- -------- -------- --------- ---------
Total operating expenses...... 14,797 24,543 34,434 51,011 141,137 141,137
-------- -------- -------- -------- --------- ---------
Loss from operations............. (14,408) (21,128) (27,444) (41,594) (82,137) (82,137)
Interest and other income........ 218 4,410 2,757 6,390 8,686 8,686
Interest and other expense....... (170) (10,477) (10,390) (18,032) (41,565) (66,764)
-------- -------- -------- -------- --------- ---------
Loss before minority interest.... (14,746) (27,195) (35,077) (53,236) (115,016) (140,215)
Minority interest(3)............. 48 413 160 417 -- --
-------- -------- -------- -------- --------- ---------
Net loss......................... $(14,698) $(26,782) $(34,917) $(52,819) $(115,016) $(140,215)
======== ======== ======== ======== ========= =========
Basic and diluted net loss per
common share.................... $ (3.30) $ (4.96) $ (5.48) $ (8.54) $ (4.65) $ (4.30)
Weighted average shares
outstanding..................... 4,772 6,185 6,734 6,653 27,234 35,334
OTHER DATA:
EBITDA(4)........................ $ (7,443) $(14,901) $(21,822) $(31,868) $ (53,732) $ (53,732)
Capital expenditures............. 15,303 60,856 64,574 107,773 135,036 135,036
Deficiency of earnings to cover
fixed charges(5)................ -- -- -- -- -- --
Ratio of debt to capital(6)...... .09 3.26 3.80 3.80 1.37 1.46
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
ENDED JUNE 30, 1998
JUNE 30, -------------------------
1997 ACTUAL AS ADJUSTED(2)
----------- -------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 19,793 $ 63,221 $ 63,221
Operating expenses:
Network, development and
operations.................... 19,640 43,597 43,597
Selling, general and
administrative................ 28,205 41,454 41,454
Non-cash stock compensation..... 823 3,427 3,427
Depreciation and amortization... 9,457 17,383 17,383
-------- -------- --------
Total operating expenses...... 58,125 105,861 105,861
-------- -------- --------
Loss from operations............. (38,332) (42,640) (42,640)
Interest and other income........ 1,078 9,991 9,991
Interest and other expense....... (12,421) (31,891) (45,477)
-------- -------- --------
Loss before minority interest.... (49,675) (64,540) (78,126)
Minority interest(3)............. -- -- --
-------- -------- --------
Net loss......................... $(49,675) $(64,540) $(78,126)
======== ======== ========
Basic and diluted net loss per
common share.................... $ (2.82) $ (1.97) $ (2.29)
Weighted average shares
outstanding..................... 17,994 41,496 41,496
OTHER DATA:
EBITDA(4)........................ $(28,052) $(21,830) $(21,830)
Capital expenditures............. 73,213 79,752 79,752
Deficiency of earnings to cover
fixed charges(5)................ -- -- --
Ratio of debt to capital(6)...... 1.94 1.05 1.51
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, 1998
------------------ DECEMBER 31, DECEMBER 31, JUNE 30, -------------------------
1995 1996 1996 1997 1997 ACTUAL AS ADJUSTED(7)
------- -------- ------------ ------------ -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............... $20,351 $134,116 $ 78,619 $260,837 $ 8,499 $294,581 $ 512,916
Total assets............................ 37,627 223,600 230,038 638,895 243,381 782,442 1,007,401
Working capital......................... 13,908 114,966 46,001 272,234 (13,274) 296,227 514,562
Property, plant and equipment, net...... 15,567 76,739 136,083 250,477 202,904 349,267 349,267
Long-term debt, including current
portion................................ 3,798 184,382 210,410 461,285 225,079 506,343 731,302
Long-term liabilities................... 4,723 189,072 216,484 461,321 224,562 499,634 724,593
Redeemable stock and options............ 2,931 2,155 2,000 206,160 2,000 222,259 222,259
Stockholders' equity (deficit).......... 22,141 8,982 (27,038) (65,356) (18,226) (453) (453)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997 1997 1998
-------- -------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL
DATA(8):
Networks in operation.................. 5 15 21 32 31 32
Route miles............................ 43 386 697 1,061 957 1,433
Fiber miles............................ 1,754 28,476 48,792 92,528 82,693 123,982
Buildings connected.................... 36 216 595 1,604 1,083 2,393
VGE circuits in service................ 31,920 137,431 384,134 1,052,698 886,375 1,233,988
Voice switches installed............... -- -- 1 16 8 17
Access lines sold...................... -- -- -- 43,581 9,177 96,405
Employees.............................. 74 199 322 803 559 979
</TABLE>
(see
footnotes on following page)
8
<PAGE> 13
(footnotes to previous page)
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31.
(2) As adjusted for the Private Placement, the net proceeds to the Company of
which were approximately $218.3 million, as if such transaction had occurred
on January 1, 1997. Includes interest expense on the Notes calculated at a
rate of 10.625% per annum, compounded semi-annually, applied to the $225.0
million gross proceeds of the Private Placement, plus amortization of debt
issuance costs, as if the Private Placement had occurred on January 1, 1997.
The ratio of debt to capital, however, is as adjusted as if such transaction
had occurred on December 31, 1997 and June 30, 1998, respectively.
(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness." Such minority interest of AT&T in the Company's subsidiaries
was exchanged for 207,964 shares of Common Stock on December 30, 1997 in
connection with the Company entering into the New AT&T Credit Facility.
(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $0.4 million. 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 accounting principles ("GAAP"). Noncash compensation
associated with employee stock and stock options was $6.4 million, $2.7
million, $0.5 million, $2.1 million, $4.3 million, $0.8 million and $3.4
million for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996, the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1997 and 1998, respectively. See Note 7 of the
Company's Consolidated Financial Statements.
(5) For purposes of calculating the ratio of earnings to cover fixed charges,
earnings (loss) consists of earnings (loss) before minority interest and
fixed charges. Fixed charges consists of interest, whether expensed or
capitalized, (including amortization of debt issuance costs). For the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996, the
years ended December 31, 1996 and 1997 and the six months ended June 30,
1997 and 1998, the Company's earnings were insufficient to cover its fixed
charges by $15.3 million, $30.2 million, $37.3 million, $57.8 million,
$118.9 million, $52.3 million and $65.4 million, respectively. On a pro
forma basis for the year ended December 31, 1997 and the six months ended
June 30, 1998, assuming the Private Placement had occurred at the beginning
of each of those periods, the Company's earnings would have been
insufficient to cover its fixed charges by $144.1 million and $79.0 million,
respectively.
(6) The Debt to Capital Ratio is calculated as the ratio of (i) the amount of
Indebtedness of the Company on a consolidated basis to (ii) the capital of
the Company on a consolidated basis as at such date. For purposes of this
calculation, "capital" shall mean stockholders' equity (deficit), except
that all Preferred Stock shall be included and retained earnings (deficit)
shall be excluded, each as determined in accordance with GAAP.
(7) As adjusted for the Private Placement, as if such transaction had occurred
on June 30, 1998.
(8) Network and Selected Statistical Data are derived from the Company's
records.
9
<PAGE> 14
RISK FACTORS
Holders of Old Notes should consider carefully the following information in
conjunction with the other information set forth or incorporated by reference in
this Prospectus before tendering their Old Notes in the Exchange Offer. The risk
factors set forth below (other than "Consequences of Failure to Exchange") are
generally applied to the Old Notes as well as the New Notes.
NEGATIVE CASH FLOW; ANTICIPATED FUTURE LOSSES; SIGNIFICANT FUTURE CAPITAL
REQUIREMENTS; NEED FOR ADDITIONAL CASH.
Since its inception, the Company has incurred significant net operating
losses and negative cash flow. As of June 30, 1998, the Company had an
accumulated deficit of $262.0 million. During the year ended December 31, 1997
and the six months ended June 30, 1998, the Company incurred a net operating
loss of $115.0 million and $64.5 million, respectively, and generated negative
cash flow from operations of $76.4 million and $29.3 million, respectively.
After giving pro forma effect to the Private Placement, the Company's pro forma
earnings would have been insufficient to cover fixed charges by $144.1 million
and $79.0 million, for the year ended December 31, 1997 and the six months ended
June 30, 1998, respectively. The Company will continue to incur significant
expenditures in the future 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 positive cash
flow in the future.
The Company's further development and enhancement of new services as well
as the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. As of June 30, 1998, the Company had raised approximately
$759 million from debt and equity financings ($977 million after giving pro
forma effect to the Private Placement). The Company estimates that for 1998,
capital required for expansion of its infrastructure and services and to fund
negative cash flow will be approximately $200 million. At June 30, 1998, the
Company had approximately $323.8 million of cash and cash equivalents available
for such purposes ($542.1 million after giving pro forma effect to the Private
Placement). The Company continues to consider potential acquisitions or other
arrangements that may fit the Company's strategic plan. Any such acquisitions or
arrangements that the Company might consider are likely to require additional
equity or debt financing, which the Company will seek to obtain as required and
may also require that the Company obtain the consent of its debt holders. See
"-- Strategic Investments; Business Combinations".
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures in the near future. To meet its additional remaining
capital requirements and to successfully implement its strategy, the Company
will be required to borrow under the GSCP Credit Facilities, sell additional
equity securities, acquire additional credit facilities or sell additional debt
securities, certain of which would require the consent of the Company's debt
holders. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
implement its strategy successfully, in which event the Company will be unable
to fund its ongoing operations, which would have a material adverse effect on
its business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; FUTURE CASH OBLIGATIONS
Since inception, other than for the year ended June 30, 1996, the Company's
consolidated cash flow from operations has been negative. As a result, the
Company has been required to pay its fixed charges (including interest on
existing indebtedness) and operating expenses with the proceeds from sales of
its debt and equity securities. Under the terms of its debt securities, the
Company will be required to satisfy substantially higher periodic cash debt
service obligations in the future. Commencing in the year 2001, cash interest on
the Company's 13% Senior Discount Notes due
10
<PAGE> 15
2005 (the "2005 Notes") and 12 3/4% Senior Discount Notes due 2006 (the "2006
Notes") will be payable semi-annually at the rate of 13% per annum
(approximately $24.7 million per year) and 12 3/4% per annum (approximately
$15.3 million per year), respectively. In addition, the Company has substantial
cash interest requirements with respect to its 13 3/4% Senior Notes due 2007
(the "2007 Notes", and, together with the 2006 Notes and the 2005 Notes, the
"Existing Notes") and, commencing January 1, 2004, will have substantial cash
interest requirements with respect to the Notes. As of June 30, 1998, the
Company had approximately $35.0 million in debt outstanding under the New AT&T
Credit Facility. As of June 30, 1998, the Company had approximately $506.3
million of consolidated outstanding long-term indebtedness, including current
portion ($731.3 million after giving pro forma effect to the Private Placement).
As of June 30, 1998, the total consolidated liabilities of the Company were
approximately $560.6 million ($785.5 million after giving pro forma effect to
the Private Placement). It is expected that the Company and its subsidiaries
will incur additional indebtedness. Many factors, some of which are beyond the
Company's control, will affect its performance and, therefore, its ability to
meet its ongoing obligations to repay the Existing Notes, the Notes and its
other debt. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds in the future to cover interest
and principal payments associated with the Notes, the Existing Notes and its
other debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources", "Description of
Certain Indebtedness" and "Description of the Notes".
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes (as amended as of February 26, 1998, the
"2005 Indenture") and the 2006 Notes (as amended as of February 26, 1998, the
"2006 Indenture", together with the 2005 Indenture and the indenture governing
the 2007 Notes (as amended as of February 26, 1998, the "2007 Indenture"), the
"Existing Indentures") that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in the 2005 Indenture and 2006
Indenture. The incurrence by the Company of such Indebtedness was not permitted
under the 2005 Indenture and 2006 Indenture and, therefore, constituted an Event
of Default (as defined in the 2005 Indenture and 2006 Indenture) under the 2005
Indenture and 2006 Indenture. The Company used a portion of the proceeds of the
Unit Offering (as defined herein) to pay in full all ordinary course trade
accounts payable that were more than 60 days overdue to cure such Event of
Default.
In addition, in connection with the Unit Offering and Junior Preferred
Stock Offering (as defined herein), the Company issued the 14 3/4% Preferred
Stock and the 12 3/4% Preferred Stock (each, as defined herein), respectively,
dividends on which may be paid, at the Company's option, either in cash or by
the issuance of additional shares of Preferred Stock; provided, however, that
after June 30, 2002, to the extent and so long as the Company is not precluded
from paying cash dividends on the Preferred Stock by the terms of any then
outstanding indebtedness or any other agreement or instrument to which the
Company is then subject, the Company is required to pay dividends on such
Preferred Stock in cash.
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Notes, including the following:
(i) the debt service requirements of the Company's existing indebtedness and any
additional indebtedness could make it difficult for the Company to make payments
on the Notes, the Existing Notes and the Preferred Stock; (ii) the ability of
the Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) any cash flow from the operations of certain of the Company's
subsidiaries may need to be dedicated to debt service payments and might not be
available for other purposes; (iv) the Company's level of indebtedness could
limit its flexibility in planning for, or reacting to, changes in its business;
(v) the Company is more highly leveraged than most of its competitors, which may
place it at a competitive disadvan-
11
<PAGE> 16
tage; and (vi) the Company's high degree of indebtedness will make it more
vulnerable to a downturn in its business.
Prior to July 1, 2003, the Company's interest expense on the Notes will be
comprised solely of the accretion of original issue discount. Thereafter, the
Notes will require annual cash interest payments of $39.8 million.
HOLDING COMPANY STRUCTURE
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the Notes and will not guarantee the New Notes. As a result,
the New Notes effectively will be subordinated to all existing and future
third-party indebtedness and other liabilities of the Company's subsidiaries
(including trade payables). See "Description of Certain Indebtedness." Any
rights of the Company and its creditors, including the holders of New Notes, to
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors (including trade creditors).
RANKING OF THE NOTES; ASSET ENCUMBRANCES
The New Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all future senior indebtedness of the
Company. The New Notes will be effectively subordinated to all senior secured
indebtedness of the Company to the extent of such security, including
indebtedness under the GSCP Credit Facilities, which will provide for revolving
credit borrowings of up to $225.0 million and term loans of up to $75.0 million.
It is expected that the Company's obligations under the GSCP Credit Facilities
will be secured by a pledge of substantially all of the capital stock of the
Company's subsidiaries, and the tangible and intangible assets of the Company
and its subsidiaries. If the Company becomes insolvent or is liquidated, or if
payment under the GSCP Credit Facilities is accelerated, the lenders under the
GSCP Credit Facilities will be entitled to exercise the remedies available to a
secured lender under applicable law pursuant to the GSCP Credit Facilities.
Accordingly, such lenders will have a prior claim with respect to such assets.
See "Description of Certain Indebtedness -- GSCP Credit Facilities" and
"Description of the Notes".
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Indenture, the Existing Indentures, the New AT&T Credit Facility and
the certificates of designation relating to the 14 3/4% Preferred Stock and
12 3/4% Preferred Stock impose, and it is expected that the GSCP Credit
Facilities will impose, operating and financial restrictions on the Company and
its subsidiaries. These restrictions affect, and in certain cases significantly
limit or prohibit, among other things, the ability of the Company and its
subsidiaries to incur additional indebtedness or create liens on their assets,
pay dividends, sell assets, engage in mergers or acquisitions or make
investments. Failure to comply with any of these restrictions could limit the
availability of borrowings or result in a default thereunder. See "Description
of Certain Indebtedness" and "Description of the Notes". In addition, the terms
of any debt or equity financings undertaken by the Company to meet its future
cash requirements could restrict the Company's operational flexibility and
thereby adversely affect the Company's business, results of operations and
financial condition.
12
<PAGE> 17
CHANGE OF CONTROL RISK
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter a
third party from acquiring the Company in a transaction that constitutes a
Change of Control. If a Change of Control Offer (as defined) is made, there can
be no assurance that the Company will have sufficient funds to pay the purchase
price for all Notes tendered by holders seeking to accept the Change of Control
Offer. In addition, instruments governing other indebtedness of the Company may
prohibit the Company from purchasing any Notes prior to their stated maturity,
including pursuant to a Change of Control Offer. See "Description of Certain
Indebtedness." In the event that a Change of Control Offer occurs at a time when
the Company does not have sufficient available funds to pay the purchase price
for all Notes tendered pursuant to such offer or a time when the Company is
prohibited from purchasing the Notes (and the Company is unable either to obtain
the consent of the holders of the relevant indebtedness or to repay such
indebtedness), an Event of Default would occur under the Indenture. In addition,
one of the events that constitutes a Change of Control under the Indenture is a
sale, conveyance, transfer or lease of all or substantially all of the property
of the Company. The Indenture is governed by New York law, and there is no
established definition under New York law of "substantially all" of the assets
of a corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
MANAGEMENT OF RAPID GROWTH
Subject to the sufficiency of its cash resources, the Company intends to
continue to expand its business rapidly. The Company's future performance will
depend, in large part, upon its ability to implement and manage its growth
effectively. The Company's rapid growth has placed, and in the future will
continue to place, a significant strain on its administrative, operational and
financial resources. The Company anticipates that, if successful in expanding
its business, the Company will be required to integrate its newest senior
managers successfully and to recruit and hire a substantial number of new
managerial, finance, accounting and support personnel. Failure to retain and
attract additional management personnel who can manage the Company's growth
effectively would have a material adverse effect on the Company and its growth.
To manage its growth successfully, the Company will also have to continue to
improve and upgrade operational, financial, accounting and information systems,
controls and infrastructure as well as expand, train and manage its employee
base. In the event the Company is unable to upgrade its financial controls and
accounting and reporting systems adequately to support its anticipated growth,
the Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Integrated management information and processing systems are vital to the
Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. As the Company transitions
to the provisioning of integrated communications services, the need for
sophisticated billing and information systems will increase significantly. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Similarly, the Company is developing customer call centers to respond
to service orders. Information systems are vital to the success of the call
centers, and the information systems for these call centers are largely being
developed by third party vendors. Failure of these vendors to deliver these
systems solutions in a timely and effective manner and at acceptable costs,
failure of the Company to adequately identify and integrate all of its
information and processing needs, failure of the Company's related processing or
information systems, or the failure of the Company to upgrade systems as
necessary could have a material adverse effect on the ability of the Company to
reach its objectives, on its financial condition and on its results of
operations.
13
<PAGE> 18
While the Company believes that the majority of its software applications
are year 2000 compliant, there can be no assurance until the year 2000 occurs
that all systems will then function adequately. Further, if the hardware or
software comprising the Company's network elements acquired from third party
vendors or the software applications of the ILECs, long distance carriers or
others on whose services the Company depends or with whom the Company's systems
interface are not year 2000 compliant, it could affect the Company's systems,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS; AGE OF ACCOUNTS RECEIVABLE
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the IXCs and ISPs. For the year ended
December 31, 1997 and the six months ended June 30, 1998, approximately 20% and
13% of the Company's revenues were attributable to access services provided to
five and four, respectively, of the largest IXCs, including services provided
for the benefit of their customers. In addition, the Company derived
approximately 20% of its 1997 revenues and 11% of its revenues for the first six
months of 1998 from services provided to ISPs, which operate in a highly
competitive and uncertain environment. The Company is, and expects to continue
to be, dependent upon such IXC and ISP customers, and the loss of any one of the
IXCs or certain of the ISP customers could have a material adverse effect on the
Company's business, results of operations and financial condition. Additionally,
customers who account for significant portions of the Company's revenues may
have the ability to negotiate prices for the Company's services that are more
favorable to the customer and that result in lower profit margins for the
Company. In addition, a significant portion of the Company's accounts receivable
are at least 90 days past due. A substantial portion of such overdue amount
consists of reciprocal compensation payments due from ILECs. An inability to
collect on its accounts receivable could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Competition," "Business -- Competition" and "-- Regulation".
DEPENDENCE UPON SUPPLIERS
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services, network
capacity and switching and networking equipment, which, in the quantities and
quality demanded by the Company, are available only from sole or limited
sources. The Company is also dependent upon ILECs and other carriers to provide
telecommunications services and facilities to the Company and its customers. The
Company has from time to time experienced delays or other problems in receiving
telecommunications services and facilities which it requests, and there can be
no assurance that the Company will be able to obtain such services or facilities
on the scale and within the time frames required by the Company at an affordable
cost, or at all. Any failure to obtain such components, services or additional
capacity on a timely basis at an affordable cost, or at all, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Regulation".
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its network infrastructure. The Company's networks and the networks
upon which it depends are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by computer virus, break-
ins or otherwise) and other factors, certain of which may cause interruptions in
service or reduced capacity for the customers. Interruptions in service,
capacity limitations or security breaches could have a material adverse effect
on the Company's business, financial condition and results of operations.
14
<PAGE> 19
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
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 aerial pole space and other rights-of-way and fiber capacity from entities
such as ILECs and other utilities, railroads, long distance companies, state
highway authorities, local governments and transit authorities. 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 canceled
or will not be renewed as needed in the near future, cancellation or non-renewal
of certain of such arrangements could materially adversely affect the Company's
business in the affected metropolitan area. In addition, the failure to enter
into and maintain any such required arrangements for a particular network,
including a network which is already under development, may affect the Company's
ability to acquire or develop that network. See "Business -- Regulation".
EFFECT OF REGULATION
As a common carrier, the Company is subject to substantial federal, state
and local regulation. The Company's local networks do not require authorization
from the Federal Communications Commission (the "FCC") for construction or
installation. However, the Company currently must file FCC tariffs stating its
rates, terms and conditions of service for interstate access services and must
file tariffs covering its interstate and international long distance traffic.
State regulatory agencies regulate intrastate communications, while local
authorities control the Company's access to and use of municipal rights-of-way.
Under the FTA, state and local legal requirements which prohibit or have the
effect of prohibiting any entity from providing any intrastate
telecommunications service are preempted. However, many states continue to
require telecommunications carriers to obtain a certificate, license, permit or
similar approval before providing services. Thus, the Company's ability to
provide additional intrastate services is dependent upon its receipt of
requisite state regulatory approval. The inability to obtain the approvals
necessary to provide intrastate switched services could have a material adverse
effect on the Company's business, results of operations and financial condition.
The FTA imposes a duty upon all ILECs to negotiate in good faith with
potential interconnectors such as the Company to provide interconnection to the
ILEC network, exchange local traffic, make unbundled basic local network
elements available and permit resale of most local services. All local
interconnection agreements must be filed with state Public Service Commissions
("PSCs") for approval. In the event that negotiations with the ILECs do not
succeed, the Company has a right to seek PSC arbitration of any unresolved
issues.
Although passage of the FTA should result in increased opportunities for
companies that are competing with the ILECs, 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 addition,
although the FTA makes RBOC entry into the in-region long distance market
conditional upon their offering of local interconnection arrangements to other
telecommunications service providers, there can be no assurance that these ILECs
will negotiate quickly with competitors such as the Company for the required
interconnection of the competitor's networks with those of the ILEC.
Internet-related information services are not currently subject to direct
regulation by the FCC or any other U.S. agency other than regulation applicable
to businesses generally. The FCC is considering whether additional regulations
should be applied to Internet services and whether Internet service providers
should pay interexchange access charges and universal service fees. Moreover, as
discussed hereafter, the FTA and similar state laws create civil and criminal
penalties for the knowing transmission of "indecent" material over the Internet.
Additionally, the FTA may permit telecommunications companies, RBOCs or others
to increase the scope or reduce the cost
15
<PAGE> 20
of their Internet access services. These and other changes in the regulatory
environment relating to the telecommunications or Internet-related services
industry could have an adverse effect on the Company's Internet-related services
business.
On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the FTA, including Section 271, which
prevents RBOC subsidiaries from providing in-region long distance services until
certain conditions are met. This decision would permit the three RBOCs that are
parties in the case immediately to begin offering widespread in-region long
distance services. However, the judge stayed the effectiveness of his own order,
and the decision was reversed by the United States Court of Appeals for the
Fifth Circuit on September 4, 1998. The company cannot predict whether the
decision of the Fifth Circuit will be further appealed, or the resolution of any
such further appeals. If the Fifth Circuit decision were reversed, such a
decision could have a material adverse effect on the Company. In addition, the
Company cannot predict the effect that the FTA or any future legislation,
regulation or regulatory changes may have on its business.
The Company believes it is entitled to receive reciprocal compensation from
ILECs for the transport and termination of Internet traffic as local traffic
pursuant to various interconnection agreements. Some ILECs have not paid and/or
have disputed these charges, arguing that ISP traffic is not local traffic as
defined by the various agreements. Both state and federal regulators currently
are considering the proper jurisdictional classification of local access calls
placed to an ISP, and whether ISP calling triggers an obligation to pay
reciprocal compensation. There can be no assurance that these issues will be
resolved. Any final order by the FCC or a state PSC in a state in which the
Company's interconnection agreements entitle it to reciprocal compensation, or a
final determination by a Federal or applicable state court that no reciprocal
compensation is owed for calls placed to ISPs could have a material adverse
effect on the Company. See "Business -- Regulation -- State Regulation -- Local
Interconnection".
COMPETITION
The Company operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of its actual
and potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than the
Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, decide to engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, the revenue of
competitors to the ILECs, including the Company, could be materially adversely
affected. If future regulatory decisions afford the ILECs increased access
services pricing flexibility or other regulatory relief, such decisions could
also have a material adverse effect on competitors to the ILECs, including the
Company.
16
<PAGE> 21
In the local exchange market, the Company also faces competition or
prospective competition from several other carriers, many of which have
significantly greater financial resources than the Company. For example, AT&T
Communications ("AT&T"), MCI Communications Corporation ("MCI") and Sprint
Corporation ("Sprint"), which historically have been purely long distance
carriers, have each begun to offer local telecommunications services in major
U.S. markets using their own facilities or by resale of the ILECs' or other
providers' services. In addition to these long distance service providers,
entities that currently offer or are potentially capable of offering local
switched services include companies that have previously been known purely as
competitive access providers ("CAPs"), cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and large
customers who build private networks. These entities, upon entering into
appropriate interconnection agreements or resale agreements with ILECs,
including RBOCs, can offer single source local and long distance services, like
those offered by the Company. In addition, a continuing trend towards business
combinations and alliances in the telecommunications industry may create
significant new competitors to the Company. The proposed merger of WorldCom,
Inc. and MCI or AT&T's proposed acquisition of Teleport Communications Group,
Inc. and TCI Cable are examples of some of the alliances that are being formed.
Many of these combined entities may have resources far greater than those of the
Company. These combined entities may provide a bundled package of
telecommunications products, including local and long distance telephony, that
is in direct competition with the products offered by the Company.
The Company will also face competition from fixed wireless services,
including MMDS, LMDS, 24 GHz and 38 GHz wireless communications systems, WCS,
FCC Part 15 unlicensed wireless radio devices, and other services that use
existing point-to-point wireless channels on other frequencies. See
"Business -- Regulation". In addition, the FCC has allocated a number of
spectrum blocks for use by wireless devices that do not require site or network
licensing. A number of vendors have developed such devices that may provide
competition to the Company, in particular for certain low data-rate transmission
services.
With respect to mobile wireless telephone system operators, the FCC has
authorized cellular, PCS, and other CMRS providers to offer wireless services to
fixed locations, rather than just to mobile customers, in whatever capacity such
CMRS providers choose. Previously, cellular providers could provide service to
fixed locations only on an ancillary or incidental basis. This authority to
provide fixed as well as mobile services will enable CMRS providers to offer
wireless local loop service and other services to fixed locations (e.g., office
and apartment buildings) in direct competition with the Company and other
providers of traditional wireless telephone service. See
"Business -- Regulation".
Section 271 of the FTA prohibits an RBOC from providing long-distance
service that originates (or in certain cases terminates) in one of its in-region
states until the RBOC has satisfied certain statutory conditions in that state
and has received the approval of the FCC. The FCC has denied the following
applications for such approval: SBC Communications Inc.'s Oklahoma application
in June 1997; Ameritech Inc.'s Michigan application in August 1997; and
BellSouth Corporation applications for South Carolina and Louisiana in December
1997 and February 1998, respectively. The Company anticipates that a number of
RBOCs will file additional applications for in-region long distance authority in
1998. The FCC will have 90 days from the date an application for in-region long
distance authority is filed to decide whether to grant or deny the application.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would permit the three RBOCs immediately to
begin offering widespread in-region long distance services. The decision,
however, was stayed on February 11, 1998 by the Court upon motion from the
defendants. Unless overturned on appeal, this decision could have a material
adverse effect on the Company. The FCC and certain IXCs have filed appeals of
the decision with the United States Court of Appeals for the Fifth Circuit.
Although
17
<PAGE> 22
there can be no assurance as to the outcome of this litigation, the Company
believes that significant parts of the District Court decision may be reversed
or vacated on appeal.
In addition, new FCC rules went into effect in February 1998 which will
make it substantially easier for many non-U.S. telecommunications companies to
enter the U.S. market, thus potentially further increasing the number of
competitors.
The market for data communications and Internet access services, including
IP switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including: market presence; the ability to execute a rapid
expansion strategy; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
services by the Company and its competitors; the Company's ability to support
industry standards; and industry and general economic trends. The Company's
success in this market will depend heavily upon its ability to provide high
quality Internet connections and value-added Internet services at competitive
prices. See "Business -- Competition".
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
technological change that could materially affect the continued use of fiber
optic cable or the electronics utilized in the Company's networks. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies and Internet-related services
and technologies, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its telecommunications
services business to alternate access devices, conduits and protocols.
STRATEGIC INVESTMENTS; BUSINESS COMBINATIONS
The Company expects to actively pursue over the next several months one or
more acquisitions of companies engaged in businesses similar or related to the
business of the Company. As consideration for such acquisitions, the Company may
be required to incur additional indebtedness or issue capital. There can be no
assurance that the Company will be able to obtain such financing. In addition,
the Company from time to time engages in discussions with (i) potential business
partners looking toward formation of business combinations or strategic
alliances that would expand the reach of the Company's networks or services and
(ii) potential strategic investors (i.e., investors in the same or related
business) who have expressed an interest in making an investment in the Company.
Such acquisitions, combinations or alliances, if consummated, could divert the
resources and management time of the Company and would require integration with
the Company's existing networks and services. There can be no assurance that any
acquisitions, combinations or alliances will occur or, if consummated, would be
on terms favorable to the Company or would be successfully integrated into the
Company's operations. An investment, business combination or strategic alliance
could constitute a Change of Control (as defined in the Indenture and the
Existing Indentures) requiring the Company to offer to purchase all Notes and
Existing Notes. In the event that such a Change of Control occurs at a time when
the Company does not have sufficient available funds to purchase all Notes and
Existing Notes tendered or at a time when the Company is prohibited from
purchasing the Notes and the Existing Notes, an Event of Default (as defined in
the
18
<PAGE> 23
Indenture and the Existing Indentures) could occur under the relevant indenture.
See "-- Change of Control Risk".
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
of the FTA, both civil and criminal penalties can be imposed for the use of
interactive computer services for the transmission of certain indecent or
obscene communications. However, this provision was recently found to be
unconstitutional by the U.S. Supreme Court. Nonetheless, many states have
adopted or are considering adopting similar requirements, and the
constitutionality of such state requirements remains unsettled at this time.
Congress is also considering several bills addressing these issues. In addition,
several private lawsuits have been filed seeking to hold Internet access
providers accountable for information which they transmit. While the outcome of
these activities is uncertain, the ultimate imposition of potential liability on
Internet access providers for information which they host, distribute or
transport could materially change the way they must conduct business. To avoid
undue exposure to such liability, Internet access providers could be compelled
to engage in burdensome investigation of subscriber materials or even
discontinue offering services altogether. Any such event could have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON KEY PERSONNEL
The Company is currently managed by a small number of key management and
operating personnel whose efforts will largely determine the Company's success.
The success of the Company also depends upon its ability to hire and retain
qualified operating, marketing, sales, financial, accounting and technical
personnel. Competition for qualified personnel in the telecommunications
industry is intense and, accordingly, there can be no assurance that the Company
will be able to continue to hire or retain necessary personnel. The loss of key
management personnel would likely have a material adverse impact on the Company.
See "Management".
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
As of June 30, 1998, the Company's directors and executive officers
beneficially owned approximately 8.2% of the outstanding Common Stock. In
addition, as of such date approximately 31.2% of the outstanding Common Stock
was beneficially owned by The Huff Alternative Income Fund, L.P. ("Huff"), the
designees of which occupy three positions on the Board of Directors,
approximately 16.7% was beneficially owned by ING Equity Partners, L.P. I
("ING"), the designees of which occupy two positions on the Board of Directors,
and approximately 6.3% was beneficially owned by affiliates of First Analysis
Corporation ("FAC"), a designee of which occupies one position on the Board of
Directors, respectively. In addition, at the date hereof Huff is the beneficial
owner of approximately 13% of the 14 3/4% Preferred Stock, which shares have
voting rights in certain circumstances, and ING Baring (U.S.) Securities, Inc.,
which is affiliated with the limited partner of ING, is the beneficial owner of
approximately 4% of such Preferred Stock. Accordingly, if they choose to act
together, these persons will be able to control the election of the Board of
Directors and other matters voted upon by the stockholders. There can be no
assurance that the interests of such persons will not conflict with the
interests of the holders of the Notes.
In addition, a sale of Common Stock by one or more of the principal
stockholders to third parties could trigger the right of the holders of the
Notes and the Existing Notes to require the Company to repurchase the Notes and
the Existing Notes (a "Change of Control Offer"). In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price (as defined in the
Indenture and the Existing Indentures) for all Notes and Existing Notes
tendered, or at a time when the Company is prohibited from purchasing the Notes
and the Existing Notes, an Event of Default (as defined in the relevant
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<PAGE> 24
indentures) could occur. See "-- Change of Control Risk", "Management",
"Principal Stockholders", "Description of Certain Indebtedness -- The Existing
Notes" and "Description of the Notes".
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
The Notes were issued at a substantial discount from the stated principal
amount. Consequently, holders of the Notes should be aware that, although there
will be no periodic payments of interest on the Notes prior to January 1, 2004,
original issue discount (that is, the difference between the stated redemption
price at maturity and the issue price of the Notes) will accrue from the issue
date of the Notes and will be includible as interest income periodically
(including for periods ending prior to July 1, 2003) in a holder's gross income
for U.S. federal income tax purposes in advance of receipt of the cash payments
to which the income is attributable. Similar results may apply under state and
other tax laws.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code after the issuance of the Notes, the claim of a holder of Notes
with respect to the principal amount may be limited to an amount equal to the
sum of (i) the initial offering price and (ii) that portion of the original
issue discount that is not deemed to constitute "unmatured interest" for
purposes of the U.S. Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
See "Certain Federal Income Tax Considerations" for a more detailed
discussion of the federal income tax consequences to the holders regarding the
ownership and disposition of the Notes.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes constitute new issues of securities with no established trading
market. In addition, because the Exchange Offer is not conditioned upon any
minimum number of Old Notes being tendered for exchange, the number of New Notes
issued could be quite small, which could have an adverse effect on the liquidity
of the New Notes. Also, to the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Therefore, no assurance can be given as to the liquidity of
the trading market for the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Old Notes may be resold under limited
circumstances, as discussed in "The Exchange Offer -- Consequences of Failure to
Exchange." The liquidity of the Old Notes could be adversely affected by the
Exchange Offer. Following consummation of the Exchange Offer, holders of the Old
Notes will have no further registration rights under the Registration Rights
Agreement.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the Private Placement were approximately $218.3
million, after deducting discounts and other offering expenses payable by the
Company. The Company plans to use the net proceeds from the Private Placement
for expansion of its voice and data network infrastructure, enhancement of its
operational support systems and sales and marketing services, deployment of
switching equipment, potential future acquisitions and general corporate
purposes.
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<PAGE> 25
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of June 30, 1998, and (ii) as adjusted for
the Private Placement, the net proceeds to the Company of which were
approximately $218.3 million. This table should be read in conjunction with the
"Selected Consolidated Financial and Operating Data" and the Consolidated
Financial Statements and related notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 294,581 $ 512,916
Restricted cash and restricted investments in Marketable
Securities(1)............................................. 59,463 59,463
--------- ---------
Total cash and restricted assets.................. $ 354,044 $ 572,379
========= =========
Long term debt:
2005 Notes................................................ $ 135,026 $ 135,026
2006 Notes................................................ 85,368 85,368
2007 Notes................................................ 220,000 220,000
10.625% Senior Discount Notes due 2008.................... -- 224,959
Notes payable(2).......................................... 35,000 35,000
--------- ---------
Total long-term debt................................... 475,394 700,353
Capital lease obligation.................................... 30,949 30,949
Redeemable stock and options................................ 222,259 222,259
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 125,000,000
shares authorized, 47,385,349 shares issued and
outstanding at June 30, 1998(3)........................ 474 474
Additional paid in capital................................ 261,069 261,069
Accumulated deficit....................................... (261,996) (261,996)
--------- ---------
Total stockholders' equity (deficit)................... (453) (453)
--------- ---------
Total capitalization................................... $ 728,149 $ 953,108
========= =========
</TABLE>
- ---------------
(1) Primarily represents cash and investments in marketable securities
sufficient to make the first five interest payments on the 2007 Notes. The
Company placed approximately $70.0 million of the net proceeds realized from
the offering of the 2007 Notes, representing funds, together with interest
thereon, sufficient to pay the first five interest payments on the 2007
Notes, into an escrow account. At June 30, 1998, the Company had
approximately $58.0 million remaining in the escrow account to fund the
remaining four interest payments of the 2007 Notes.
(2) Represents borrowings under the New AT&T Credit Facility. It is expected
that the Company will incur $75.0 million of indebtedness in connection with
the closing of the GSCP Credit Facilities and will refinance the
indebtedness then outstanding under the New AT&T Credit Facility with a
portion of the proceeds therefrom. See "Description of Certain
Indebtedness".
(3) Shares excluded for options and warrants.
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected data presented below under the captions "Statement of
Operations Data", "Other Data", and "Balance Sheet Data" as of and for the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996 and the
year ended December 31, 1997 are derived from and qualified by reference to the
audited Consolidated Financial Statements of the Company contained herein and
the related notes thereto, and should be read in conjunction therewith and in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The Company's Consolidated Financial Statements as
of and for the years ended June 30, 1995 and 1996, the six months ended December
31, 1996, and the year ended December 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors. Subsequent to June 30, 1996, the Company
changed its fiscal year-end from June 30 to December 31. Selected data presented
below under the captions "Statement of Operations Data", "Other Data" and
"Balance Sheet Data" as of and for the six months ended June 30, 1997 and 1998,
and for the year ended December 31, 1996, have been derived from the unaudited
consolidated financial statements of the Company which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments which the Company considers necessary for a fair presentation of the
results of operations and the financial condition for that period. The results
for the six months ended June 30, 1998 are not necessarily indicative of the
results which may be expected for future periods, including for the year ending
December 31, 1998. Network and Selected Statistical Data are derived from the
Company's records.
22
<PAGE> 27
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS YEAR YEAR ENDED
JUNE 30, ENDED ENDED DECEMBER 31, 1997
------------------- DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996(1) 1996(1) ACTUAL AS ADJUSTED(2)
-------- -------- ------------ ------------ --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 389 $ 3,415 $ 6,990 $ 9,417 $ 59,000 $ 59,000
Operating expenses:
Network, development and
operations................. 3,282 5,265 8,703 11,046 52,881 52,881
Selling, general and
administrative............. 4,598 13,464 20,270 30,656 59,851 59,851
Non-cash stock
compensation............... 6,419 2,736 550 2,081 4,274 4,274
Depreciation and
amortization............... 498 3,078 4,911 7,228 24,131 24,131
-------- -------- -------- -------- --------- ---------
Total operating
expenses................ 14,797 24,543 34,434 51,011 141,137 141,137
-------- -------- -------- -------- --------- ---------
Loss from operations.......... (14,408) (21,128) (27,444) (41,594) (82,137) (82,137)
Interest and other income..... 218 4,410 2,757 6,390 8,686 8,686
Interest and other expense.... (170) (10,477) (10,390) (18,032) (41,565) (66,764)
Debt conversion expense....... (385) -- -- -- -- --
-------- -------- -------- -------- --------- ---------
Loss before minority
interest.................... (14,746) (27,195) (35,077) (53,236) (115,016) (140,215)
Minority interest(3).......... 48 413 160 417 -- --
-------- -------- -------- -------- --------- ---------
Net loss...................... $(14,698) $(26,782) $(34,917) $(52,819) $(115,016) $(140,215)
======== ======== ======== ======== ========= =========
Preferred stock dividends and
accretion................... (1,071) (3,871) (2,003) (4,021) (11,630) (11,630)
-------- -------- -------- -------- --------- ---------
Net loss to common
stockholders................ $(15,769) $(30,653) $(36,920) $(56,840) $(126,646) $(151,845)
======== ======== ======== ======== ========= =========
Basic and diluted net loss per
common share................ $ (3.30) $ (4.96) $ (5.48) $ (8.54) $ (4.65) $ (4.30)
======== ======== ======== ======== ========= =========
Weighted average shares
outstanding................. 4,772 6,185 6,734 6,653 27,234 35,334
OTHER DATA:
EBITDA(4)..................... $ (7,443) $(14,901) $(21,822) $(31,868) $ (53,732) $ (53,732)
Capital expenditures.......... 15,303 60,856 64,574 107,773 135,036 135,036
Deficiency of earnings to
cover fixed charges(5)...... -- -- -- -- -- --
Ratio of debt to capital(6)... .09 3.26 3.80 3.80 1.37 1.46
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
ENDED JUNE 30, 1998
JUNE 30, ---------------------------
1997 ACTUAL AS ADJUSTED(2)
---------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 19,793 $ 63,221 $ 63,221
Operating expenses:
Network, development and
operations................. 19,640 43,597 43,597
Selling, general and
administrative............. 28,205 41,454 41,454
Non-cash stock
compensation............... 823 3,427 3,427
Depreciation and
amortization............... 9,457 17,383 17,383
-------- -------- ---------
Total operating
expenses................ 58,125 105,861 105,861
-------- -------- ---------
Loss from operations.......... (38,332) (42,640) (42,640)
Interest and other income..... 1,078 9,991 9,991
Interest and other expense.... (12,421) (31,891) (45,477)
Debt conversion expense....... -- -- --
-------- -------- ---------
Loss before minority
interest.................... (49,675) (64,540) (78,126)
Minority interest(3).......... -- -- --
-------- -------- ---------
Net loss...................... $(49,675) $(64,540) $ (78,126)
======== ======== =========
Preferred stock dividends and
accretion................... (1,095) (17,100) (17,100)
-------- -------- ---------
Net loss to common
stockholders................ $(50,770) $(81,640) $ (95,226)
======== ======== =========
Basic and diluted net loss per
common share................ $ (2.82) $ (1.97) $ (2.29)
======== ======== =========
Weighted average shares
outstanding................. 17,994 41,496 41,496
OTHER DATA:
EBITDA(4)..................... $(28,052) $(21,830) $ (21,830)
Capital expenditures.......... 73,213 79,752 79,752
Deficiency of earnings to
cover fixed charges(5)...... -- -- --
Ratio of debt to capital(6)... 1.94 1.05 1.51
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, 1998
------------------ DECEMBER 31, DECEMBER 31, JUNE 30, --------------------------
1995 1996 1996 1997 1997 ACTUAL AS ADJUSTED(7)
---- ---- ------------ ------------ -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............. $20,351 $134,116 $ 78,619 $260,837 $ 8,499 $294,581 $ 512,916
Total assets.......................... 37,627 223,600 230,038 638,895 243,381 782,442 1,007,401
Working capital....................... 13,908 114,966 46,001 272,234 (13,274) 296,227 514,562
Property, plant and equipment, net.... 15,567 76,739 136,083 250,477 202,904 349,267 349,267
Long-term debt, including current
portion............................. 3,798 184,382 210,410 461,285 225,079 506,343 731,302
Long-term liabilities................. 4,723 189,072 216,484 461,321 224,562 499,634 724,593
Redeemable stock and options.......... 2,931 2,155 2,000 206,160 2,000 222,259 222,259
Stockholders' equity (deficit)........ 22,141 8,982 (27,038) (65,356) (18,226) (453) (453)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997 1997 1998
-------- -------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA(8):
Networks in operation.................................. 5 15 21 32 31 32
Route miles............................................ 43 386 697 1,061 957 1,433
Fiber miles............................................ 1,754 28,476 48,792 92,528 82,693 123,982
Buildings connected.................................... 36 216 595 1,604 1,083 2,393
VGE circuits in service................................ 31,920 137,431 384,134 1,052,698 886,375 1,233,988
Voice switches installed............................... -- -- 1 16 8 17
Access lines sold...................................... -- -- -- 43,581 9,177 96,405
Employees.............................................. 74 199 322 803 559 979
</TABLE>
(see footnotes on following page)
23
<PAGE> 28
(footnotes to previous page)
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31.
(2) As adjusted for Private Placement, the net proceeds to the Company of which
were approximately $218.3 million, as if such transaction had occurred on
January 1, 1997. Includes interest expense on the Notes calculated at a rate
of 10.625% per annum, compounded semi-annually, applied to the $225.0
million gross proceeds of the Private Placement, plus amortization of debt
issuance costs, as if the Private Placement had occurred on January 1, 1997.
The ratio of debt to capital, however, is as adjusted as if such
transactions had occurred on December 31, 1997 and June 30, 1998,
respectively.
(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness." Such minority interest of AT&T in the Company's subsidiaries
was exchanged for 207,964 shares of Common Stock on December 30, 1997 in
connection with the Company entering into the New AT&T Credit Facility.
(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $0.4 million. 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
GAAP. Noncash compensation associated with employee stock and stock options
was $6.4 million, $2.7 million, $0.5 million, $2.1 million, $4.3 million,
$0.8 million and $3.4 million for the years ended June 30, 1995 and 1996,
the six months ended December 31, 1996, the years ended December 31, 1996
and 1997 and the six months ended June 30, 1997 and 1998, respectively. See
Note 7 of Notes to the Company's Consolidated Financial Statements.
(5) For purposes of calculating the ratio of earnings to cover fixed charges,
earnings (loss) consists of earnings (loss) before minority interest and
fixed charges. Fixed charges consists of interest, whether expensed or
capitalized, (including amortization of debt issuance costs). For the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996, the
years ended December 31, 1996 and 1997 and the six months ended June 30,
1997 and 1998, the Company's earnings were insufficient to cover its fixed
charges by $15.3 million, $30.2 million, $37.3 million, $57.8 million,
$118.9 million, $52.3 million and $65.4 million, respectively. On a pro
forma basis for the year ended December 31, 1997 and the six months ended
June 30, 1998, assuming the Private Placement had occurred at the beginning
of each of those periods, the Company's earnings would have been
insufficient to cover its fixed charges by $144.1 million and $79.0 million,
respectively.
(6) The Debt to Capital Ratio is calculated as the ratio of (i) the amount of
Indebtedness of the Company on a consolidated basis to (ii) the capital of
the Company on a consolidated basis as at such date. For purposes of this
calculation, "capital" shall mean stockholders' equity (deficit), except
that all Preferred Stock shall be included and retained earnings (deficit)
shall be excluded, each as determined in accordance with GAAP.
(7) As adjusted for the Private Placement, as if such transaction had occurred
on June 30, 1998.
(8) Network and Selected Statistical Data are derived from the Company's
records.
24
<PAGE> 29
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were issued by e.spire on July 24, 1998 (the "Closing Date")
to the Initial Purchasers, pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Old Notes to qualified institutional buyers in
reliance on Rule 144A and to non-U.S. persons pursuant to Regulation S,
respectively, under the Securities Act. As a condition to the Purchase
Agreement, e.spire and the Initial Purchasers entered into the Registration
Rights Agreement on July 24, 1998. Pursuant to the Registration Rights
Agreement, e.spire agreed to file with the SEC a registration statement under
the Securities Act with respect to the Exchange Offer following the Closing
Date, (ii) to use its reasonable best efforts to cause such registration
statement to become effective under the Securities Act at the earliest possible
time thereafter, but in no event later than 120 days after the Closing Date, and
(iii) upon effectiveness of the registration statement, to commence the Exchange
Offer. A copy of the Registration Rights Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The
Registration Statement is intended to satisfy e.spire's obligations under the
Registration Rights Agreement and the Purchaser Agreement.
As a result of the effectiveness of the Registration Statement of which
this Prospectus is a part, payment of certain liquidated damages provided for in
the Registration Rights Agreement will not occur. Following the consummation of
the Exchange Offer, holders of Old Notes will not have any further registration
rights and the Old Notes will continue to be subject to certain restrictions on
transfer. See "-- Consequences of Failure to Exchange." Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the applicable Letter of Transmittal, e.spire will accept any Old Notes
in principal amounts of $1,000 validly tendered and not withdrawn prior to the
Expiration Date. e.spire will issue (i) New Notes in principal amounts of $1,000
for each $1,000 principal amount outstanding of the Old Notes. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the New Notes will have been registered under the
Securities Act and hence will not bear legends restricting their transfer
pursuant to the Securities Act.
As of the date of this Prospectus, $225.0 million principal amount of Old
Notes were outstanding. Only a registered holder of the Old Notes (or such
holder's legal representative or attorney-in-fact) reflected on the records of
the transfer agent and registrar for the Notes may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders of
the Old Notes entitled to participate in the Exchange Offer.
Holders of the Old Notes do not have any appraisal or dissenters rights
under the General Corporation Law of Delaware in connection with the Exchange
Offer. e.spire intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
e.spire shall be deemed to have accepted validly tendered Old Notes when,
as and if e.spire has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of the Old
Notes for the purposes of receiving the New Notes from e.spire.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
25
<PAGE> 30
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
applicable Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. e.spire will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "-- Fees and Expenses."
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such New Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
November 18, 1998, unless e.spire, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. The Company will not extend the
Exchange Offer beyond December 10, 1998.
In order to extend the Exchange Offer, e.spire will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
e.spire reserves the right, (i) to delay accepting any Old Notes, (ii) to
extend the Exchange Offer, (iii) if any of the conditions set forth below under
"-- Conditions of the Exchange Offer" shall not have been satisfied, to
terminate the Exchange Offer, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or (iv) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a public
announcement thereof. If the Exchange Offer is amended in a manner determined by
e.spire to constitute a material change, e.spire will promptly disclose such
amendments by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes, and e.spire will extend the Exchange Offer
for a period of five to ten business days depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
Without limiting the manner in which e.spire may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, e.spire shall not have an obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company (also referred to
as a book-entry transfer facility) whose name appears on a security listing as
the owner of the Old Notes) of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer a holder must complete, sign and
date the applicable Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the applicable Letter of
Transmittal and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Old Notes and any other required documents, to the
Exchange Agent at the appropriate address set forth below under "Exchange Agent"
for receipt prior to the Expiration Date (or comply with the procedure for
book-entry transfer described below).
The tender by a holder will constitute an agreement between such holder and
e.spire in accordance with the terms and subject to the conditions set forth
herein and in the applicable Letter of Transmittal.
26
<PAGE> 31
THE METHOD OF DELIVERY OF THE OLD NOTES AND THE APPLICABLE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
E.SPIRE. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH
HOLDERS.
Any financial institution that is a participant in The Depository Trust
Company's book-entry transfer facility system may make book-entry delivery of
the Old Notes by causing The Depository Trust Company to transfer such Old Notes
into the Exchange Agent's account and to deliver an Agents Message on or prior
to the Expiration Date in accordance with The Depository Trust Company's
procedures for such transfer and delivery. If delivery of Old Notes is effected
through book-entry transfer into the Exchange Agent's account at The Depository
Trust Company and an Agent's Message is not delivered, the Letter of Transmittal
(or facsimile thereof), with any required signature guarantees and any other
required documents must be transmitted to and received or confirmed by the
Exchange Agent at its addresses set forth herein under "-- Exchange Agent" prior
to midnight, New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS
TO THE DEPOSITORY TRUST COMPANY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term "Agents Message" means a message, transmitted by The Depository
Trust Company to an received by the Exchange Agent and forming a part of a
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's Account at The Depository Trust Company, which states that The
Depository Trust Company has received an express acknowledgement from the
tendering participant, which acknowledgment states that such participant has
received and agrees to be bound by, and makes the representations and warranties
contained in, the Letter of Transmittal and that the Company may enforce the
Letter of Transmittal against such participant.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder from Beneficial Owner" included with the Letter of
Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Delivery Instructions" on
the appropriate Letter of Transmittal, or (ii) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc. a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(each an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed stock power, signed by such registered
holder as such registered holder's name appears on such Old Notes.
If a Letter of Transmittal or Old Notes are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative
27
<PAGE> 32
capacity, such persons should so indicate when signing, and evidence
satisfactory to e.spire of their authority to so act must be submitted with such
Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
e.spire in its sole discretion, which determination will be final and binding.
e.spire reserves the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes e.spire's acceptance of which would, in the opinion of
counsel for e.spire, be unlawful. e.spire also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
e.spire's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as e.spire
shall determine. Although e.spire intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither e.spire, the
Exchange Agent nor any other person shall incur why liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not validly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the applicable Letter of Transmittal, as soon as practicable
following the Expiration Date.
By tendering, each registered holder will represent to e.spire that, among
other things, (i) the New Notes to be acquired by the holder and any beneficial
owner(s) of the Old Notes ("Beneficial Owner(s)") in connection with the
Exchange Offer are being acquired by the holder and any Beneficial Owner(s) in
the ordinary course of business of the holder and any Beneficial Owner(s), (ii)
the holder and each Beneficial Owner are not participating, do not intend to
participate, and have no arrangement or understanding with any person to
participate, in the distribution of the New Notes, (iii) the holder and each
Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the New Notes, must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the New Notes acquired by such
person and cannot rely on the position of the Staff of the Commission set forth
in the no-action letters that are discussed herein under "-- Resales of the New
Notes", (iv) the holder and each Beneficial Owner understands that a secondary
resale transaction described in clause (iii) above should be covered by an
elective registration statement containing the selling securityholder
information required by Item 507 of Registration S-K of the Commission, and (v)
neither the holder nor any Beneficial Owner(s) is an "affiliate," as defined
under Rule 405 of the Securities Act, of e.spire except as otherwise disclosed
to e.spire in writing.
Each broker-dealer who holds Old Notes acquired for its own account as a
result of market-making activities or other trading activities and who receives
New Notes in the Exchange Offer may be a statutory underwriter and must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. By so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. e.spire will, for a period of 120 days
after the Expiration Date, make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the book-entry transfer facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the book-entry
28
<PAGE> 33
transfer facility's systems may make book-entry delivery of Old Notes by causing
the book-entry transfer facility to transfer such Old Notes into the Exchange
Agent's account at the book-entry transfer facility in accordance with such
book-entry transfer facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the book-
entry transfer facility, the Letter of Transmittal (or a facsimile thereof or an
Agent's Message in lieu thereof), with any required signature guarantees and any
other required documents, must, in any case, be transmitted to and received by
the Exchange Agent at one of the addresses set forth below, under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date or complete the procedure for book-entry transfer on a timely
basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate number(s) of such Old Notes and
the principal amount of Old Notes being tendered, stating that the tender is
being made thereby and guaranteeing that, within three business days after the
Expiration Date, the applicable Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a confirmation
of book-entry transfer of such Old Notes into the Exchange Agent's account at
the book-entry transfer facility) and any other documents required by such
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by such
Letter of Transmittal are received by the Exchange Agent within three business
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of the Old Notes may be
withdrawn at any time prior to the Expiration Date or, if tendered notes or
shares have not yet been accepted for exchange, after the expiration of forty
business days from the commencement of the Exchange Offer.
To withdraw a tender of Old Notes in the Exchange Offer, a written of
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the certificate number or numbers and principal amount
of Notes), and (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees). If Old Notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn Old Notes or otherwise comply with the
book-entry facility procedure. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
e.spire in its sole discretion, which determination shall be final and binding
on all parties. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no New Notes will be
issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Properly withdrawn Old Notes may be retendered by following one
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<PAGE> 34
of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
exchange due to rejection of tender or termination of the Exchange Offer, or
which have been validly withdrawn, will be returned as soon as practicable to
the holder thereof without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any change in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer, and the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the Securities Act and the Exchange Act and without
material restrictions under the "blue sky" or securities laws of substantially
all of the states.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
QUESTIONS AND REQUESTS RELATING TO THE EXCHANGE OFFER:
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmissions: By Hand:
The Chase Manhattan Bank (212) 638-7380 The Chase Manhattan Bank
450 West 33rd Street (212) 638-7381 Corporate Trust -- Services
15th Floor Confirm by Telephone: Window
New York, New York 10001-2697 Sharon Lewis: (212) 638-0454 55 Water Street -- Room 234
Carlos Esteves: (212) 638-0828 North Building
New York, New York 10041
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by e.spire. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telecopy, telephone or in person by officers and regular employees of e.spire
and its affiliates.
e.spire has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the Exchange Offer. e.spire, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by e.spire and are estimated in the aggregate to be approximately
$300,000. Such expenses include fees and expenses of the Exchange Agent and
transfer agent and registrar, accounting and legal fees and printing costs,
among others.
e.spire will pay all transfer taxes, if any, applicable to the exchange of
the Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxpayers or exemption
therefrom is not submitted with
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<PAGE> 35
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Old Notes may be resold only (i) to
e.spire, its subsidiaries or the Initial Purchasers, (ii) inside the United
States to a qualified institutional buyer in compliance with Rule 144A under the
Securities Act, (iii) inside the United States to an institutional accredited
investor that, prior to such transfer, furnishes to e.spire a signed letter
containing certain representations and agreements relating to the restrictions
on transfer of this security (the form of which letter can be obtained from
e.spire) and if such transfer is in respect of an aggregate liquidation
preference of securities at the time of transfer of less than $100,000 an
opinion of counsel acceptable to e.spire that such transfer is in compliance
with the Securities Act, (iv) outside the United States in an offshore
transaction in compliance with Rule 904 of Regulation S under the Securities
Act, (v) pursuant to the exemption from registration provided by Rule 144 under
the Securities Act (if available), or (vi) pursuant to an effective registration
statement under the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States and subject to
certain requirements of the transfer agent and registrar being met. The
liquidity of the Old Notes could be adversely affected by the Exchange Offer.
Following the consummation of the Exchange Offer, holders of the Old Notes will
have no further registration rights under the Registration Rights Agreement.
ACCOUNTING TREATMENT
The carrying value of the Old Notes is not expected to be materially
different from the fair value of the New Notes at the time of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer associated with the New Notes will be reported as
a non-current asset and amortized over the term of the New Notes.
RESALES OF THE NEW NOTES
With respect to resales of the New Notes, based on interpretations by the
staff of the SEC set forth in no-action letters issued to third parties, e.spire
believes that a holder (other than a person that is an "affiliate" of e.spire
within the meaning of Rule 405 under the Securities Act) who exchanges Old Notes
for New Notes in the ordinary course of business and who is not participating,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes, will be allowed to
resell the New Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the New Notes a
prospectus that satisfies the requirements of Section 10 thereof. However, if
any holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such holder
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
e.spire in the applicable Letter of Transmittal that (i) the holder is not an
"affiliate" of e.spire within the meaning of Rule 405 of the Securities Act,
(ii) the New Notes are to be acquired by the holder in the ordinary course of
business, (iii) the holder is not engaging and does not intend to engage, in the
distribution of the New Notes and (iv) the holder acknowledges that if such
holder participates in such Exchange Offer for the purpose of distributing the
New Notes such holder must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale of the
New Notes; however, holders of the New Notes will have no registration rights
under the Registration Rights Agreement.
31
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Holders of Old Notes are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, Holders of Old Notes should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such forward-
looking statements. The following discussion should be read in conjunction with
the consolidated financial statements and the related notes thereto included
elsewhere or incorporated by reference in this Prospectus.
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based ICP to businesses primarily in major markets in the southern
half of the United States. By the end of 1997, the Company had become one of the
first CLECs to combine the provision of dedicated, local and long distance voice
services with frame relay, ATM and Internet services. Having established this
suite of telecommunications services which emphasizes data capabilities in
addition to traditional CLEC offerings, the Company has evolved into an ICP. The
Company seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of June 30, 1998, was comprised of 1,433 route miles of fiber in
its 32 local networks in 19 states, 44 Newbridge ATM switches, 17 Lucent 5ESS
switches and approximately 22,000 backbone longhaul miles in its coast-to-coast
broadband data network.
With the passage of the FTA, the Company has enhanced the scope of its
product offerings from dedicated services to a full range of switched voice,
data and Internet services in order to meet the needs of business end-users, and
is expanding its sales, marketing, customer care and OSS capabilities. The
Company introduced local switched voice services, including local exchange
services in late 1996 and long distance services in late 1997. By June 30, 1998,
e.spire had sold 96,405 customer access lines, of which 85,633 were installed,
representing a significant increase over the 9,177 access lines sold as of June
30, 1997.
The development of the Company's business and the construction, acquisition
and expansion of its networks require significant capital expenditures, a
substantial portion of which are incurred before realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the Company's customer base grows, the Company expects that incremental revenues
can be generated with decreasing incremental operating expenses, which may
provide positive contributions to cash flow. The Company has made specific
strategic decisions to build high capacity networks with broad market coverage,
which initially increases its level of capital expenditures and operating
losses. However, the Company believes that over the long term this strategy will
enhance the Company's financial performance by increasing the traffic flow over
its network. The Company also has entered into leased dark fiber and fiber
capacity arrangements, which allow the Company, by installing one or more
switches and related electronics, to enter a market prior to completion of its
own fiber optic network.
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<PAGE> 37
The following table presents key operating statistics for the Company for
the reporting periods.
<TABLE>
<CAPTION>
ACCESS
OPERATIONAL ROUTE FIBER LINES VOICE
AS OF DATE EMPLOYEES NETWORKS MILES MILES BLDGS VGES SOLD SWITCHES
---------- --------- ----------- ----- ----- ----- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1998............. 979 32 1,433 123,982 2,393 1,233,988 96,405 17
March 31, 1998............ 834 32 1,314 112,086 1,912 1,059,601 71,581 17
December 31, 1997......... 803 32 1,061 92,528 1,604 1,052,698 43,581 16
September 30, 1997........ 699 32 977 85,976 1,239 989,285 28,394 9
June 30, 1997............. 559 31 957 82,693 1,083 886,375 9,177 8
March 31, 1997............ 502 28 908 75,867 858 554,883 360 5
December 31, 1996......... 322 21 697 48,792 595 384,134 0 1
September 30, 1996........ 272 19 543 32,774 532 267,894 0 0
June 30, 1996............. 199 15 386 28,476 216 137,431 0 0
March 31, 1996............ 142 10 200 9,466 133 125,208 0 0
December 31, 1995......... 111 9 136 5,957 100 82,055 0 0
September 30, 1995........ 100 5 92 4,373 79 50,303 0 0
June 30, 1995............. 74 5 43 1,754 36 31,920 0 0
</TABLE>
VGE represents voice grade equivalent circuits, a measure of service
equivalent to one telephone line actually billed to a customer. Access lines
represent business lines providing switched voice services.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
The Company reported an increase in revenues of $43.4 million, or 219%, to
$63.2 million for the six months ended June 30, 1998 compared with the revenues
of $19.8 million for the same period of 1997. The increase in revenues was
primarily attributable to the Company's greater presence and expansion in its 32
local fiber optic networks which is up from 31 markets at June 30, 1997. The
increase is also attributable to the increase in route miles, buildings
connected and voice and data switches deployed as well as revenues from ACSI
Network Technologies as described below. As of June 30, 1998, the Company had
installed 17 Lucent 5ESS switches, up from 8 Lucent 5ESS switches as of June 30,
1997. In addition, the Company has deployed 44 Newbridge ATM switches over its
coast-to-coast data network as of June 30, 1998. Also, access lines sold have
increased to 96,405 at June 30, 1998 from 9,177 at June 30, 1997.
For the six months ended June 30, 1998 and 1997, approximately 39% and 47%
respectively of the Company's revenues were derived from network services,
approximately 32% and 44%, respectively, were derived from data and Internet
services and approximately 30% and 9%, respectively, from switched local and
other services. The increase in switched revenue reflects the Company's
expansion of its facilities-based infrastructure and the Company's continued
sales and marketing efforts. Included in the network services category of
revenues are high capacity dedicated and special access services, and revenues
from ACSI Network Technologies for construction contracts and long term leases
of high capacity systems. For the six month period ended June 30, 1998,
approximately $8.1 million is included from these contracts, of which $4.6
million was derived from a contract with a single interexchange carrier.
OPERATING EXPENSES
Network Development and Operations
Network development and operating expenses for the six months ended June
30, 1998 increased $24.0 million, or 123%, to $43.6 million from $19.6 million
for the same period of 1997. Included in network development and operations
expenses are costs of telecommunications
33
<PAGE> 38
services paid to IXCs, ILECs and others for leased telecommunications
facilities, access charges and services. For the six months ended June 30, 1998,
these costs increased to approximately $38.0 million from $14.0 million for the
same period of 1997. Also, included in network, development and operations
expenses are network related personnel costs such as employee salaries and
benefits. For the six months ended June 30, 1998 and 1997, such costs were
approximately $5.6 million.
The increase in network development and operations costs was primarily due
to the Company's expansion of its facilities-based infrastructure which includes
the rapid deployment of operational networks and Lucent 5ESS switches as well as
the increase in access lines. Also, the increase was due to costs associated
with the Company's construction line of business which were approximately $1.8
million for the six months ended June 30, 1998.
Selling, General and Administrative
For the six months ended June 30, 1998, selling, general and administrative
expenses increased $13.2 million, or 47%, to $41.4 million from $28.2 million
for the same period of 1997. Included in selling, general and administrative
expenses are personnel costs such as employee salaries, benefits and
commissions. For the six months ended June 30, 1998 and 1997, these costs
increased to $15.0 million and $10.5 million, respectively. Also, included in
selling, general and administrative expenses are operating costs such as rent,
advertising and general administrative and office expenses. For the six months
ended June 30, 1998 and 1997, these costs increased to $26.4 million from $17.7
million.
The increase in selling, general and administrative expense is a result of
the Company's efforts to significantly expand its network sales, support,
marketing and administrative staff and facilities. A significant portion of this
increase is due to an increase in the sales and marketing costs which have
increased due to an expanded field sales force aimed at supporting the Company's
strategy of building market share through focused customer sales and support.
Non-Cash Compensation
Non-cash stock compensation expense increased $2.6 million, or 316%, to
$3.4 million from $0.8 million for the same period of 1997. Included in non-cash
compensation for 1998 are accruals for the issuance of common stock in
connection with 1998 performance bonuses. In addition, the stock option costs
associated with the settlement of a lawsuit with a former executive is included.
Depreciation and Amortization
Depreciation and amortization expenses for the six months ended June 30,
1998, increased by $7.9 million, or 84%, to $17.4 million from $9.5 million for
the same period of 1997. This increase was due to an increase in capital assets
to $397.5 million at June 30, 1998 compared with capital assets of $219.9 at
June 30, 1997 as well as an increased amount of network assets placed in
service.
INTEREST AND OTHER INCOME
Interest and other income for the six months ended June 30, 1998 increased
$8.9 million, or 827%, to $10.0 million from $1.1 million for the same period of
1997. The increase in interest and other income reflects the increase in
earnings from the proceeds received from the issuance of the 2007 Notes, the
14 3/4% Preferred Stock, the 12 3/4% Preferred Stock and the 1998 Common Stock
Offering which have been invested.
INTEREST AND OTHER EXPENSE
For the six months ended June 30, 1998, interest and other expense
increased $19.5 million, or 157%, to $31.9 million from $12.4 million for the
same period of 1997. The increase reflected the
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<PAGE> 39
accrual of interest related to the 2005 Notes, the 2006 Notes and the 2007 Notes
and the Company's increased borrowings under the credit facility with AT&T
Capital Corporation.
EBITDA
EBITDA increased $6.2 million, or 22%, to ($21.8) million, for the six
months ended June 30, 1998 from ($28.1) million for the same period of 1997. The
increase was due to the changes in revenues, network development and operations
and selling, general and administrative expense discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss for the six months ended June 30, 1998 increased $14.9 million, or 30%, to
$64.5 million from $49.7 million for the six months ended June 30, 1997.
Further, for the six months ended June 30, 1998, net loss to common stockholders
increased $32.4 million, or 64% to $83.2 million from $50.8 million for the same
period of 1997. This increase is primarily attributable to the issuance of
14 1/4% Preferred Stock and the 12 1/4% Preferred Stock.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
REVENUES
Revenues for the year ended December 31, 1997, increased $49.6 million, or
527%, to $59.0 million from $9.4 million for the year ended December 31, 1996.
This increase was primarily attributable to the Company's rapid expansion of its
local fiber optic networks in 32 markets by the end of 1997 (up from 21 at the
end of 1996) and the increase in route miles, buildings connected and voice and
data switches deployed. In late 1996, the Company introduced its coast-to-coast
data network, deploying 39 Newbridge ATM switches by mid-1997. In addition, the
Company introduced local switched service on a resale basis in its markets, and
also provided facilities-based services in 16 of those markets by installing
Lucent 5ESS switches. Revenues also increased as a result of the Cybergate
Acquisition. For the year ended December 31, 1997, approximately 42% of the
Company's 1997 revenues were derived from special access and dedicated services,
approximately 38% from data and Internet services and approximately 20% from
switched local and other services. By contrast, 1996 revenues were derived
primarily from dedicated and special access services.
OPERATING EXPENSES
Network Development and Operations
Network development and operations expenses for the year ended December 31,
1997, increased $41.9 million, or 379%, to $52.9 million from $11.0 million for
the year ended December 31, 1996. Of these amounts, approximately $44.4 million
and $4.1 million, respectively, represented the cost of providing
telecommunications services paid to IXCs, ILECs and others for leased
telecommunications facilities and services. In addition, approximately $8.5
million and $6.9 million, respectively, represented network-related personnel
costs. The increase in costs was due primarily to the Company's rapid deployment
of operational networks, Lucent 5ESS switches and access lines.
Selling, General and Administrative
For the year ended December 31, 1997, selling, general and administrative
expenses increased $29.2 million, or 95%, to $59.9 million from $30.7 million
for the year ended December 31, 1996. Related personnel costs increased to $16.5
million for the year ended December 31, 1997 from $8.3
35
<PAGE> 40
million for the year ended December 31, 1996. Other sales and administrative
costs increased to $43.4 million for the year ended December 31, 1997 from $22.4
million for the year ended December 31, 1996. This increase reflected costs
associated with the Company's efforts to significantly expand its network
support, sales, marketing and administrative staff and facilities.
Non-Cash Compensation
Non-cash stock compensation expense increased $2.2 million, or 105%, to
$4.3 million for the year ended December 31, 1997 from $2.1 million for the year
ended December 31, 1996. Included in non-cash compensation for 1997 was
approximately $2.9 million accrued for the issuance of Common Stock to be issued
in connection with 1997 performance bonuses.
Depreciation and Amortization
Depreciation and amortization expenses increased $16.9 million, or 234%, to
$24.1 million for the year ended December 31, 1997 from $7.2 million for the
year ended December 31, 1996. This increase was due to an increase in capital
assets to $282.2 million at December 31, 1997 from $144.4 million at December
31, 1996.
INTEREST AND OTHER INCOME
Interest and other income increased $2.3 million, or 36%, to $8.7 million
for the year ended December 31, 1997 from $6.4 million for the year ended
December 31, 1996. The increase in interest and other income reflects the
increase in earnings from the proceeds received from the 2007 Notes, the 14 3/4%
Preferred Stock and the 12 3/4% Preferred Stock which have been invested.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $23.6 million, or 131%, to $41.6
million for the year ended December 31, 1997 from $18.0 million for the year
ended December 31, 1996. The increase reflected the accrual of interest related
to the 2006 Notes and 2007 Notes and the Company's increased borrowings under
the Old AT&T Credit Facility.
EBITDA
EBITDA decreased $21.8 million, or 69%, to ($53.7) million for the year
ended December 31, 1997 from ($31.9) million for the year ended December 31,
1996. This decrease was due to the changes in revenues, network development and
operations and selling, general and administrative expenses discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $62.2 million, or 118%, to $115.0 million for the year ended
December 31, 1997, from $52.8 million for the year ended December 31, 1996.
Further, net loss to common stockholders increased to $126.6 million from $56.8
million for the same periods, due to the increase in preferred stock dividends
and accretion during 1997. This increase is primarily attributable to the
issuance of 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995 (UNAUDITED)
REVENUES
During the six months ended December 31, 1996, the Company's revenues
increased $6.0 million, or 600%, to $7.0 million from $1.0 million during the
six months ended December 31, 1995. Four
36
<PAGE> 41
of the largest IXCs accounted for approximately $2.8 million, or 40%, of
revenues for the six months ended December 31, 1996.
OPERATING EXPENSES
Network Development and Operations
Network development and operating expenses for the six months ended
December 31, 1996 increased $5.8 million, or 200%, to $8.7 million from $2.9
million for the six months ended December 31, 1995, reflecting significant
increases in personnel, network development and non-payroll operating expenses.
Related personnel costs increased to $3.9 million in the fiscal period ended
December 31, 1996, from approximately $1.5 million in the six months ended
December 31, 1995. Other operating expenses related to the development of
prospective new markets, which include expenses such as contract labor and legal
expenses and certain franchise fees, travel expenses, rent, utilities, charges
and taxes increased to $4.8 million in the six months ended December 31, 1996
from approximately $1.4 million in the six months ended December 31, 1995.
Selling, General and Administrative
In the six months ended December 31, 1996, selling, general and
administrative expenses increased $17.2 million, or 555%, to $20.3 million from
$3.1 million in the six months ended December 31, 1995. Related personnel costs
increased to $6.6 million in the six months ended December 31, 1996 from $1.5
million in the six months ended December 31, 1995, and corresponding operating
costs increased to $13.7 million in the six months ended December 31, 1996 from
$1.6 million in the six months ended December 31, 1995. This increase reflected
costs associated with the Company's efforts in the rapid expansion of its
services offered, network deployment and geographic coverage as well as
significantly increasing its national and local city sales, marketing and
administrative staffs and increased legal and other consulting expenses
associated with its programs for obtaining regulatory approvals and
certifications and providing quality network services.
Non-Cash Stock Compensation
Non-cash stock compensation expense decreased $0.7 million, or 58%, to $0.5
million for the six months ended December 31, 1996 from $1.2 million for the six
months ended December 31, 1995. This expense reflects the Company's accrual of
non-cash costs for options granted to key executives, employees and others
arising from the difference between the exercise price and the valuation prices
used by the Company to record such costs and from the vesting of those options.
Certain of these options had put rights and other factors that required variable
plan accounting in both 1996 and 1995 but, on or about June 30, 1995, the
Company renegotiated contracts with certain of its officers, establishing a
limit of $2.5 million on the Company's "put right" obligations with respect to
those contracts. Between July 1, 1995 and June 30, 1996, the limit was further
reduced to $2.0 million.
Depreciation and Amortization
Depreciation and amortization expenses increased $4.1 million, or 513%, to
$4.9 million in the six months ended December 31, 1996 from $0.8 million in the
six months ended December 31, 1995. The Company's capital assets increased to
$144.4 million as of December 31, 1996, from $32.6 million in capital assets as
of December 31, 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $2.0 million, or 250%, to $2.8 million
for the six months ended December 31, 1996 from $0.8 million in the six months
ended December 31, 1995. The increase in interest and other income reflects the
significant increase in available funds from the Company's sale of its 9% Series
B Preferred Stock in June and November 1995, the 2005 Notes in November 1995 and
the 2006 Notes in March 1996.
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<PAGE> 42
INTEREST AND OTHER EXPENSES
Interest and other expense increased $7.6 million, or 271%, to $10.4
million in the six months ended December 31, 1996 from $2.8 million in the six
months ended December 31, 1995. The increase reflected the accrual of interest
related to the 2005 Notes and 2006 Notes and the Company's increased borrowings
under the Old AT&T Credit Facility.
MINORITY INTEREST
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries reduced operating losses by approximately $0.2 million
for each of the six months ended December 31, 1996, and 1995.
EBITDA
EBITDA decreased $16.9 million, or 345%, to ($21.8) million for the six
months ended December 31, 1996 from ($4.9) million for the six months ended
December 31, 1995. This decrease was due to the changes in revenues, network
development, operations and selling, general and administrative expenses
discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $26.0 million, or 292%, to $34.9 million for the fiscal period
ended December 31, 1996, from $8.9 million for the six months ended December 31,
1995. Further, net loss to common stockholders increased to $36.9 million from
$10.7 million for the same periods, due primarily to the increase in net loss,
accompanied by a slight increase in preferred stock dividends between periods.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
REVENUES
During the fiscal year ended June 30, 1996 ("fiscal 1996"), the revenues
increased $3.0 million, or 750%, to $3.4 million from $0.4 million during the
fiscal year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs
accounted for approximately $2.1 million, or 60%, of revenues for fiscal 1996 as
compared to fiscal 1995, when three of the largest IXCs accounted for
approximately $0.3 million, or 85% of revenues for fiscal 1995, reflecting the
Company's increased sales to end-users during fiscal 1996.
OPERATING EXPENSES
Network Development and Operations
Network development and operations expenses for fiscal 1996 increased $2.0
million to $5.3 million from $3.3 million in fiscal 1995, reflecting significant
increases in personnel, network development and non-payroll operating expenses.
These increased costs were associated with developing and establishing
centralized engineering, circuit provisioning and network management functions,
constructing and initially operating the Company's competitive access networks
and performing market feasibility, engineering, rights-of-way and regulatory
evaluations in additional target cities. Related personnel costs increased to
$4.5 million in fiscal 1996 from approximately $1.3 million in fiscal 1995.
Other operating expenses related to the development of prospective new markets,
which include expenses such as contract labor and legal expenses and certain
franchise fees, travel expenses, rent, utilities, charges and taxes, decreased
to $0.8 million in fiscal 1996 from approximately $1.9 million in fiscal 1995.
Selling, General and Administrative
In fiscal 1996, selling, general and administrative expenses increased $8.9
million to $13.5 million from $4.6 million in fiscal 1995. Related personnel
costs increased to $3.2 million in fiscal 1996 from $2.0 million in fiscal 1995,
and corresponding operating costs increased to $10.2 million in
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fiscal 1996 from $2.2 million in fiscal 1995. This increase reflected costs
associated with the Company's efforts in expanding its national and local city
sales, marketing and administrative staffs, as well as increased legal and other
consulting expenses associated with its aggressive programs for obtaining
regulatory approvals and certifications and providing quality network services.
Non-Cash Compensation
Non-cash stock compensation expense decreased $3.7 million to $2.7 million
for fiscal 1996 from $6.4 million for fiscal 1995. This expense reflects the
Company's accrual of non-cash costs for options and warrants granted to key
executives, employees and others arising from the difference between the
exercise price and the valuation prices used by the Company to record such costs
and from the vesting of those options and warrants. Certain of these options had
put rights and other factors that required variable plan accounting in fiscal
1994 and fiscal 1995 but, at the end of fiscal 1995, the Company renegotiated
contracts with certain of its officers, establishing a limit of $2.5 million on
the Company's put right obligations with respect to those contracts. During
fiscal 1996, the limit was further reduced to $2.0 million.
Depreciation and Amortization
Depreciation and amortization expenses increased $2.6 million to $3.1
million in fiscal 1996 from $0.5 million in fiscal 1995. During fiscal 1996 the
Company increased its capital assets to approximately $80.2 million,
representing an increase from $15.9 million at the end of fiscal 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $4.2 million to $4.4 million for fiscal
1996 from $0.2 million in fiscal 1995. The increase reflected the significant
increase in available funds from the Company's sale of its 9% Series B Preferred
Stock in June and November 1995 and the 2005 Notes in November 1995.
INTEREST AND OTHER EXPENSES
Interest and other expenses increased $10.3 million to $10.5 million in
fiscal 1996 from $0.2 million in fiscal 1995. The increase reflected the accrual
of interest related to the 2005 Notes and the Company's increased borrowings
under the Old AT&T Credit Facility.
DEBT CONVERSION EXPENSE AND MINORITY INTEREST
Debt conversion expense in fiscal 1995 totaled $0.4 million, reflecting
expenses incurred in connection with the conversion of certain of the Company's
debt to equity in September 1994. AT&T Credit Corporation's minority interest in
the Company's operating subsidiaries for which it provided funding reduced
operating losses by approximately $0.4 million for fiscal 1996, and by $48,055
for fiscal 1995.
EBITDA
EBITDA decreased $7.5 million to ($14.9) million at June 30, 1996 from
($7.4) million at June 30, 1995. This change was due to the changes in revenues,
network development, operations and selling, general and administrative expenses
discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $12.1 million to $26.8 million for the fiscal year ended June 30,
1996, from $14.7 million for the fiscal year ended June 30, 1995. Further, net
loss to common stockholders increased to $30.7 million from ($15.7) million for
the same periods, due primarily to the increase in net loss, accompanied by a
slight increase in preferred stock dividends between periods.
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CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of June 30, 1998, the Company was operating 32 digital fiber optic
networks. The costs associated with the initial construction and operation of a
network may vary, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies which
can be used to deploy the network. In addition, the Company has implemented
aggressive network expansion and optimization programs. This is evidenced by an
increase in fiber optic cable miles to 92,528 fiber miles at December 31, 1997
and 123,982 fiber miles at June 30, 1998, from 48,792 fiber miles at December
31, 1996 and 82,693 fiber miles at June 30, 1997. The Company also significantly
increased the number of buildings connected to its network to 1,604 at December
31, 1997 and 2,393 at June 30, 1998, from 595 at December 31, 1996 and 1,083 at
June 30, 1997.
As the Company develops, introduces and expands its high-speed data,
enhanced voice messaging and local switched services in each of its markets,
additional capital expenditures and net operating costs will be incurred. The
amount of these costs will vary, based on the number of customers served and the
actual services provided to the customers.
Although as of June 30, 1998, the Company was generating revenues from all
of its fiber optic networks, on a consolidated basis, it is still incurring
negative cash flows due, in part, to the funding requirements for continuing
network construction or development and to the roll-out of new data and switched
voice services. The Company expects it will continue to incur negative cash flow
for at least two more years. There can be no assurance that the Company's
networks or any of its other services will ever provide a revenue base adequate
to sustain profitability or generate positive cash flow. The Company estimates
that in 1998, capital required for implementation of its integrated networks and
its other services and to fund negative cash flow will be approximately $200
million. The Company anticipates that current cash resources are sufficient to
fund its continuing negative cash flow and required capital expenditures in the
near future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's further development and enhancement of new services as well
as the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. Prior to
July 1, 2003, the Company's interest expense on the Notes will be comprised
solely of the accretion of original issue discount. Thereafter, the Notes will
require annual cash interest payments of $39.8 million. The funding of these
expenditures is dependent upon the Company's ability to raise substantial
financing. As of June 30, 1998, the Company had raised approximately $759
million from debt and equity financings (approximately $977 million after giving
pro forma effect to the issuance of the Notes). The Company estimates that for
1998, capital required for expansion of its infrastructure and services and to
fund negative cash flow will be approximately $200 million. At June 30, 1998,
the Company had approximately $323.8 million of cash and cash equivalents
available for such purposes ($542.1 million after giving pro forma effect to the
Private Placement. The Company continues to consider potential acquisitions or
other arrangements that may fit the Company's strategic plan. Any such
acquisitions or arrangements that the Company might consider are likely to
require additional equity or debt financing, which the Company will seek to
obtain as required and may also require that the Company obtain the consent of
its debt holders.
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures in the near future. To meet its additional remaining
capital requirements and to successfully implement its strategy, the Company
will be required to sell additional equity securities, increase its existing
credit facility, acquire additional credit facilities or sell additional debt
securities, certain of which would require the consent of the Company's debt
holders. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
implement its strategy successfully, in which event the Company will be unable
to fund its ongoing
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operations, which would have a material adverse effect on its business, results
of operations and financial condition.
On November 14, 1995, the Company completed a private offering of the 2005
Notes and warrants from which the Company received approximately $96.1 million
in net proceeds. The 2005 Notes will accrue to an aggregate principal amount of
$190.0 million by November 1, 2000, after which cash interest will accrue and be
payable on a semi-annual basis.
The Company also received net proceeds of approximately $4.7 million from
the private sale of an additional 50,000 shares of its preferred stock to a
principal stockholder and the exercise by that stockholder of warrants to
purchase 214,286 shares of Common Stock acquired in the Company's June 1995
preferred stock private placement.
On March 21, 1996, the Company completed a private offering of the 2006
Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis.
On April 15, 1997, the Company completed the offering of 8,000,000 shares
of Common Stock. In connection therewith, the Company completed the sale of an
additional 660,000 shares on May 14, 1997 upon exercise of the underwriters'
over-allotment option and received aggregate net proceeds of approximately $40.0
million from the sale of these 8,660,000 shares.
On July 10, 1997, the Company completed the Unit Offering from which the
Company received net proceeds of approximately $70 million. Dividends on the
14 3/4% Preferred Stock accrue from the date of issuance, are cumulative and are
payable quarterly in arrears, at a rate per annum of 14 3/4% of the liquidation
preference per share. Dividends on the 14 3/4% Preferred Stock will be paid, at
the Company's option, either in cash or by the issuance of additional shares of
14 3/4% Preferred Stock; provided, however, that after June 30, 2002, to the
extent and for so long as the Company is not precluded from paying cash
dividends on the 14 3/4% Preferred Stock by the terms of any then outstanding
indebtedness or any other agreement or instrument to which the Company is then
subject, the Company shall pay dividends on the 14 3/4% Preferred Stock in cash.
On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first five interest payments on the
2007 Notes into an escrow account for the benefit of the holders thereof.
Payments of interest on the 2007 Notes are payable semi-annually, and began in
January 1998.
In October 1997, the Company issued the 12 3/4% Preferred Stock from which
the Company received net proceeds of approximately $146.0 million. Dividends on
the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, at a rate per annum of 12 3/4% of the
liquidation preference per share. Dividends on the 12 3/4% Preferred Stock will
be paid, at the Company's option, either in cash or by the issuance of
additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.
The Company intends to use the remaining proceeds from the sale of the
Existing Notes, the 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock
towards expansion and construction of local fiber optic networks, the further
expansion and introduction of services and to fund negative operating cash flow.
On December 30, 1997, the Company entered into the New AT&T Credit Facility
for the development and construction of fiber optic local networks. The Company
has financing commitments for $35.0 million under the New AT&T Credit Facility,
of which $35.0 million had been borrowed as of December 31, 1997. Payments of
interest on borrowings under the New AT&T Credit Facility are payable quarterly,
commencing in December 1998. It is expected that borrowings under
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the New AT&T Credit Facility will be repaid in connection with the closing of
the GSCP Credit Facilities. See "Description of Certain Indebtedness".
On February 26, 1998, the Company paid approximately $10.3 million to
effect the Amendments to the Existing Indentures in order to improve the ability
of the Company and its subsidiaries to incur additional indebtedness or make
certain investments or acquisitions. See "Description of Certain Indebtedness".
On March 23, 1998, the Company restructured certain leases resulting in a
change from operating to capital lease treatment. This transaction resulted in
capitalizing leases totaling $27.6 million.
On April 3, 1998, the Company completed the offering of 8,100,000 shares of
Common Stock at a price of $18.50 per share (the "1998 Common Stock Offering").
7,502,418 of such shares were issued and sold by the Company and 597,582 of such
shares were sold by certain stockholders of the Company. Total net proceeds to
the Company from the 1998 Common Stock Offering and the exercise of certain
options and warrants in connection therewith were approximately $134.2 million.
On July 8, 1998, the Company and GSCP signed a commitment letter in respect
of the GSCP Credit Facilities. It is expected that the GSCP Credit Facilities
will provide for up to $300.0 million in term loan and revolving credit
borrowings. See "Description of Certain Indebtedness -- GSCP Credit Facilities".
EFFECTS OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income." FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
adopted the provisions of this Statement in the quarter ended March 31, 1998.
The adoption of this statement had no impact in the manner of the presentation
of the Company's financial statements as currently or previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information." FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
capitalizing certain costs related to computer software developed or obtained
for internal use. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has not completed its analysis of
the impact on the financial statements that will be caused by the adoption of
this statement.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). This statement requires that the costs of start-up
activities, including organization costs, be expensed as incurred and is
effective for fiscal years beginning after December 31, 1998. The Company has
not completed its analysis of the impact on the financial statements that will
be caused by the adoption of this statement.
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SUBSEQUENT EVENT
On July 7, 1998, the Company signed a commitment letter with GSCP in
respect of the GSCP Credit Facilities. See "Description of Certain
Indebtedness -- GSCP Credit Facilities".
YEAR 2000 PROGRAM
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based upon a comprehensive systems assessment of its Year 2000 readiness,
which included hardware and software for the Company's telecommunications
network and information systems, the Company has determined that 71% of its
hardware and software is Year 2000 compliant. Accordingly, the Company believes
that it will not be required to modify or replace significant portions of its
software and hardware so that its computer systems will function properly with
respect to dates in the Year 2000 and thereafter. Additionally, because the
majority of the hardware and software in use by the Company is of the commercial
off-the-shelf variety and requires minimal customization, the Company expects
its efforts to bring 100% of the software and hardware into compliance to be
minimal. The Company has completed its overall planning phase, and currently is
beginning the execution phase, which includes verification and updating of its
initial assessment, and the development and execution of specific initiatives to
upgrade the remaining non-compliant hardware and software to Year 2000
compliance not later than October 31, 1999.
The Company is upgrading hardware and software in the normal course of
maintenance to make the installed base include only Year 2000 compliant
products. In addition to the Year 2000 effort, there is a major strategic
initiative underway which will replace much of the information technology of the
Company with new products that will be compliant upon implementation. The
Company has engaged an Information Technology Association of America Year 2000
certified consulting firm to help execute its Year 2000 readiness program in
conjunction with e.spire staff. The Company also has engaged a second
independent consulting firm to perform comprehensive testing of its systems.
Based upon the results of the comprehensive system assessment, the Company
believes that its risks of Year 2000 non-compliance (i.e., its "most reasonably
likely worst case scenario") are minimal and limited to replacement of a single
software product used to provision new customers, the remediation of the general
ledger of its subsidiary CyberGate, and the replacement of a small number of
personal computers. If the replacement software is not in place before the year
2000, the most likely worst case scenario is that e.spire would not be able to
add new customers to its network using an automated system, although it would be
able to add new customers manually for a limited time. If the remediation of
Cybergate's general ledger is not completed, it may have to resort to manual
reporting processes for that subsidiary.
The Company has initiated formal communications with all of its significant
hardware and software suppliers and plans to communicate with large customers
and suppliers to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of third party
Year 2000 issues based on presently available information. However there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems. The Company is working with its vendors to remove any
non-compliant installed hardware and software by October 31, 1999. If third
party vendors do not remediate prior to the Year 2000, the most reasonably
likely worst case
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scenario is that there may be problems associated with operating systems,
billing information, trouble reports and service orders. Contingency plans will
be developed as necessary if a vendor cannot provide the necessary Year 2000
compliant product on a timely basis for the Company to meet that date.
The Company anticipates completing the Year 2000 project not later than
October 31, 1999, which is prior to any anticipated impact on its operating
systems. Historical costs include $200,000 for the initial Year 2000 Assessment
Report and inventory database. The total cost of the Year 2000 project is
estimated to be $5-6 million and will be expensed as incurred and funded with
existing cash resources. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous assumptions of
future events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
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BUSINESS
THE COMPANY
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based ICP to businesses in markets primarily in the southern half of
the United States. By the end of 1997, the Company had become one of the first
CLECs to combine the provision of dedicated, local and long distance voice
services with frame relay, ATM and Internet services. Having established this
suite of telecommunications services which emphasizes data capabilities in
addition to traditional CLEC offerings, the Company has evolved into an ICP.
e.spire seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of June 30, 1998, was comprised of 1,433 route miles of fiber in
its 32 local networks in 19 states, 44 Newbridge ATM switches, 17 Lucent 5ESS
switches and approximately 22,000 backbone longhaul miles in its leased
coast-to-coast broadband data network.
With the passage of the FTA, the Company has enhanced the scope of its
product offerings from dedicated services to a full range of switched voice,
data and Internet services in order to meet the needs of business end-users, and
is expanding its sales, marketing, customer care and OSS capabilities. The
Company introduced local switched voice services, including local exchange
services in late 1996 and long distance services in late 1997. By June 30, 1998,
e.spire had sold 96,405 customer access lines, of which 85,633 were installed,
representing a significant increase over the 9,177 access lines sold as of June
30, 1997.
The Company believes that there is significant unmet demand by businesses
for integrated voice and data services from a single-source communications
provider. In addition, the domestic market for Internet-related business
services is growing rapidly. The Company believes that, through its data
network, it is well positioned to satisfy these customer demands by providing
its suite of network solutions. This suite of services is integrated through the
Company's proprietary e.spire Internet access product, which combines its ISP
capabilities and ATM, frame relay, and IP services. The Company also provides
additional Internet-based and other data custom solutions and value-added
services such as web hosting, managed services and firewall services. The
Company's e.spire product currently is offered in its Florida markets and the
Company intends to offer it and the Company's other Internet-based services in
substantially all of its markets by the end of 1998 to complement its existing
data services.
For the year ended December 31, 1997 and the six months ended June 30,
1998, approximately 42% and 39%, respectively of the Company's revenues were
derived from network services, approximately 38% and 32%, respectively, were
derived from data and Internet services and approximately 20% and 30%,
respectively, from switched local and other services. Included in the network
services category of revenues are high capacity dedicated and special access
services, and revenues from ACSI Network Technologies for construction contracts
and long term leases of high capacity systems. For the year ended December 31,
1997 and the six month period ended June 30, 1998, approximately $1.7 million
and $8.1 million is included from these contracts, of which $4.6 million of 1998
revenues was derived from a contract with a single interexchange carrier.
Revenues for the year ended December 31, 1997, increased $49.6 million, or 527%,
to $59.0 million from $9.4 million for the year ended December 31, 1996.
Revenues for the six months ended June 30, 1998, increased $43.4 million, or
219% to $63.2 million from $19.8 million for the six months ended June 30, 1997.
As of June 30, 1998, the Company served over 10,400 telecommunications
customers, excluding internet dial-up customers.
The Company believes that a key factor in the successful implementation of
its strategy and its improved operating performance is the quality of its
management team. In the past twenty one months, the Company hired Jack E. Reich
as President and Chief Executive Officer and David L. Piazza as Chief Financial
Officer, complementing Anthony J. Pompliano, the Company's founder
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and Chairman, and Riley M. Murphy, the Company's General Counsel. In addition,
in February 1998, the Company hired Ronald E. Spears as Chief Operating Officer.
Collectively, these individuals have an average of 21 years of
telecommunications industry experience. The Company also has significantly
increased its marketing and sales forces during the past year by hiring an
additional 151 employees in such departments. As of June 30, 1998, the Company
had a total of 278 employees in its marketing and sales forces, an increase of
over 119% from June 30, 1997.
STRATEGY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. In order to increase penetration in its target markets, build
brand recognition and achieve its strategic objectives, the Company seeks to:
PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES
To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. In 1997,
the Company introduced new voice products such as local dial tone, long
distance, audio conferencing and voice messaging services. In addition, through
the 1997 Cybergate Acquisition, the Company also introduced its Internet
services and, as of June 30, 1998, served over 46,000 Internet customers. In
late 1997, the Company introduced its data and Internet products, which it
currently offers in all of its markets. In April 1998, the Company also
introduced its PLATINUM product, which offers customers integrated local, long
distance, toll free and dedicated Internet access using a single multi-purpose
T1. PLATINUM is available in 20 markets. The Company believes that its ability
to provide one-stop integrated communications services will enable it to capture
a larger portion of its customers' total expenditures on communication services,
and reduce customer turnover.
EXPLOIT RAPIDLY GROWING MARKET FOR DATA SERVICES
The Company believes that the market for data services is one of the
fastest growing segments of the communications market. The Company's suite of
data products consisting primarily of the e.spire family of high-speed Internet
and data products for small and medium-sized businesses, will be transported
over the Company's coast-to-coast, leased broadband data communications network.
ENHANCE FACILITIES-BASED INFRASTRUCTURE
Expansion of the Company's facilities-based infrastructure will increase
the proportion of communications traffic that is originated and/or terminated on
its network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company uses both an on-net and a resale strategy to capture new
customers, and intends to accelerate migration of traffic onto its own
facilities.
The Company will continue to install voice and data switches, construct
SONET digital local fiber networks and increase the reach of its data backbone.
The Company's expansion decisions are structured to efficiently deploy capital
and are based upon a number of economic factors, including customer demographics
in each market and anticipated cost savings associated with particular
installations. The Company's state-of-the-art infrastructure and high capacity
bandwidth facilitate efficient network expansion. The Company recently announced
plans to expand its local network infrastructure into six additional markets:
Atlanta, Washington, D.C., San Antonio, South Florida, New York and
Philadelphia. In addition, the Company plans to deploy a broadband long-haul
network between New York and Baltimore. Combined, these expansions are
anticipated to increase
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the network facilities to over 2200 route miles by year end. The Company also
installed 20 Lucent 5ESS switches as of August 20, 1998 and plans to install an
additional 5 by year end.
BUILD MARKET SHARE THROUGH FOCUSED CUSTOMER SALES AND SERVICE
The Company believes that its local, customer-oriented, single
point-of-service sales structure facilitates greater customer care in both the
sales and customer service processes and differentiates e.spire as a
customer-focused telecommunications services provider. In addition to its field
sales force, the Company's major account team targets large national accounts,
and its carrier sales group targets dedicated services to long distance carriers
and ISPs. As of June 30, 1998, the Company had 278 employees in its marketing
and sales forces, an increase of over 119% from June 30, 1997. The Company
supplements its internal marketing and sales force through alternative sales
channels, and had executed 117 sales agency agreements as of June 30, 1998.
The Company currently is implementing an integrated customer care strategy
that emphasizes infrastructure improvements, training of personnel, performance
monitoring and image/brand recognition. The customer care strategy is intended
to provide a heightened level of responsive and cost efficient customer service
across the Company's full range of existing and planned products and services,
with a particular emphasis on operational support and other
information/financial systems. The Company is in the process of supplementing
its customer service effort with an integrated customer care and billing
software platform, differentiating e.spire from its major competitors.
EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES
The Company believes that acquisitions of, and joint ventures and other
strategic alliances with, related or complementary businesses in its region will
enable it to more rapidly execute its business plan by providing additional
customers, new products and services, service and technical support and
additional cash flow. For example, the Cybergate Acquisition increased the
Company's penetration of its current markets and accelerated its entry into new
markets by expanding the scope of the Company's Internet product offerings. As
part of its expansion strategy the Company plans to consider additional
acquisitions, joint ventures and strategic alliances in communications, Internet
access and other related service areas.
COMPANY SERVICES
DEDICATED SERVICES. The Company's dedicated services provide high capacity
non-switched interconnections: (i) between POPs of the same IXC; (ii) between
POPs of different IXCs; (iii) between large business and government end-users
and their selected IXCs; (iv) between an IXC POP and an ILEC central office or
between two ILEC central offices; and (v) between different locations of
business or government end-users.
- SPECIAL ACCESS SERVICES. Special access services provide a link between
an end-user location and the POP of its IXC, or links between IXC POPs,
thus bypassing the facilities of the ILEC. These services, which may be
ordered by either the long distance customer or directly by its IXC,
typically provide the customer better reliability, shorter installation
intervals, and lower costs than similar services offered by the ILEC.
Customer charges are based on the number of channel terminations, fixed
and mileage-sensitive transport charges, and costs for any services
required to multiplex circuits.
- SWITCHED TRANSPORT SERVICES. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a
ILEC switch at a central office where the Company has collocated its
network. The Company provides dedicated facilities for transporting these
aggregated volumes of long distance traffic from the ILEC central office
to its POP or between ILEC central offices.
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- PRIVATE LINE SERVICES. Private line services provide dedicated
facilities between two end-user locations in the same metropolitan area
(e.g., a central banking facility and a branch office or a manufacturing
facility and its remote data processing center) and are priced like
special access services (channel termination charges plus transport and
any associated multiplexing charges). The Company expects the demand for
private line service to increase in conjunction with higher bandwidth
customer applications.
SWITCHED VOICE SERVICES. As of August 31, 1998, the Company had installed
20 Lucent 5ESS switches to provide facilities-based local exchange service in 20
of its markets. The Company also provides such services on a resale basis in 35
markets. As an adjunct to its local switched services, the Company provides long
distance, calling card and other interLATA services.
The Company's switched voice services include telephone exchange service,
including optional enhanced services such as call waiting, caller ID and
three-way conference calling; switching traffic between The Company's switch and
a business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premises and interexchange carrier via shared trunks utilizing the
Company's local switch.
HIGH SPEED INTERNET AND DATA SERVICES AND CYBERGATE ACQUISITION. In
January 1997, the Company consummated the Cybergate Acquisition. Cybergate, Inc.
("Cybergate"), an ISP, delivers high-speed data communications services,
including computer network connections and related infrastructure services, that
provide both commercial and residential customers access to the Internet through
their personal computers and the use of a modem. As of June 30, 1998, Cybergate
had over 46,000 customers. The Cybergate Acquisition enabled e.spire to become a
major provider of high-speed data communications services in the southern United
States.
In 1997, the Company introduced the e.spire family of high-speed Internet
and data services for businesses as well as government and educational
institutions, ISPs and carriers. The e.spire family of services operates over
the Company's coast-to-coast, leased broadband data communications network which
supports the following services:
- e.spire INTERNET ACCESS SERVICE. The data and Internet data backbone is
connected to the Global Internet via public and private peering
arrangements with Tier I-Internet backbone providers at strategic NAPs
across the United States. This enables the Company to provide
high-quality dedicated and dial-up Internet connectivity and IP transport
for the business and reseller community. The service is targeted to
consumers, local and regional ISPs and corporate Internet users requiring
dedicated access. The service operates at dedicated speeds ranging from
56 kbps to 45 Mbps and at industry-standard dial-up speeds.
- e.spire FRAME RELAY SERVICE. This service is designed for bandwidth
needs that vary, and for interconnecting geographically dispersed
networks and equipment. Businesses of any size can take advantage of
e.spire Frame Relay for internetworking, application sharing, e-mail,
file transfer, PC-to-PC and PC-to-Server communications. The Frame Relay
backbone is connected to frame relay networks of other key providers via
NNIs (Network-to-Network Interfaces) thus enabling the Company to offer
comprehensive solutions to local, regional, and national businesses
regardless of their location. This service supports standard multi-
protocol encapsulation which makes it easier to integrate new and legacy
systems. The service support user port connections ranging from 56 kbps
to 1.5 Mbps with a wide range of Committed Information Rates.
- e.spire ATM SERVICE. This service provides a solution to local, regional
and national businesses with highbandwidth, delay-sensitive data
communications applications. With e.spire ATM service, the performance
needs of complex, media-rich applications such as
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CAD/CAM, remote super-computing, medical imaging, video conferencing, and
voice calls are easily met. This service is also ideal for higher-volume
users of applications such as PC-to-server and file transfer. The service
supports both Constant Bit Rate and Variable Bit Rate service levels over
Permanent Virtual Circuits with user port speeds ranging from 2 Mbps to
45 Mbps.
- e.spire BUNDLED INTERNET SOLUTIONS. The Company also provides turnkey
business Internet solutions. These solutions include dedicated Internet
Access, pre-configured Customer Premises Equipment, web site hosting
account, domain name registration and maintenance, news feed, and
end-to-end service installation. These solutions enable businesses to
benefit from integrated billing and network management.
- e.spire CUSTOM NETWORK SERVICES. These services include design,
installation, maintenance, hardware (such as switches, routers and
modems) and configuration (such as maintaining consistent versions of the
router software and deploying consistent configurations) of a customer's
network. The Company's custom network services are designed to eliminate
many of the timing, coordination and inter-operability issues that arise
in installations requiring multiple vendors.
- e.spire MANAGED NETWORK SERVICE. This service provides complete
management and monitoring of all customer equipment and network elements
needed to operate dedicated Internet or frame relay services. Companies
of all sizes can enhance their competitive performance, eliminating the
need to commit their own resources to the costly, time-consuming job of
network management.
- e.spire PLATINUM SERVICE. This service provides integrated local, long
distance, toll free and Dedicated Internet Access using a single
multipurpose T1. Voice services come complete with a full range of
standard and optional custom features, and Internet access can be
provided up to 512Kbps. The Company believes PLATINUM provides an
unprecedented mix of voice and data services on a consolidated invoice.
SALES, MARKETING AND SERVICE DELIVERY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. The Company's customers include corporations, financial services
companies, government departments and agencies, and academic, scientific and
other major institutions as well as ISPs, IXCs and other carriers.
The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single source
provider of their telecommunications services. The Company's sales force
includes specialized professionals who focus on sales to retail, wholesale and
alternate channel (agents and value-added resellers) consumers of the Company's
telecommunications services. The Company's sales staff works to gain a better
understanding of the customer's operations in order to develop innovative,
application-specific solutions to each customer's needs. Sales personnel locate
potential business customers by several methods, including customer referral,
market research, cold calling and networking alliances.
Enhanced data services, like all other Company services, are sold through
the Company's existing sales force and supported by engineers and other sales
channels such as agents and value-added resellers, including independent
providers of communications hardware to customers. This approach enables the
Company to (i) emphasize the applications solutions aspects of enhanced data
services and (ii) utilize the expertise and resources of other vendors. The
Company intends to continue expanding its sales and engineering support staff
and other technical specialists in order to meet the growing demand for enhanced
data services. See "-- Network".
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Historically, the Company has established new customer relationships by
providing customers with local or data services and subsequently marketing
additional services to such customers. Having evolved into an ICP, however, the
Company intends to emphasize its ability to provide customers "one-stop"
integrated voice, data and Internet communications services in its sales and
marketing efforts.
The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Service delivery activities
include coordinating installation dates and equipment delivery and testing. The
Company's customer service and technical staff plans, engineers, monitors and
maintains the integrity, quality and availability of the Company's networks. The
Company's technical staff are available to customers 24 hours every day.
NETWORK
The Company has deployed its network infrastructure on a "smart-build"
approach, selecting the most economic alternative of constructing or leasing
facilities or a combination thereof. As of June 30, 1998, the Company had local
fiber optic networks in service in 32 markets. The Company continues to expand
those networks and will look to identify new markets for other network expansion
opportunities. The Company generally chooses to own facilities where (i) there
is no attractive fiber optic network alternative, (ii) ownership creates
strategic value for the Company and/or (iii) large concentrations of
telecommunications traffic are accessible, or have been secured, to justify
network construction. In addition to the "build" vs. "lease" decision for
network deployment, the Company also will consider potential network
acquisitions from time to time.
The Company also seeks to expand the reach of its backbone data network
through agreements with certain third parties to deliver enhanced data
communications services through a seamless data network. Often, the Company
offers data services in geographic markets where it has not deployed its own
local fiber optic network by leasing facilities from a variety of entities,
including ILECs, utilities, IXCs, cable companies and various transit/highway
authorities. In many cases, such capacity is obtained through the purchase of
"dark fiber." The combination of the Company's local networks and its broadband
data backbone network comprise the seamless network platform which the Company
utilizes to offer its broad array of telecommunications services to customers.
The Company utilizes Newbridge ATM networking technology on its data
backbone network, allowing its network capacity to be efficiently shared between
multiple platforms. The Company's local networks are comprised of fiber optic
cable, integrated switching facilities, advanced electronics, data switching
equipment (e.g., frame relay and ATM), transmission equipment and associated
wiring and equipment. By virtue of their state-of-the-art equipment and
ring-like architecture, the Company's networks offer electronic redundancy and
diverse access routing. Through automatic protection switching, if any
electrical component or fiber optic strand fails, the signal is instantaneously
switched to a "hot standby" component or fiber. Since network outages and
transmission errors can be very disruptive and costly to long distance carriers
and other customers, consistent reliability is critical to customers.
In those markets where the Company chooses to deploy broadband fiber
networks, the Company's strategy is to first develop the "carrier ring" portion
of its network, a high capacity network designed to be accessible to all the
major long distance carriers and key ILEC central offices in the area. This
portion of the network allows the Company to provide access to the ILEC central
offices, the IXC POPs and customer buildings. Second, the Company designs a
larger "backbone ring" extending from the carrier ring, with a view toward
making the network accessible to the largest concentration of
telecommunciations-intensive business and government customers in the area. Hubs
are strategically located on the backbone ring. Third, the Company concentrates
its sales and marketing efforts on adding business and government customers
located on or very near its backbone network and hub locations. Once the Company
determines that there is sufficient
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customer demand in a particular area, it extends "distribution rings" from the
backbone ring to reach specific business customers in that area. The Company's
emphasis is on the building and expansion of these local networks to reach end
user customers in buildings or office parks with substantial telecommunications
needs.
The Company's network management center in Annapolis Junction, Maryland
monitors all of the Company's networks from one central location. Centralized
electronic monitoring and control of the Company's networks allows the Company
to avoid duplication of this function in each city. This consolidated operations
center also helps make the Company's per customer monitoring and customer
service costs lower than if such costs were monitored on a single-city basis.
The Company also plans to enhance its use of this facility to monitor the
performance of data and switched voice services. During 1997, the Company
performed various network management services for other telecommunications
service providers and plans to continue to offer these services on a limited
basis.
INDUSTRY OVERVIEW
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Company's opportunities in the converging
voice and data communications services markets. Technological advances,
including rapid growth of the Internet, the increased use of packet switching
technology for voice communications and the growth of multimedia applications,
are expected to result in substantial growth in the high-speed data services
market.
DEDICATED SERVICES. Competition in the local exchange services market
began in the mid-1980s. In New York City, Chicago and Washington, D.C., newly
formed companies provided dedicated non-switched services by installing fiber
optic facilities connecting POPs of IXCs within a metropolitan area and, in some
cases, connecting business and government end-users with IXCs. Most of the early
competitors operated limited networks in the central business districts of major
cities in the U.S. where the highest concentration of voice and data traffic,
including IXC traffic, is typically found. CAPs used the substantial capacity
and economies of scale inherent in fiber optic cable to offer customers service
that was generally less expensive and of higher quality than could be obtained
from the ILECs due, in part, to antiquated copper-based facilities used in many
ILEC networks.
LOCAL SWITCHED VOICE SERVICES. The FCC Interconnection Decisions in 1992
and 1993 enabled CAPs to provide interstate switched access services in
competition with ILECs, which has encouraged the development of the competitive
interstate switched access market. Competition in this market was further
enhanced with the passage of the FTA, which requires (i) removal of state, local
and long distance entry barriers, (ii) ILECs to provide interconnections to
their facilities, and (iii) access to rights-of-way.
DATA COMMUNICATIONS SERVICES. The Company believes that high-speed data
communications services represent one of the fastest growing segments of the
telecommunications services market, due in part to the continuing proliferation
of computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high-bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for e.spire to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs. In
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addition, businesses are increasingly using the Internet to transmit e-mail,
engage in commercial transactions (e.g., electronic commerce) and develop
internal communications networks, or "intranets." Increasing business
utilization of the Internet has added to the demand for higher-speed access
applications.
COMPETITION
The Company operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of its actual
and potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than the
Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, engage in aggressive volume and term discount pricing
practices for their customers, and/or seek to charge competitors excessive fees
for interconnection to their networks, the income of competitors to the ILECs,
including the Company, could be materially adversely affected. If future
regulatory decisions afford the ILECs increased access services, pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on competitors to the ILEC, including the Company.
In the local exchange market, the Company also faces competition or
prospective competition from other carriers, many of which have significantly
greater financial resources than the Company. For example, AT&T, MCI and Sprint,
which historically have been purely long distance carriers, have each begun to
offer local telecommunications services in major U.S. markets using their own
facilities or by resale of the ILECs' or other providers' services. In addition
to these long distance service providers, entities that currently offer or are
potentially capable of offering local switched services include companies that
have previously been known purely as CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and large
customers who build private networks. These entities, upon entering into
appropriate interconnection agreements or resale agreements with ILECs,
including RBOCs, can offer single source local and long distance services, like
those offered by the Company. In addition, a continuing trend towards business
combinations and alliances in the telecommunications industry may create
significant new competitors to the Company. The proposed merger of WorldCom,
Inc. and MCI or AT&T's proposed acquisition of Teleport Communications Group,
Inc. and TCI Cable are examples of some of the alliances that are being formed.
Many of these combined entities may have resources far greater than those of the
Company. These combined entities may provide a bundled package of
telecommunications products, including local and long distance telephony, that
is in direct competition with the products offered by the Company.
The Company will also face competition from other fixed wireless services,
including MMDS, LMDS, 24 GHz and 38 GHz wireless communications systems, WCS,
FCC Part 15 unlicensed wireless radio devices, and other services that use
existing point-to-point wireless channels on other frequencies. The FCC has
issued or is in the process of issuing licenses for these services to
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provide broadband integrated telecommunications services on a point-to-point
and/or point-to-multipoint basis. Many of these service providers have already
raised substantial capital and have commenced building their wide-area networks,
primarily in urban areas. Upon entering into appropriate interconnection
agreements with ILECs, these service providers are expected to provide
integrated voice and data services comparable to those the Company currently
offers or intends to offer. Many of these companies have announced plans to
target small and medium-sized businesses and may enjoy certain advantages over
the Company with respect to the speed with which they can deploy their own
facilities directly serving end user premises to the extent that they need not
lease or resell "last mile" facilities from the ILEC. In addition, the FCC has
allocated a number of spectrum blocks for use by wireless devices that do not
require site or network licensing. A number of vendors have developed such
devices that may provide competition to the Company, in particular for certain
low data-rate transmission services.
With respect to mobile wireless telephone system operators, the FCC has
authorized cellular, PCS, and other CMRS providers to offer wireless services to
fixed locations, rather than just to mobile customers, in whatever capacity such
CMRS providers choose. Previously, cellular providers could provide service to
fixed locations only on an ancillary or incidental basis. This authority to
provide fixed as well as mobile services will enable CMRS providers to offer
wireless local loop service and other services to fixed locations (e.g., office
and apartment buildings) in direct competition with the Company and providers of
other types of traditional wireless telephone service.
Section 271 of the FTA prohibits an RBOC from providing long-distance
service that originates (or in certain cases terminates) in one of its in-region
states until the RBOC has satisfied certain statutory conditions in that state
and has received the approval of the FCC. The FCC has denied all four
applications for such approval filed to date. The Company anticipates that a
number of RBOCs will file additional applications for in-region long distance
authority in 1998. The FCC will have 90 days from the date an application for
in-region long distance authority is filed to decide whether to grant or deny
the application.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would permit the three RBOCs that are
parties to the case immediately to begin offering widespread in-region long
distance services. The decision, however, was stayed on February 11, 1998 by the
Court upon motion from the defendants. Unless overturned on appeal, this
decision could have a material adverse effect on the Company. The FCC and
certain IXCs have filed appeals of the decision with the United States Court of
Appeals for the Fifth Circuit. Although there can be no assurance as to the
outcome of this litigation, the Company believes that significant parts of the
District Court decision may be reversed or vacated on appeal.
The market for data communications and Internet access services, including
IP switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the future. In
addition, new FCC rules went into effect in February 1998 which will make it
substantially easier for many non-U.S. telecommunications companies to enter the
U.S. market, thus potentially further increasing the number of competitors.
The Company believes that its ability to compete successfully depends on a
number of factors, including: market presence; the ability to execute a rapid
expansion strategy: the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
services by the Company and its competitors; the Company's ability to support
industry standards; and general industry and economic trends. The Company's
success in this market will depend heavily upon its ability to provide high
quality Internet connectivity and value-added Internet services at competitive
prices.
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REGULATION
OVERVIEW
The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or terminate intrastate
communications. Local governments may require the Company to obtain licenses or
franchises regulating use of public rights-of-way necessary to install and
operate its networks.
THE FEDERAL TELECOMMUNICATIONS ACT OF 1996
STATUTORY REQUIREMENTS. On February 1, 1996, the U.S. Congress enacted
comprehensive telecommunications reform legislation, which the President signed
into law as the FTA on February 8, 1996. The Company believes that this
legislation is likely to enhance competition in the local telecommunications
marketplace because it (i) preempts state and local entry barriers and gives the
FCC authority to enforce such preemption, (ii) requires ILECs to provide
interconnection to their facilities, (iii) facilitates end-users' choice to
switch service providers from ILECs to CLECs and (iv) requires access to
rights-of-way.
The FTA requires all LECs (including ILECs and CLECs): (i) not to prohibit
or unduly restrict resale of their services; (ii) to provide number portability;
(iii) to provide dialing parity and nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listings; (iv) to
afford access to poles, ducts, conduits and rights-of-way; and (v) to establish
reciprocal compensation arrangements for the transport and termination of local
telecommunications traffic. It also requires ILECs to negotiate local
interconnection agreements in good faith and to provide interconnection (a) for
the transmission and routing of telephone exchange service and exchange access,
(b) at any technically feasible point within the ILEC's network, (c) that is at
least equal in quality to that provided by the ILEC to itself, its affiliates or
any other party to which the ILEC provides interconnection and (d) at rates,
terms and conditions that are just, reasonable and nondiscriminatory. ILECs also
are required under the new law to provide nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point, to offer their
local telephone services for resale at wholesale rates, and to facilitate
collocation of equipment necessary for competitors to interconnect with or
access unbundled network elements.
In addition, Section 271 of the FTA requires RBOCs to comply with certain
safeguards and offer interconnection that satisfies a prescribed 14-point
competitive checklist before the RBOCs are permitted to provide in-region
interLATA (i.e. long distance) services. These safeguards are designed to ensure
that the RBOCs' competitors have access to local exchange and exchange access
services on nondiscriminatory terms and that subscribers of regulated
non-competitive RBOC services do not subsidize their provision of competitive
services. The safeguards also are intended to promote competition by preventing
RBOCs from using their market power in local exchange services to obtain an
anti-competitive advantage in the provision of other services.
Three RBOCs have filed applications with the FCC for authority to provide
in-region interLATA service in selected states. Requests by SBC Communications
Inc. in Oklahoma, by Ameritech in Michigan, and by BellSouth in South Carolina
and Louisiana to provide long distance, all were denied by the FCC. A second
request by BellSouth for authority to provide long distance in Louisiana remains
pending at the FCC. Other RBOCs have begun the process of applying to provide
in-region interLATA service by filing with state commissions notice of their
intent to file at the FCC.
In addition, several RBOCs challenged the constitutionality of certain
provisions of the FTA which bar the RBOCs from providing in-region interchange
and other services by filing a lawsuit in
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the U.S. District Court for the Northern District of Texas (captioned SBC
Communications, Inc. v. FCC, Civil Action No. 7:97-CV-163-X (Kendall, J.)). On
December 31, 1998, Judge Kendall released an order which invalidated Sections
271-275 of the FTA as they pertain to SBC, US West and Bell Atlantic, after
finding that these provisions violated the constitutional prohibition against
"bills of attainder." However, Judge Kendall's decision was reversed by the U.S.
Court of Appeals for the Fifth Circuit on September 4, 1998.
The FTA also granted important regulatory relief to industry segments which
compete with CLECs. ILECs were given substantial new pricing flexibility. RBOCs
have the ability to obtain authorization to provide long distance services under
prescribed circumstances and were granted new rights to provide certain cable TV
services. IXCs were permitted to construct their own local facilities and/or
resell local services. State laws no longer can require CATVs to obtain a
franchise before offering telecommunications services nor permit CATVs'
franchise fees to be based on their telecommunications revenues. In addition,
under the FTA all utility holding companies are permitted to diversify into
telecommunications services. See "Risk Factors -- Competition".
FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE FTA. On
August 8, 1996, the FCC released a First Report and Order, a Second Report and
Order and a Memorandum Opinion and Order in its CC Docket 96-98 (combined, the
"Interconnection Orders") that established a framework of minimum, national
rules enabling state Public Service Commissions ("PSC," or "State Commissions")
and the FCC to begin implementing many of the local competition provisions of
the FTA. In its Interconnection Orders, the FCC prescribed certain minimum
points of interconnection necessary to permit competing carriers to choose the
most efficient points at which to interconnect with the ILECs' networks. The FCC
also adopted a minimum list of unbundled network elements that ILECs must make
available to competitors upon request and a methodology for states to use in
establishing rates for interconnection and the purchase of unbundled network
elements. The FCC also adopted a methodology for states to use when applying the
FTA's "avoided cost standard" for setting wholesale prices with respect to
retail services.
The following summarizes the key issues addressed in the Interconnection
Orders.
- INTERCONNECTION. ILECs are required to provide interconnection for
telephone exchange or exchange access service, or both, to any requesting
telecommunications carrier at any technically feasible point. The
interconnection must be at least equal in quality to that provided by the
ILEC to itself or its affiliates and must be provided on rates, terms and
conditions that are just, reasonable and nondiscriminatory.
- ACCESS TO UNBUNDLED ELEMENTS. ILECs are required to provide requesting
telecommunications carriers with nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point on
rates, terms, and conditions that are just, reasonable and
nondiscriminatory. At a minimum, ILECs must unbundle and provide access
to network interface devices, local loops, local and tandem switches
(including all software features provided by such switches), interoffice
transmission facilities, signaling and call-related database facilities,
operations support systems and information and operator and directory
assistance facilities. Further, ILECs may not impose restrictions,
limitations or requirements upon the use of any unbundled network
elements by other carriers.
- METHODS OF OBTAINING INTERCONNECTION AND ACCESS TO UNBUNDLED
ELEMENTS. ILECs are required to provide physical collocation of
equipment necessary for interconnection or access to unbundled network
elements at the ILEC's premises, except that the ILEC may provide virtual
collocation if it demonstrates to the PSC that physical collocation is
not practical for technical reasons or because of space limitations.
- TRANSPORT AND TERMINATION CHARGES. The FCC rules require that LEC
charges for transport and termination of local traffic delivered to them
by competing LECs must be cost-based and should be based on the LECs'
Total Element Long-Run Incremental Cost ("TELRIC") of
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providing that service. However, as discussed below, the FCC's pricing
and costing rules have been vacated by the U.S. Court of Appeals for the
Eighth Circuit.
- PRICING METHODOLOGIES. New entrants were required to pay for
interconnection and unbundled elements at rates based on the ILEC's
TELRIC of providing a particular network element plus a reasonable share
of forward-looking joint and common costs, and may include a reasonable
profit. However, as discussed below, these rules have been vacated by the
Eighth Circuit.
- RESALE. ILECs are required to offer for resale any telecommunications
service that they provide at retail to subscribers who are not
telecommunications carriers. PSCs were required to identify which
marketing, billing, collection and other costs will be avoided or that
are avoidable by ILECs when they provide services on a wholesale basis
and to calculate the portion of the retail rates for those services that
is attributable to the avoided and avoidable costs. However, as discussed
below, the specific federal pricing requirements have been vacated by the
Eighth Circuit.
- ACCESS TO RIGHTS-OF-WAY. The FCC established procedures and guidelines
designed to facilitate the negotiation and mutual provision of
nondiscriminatory access by telecommunications carriers and utilities to
their poles, ducts, conduits, and rights-of-way.
- UNIVERSAL SERVICE REFORM. All telecommunications carriers, including the
Company, are required to contribute funding for universal service
support, on an equitable and nondiscriminatory basis, in an amount
sufficient to preserve and advance universal service pursuant to a
specific or predictable universal service funding mechanism. On May 8,
1997, the FCC released an order implementing these requirements by
reforming its existing access charge and universal service rules. See
"-- Other Federal Regulation -- Universal Service Reform" below.
Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the Eighth Circuit (captioned
Iowa Utilities Board v. FCC). On July 18, 1997, the Court of Appeals released
its decision regarding issues raised in the consolidated appeals of the
Interconnection Orders. The Interconnection Orders were upheld in part and
reversed in part. A non-exclusive list of decisions rendered include that:
- The FCC exceeded its jurisdiction in establishing rules governing the
prices that ILECs may charge competitors for interconnection, unbundled
access and resale. The Court ruled that the authority to establish prices
for local communications facilities and services is reserved to the
States and, thus, vacated the FCC's pricing rules (except as they apply
to CMRS providers).
- The FCC's "pick and choose" rule, which allows competitors to select
individual terms of previously approved interconnection agreements for
their own use, conflicts with the purposes of the FTA, and also was
vacated.
- The FCC lacks authority to hear formal complaints which involve the
review and/or enforcement of certain terms of local interconnection
agreements approved by State commissions.
- The FCC lacks authority to require interconnection agreements which were
negotiated before the enactment of the FTA to be submitted for State
commission approval.
- The FCC may not adopt a blanket requirement that State interconnection
rules must be consistent with the FCC's regulations.
- The FCC correctly concluded that ILEC operations support systems,
operator services and vertical switching features qualify as network
elements that are subject to the unbundling requirements of the FTA.
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- The FCC's definition of "technically feasible" was upheld for purposes of
deciding where ILECs must permit interconnection by competitors, but the
FCC's use of this term to determine what elements must be unbundled was
rejected.
- The FCC erred in deciding that ILECs could be required by competitors to
provide interconnection and unbundled network elements at levels of
quality which exceed those levels at which ILECs provide such services to
themselves.
- The FCC cannot require ILECs to recombine network elements for
competitors, but competitors may recombine such network elements
themselves as necessary to provide telecommunications services.
- Claims that the unbundling rules constitute an unconstitutional taking
were not decided because they were either raised by parties which lacked
standing or were not ripe for review.
- FCC rules and policies regarding the ILECs' duty to provide for physical
collocation of equipment were upheld.
- The FCC's rules requiring ILECs to allow the resale of promotional prices
lasting more than 90 days were upheld.
The Interconnection Orders, and resulting local interconnection rules, were
vacated in part consistent with these decisions. The U.S. Supreme Court has
granted certiorari to review most aspects of the Eight Circuit decision
regarding the Interconnection Orders. The Company cannot predict the outcome of
this litigation or the requests for reconsideration that remain pending at the
FCC. Notably, the FCC made the use of forward looking, economic costs for the
pricing of local interconnection, transport and termination and unbundled
network elements, a temporary condition of its approval of the merger of Bell
Atlantic and NYNEX. However, after the FCC indicated in its denial of
Ameritech's application for in-region long distance authority that an RBOC's use
of such forward looking, economic costs is relevant to the issue of whether it
has satisfied the conditions necessary for approval of such an application, the
Eighth Circuit issued a mandamus order instructing the FCC not to enforce such a
requirement. On August 10, 1998, the Eighth Circuit issued a ruling in a related
appeal upholding the FCC's regulations that "shared transport" be made available
as an unbundled network element.
ADVANCED COMMUNICATIONS SERVICES. On August 6, 1998, the FCC took two
related actions regarding the deployment of advanced communications services.
"Advanced communications services" are wireline, broadband telecommunications
services, such as services that rely on digital subscriber line technology
(commonly referred to as xDSL) and packet-switched technology. In its first
action, the FCC issued a Notice of Inquiry (NOI) pursuant to Section 706 of the
FTA seeking information regarding whether advanced telecommunications capability
is being deployed to all Americans in a reasonable and timely fashion. Section
706 gives the FCC the right to forbear from regulating a market, including ILEC
activities, if the FCC concludes that such forbearance is necessary to encourage
the rapid deployment of advanced telecommunications capability. The Company
expects the FCC to conclude its inquiry in early 1999.
In its second action, the FCC issued a Memorandum Opinion and Order (Order)
and a Notice of Proposed Rulemaking (NPRM) which (i) clarified its views on the
applicability of existing statutory requirements in Sections 251 and 271 to
advanced services, and (ii) sought comment on a wide variety of issues
associated with the provision of advanced services by wireline carriers.
Generally, the FCC clarified that the Section 251 interconnection, unbundling
and resale obligations of ILECs extend to their provision of advanced services,
and proposed measures to promote the deployment of advanced services by both
ILECs and CLECs. Among the proposals which generally were favorable to CLECs are
those for expanded physical collocation rights and strengthened rights to order
unbundled network elements ("UNEs") required to provide advanced services.
However, the FCC also proposed to encourage ILEC deployment of advanced services
by permitting them to provide such services through a separate affiliate which
would not be regulated as an ILEC. Thus,
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such a separate affiliate of the ILEC would not be subject to Section 251
unbundling and resale obligations, and may be permitted to provide certain
interLATA services. The Company cannot predict the final outcome of these
proceedings.
OTHER FEDERAL REGULATION. In general, the FCC has a policy of encouraging
the entry of new competitors, such as the Company, in the telecommunications
industry and preventing anti-competitive practices. Therefore, the FCC has
established different levels of regulation for dominant carriers and nondominant
carriers. For domestic common carrier telecommunications regulation, large ILECs
such as GTE and the RBOCs are currently considered dominant carriers in their
local exchange markets, while CLECs such as the Company are considered
nondominant carriers.
- TARIFFS. As a nondominant carrier, the Company may install and operate
facilities for the transmission of domestic interstate communications
without prior FCC authorization. Services of nondominant carriers have
been subject to relatively limited regulation by the FCC, primarily
consisting of the filing of tariffs and periodic reports. However,
nondominant carriers like the Company must offer interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject
to FCC complaint procedures. With the exception of informational tariffs
for operator-assisted services and tariffs for interexchange casual
calling services, the FCC has ruled that IXCs must cancel their tariffs
for domestic, interstate interexchange services. Tariffs remain required
for international services. The effectiveness of those orders currently is
subject to a stay issued by the U.S. Court of Appeals for the District of
Columbia Circuit. The FCC also has issued an order providing CLECs the
option to cease filing tariffs for interstate interexchange access
services and has proposed to make the withdrawal of CLEC access service
tariffs mandatory. Pursuant to these FCC requirements, the Company has
filed and maintains tariffs for its interstate services with the FCC. All
of the interstate access and retail "basic" services (as defined by the
FCC) provided by the Company are described therein. "Enhanced" services
(as defined by the FCC) need not be tariffed. The Company believes that
its enhanced voice and Internet services are "enhanced" services that need
not be tariffed.
- INTERNATIONAL SERVICES. Nondominant carriers such as the Company also
are required to obtain FCC authorization pursuant to Section 214 of the
Communications Act and file tariffs before providing international
communications services. The Company has obtained authority from the FCC
to provide voice and data communications services between the United
States and all foreign points on a resale basis.
- ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs can only raise prices for certain interstate
services by a small percentage each year. In addition, there are
constraints on the pricing of ILEC services that are competitive with
those of CLECs. On September 14, 1995, the FCC proposed a three-stage
plan that would substantially reduce ILEC price cap regulation as local
markets become increasingly competitive and ultimately would result in
granting ILECs nondominant status. Adoption of the FCC's proposal to
reduce significantly its regulation of ILEC pricing would significantly
enhance the ability of ILECs to compete against the Company and could
have a material adverse effect on the Company. The FCC released an order
on December 24, 1996 which adopted certain of these proposals, including
the elimination of the lower service band index limits on price
reductions within the access service category. The FCC's December 1996
order also eased the requirements necessary for the introduction of new
services by ILECs. On May 7, 1997, the FCC took further action in its CC
Docket No. 94-1 updating and reforming its price cap plan for the ILECs.
Among other things, the changes require price cap LECs to reduce their
price cap indices by 6.5 percent annually, less an adjustment for
inflation. The FCC also eliminated rules that require ILECs earning more
than certain specified rates of return to "share" portions of the excess
with their access customers during the next year in the form of lower
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access rates. These actions could have a significant impact on the
interstate access prices charged by the ILECs with which the Company
competes.
- ACCESS CHARGES. Over the past few years, the FCC has granted ILECs
significant flexibility in pricing their interstate special and switched
access services. Under this pricing scheme, ILECs may establish pricing
zones based on access traffic density and charge different prices for
each zone. The Company anticipates that this pricing flexibility will
result in ILECs lowering their prices in high traffic density areas, the
probable area of competition with the Company. The Company also
anticipates that the FCC will grant ILECs increasing pricing flexibility
as the number of interconnections and competitors increases. On May 7,
1997, the FCC took action in its CC Docket No. 96-262 to reform the
current interstate access charge system. The FCC adopted an order which
makes various reforms to the existing rate structure for interstate
access that are designed to move access charges, over time, to more
economically efficient rate levels and structures. The following is a
nonexclusive list of actions announced by the FCC:
SUBSCRIBER LINE CHARGE ("SLC"). The maximum permitted amount which an
ILEC may charge for SLC's on certain lines was increased. Specifically,
the ceiling was increased significantly for second and additional
residential lines, and for multi-line business customers. SLC ceiling
increases began in July 1997 and will be phased-in over a two-year
period.
PRESUBSCRIBED INTEREXCHANGE CARRIER CHARGE ("PICC"). The FCC created a
new PICC access charge rate element. The PICC is a flat-rated, per-line
charge that is recovered by LECs from IXCs. The charge is designed to
recover common line revenues not recovered through SLCs. A schedule of
maximum permitted PICC charges was established. The rate ceilings will be
permitted to increase over time.
CARRIER COMMON LINE CHARGE ("CCL"). As the ceilings on the SLCs and
PICCs increase, the per-minute CCL charge will be eliminated. Until then,
the CCL will be assessed on originating minutes of use. Thus, ILECs will
charge lower rates for terminating then originating access. In addition,
Long Term Support ("LTS") payments for universal service were eliminated
from the CCL charge.
LOCAL SWITCHING. Effective January 1, 1998, ILECs subject to price-cap
regulation were required to move non-traffic-sensitive ("NTS") costs of
local switching associated with line ports to common line and recover
them through the common line charge discussed above. Local switching
costs attributable to dedicated trunk ports must be moved to the trunking
basket and recovered through flat-rate monthly charges.
TRANSPORT. The "unitary" rate structure option for tandem-switched
transport was eliminated effective July 1, 1998. For price cap LECs,
additional rate structure changes became effective on January 1, 1998,
which altered the recovery of certain NTS costs of tandem-switching and
multiplexing and the minutes-of-use assumption employed to determine
tandem-switched transport prices. Also effective January 1, 1998, certain
costs previously recovered through the Transport Interconnection Charge
("TIC") were reassigned to specified facilities charges. The reassignment
of tandem costs currently recovered through the TIC to the tandem
switching charge will be phased in evenly over a three-year period.
Residual TIC charges will be recovered in part through the PICC, and
price cap reductions will be targeted at the per-minute residual TIC
until it is eliminated.
In other actions, the FCC clarified that incumbent ILECs may not assess
interstate access charges on the purchasers of unbundled network elements
or information services providers (including ISPs). Further regulatory
actions affecting ISPs are being considered in various on-going FCC
proceedings. The FCC also decided not to adopt any regulations governing
the provision of terminating access by CLECs. ILECs also were ordered to
adjust their access
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charge rate levels to reflect contributions to and receipts from the new
universal service funding mechanisms.
The FCC also announced that it will, in a subsequent Report and Order,
provide detailed rules for implementing a market-based approach to
further access charge reform. That process will give ILECs progressively
greater flexibility in setting rates as competition develops, gradually
replacing regulation with competition as the primary means of setting
prices. The FCC also adopted a "prescriptive safeguard" to bring access
rates to competitive levels in the absence of competition. For all
services then still subject to price caps and not deregulated in response
to competition, the FCC required ILECs subject to price caps to file
Total Service Long Run Incremental Cost ("TSLRIC") costs studies no later
than February 8, 2001.
This series of decisions is likely to have a significant impact on the
operations, expenses, pricing and revenue of the Company. Appeals of the FCC's
access charge reform order were denied by the U.S. Court of Appeals for the
Eighth Circuit on August 18, 1998.
UNIVERSAL SERVICE REFORM. On May 8, 1997, the FCC released an order in its
CC Docket No. 96-45, which reforms the current system of interstate universal
service support and implements the universal service provisions of the FTA. The
FCC established a set of policies and rules that ensure that low-income
consumers and consumers that live in rural, insular and high cost areas receive
a defined set of local telecommunications services at affordable rates. This is
to be accomplished in part through expansion of direct consumer subsidy programs
and in part by ensuring that rural, small and high cost LECs continue to receive
universal service subsidy support. The FCC also created new programs to
subsidize connection of eligible schools, libraries and rural health care
providers to telecommunications networks. These programs will be funded by
assessment of eligible revenues of nearly all providers of interstate
telecommunications carriers, including ICPs such as the Company.
The Company, like other telecommunications carriers that provide interstate
telecommunications services, is required to contribute a portion of its end-user
telecommunications revenues to fund universal service programs. However, the
Company also is eligible to qualify as a recipient of universal service support
if it elects to provide facilities-based service to areas designated for
universal service support. The FCC's decisions in CC Docket No. 96-45 could have
a significant impact on future operations of the Company. Significant portions
of the FCC's order have been appealed and are under review by the U.S. Court of
Appeals for the Fifth Circuit, or are the subject of further proceedings by the
FCC. The Company cannot predict the outcome of these proceedings.
STATE REGULATION
The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
are in the process of addressing issues relating to the regulation of CLECs.
Some states may also require authorization to provide enhanced services.
In some states, existing state statutes, regulations or regulatory policy
may preclude some or all forms of local service competition. However, Section
253 of the FTA prohibits states and localities from adopting or imposing any
legal requirement that may prohibit, or have the effect of prohibiting, the
ability of any entity to provide any interstate or intrastate telecommunications
services. The FCC has the authority to preempt any such state or local
requirements to the extent necessary to enforce the FTA's open market entry
requirements. States and localities may, however, continue to regulate the
provision of intrastate telecommunications services, and, presumably, require
carriers to obtain certificates or licenses before providing service.
Some states in which the Company operates are considering legislation which
could impede efforts by new entrants in the local services market to compete
effectively with ILECs. The Arkansas
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legislature, for example, has enacted legislation which curtails the ability of
the state PSC to make available additional network elements to CLECs or
authorize CLECs to receive universal service funding. On March 25, 1997, the
Company filed a petition for Declaratory Ruling with the FCC asking it to
preempt portions of the Arkansas statute.
The Company has obtained intrastate authority for the provision of
dedicated services and a full range of local switched services in each of the
states where it provides local telecommunications services. In addition, the
Company has obtained PSC certification to provide interexchange services in a
majority of these states and is in the process of obtaining such certification
in other states. There can be no assurance that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks additional services from the above-named PSCs. In most states,
the Company is required to file tariffs setting forth the terms, conditions and
prices for services that are classified as intrastate.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from other
competitive services, thereby allowing ILECs to offer services competing with
those of the Company at prices below the cost of providing the service. The
Company cannot predict the extent to which this may occur or its impact on the
Company's business.
Numerous states have adopted or are considering adoption of new programs to
fund state universal programs. The Company could be required to contribute a
significant portion of its intrastate end user revenues toward the funding of
such programs; and such a development could have a significant impact on future
operations of the Company.
LOCAL INTERCONNECTION. The FTA imposes a duty upon all ILECs to negotiate
in good faith with potential interconnectors to provide interconnection to ILEC
networks, exchange local traffic, make unbundled network elements available, and
permit resale of most local services. In the event that negotiations do not
succeed, the Company has a right to seek state PSC arbitration of any unresolved
issues. The Company has signed, negotiated or arbitrated interconnection
arrangements with each of the following: BellSouth (South Carolina, Georgia,
Florida, Alabama, Mississippi, Louisiana, Tennessee and Kentucky), Southwestern
Bell (Texas, Arkansas, Kansas, Missouri and Oklahoma), US West (Arizona, New
Mexico and Colorado), Bell Atlantic (Maryland, Virginia and the District of
Columbia), GTE (Texas, Kentucky and Florida) and Sprint/Central Telephone
(Nevada). Arbitration decisions involving the Company's interconnection
arrangements in several states have been challenged in lawsuits filed in U.S.
District Courts by the affected ILECs. In addition, the Company has filed a
lawsuit in U.S. District Court in Louisiana seeking review of the pricing of
interconnection and unbundled network elements approved by the Louisiana PSC.
Some of the Company's local interconnection agreements expire during 1998 and
will require renegotiation this year. Attempts by the Company to negotiate
interconnection of its frame relay services already have proven unsuccessful in
some areas, requiring the Company to seek state Commission arbitration in
Arizona, Colorado, New Mexico and California. There can be no assurance that
these negotiations and renegotiations of interconnection agreements will be
successful, or that state PSC arbitration of any unresolved issues will be
decided favorably to the Company.
The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
unbundled loop and number portability installation have caused the Company to
file complaints against BellSouth with the FCC and Georgia PSC. The Company is
considering the possibility of filing similar actions against other ILECs.
Under its local interconnection agreements, the Company has a right to
charge ILECs reciprocal compensation for the transport and termination of local
traffic routed from ILEC end users to end users of the Company's local exchange
services. Many CLECs, like the Company, have booked significant revenue based on
reciprocal compensation for the termination of calls placed to ISPs that are
business subscribers to the CLEC's local exchange services. Certain ILECs have
taken the
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position that calls placed to enhanced service providers, including ISPs, do not
terminate with the ISP and, therefore, are not "local traffic" for which the
CLEC is entitled to receive reciprocal compensation under these interconnection
agreements. Consequently, certain ILECs currently are refusing to pay reciprocal
compensation amounts for traffic attributable to calls placed to ISPs. Since a
significant amount of the Company's local traffic is generated from ISPs, a
failure by one or more ILECs to pay ISP-related reciprocal compensation could
have a significant impact on the Company's revenues. The obligation of ILECs to
remit such compensation currently is the subject of numerous proceedings at the
FCC and State Commissions and in Federal and state courts, including complaint
proceedings initiated by the Company at PSCs and through commercial arbitration
for collection of such compensation under its interconnection agreements. Any
final order by the FCC or a state PSC in a state in which the Company's
interconnection agreements entitle it to reciprocal compensation, or a final
determination by a Federal or applicable state court or arbitration panel that
no reciprocal compensation is owed for calls placed to ISPs could have a
material adverse effect on the Company.
LOCAL GOVERNMENT AUTHORIZATIONS. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. Termination of
the existing franchise or license agreements prior to their expiration dates
could have a materially adverse effect on the Company. In some municipalities
where the Company has installed or anticipates constructing networks, it will be
required to pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis, as well as post performance bonds or
letters of credit. There can be no assurance that the Company will not be
required to post similar bonds in the future, nor is there any assurance that,
following the expiration of existing franchises, fees will remain at their
current levels. In many markets, the ILECs do not pay such franchise fees or pay
fees that are substantially less than those required to be paid by the Company.
To the extent that competitors do not pay the same level of fees as the Company,
the Company could be at a competitive disadvantage. However, the FTA provides
that any compensation extracted by states and localities for use of public
rights-of-way must be "fair and reasonable," applied on a "competitively neutral
and nondiscriminatory basis" and be "publicly disclosed" by such government
entity.
EMPLOYEES
As of June 30, 1998, the Company employed a total of 979 individuals full
time. The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are currently parties to routine
litigation incidental to their business, none of which, individually or in the
aggregate, are expected to have a material adverse effect on the Company. The
Company and its subsidiaries are parties to various court appeals and regulatory
arbitration proceedings relating to certain of the Company's interconnection
agreements and continue to participate in regulatory proceedings before the FCC
and state regulatory agencies concerning the authorization of services and the
adoption of new regulations. See "-- Regulation".
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Anthony J. Pompliano...................... 59 Chairman of the Board of Directors
Jack E. Reich............................. 47 President and Chief Executive Officer and Director
Ronald E. Spears.......................... 50 Chief Operating Officer
Riley M. Murphy........................... 42 Executive Vice President -- Legal and Regulatory
Affairs, General Counsel and Secretary
David L. Piazza........................... 43 Chief Financial Officer
George M. Middlemas(1).................... 52 Director
Edwin M. Banks(2)......................... 35 Director
Christopher L. Rafferty(1)................ 50 Director
Benjamin P. Giess......................... 35 Director
Olivier L. Trouveroy(1)(2)................ 43 Director
Peter C. Bentz............................ 33 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Anthony J. Pompliano, Chairman of the Board of Directors, has more than 30
years of experience in the telecommunications industry. Mr. Pompliano was
elected a director of the Company in November 1993. He was co-founder and
President of Metropolitan Fiber Systems, the predecessor organization to MFS
Communications, a publicly-traded CLEC that was acquired by WorldCom, Inc. in
December 1996. Mr. Pompliano served as President, CEO and Vice Chairman of MFS
Communications from April 1988 until March 1991. He joined the Company in August
1993 after the expiration of his non-competition agreement with MFS
Communications. Before his association with MFS Communications and its
predecessor, he was Vice President -- Operations and Sales for MCI
Telecommunications International from 1981 to 1987, and prior thereto, was Vice
President -- National Operations for Western Union International, Inc. from 1960
to 1981.
Jack E. Reich, President and Chief Executive Officer, had 22 years of
telecommunications industry and management experience before joining the Company
in December 1996. Mr. Reich was elected to the Board of Directors on September
22, 1997. For two and one-half years prior to joining ACSI, Mr. Reich was
employed by Ameritech, Inc. as President of its Custom Business Service
Organization, where Mr. Reich was responsible for full business marketing to
Ameritech's largest customers for telecommunications services, advanced data
services, electronic commerce and managed services/outsource initiatives. Prior
thereto, he served as President of MCI's Multinational Accounts organization,
and also served as MCI's Vice President of Products Marketing. Mr. Reich has
also held sales and marketing positions at AT&T and ROLM Corp. Mr. Reich has a
B.S. degree from St. Louis University and an MBA from the University of Chicago.
Ronald E. Spears, Chief Operating Officer, joined the Company on February
2, 1998. Mr. Spears has over 20 years of experience in the telecommunications
industry. For two years prior to joining the Company, Mr. Spears served as
Corporate Vice President -- Telecommunications for Citizens Utilities where he
was responsible for the development and execution of communications for its
Citizens Communications subsidiary. While employed by Citizens Utilities, Mr.
Spears managed over 3500 employees, helped build a 5-market CLEC business and
developed and launched their long distance business. Prior thereto he served as
Chairman and Chief Executive Officer of Videocart Inc. and from 1984 until 1990,
as President of MCI Communications Corporation's Midwest operating
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division. He also serves on the Board of Directors of Hungarian Telephone and
Cable Corp. Mr. Spears has a B.S. degree in Electrical Engineering from the
United States Military Academy and a Masters degree in Public Service from
Western Kentucky University.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for interexchange, cellular, paging and other
competitive telecommunication services prior to joining the Company in 1994. She
is a director of COMPTEL and from February 1995 through 1997, she served as an
officer and director of the Association for Local Telecommunications Services.
Ms. Murphy was senior counsel to Locke Purnell Rain Harrell, a Dallas-based law
firm, from 1993 to 1994. From 1987 to 1992, Ms. Murphy was a partner of Wirpel
and Murphy, a telecommunications law firm she co-founded, and from 1992 to 1993
she was a sole practitioner. She holds a B.A. degree from the University of
Colorado and a J.D. from the Catholic University of America and is admitted to
practice law in the District of Columbia and Louisiana.
David L. Piazza, Chief Financial Officer, joined the Company on March 24,
1997. For ten years prior to joining the Company, Mr. Piazza was employed by MFS
Communications in a variety of finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T for four years in its
finance and regulatory support divisions. He spent the first five years of his
career with Arthur Andersen & Co. in its regulated industries and public utility
practice. Mr. Piazza received his B.S. degree in Accountancy from the University
of Illinois and holds a CPA.
George M. Middlemas, Director, was elected a director of the Company in
December 1993. Mr. Middlemas is a general partner of Apex Management
Partnership, which is the general partner of Apex Investment Fund I, L.P. and
Apex Investment Fund II, L.P., both of which are venture capital funds, and
affiliates of First Analysis Corporation, a principal stockholder of the
Company. See "Principal Stockholders." From March 1991 to December 1991, Mr.
Middlemas acted as an independent consultant providing fund raising and other
advisory services. From 1985 until March 1991, Mr. Middlemas was a Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm. He also serves on the Board of Directors of PureCycle Corporation,
Security Dynamics Technologies, Inc. and several privately held companies.
Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C. and currently serves as a portfolio manager concentrating in the
healthcare, communications, food and food services industries. From 1985 until
he joined W.R. Huff Asset Management Co., L.L.C., Mr. Banks was employed by
Merrill Lynch & Co. Mr. Banks received his B.A. degree from Rutgers College and
his MBA degree from Rutgers University. Mr. Banks also serves as a director of
Magellan Health Services.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty received his undergraduate degree from Stanford
University and his law degree from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Partner responsible for originating,
structuring and managing equity and debt investments. From
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1991 to 1992, Mr. Giess worked in the Corporate Finance Group of ING Capital.
From 1990 to 1991, Mr. Giess was employed by the Corporate Finance Group of
General Electric Capital Corporation where he worked in the media and
entertainment group. Prior to attending business school, from 1986 to 1988, Mr.
Giess was the Credit Department Manager of the Boston Branch of ABN Amro North
America, Inc. From 1984 to 1986, Mr. Giess was employed at the Shawmut Bank of
Boston. Mr. Giess also serves as a director of Matthews Studio Equipment Group,
CMI Holding Corp. and TransCare Corporation. Mr. Giess received his
undergraduate degree from Dartmouth College and his MBA from the Wharton School
of the University of Pennsylvania.
Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Partner
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York. Mr. Trouveroy also serves as a director of AccessLine
Technologies, Inc., Cost Plus, Inc., Kasper A.S.L., Ltd. and TransCare
Corporation. Mr. Trouveroy holds B.S. and Masters degrees in Economics from the
University of Louvain in Belgium, as well as an MBA from the University of
Chicago.
Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his MBA from the Wharton School of the University of
Pennsylvania in 1992.
The Board is comprised of eight members who were elected by the holders of
the Common Stock. All directors of the Company hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1998, certain information
regarding the beneficial ownership of the Common Stock outstanding (assuming the
exercise of options and warrants exercisable on or within 60 days of such date)
by (i) each person who is known to the Company to own 5% or more of the Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all executive officers and directors of the Company as a group.
Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OWNED
--------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(2)
- --------------------------- ------ ----------
<S> <C> <C>
Anthony J. Pompliano........................................ 1,649,999(3) 3.4%
Jack E. Reich............................................... 320,722(4) *
Ronald E. Spears............................................ 20,021(5) *
Riley M. Murphy............................................. 300,871(6) *
David L. Piazza............................................. 57,380(7) *
George M. Middlemas......................................... 1,699,499(8) 3.6
Christopher Rafferty(9)..................................... 8,000 *
Edwin M. Banks(9)........................................... -- --
Peter C. Bentz(9)........................................... -- --
Olivier L. Trouveroy(10).................................... -- --
Benjamin P. Giess(10)....................................... -- --
The Huff Alternative Income Fund, L.P....................... 15,090,140(11) 31.2
ING Equity Partners, L.P. I................................. 7,946,828(12) 16.7
First Analysis.............................................. 3,202,233(13) 6.3
All executive officers and directors as a group (11
persons).................................................. 4,056,492 8.2
</TABLE>
- ---------------
* Less than one percent.
(1) The addresses of all officers and directors listed above are in the care of
the Company.
(2) The percentage of total outstanding stock for each stockholder is based on
the number of shares outstanding as of June 30, 1998.
(3) Includes currently exercisable options to purchase 1,649,899 shares of
common stock.
(4) Includes currently exercisable options to purchase 300,000 shares, 2,272
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan and 18,450 shares of common stock awarded for 1997 bonuses pursuant to
the Company's Annual Performance Plan.
(5) Includes currently exercisable options to purchase 20,000 shares and 21
shares of common stock purchased through the 1996 Employer Stock Purchase
Plan.
(6) Includes currently exercisable options to purchase 290,002 shares, 3,379
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan and 7,490 shares of common stock awarded for 1997 bonuses pursuant to
the Company's Annual Performance Plan.
(7) Includes currently exercisable options to purchase 50,000 shares of common
stock and 7,380 shares of common stock awarded for 1997 bonuses pursuant to
the Company's Annual Performance Plan.
(8) Includes 20,000 shares owned directly, 8,000 shares owned through an
individual retirement account and currently exercisable options to purchase
30,000 shares. Also includes 1,222,702 shares of Common Stock owned by Apex
II and 418,797 shares of Common Stock owned by Apex I. Mr. Middlemas is a
general partner of Apex Management Partnership which is the general partner
of Apex I and Apex II. Mr. Middlemas disclaims beneficial ownership of the
shares owned by Apex I and Apex II, except to the extent of his ownership
in the general partner of Apex I and in the general partner of Apex II.
(9) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff. Mr. Rafferty is an employee of WRH Partners,
L.L.C., the general partner of Huff. Messrs. Rafferty, Bentz and Banks
disclaim beneficial ownership of all shares held by Huff.
(10) Mr. Trouveroy is a Managing Partner of ING and Mr. Giess is a Partner of
ING. Messrs. Trouveroy and Giess disclaim beneficial ownership of all
shares held by ING.
(11) Includes currently exercisable warrants to purchase 200,000 shares. The
address for Huff is 1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(12) Includes currently exercisable warrants to purchase 100,000 shares. The
address for ING is 135 East 57th Street, 16th Floor, New York, NY 10022.
(13) Includes 1,222,702 shares of Common Stock owned by Apex II. Includes
418,797 shares of Common Stock owned by Apex I. Includes 780,883 shares of
Common Stock owned by The Productivity Fund II, L.P. ("Productivity").
Includes 779,855 shares of Common Stock owned by Environmental Private
Equity Fund II, L.P. ("EPEF"). First Analysis Corporation ("FAC") is an
ultimate general partner of Apex I, Apex II, Productivity and EPEF and may
be deemed to be the beneficial owner of the shares owned by them. FAC
disclaims beneficial ownership of these shares. This information was
obtained from a Schedule 13D filed with the SEC on May 6, 1997, as amended
from time to time. The address for FAC is 233 South Wacker Drive, Suite
9600, Chicago, IL 60093.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 128,000,000 shares of
capital stock, consisting of 125,000,000 shares of Common Stock, par value $.01
per share, and 3,000,000 shares of Preferred Stock, par value $1.00 per share.
On June 30, 1998, there were 47,385,349 shares of Common Stock issued and
outstanding and held of record by approximately 276 persons, including 116,400
shares issued in connection with conversion of 2,910 shares of Preferred Stock
and 17,260,864 shares issued in connection with the conversion of 461,254 shares
of Preferred Stock.
1998 COMMON STOCK OFFERING. On April 3, 1998, the Company completed the
1998 Common Stock Offering. 7,502,418 of such shares were issued and sold by the
Company and 597,582 of such shares were sold by certain stockholders of the
Company. Total net proceeds to the Company from the 1998 Common Stock Offering
were approximately $134.2 million.
JUNIOR PREFERRED STOCK OFFERING. On October 16, 1997, the Company
consummated the sale of 150,000 shares (the "Junior Preferred Stock Offering"
and, together with the Unit Offering and the Debt Offering, each as defined
below, the "Recent Offerings"), consisting of its 12 3/4% Junior Redeemable
Preferred Stock due 2009 (the "12 3/4% Preferred Stock"). Total net proceeds to
the Company from the Junior Preferred Stock Offering were approximately $146.0
million.
UNIT OFFERING. On July 10, 1997, the Company consummated the issuance and
sale of 75,000 units (the "Unit Offering"), consisting of its 14 3/4% Redeemable
Preferred Stock due 2008 (the "14 3/4% Preferred Stock" and, together with the
12 3/4% Preferred Stock, the "Preferred Stock") and warrants (the "Unit
Warrants" and together with the 14 3/4% Preferred Stock, the "Units") to
purchase approximately 6,023,800 shares (subject to adjustment) of its Common
Stock). Total net proceeds to the Company from the Unit Offering were
approximately $70 million.
COMMON STOCK OFFERING. On April 15, 1997, the Company consummated (i) the
issuance and sale of 5,060,000 shares of Common Stock (inclusive of the May 14,
1997 exercise by the underwriters of their over-allotment option) at a price per
share of $5.00 in an underwritten public offering and (ii) the issuance and sale
directly to certain of its principal stockholders of 3,600,000 shares of Common
Stock at a purchase price of $4.70 per share (together, the "Common Stock
Offering"). Total net proceeds to the Company from the Common Stock Offering
were approximately $40 million.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Director may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
It is not possible to state the actual effect of the authorization of any
particular series of Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the specific rights of the holder
of Preferred Stock of any further series. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders.
COMMON STOCK
The Company is authorized to issue 125,000,000 shares of Common Stock.
Under the Company's By-Laws, at least a majority of the issued and outstanding
voting securities of the Company present at a duly called stockholders' meeting
constitutes a quorum. Generally, if a quorum is present the affirmative vote of
the majority of the voting securities represented at the meeting constitutes an
act of the stockholders.
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Subject to the rights of holders of the Preferred Stock, certain covenants
contained in the Indentures which restrict the Company's ability to declare
dividends on its Common Stock, the restrictions on dividends contained in the
New AT&T Credit Facility and the restrictive covenants which are expected to be
contained in the GSCP Credit Facilities, holders of the Common Stock are
entitled to receive dividends, on a pro rata basis, as may from time to time be
declared by the Board of Directors. The holders of Common Stock are entitled to
one vote per share, voting together with the holders of Preferred Stock (voting
on an as-converted basis) as a single class (except with respect to the election
of directors and certain transactions and matters), on every question submitted
to them at a meeting of shareholders. In the event of liquidation, dissolution
or winding up, the holders of Common Stock are, subject to the liquidation,
dissolution or winding up, the holders of Common Stock are, subject to the
liquidation preference of the holders of Preferred Stock, entitled to share
ratably in all assets of the Company available for distribution to stockholders
along with the holders of the Preferred Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
GSCP CREDIT FACILITIES
GSCP has entered into a commitment letter with the Company to provide the
$300.0 million GSCP Credit Facilities, which are expected to close in the third
quarter of 1998. GSCP Credit Facilities are expected to consist of (i) the $35.0
million Series A Facility, the proceeds of which will be used to refinance the
New AT&T Credit Facility and (ii) the $265.0 million Series B Facility, $40.0
million of which would be in the form of the Series B Term Facility and $225.0
million of which would be in the form of the Series B Revolving Facility). The
proceeds of the Series B Facility would be available to the Company only to
provide purchase money financing for the acquisition, construction and
improvement of telecommunications assets of the Company's operating
subsidiaries.
An intermediate holding company (the "Finance Sub") which will be wholly
owned by the Company would own all of the capital stock of the Company's
operating subsidiaries and would be the borrower under the Series A Facility.
The Company would be the borrower under the Series B Facility. The Finance Sub
is expected to enter into a secured intercompany note (the "Master Note")
pursuant to which the Company would loan proceeds of the Series B Facility to
the Finance Sub, which in turn would provide intercompany loans to the operating
subsidiaries. Intercompany loans made by the Finance Sub to the operating
subsidiaries would be made pursuant to intercompany notes which would be secured
by all of the assets of such subsidiaries. Such intercompany notes and security
interests would be pledged by the Finance Sub to secure the Master Note. The
Master Note, together with all security therefor, would be pledged by the
Company to secure the loans made under the Series B Facility. The Series A
Facility is expected to be secured by a first priority security interest in 100%
of the capital stock of certain subsidiaries of the Company, including the
Finance Sub, and substantially all other assets of the Finance Sub and such
other subsidiaries.
The GSCP Credit Facilities are expected to have an eight-year maturity
subject to acceleration upon the occurrence of certain events. The Series A
Facility and Series B Term Facility are expected to be fully drawn at closing
and amounts repaid thereunder (in accordance with scheduled amortization and
otherwise) may not be reborrowed. It is expected that, commencing on the fifth
year following the closing of the GSCP Credit Facilities, borrowings will be
amortized and there will be corresponding commitment reductions. At the request
of the Company and subject to requisite lender consent, an incremental senior
secured credit facility of up to $100.0 million may be furnished to the Company
at such time that there are no more than $25.0 million of unfunded commitments
under the GSCP Credit Facilities. Certain operating subsidiaries of the Company
are expected to guarantee the obligations of the Finance Sub under the Series A
Facility. All amounts outstanding under the GSCP Credit Facilities are expected
to bear interest at a base rate or reserve adjusted eurodollar rate plus an
applicable margin based on performance. The GSCP Credit Facilities will be
subject to certain representations, warranties, covenants and events of default
customary for credits of this nature and otherwise agreed upon by the parties
thereto.
GSCP intents to syndicate the GSCP Credit Facilities to a group of lenders
selected in consultation with the Company and to identify a lender to act as
administrative agent for the lenders.
NEW AT&T CREDIT FACILITY
On December 30, 1997, the Company entered into the New AT&T Credit Facility
pursuant to which AT&T Commercial Finance Corporation has provided up to $35.0
million in financing in order to effect the Refinancing and for general
corporate purposes. It is expected that amounts outstanding under the New AT&T
Credit Facility will be repaid in connection with the closing of the GSCP Credit
Facilities. See "-- GSCP Credit Facilities" above.
The loans under the New AT&T Credit Facility are secured by the capital
stock of the material subsidiaries of the Company and the promissory notes (the
"Intercompany Notes") of certain subsidiaries of the Company evidencing debt
provided by the Company pursuant to the Refinancing. The aggregate outstanding
principal balance of the loans is payable in twenty-four (24) consecutive
quarterly installments beginning on December 31, 1998 and continuing on each of
the last calendar
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days (or the next succeeding business day if such date is not a business day) of
March, June, September and December in each calendar year thereafter through and
including September 30, 2004. The principal of borrowed amounts may be prepaid
in certain circumstances and must be prepaid, without premium or penalty, in
other circumstances. Interest is due quarterly. Interest is variable based on
the three-month Commercial Paper Rate or LIBOR Rate plus 4.5% per annum, at the
Company's option, and is compounded quarterly. Upon certain events of default,
additional interest at a rate of 2% will become payable. In addition, the New
AT&T Credit Facility includes covenants, some of which impose certain
restrictions on the Company and its material subsidiaries including restrictions
on the declaration or payment of dividends, the conduct of certain activities,
certain investments, the creation of additional liens or indebtedness, the
disposition of assets, transactions with affiliates and extraordinary corporate
transactions.
In connection with the New AT&T Credit Facility, the Company issued to AT&T
Credit Corporation 207,964 shares of its common stock in exchange for AT&T
Credit Corporation conveying to the Company (i) 145 shares of common stock of
American Communication Services of Columbia, Inc., (ii) 14.5 shares of common
stock of American Communication Services of El Paso, Inc., (iii) 145 shares of
common stock of American Communication Services of Fort Worth, Inc., (iv) 145
shares of common stock of American Communication Services of Greenville, Inc.,
and (v) 156.3 shares of common stock of American Communication Services of
Louisville, Inc. The Company was required to pledge to AT&T Commercial Finance
Corporation (i) all of its shares (present and future) of capital stock in its
material subsidiaries, along with all options and warrants therein, (ii) the
Intercompany Notes and (iii) any proceeds of any of the foregoing. Under certain
circumstances, the pledge agreement governing such pledge also restricts the
Company's ability to receive and retain dividends in respect of the pledged
collateral.
THE EXISTING NOTES
The terms of the Existing Notes include those stated in the applicable
indenture and those made a part of the applicable indenture by reference to the
Trust Indenture Act of 1939, as in effect on the date of such indenture. The
terms of the Existing Notes are substantially similar. The following summaries
of certain provisions of those indentures do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the indentures.
The Existing Notes are general unsubordinated and unsecured senior
obligations of the Company and rank pari passu with all other unsubordinated and
unsecured indebtedness of the Company. As a holding company that conducts
virtually all of its business through subsidiaries, the Company currently has no
source of operating cash flow other than from dividends and distributions from
its subsidiaries. The Company's subsidiaries have no obligation to pay amounts
due on the Existing Notes and do not guarantee the Existing Notes. Therefore,
the rights of the holders of the Existing Notes are effectively subordinated to
all liabilities of the Company's subsidiaries, including trade payables. Any
rights of the Company and its creditors, including the holders of the Existing
Notes, to participate in the assets of any of the Company's subsidiaries upon
any liquidation or reorganization of any such subsidiary are subject to the
prior claims of that subsidiary's creditors (including trade creditors).
Upon a Change of Control (as defined in the indentures), each holder of the
Existing Notes will have the right to require the Company to repurchase all or
any part of such holder's Existing Notes at 101% of the respective Accreted
Value (as defined in the indentures) thereof, or, in the case of any such
repurchase on or after November 1, 2000 in the case of the 2005 Notes, on or
after April 1, 2001 in the case of the 2006 Notes and on or after January 15,
2002 in the case of the 2007 Notes, 101% of the respective principal amount
thereof, plus accrued and unpaid interest, if any, thereon, to the date of
repurchase. A Change of Control would occur if, among other things, any person
or group, other than Mr. Pompliano, certain affiliates of FAC, ING or Huff and,
in the case of the 2005 Indenture and 2006 Indenture, Mr. Kozak, acquires more
than 35% of the total voting power of the Company. See "Risk Factors -- Change
of Control Risk."
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Each of the indentures contains certain covenants which, among other
things, restrict the ability of the Company and certain of its subsidiaries to
incur additional indebtedness, pay dividends or make distributions in respect of
the Company's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes and 2006 Notes that, as of June 10, 1997, it
had approximately $13.0 million in the aggregate of ordinary course trade
accounts payable that were more than 60 days overdue. As of June 30, 1997, the
Company had approximately $17.4 million in the aggregate of ordinary course
trade accounts payable that were more than 60 days overdue. These overdue
amounts constituted Indebtedness of the Company, as that term is defined in each
such indenture governing the 2005 Notes and 2006 Notes. The incurrence by the
Company of such Indebtedness was not permitted under the 2005 Indenture and 2006
Indenture and, therefore, constituted an Event of Default (as defined under each
of those indentures). The Company used a portion of the proceeds of the Unit
Offering to pay in full all ordinary course trade accounts payable that were
more than 60 days overdue to cure such Event of Default.
AMENDMENT OF EXISTING INDENTURES
The Company paid approximately $10.3 million to effect the amendments to
the Existing Indentures (the "Amendments") on February 26, 1998. The Amendments
amended certain covenants which significantly limited the ability of the Company
and its subsidiaries to incur additional indebtedness, issue disqualified stock
or make investments or acquisitions. The previous limitations on indebtedness
(the "Previous Debt Covenants") prohibited the incurrence of indebtedness (with
certain exceptions) unless, after giving effect to such incurrence, the Debt to
EBITDA Ratio of the Company was no more than 5.5x until November 1, 1998 or 5.0x
thereafter. The Amendments provide an alternative test which, when combined with
existing provisions, permits the incurrence of additional indebtedness if the
Company satisfies either the Debt to EBITDA Ratio test in the Previous Debt
Covenants or a new test whereby the Debt to Capital Ratio does not exceed 2.0x;
provided, that in determining the amount of indebtedness the Company may incur
in reliance on the new Debt to Capital Ratio test, $100,000,000 shall be
subtracted from the amount that may be incurred, which will have the effect of
reducing the amount of indebtedness that could otherwise have been incurred.
Debt to Capital Ratio is, as of any date of determination, the ratio of (i) the
amount of indebtedness of the Company and its Restricted Subsidiaries then
outstanding on a consolidated basis to (ii) the capital of the Company and its
restricted subsidiaries on a consolidated basis. For purposes of this
calculation, "capital" means stockholders' equity (deficit), except that all
Preferred Stock is included and retained earnings (deficit) is excluded, each as
determined in accordance with GAAP.
The Previous Debt Covenants also contained, among other exceptions, an
allowance for new indebtedness not subject to restriction in an aggregate amount
not to exceed $428,634. The Amendments increased this allowance to $10,000,000.
The Amendments also permit, subject to the limitations described below, the
incurrence of purchase money debt which is issued for the construction,
acquisition and improvement of telecommunications assets; provided, that the
amount of such purchase money debt does not exceed the cost of the construction,
acquisition or improvement of the applicable telecommunications assets.
Purchase money debt may only be incurred under this exemption so long as
all purchase money debt does not exceed 50% of the amount of accreted unsecured
indebtedness of the Company and its restricted subsidiaries on a consolidated
basis as of such date; provided, that in calculating the purchase money debt
allowance, incurrences of purchase money debt consisting of (A) capital lease
obligations resulting from the conversion of operating leases in an amount not
to exceed
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<PAGE> 76
$36,000,000 and (B) up to $35,000,000 of indebtedness incurred pursuant to the
New AT&T Credit Facility shall not be counted.
The existing definitions of "Permitted Investments" and "Permitted Liens"
were amended to permit investments in telecommunications assets and the creation
of liens in connection with the purchase money debt exemption.
THE 2005 NOTES
The 2005 Notes mature on November 1, 2005. The yield on the 2005 Notes
equals 13% per annum, computed on a semi-annual bond equivalent basis and
calculated from November 9, 1995. The 2005 Notes will accrete at a rate of 13%,
compounded semi-annually, to an aggregate principal amount of $190,000,000 by
November 1, 2000. Cash interest will not accrue on the 2005 Notes prior to
November 1, 2000. Thereafter, interest on the 2005 Notes will accrue at the rate
of 13% per annum and will be payable in cash semi-annually on May 1 and November
1, commencing May 1, 2001. The 2005 Notes will be redeemable, at the option of
the Company at any time, in whole or in part, on or after November 1, 2000, at
110%, 106 2/3% and 103 1/3% of the principal amount for the twelve months
following November 1, 2000, 2001 and 2002, respectively, plus accrued and unpaid
interest, if any, to the date of redemption.
THE 2006 NOTES
The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of the Company at any time, in whole or in part, on or after April
1, 2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the
twelve months following April 1, 2001, 2002 and 2003, respectively, plus accrued
and unpaid interest, if any, thereon, to the date of repurchase.
THE 2007 NOTES
On July 23, 1997, the Company consummated the sale of $220 million
aggregate principal amount of the 2007 Notes. Of the total net proceeds of $204
million, the Company placed approximately $70 million representing funds
sufficient to pay the first five semi-annual interest payments on the 2007
Notes, into an escrow account for the benefit of the holders thereof.
The 2007 Notes mature on July 15, 2007. The 2007 Notes bear interest at a
rate of 13 3/4% per annum from July 23, 1997 payable semi-annually in cash on
January 15, and July 15, commencing January 15, 1998. The Company placed
approximately $70.0 million of the proceeds from the sale of the 2007 Notes,
representing funds, together with interest thereon, sufficient to pay the first
five semi-annual interest payments on the 2007 Notes, into an escrow account to
be held by the escrow agent for the benefit of the holders of the 2007 Notes.
The 2007 Notes are redeemable, at the option of the Company, in whole or in
part, on or after July 15, 2002 at 106.875%, 105.156%, 103.438%, 101.719% and
100% of their principal amount for the twelve months following July 15, 2002,
2003, 2004, 2005 and 2006, respectively, plus accrued and unpaid interest, if
any, thereon, to the date of repurchase. In addition, at any time on or prior to
July 15, 2000, the Company may, at its option, redeem up to 35% of the aggregate
principal amount at maturity of the 2007 Notes with the net cash proceeds of one
or more Equity Offerings (as defined in the related indenture), at a redemption
price equal to 113.75% of the principal amount thereof; provided, however, that
after giving effect to any such redemption, at least $143.0 million aggregate
principal amount of the 2007 Notes remains outstanding.
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DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under an indenture,
dated as of July 24, 1998 (the "Indenture"), between the Company and The Chase
Manhattan Bank, as trustee under the Indenture (the "Trustee"). For purposes of
this Description of the Notes, the term "Company" refers to e.spire
Communications, Inc. and does not include its subsidiaries except for purposes
of financial data determined on a consolidated basis.
The terms of the New Notes include those stated in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the Indenture (the "Trust Indenture Act"). The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture. A copy of the Indenture is available
from the Company upon request. Whenever particular defined terms of the
Indenture not otherwise defined herein are referred to, such defined terms are
incorporated herein by reference. The New Notes are subject to all such terms,
and holders of the New Notes are referred to the Indenture and the Trust
Indenture Act for a complete statement of such terms. Certain terms used herein
are defined below under "-- Certain Definitions".
The New Notes will rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company, including the 2005
Notes, the 2006 Notes and the 2007 Notes and will be senior in right of payment
to all existing and future subordinated indebtedness of the Company. As of June
30, 1998, the total outstanding indebtedness of the Company that would rank pari
passu with the New Notes was approximately $440.4 million.The New Notes will not
be secured by any assets and will be effectively subordinated to any secured
indebtedness of the Company to the extent of the value of the assets securing
such indebtedness. As of June 30, 1998, the Company, on a consolidated basis,
had approximately $35.0 million outstanding of secured indebtedness. It is
expected that the Company's obligations under the GSCP Credit Facilities will be
secured by a pledge of substantially all of the capital stock of the Company's
subsidiaries, and the tangible and intangible assets of the Company and its
subsidiaries. See "Risk Factors -- Ranking of the Notes; Asset Encumbrances" and
"Description of Certain Indebtedness".
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the New Notes and will not guarantee the New Notes. As a
result, the New Notes effectively will be subordinated to all existing and
future third-party indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). None of the indebtedness was secured by
first priority liens on all the assets of the borrowing subsidiaries. See
"Description of Certain Indebtedness". Any rights of the Company and its
creditors, including the holders of New Notes, to participate in the assets of
any of the Company's subsidiaries upon any liquidation or reorganization of any
such subsidiary will be subject to the prior claims of that subsidiary's
creditors (including trade creditors).
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $375.0 million
and will mature on July 1, 2008. The New Notes will be issued in denominations
of $1,000 and integral multiples thereof. The Old Notes were offered at a
discount from their principal amount at maturity, with the initial Accreted
Value per $1,000 in principal amount of Old Notes equal to $599.89 (representing
the original price at which the Notes are being offered). The New Notes will
accrete (representing the amortization of original issue discount) on a
semi-annual bond equivalent basis using a 360-day year comprised of twelve
30-day months such that the Accreted Value shall be equal to the full principal
amount at maturity of the New Notes on July 1, 2003 (the "Full Accretion Date").
See
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<PAGE> 78
"Certain Federal Income Tax Considerations." No interest is payable in cash on
the New Notes prior to the Full Accretion Date. Beginning on the Full Accretion
Date the New Notes will accrue interest at the rate of 10.625% per annum, which
will be payable in cash semi-annually in arrears on January 1 and July 1 of each
year, commencing January 1, 2004, to the Person in whose name the New Note (or
any predecessor Note) is registered at the close of business on the immediately
preceding December 15 or June 15, as the case may be. The New Notes bear
interest on overdue principal and premium, if any, and, to the extent permitted
by law, overdue interest at the rate of 11.625% per annum. Interest on the New
Notes is computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal and interest will be payable at the office of the Paying Agent
but, at the option of the Company, interest may be paid by check mailed to the
registered holders at their registered addresses. The New Notes will be issued
without coupons and in fully registered form, in denominations of $1,000 and
integral multiples thereof. Unless otherwise designated by the Company, the
Company's office or agency in New York is the office of the Trustee maintained
for such purpose.
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the option of the Company prior to
July 1, 2003. Thereafter, the New Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (if any), if
redeemed during the twelve months beginning July 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 105.312%
2004........................................................ 103.542%
2005........................................................ 101.771%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the Accreted Value on the date of redemption
with the net proceeds from one or more Equity Offerings of the Company at a
redemption price equal to 110.625% of the aggregate principal amount thereof on
the date of redemption; provided, however, that, after giving effect to any such
redemption, at least 65% of the original principal amount of the New Notes
remain outstanding. In order to effect the foregoing redemption with the
proceeds of any Equity Offering, the Company shall make such redemption not more
than 60 days after the consummation of any such Equity Offering.
MANDATORY REDEMPTION
Except as set forth under "-- Repurchase at the Option of Holders Upon a
Change of Control" and "-- Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the New
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount or an integral multiple thereof) of such holder's New
Notes pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
any Change of Control Payment Date (as defined below), or, if such Change of
Control Offer is to be consummated
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prior to the Full Accretion Date, 101% of the Accreted Value thereof to any
Change of Control Payment Date.
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating: (1)
that a Change of Control Offer is being made pursuant to the covenant in the
Indenture entitled "Repurchase at the Option of Holders upon a Change of
Control" and that all New Notes timely tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (the "Change of
Control Payment Date"), which shall be no earlier than 30 days nor later than 40
days from the date such notice is mailed; (3) that any New Notes or portions
thereof not tendered or accepted for payment will continue to accrete in value
or accrue interest, as the case may be; (4) that, unless the Company defaults in
the payment of the Change of Control Purchase Price, all New Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall cease
to accrue interest, from and after the Change of Control Payment Date; (5) that
holders electing to have any New Notes or portions thereof purchased pursuant to
a Change of Control Offer will be required to surrender the New Notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the New
Notes completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change of
Control Payment Date; (6) that holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of New Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such New Notes or
portions thereof purchased; and (7) that holders whose New Notes are being
purchased only in part will be issued New Notes equal in principal amount to the
unpurchased portion of the New Note or New Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
thereof.
The Company will comply with the requirements of Section 14(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and any other
securities laws and regulations, to the extent such laws and regulations are
applicable, in connection with the repurchase of New Notes pursuant to a Change
of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment New Notes or portions thereof properly tendered pursuant to the Change
of Control Offer; (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all New Notes or portions thereof so tendered; and (3) deliver, or
cause to be delivered, to the Trustee the New Notes so accepted together with an
Officers' Certificate listing the New Notes or portions thereof tendered to the
Company and accepted for payment. The Paying Agent shall promptly mail to each
holder of New Notes so accepted payment in an amount equal to the Change of
Control Purchase Price for such New Notes, and the Trustee shall promptly
authenticate and mail to each holder a New Note equal in principal amount to any
unpurchased portion of the New Notes surrendered, if any; provided that each
such New Note shall be in a principal amount of $1,000 or any integral multiple
thereof.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase New Notes upon a Change of Control may
deter a third party from acquiring the Company in a transaction that constitutes
a Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all New Notes tendered by holders seeking to accept
the Change of Control Offer. In addition, instruments governing other
indebtedness of the Company may prohibit the Company from purchasing any New
Notes prior to their stated maturity, including pursuant to a Change of Control
Offer. See "Description of Certain Indebtedness." In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price for all New Notes
tendered pursuant to such offer or a time when the Company is prohibited from
purchasing the New Notes (and the Company is unable either to
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<PAGE> 80
obtain the consent of the holders of the relevant indebtedness or to repay such
indebtedness), an Event of Default would occur under the Indenture. In addition,
one of the events that constitutes a Change of Control under the Indenture is a
sale, conveyance, transfer or lease of all or substantially all of the property
of the Company. The Indenture is governed by New York law, and there is no
established definition under New York law of "substantially all" of the assets
of a corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of New Notes
to require that the Company repurchase or redeem New Notes in the event of a
takeover, recapitalization or similar restructuring.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) no Event of Default shall have occurred and
be continuing or shall occur as a consequence thereof; (ii) the Company or such
Restricted Subsidiary, as the case may be, receives net consideration at the
time of such Asset Sale at least equal to the Fair Market Value (as evidenced by
a Board Resolution delivered to the Trustee) of the Property or assets sold or
otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds or Telecommunications Assets; and (iv) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from such
Asset Sale in the manner set forth in the next paragraph.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest (or enter a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such Asset Sale in Telecommunications
Assets and/or (ii) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) to the permanent reduction of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary) that is pari passu with the
New Notes or to the permanent reduction of Indebtedness or preferred stock of
any Restricted Subsidiary (other than Indebtedness to, or preferred stock owned
by, the Company or another Restricted Subsidiary); provided, however, that any
Net Cash Proceeds applied to the reduction of Indebtedness represented by the
2005 Notes, 2006 Notes and 2007 Notes shall be in accordance with the next
paragraph. Any Net Cash Proceeds from any Asset Sale that are not used to
reinvest in Telecommunications Assets and/or reduce pari passu Indebtedness of
the Company or Indebtedness or preferred stock of its Restricted Subsidiaries
shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds applied to the permanent reduction of Indebtedness represented by
the 2005 Notes, 2006 Notes and 2007 Notes) calculated as of such date exceeds
$10 million, the Company shall, within 30 days of the date the amount of Excess
Proceeds exceeds $10 million, use such Excess Proceeds to make an offer to
purchase (an "Asset Sale Offer") on a pro rata basis, from all holders,
outstanding New Notes, 2005 Notes, 2006 Notes and 2007 Notes in an aggregate
principal amount equal to the maximum principal amount that may be purchased out
of Excess Proceeds, at a purchase price (the "Offer Purchase Price") in cash
equal to (a) with respect to the 2005 Notes, the 2006 Notes and the New Notes,
100% of the Accreted Value thereof (as defined in the relevant indenture) and
(b) with respect to the 2007 Notes, 100% of the principal amount thereof, plus,
in each case, accrued and unpaid interest, if any, to the purchase date, in
accordance with the procedures set forth in the relevant indenture. Upon
completion of an Asset Sale Offer (including payment of the Offer Purchase
Price), any surplus Excess Proceeds that were the subject of such offer shall
cease to be Excess Proceeds, and the Company may then use such amounts for
general corporate purposes.
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<PAGE> 81
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to an Asset Sale Offer.
REGISTRATION COVENANT; EXCHANGE OFFER
In connection with the Private Placement, the Company and the Initial
Purchasers entered into the Registration Rights Agreement, pursuant to which the
Company agreed to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act for the benefit of
the Holders of Old Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Old Notes
pursuant to the Exchange Offer who are able to make certain representations the
opportunity to exchange their Old Notes for New Notes. If (i) the Company is not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Old Notes
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provisions of information in connection with
the Shelf Registration Statement. The Company will use its reasonable best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission and to keep the Shelf Registration
Statement continuously effective until the earlier of the second anniversary of
the Closing Date or such time as there are no Old Notes outstanding. The Company
shall be deemed not to have used its reasonable best efforts to keep the Shelf
Registration Statement effective for the requisite period if, as a result of
voluntary action taken by the Company, Holders covered thereby are unable to
offer and sell the Old Notes, unless (i) such action is required by applicable
law or (ii) such action is taken by the Company in good faith and for valid
business reasons involving a material undisclosed event; provided, that in the
case of clause (ii), such period shall not exceed 60 days in any 12-month period
(a "Suspension Period").
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 75
days after the Closing Date, (ii) the Company will use its reasonable best
efforts to have the Exchange Offer Registration Statement declared effective by
the Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission New Notes in
exchange for all Old Notes tendered prior thereto in the Exchange Offer and (iv)
if obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 45 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
90 days after such obligation arises. If (a) the Company fails to file any of
the Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
date of effectiveness of the Exchange Offer Registration Statement, or (d) the
Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable (other than
in connection with a permissible Suspension Period) in connection with resales
of the Old Notes or the New Notes, as the case may be, during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through
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(d) above a "Registration Default"), then the Company will pay Liquidated
Damages to each Holder of Notes, with respect to the first 90-day period
immediately following the occurrence of the first Registration Default in an
amount equal to $.05 per week per $1,000 principal amount of Notes held by such
Holder. The amount of the Liquidated Damages will increase by an additional $.05
per week per $1,000 principal amount of Notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages for all Registration Defaults of $.50 per week per
$1,000 principal amount of Notes. All accrued Liquidated Damages will be paid by
the Company on each January 1 and July 1 to the Global Note Holder by wire
transfer of immediately available funds or by federal funds check and to Holders
of Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
The Company will not, and shall not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness), and the Company shall not issue any Disqualified Stock or permit
any of its Restricted Subsidiaries to issue any Disqualified Stock or Preferred
Stock; provided that the Company may incur Indebtedness or issue Disqualified
Stock if, after giving effect to such issuance or incurrence on a pro forma
basis, (i) the Debt to EBITDA Ratio of the Company does not exceed 5.5x in the
case of any issuance or incurrence on or before November 1, 1998, or 5.0x in the
case of any issuance or incurrence thereafter or (ii) the Debt to Capital Ratio
as of the most recent available quarterly or annual balance sheet, after giving
pro forma effect to the incurrence of such Indebtedness and any other
Indebtedness incurred since such balance sheet date and the receipt and
application of the proceeds thereof, does not exceed 2.0x; provided that in
determining the amount of Indebtedness the Company may incur in reliance upon
the alternative set forth in clause (ii), $100,000,000 shall be subtracted from
such amount.
The foregoing limitation will not apply to: (a) the incurrence by the
Company or any of its Restricted Subsidiaries of Indebtedness under the Secured
Credit Facility; provided that the aggregate principal amount of Indebtedness
under such facility does not exceed $35 million at any one time outstanding; (b)
the Existing Indebtedness; (c) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; (d) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the covenant
described in this paragraph; (e) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were entered into
in connection with transactions in the ordinary course of business or the
incurrence of Indebtedness that is permitted by the covenant described in this
paragraph; (f) the incurrence by the Company of Indebtedness represented by the
Existing Notes and the New Notes; (g) Indebtedness of the Company in connection
with one or more standby letters of credit issued in the ordinary course of
business; (h) Indebtedness in respect of performance, surety or appeal bonds
provided by the Company in the ordinary course of business; (i) Purchase Money
Debt, provided that the amount of
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such Purchase Money Debt does not exceed the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
provided, however that the Company may not incur, as of any date of
determination, Purchase Money Debt in excess of 50% of the amount of accreted
unsecured Indebtedness of the Company and its Restricted Subsidiaries on a
consolidated basis as at such date (the "Purchase Money Debt Allowance");
provided further, however that in calculating such Purchase Money Debt
Allowance, incurrences of Purchase Money Debt consisting of (A) Capital Lease
Obligations resulting from the conversion of operating leases in an amount not
to exceed $36,000,000 and (B) Indebtedness incurred pursuant to clause (a) of
this paragraph shall not be included; (j) the incurrence by the Company or any
of its Restricted Subsidiaries of Refinancing Indebtedness issued in exchange
for, or the proceeds of which are used to refinance, repurchase, replace, refund
or defease ("Refinance" and, correlatively, "Refinanced" and "Refinancing")
Indebtedness permitted pursuant to clause (b) or (f) of this paragraph; provided
that (i) the amount of such Refinancing Indebtedness shall not exceed the
principal amount of, premium, if any, and accrued interest on the Indebtedness
so Refinanced (or if such Indebtedness was issued with original issue discount,
the original issue price plus amortization of the original issue discount at the
time of the repayment of such Indebtedness) plus the fees, expenses and costs of
such Refinancing and reasonable prepayment premiums, if any, in connection
therewith; (ii) such Refinancing Indebtedness shall have a stated maturity no
earlier than the Indebtedness being Refinanced; (iii) such Refinancing
Indebtedness shall have an Average Life equal to or greater than the Average
Life of the Indebtedness being Refinanced; (iv) if the Indebtedness being
Refinanced is subordinated in right of payment to the New Notes, such
Refinancing Indebtedness shall be subordinated in right of payment to the New
Notes on terms at least as favorable to the holders of New Notes as those
contained in the documentation governing the Indebtedness being so Refinanced;
and (v) no Restricted Subsidiary shall incur Refinancing Indebtedness to
Refinance Indebtedness of the Company or another Subsidiary; (k) the incurrence
by the Company or any of its Restricted Subsidiaries of Indebtedness of any
Person which incurrence resulted directly from an Investment described in clause
(ix) of the definition of "Permitted Investments" herein; provided that, (i)
immediately after giving effect to such Investment on a pro forma basis (and
treating any Indebtedness which becomes, or is anticipated to become, an
obligation of the Company or any Restricted Subsidiary as a result of such
Investment as having been incurred by the Company or such Restricted Subsidiary
at the time of such Investment), the Company would (A) be permitted to incur
$1.00 of additional Indebtedness under the immediately preceding paragraph or
(B) have a Debt to EBITDA Ratio which is equal to or not worse than the Debt to
EBITDA Ratio of the Company immediately prior to such Investment or (ii) such
incurrence is otherwise permitted; provided further that Indebtedness incurred
by the Company and its Restricted Subsidiaries under this clause (k) as a result
of any such Investment does not exceed 50 percent of the Fair Market Value of
the Qualified Stock used as consideration in such Investment; provided further
that the aggregate principal amount of Indebtedness incurred under this clause
(k) does not exceed $50,000,000; (l) the incurrence by the Company of Permitted
Subordinated Financing; and (m) Indebtedness not otherwise permitted to be
incurred pursuant to the covenant described in this paragraph in an aggregate
amount not to exceed $10,000,000.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the New Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (i)
pari passu with the New Notes then the Guarantee of such Guaranteed Indebtedness
shall be pari passu
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with, or subordinated to, the Subsidiary Guarantee or (ii) subordinated to the
New Notes, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the New Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by, or as a result of, payment under such Guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any Liens of any kind, other than Permitted Liens, on or with
respect to any of its Property or assets now owned or hereafter acquired, or any
interest therein or any income or profits therefrom, without effectively
providing that the New Notes shall be secured equally and ratably with (and
provided the New Notes shall be secured prior to any secured obligation that is
subordinated in right of payment to the New Notes) the obligations so secured
for so long as such obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such transaction;
(ii) the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under " -- Limitation on Indebtedness"; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
or assets without securing the New Notes by the covenant described under
" -- Limitation on Liens"; and (iv) the Net Cash Proceeds from such transaction
are applied in accordance with the covenant described under "-- Asset Sales".
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment, (i) no
Default or Event of Default shall have occurred and be continuing or shall occur
as a consequence thereof; (ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness"; and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (A) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for the
period (taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment, plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company subsequent
to March 31, 1998 from the issuance or sale (other than to a Restricted
Subsidiary) of shares of its Qualified Stock, including Qualified Stock issued
upon the exercise of options, warrants or rights to purchase Qualified Stock,
plus (C) 100% of the amount of any Indebtedness of the Company or any of its
Restricted Subsidiaries (as expressed on the face of a balance sheet in
accordance with GAAP), or the carrying value of any Disqualified Stock, which
has been converted into, exchanged for or satisfied
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by the issuance of shares of Qualified Stock of the Company subsequent to the
Issue Date, less the amount of any cash, or the value of any other Property
distributed by the Company or its Restricted Subsidiaries upon such conversion,
exchange or satisfaction, plus (D) 100% of the net reduction in Investments,
subsequent to the Issue Date, in any Person, resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of Consolidated
Net Income), in each case to the Company or any Restricted Subsidiary from any
Person (including, without limitation, from Unrestricted Subsidiaries) or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed in
the case of any Person the amount of Investments previously made by the Company
or any Restricted Subsidiary in such Person and which was treated as a
Restricted Payment, minus (E) 100% of the amount of Investments made pursuant to
clause (vii) of the following paragraph subsequent to the Issue Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinate to the New Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of, the
substantially concurrent sale of Qualified Stock of the Company; (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the New
Notes in exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company (other than Indebtedness to a
Subsidiary of the Company), provided that such new Indebtedness (A) is
subordinated in right of payment to the New Notes at least to the same extent
as, (B) has an Average Life at least as long as, and (C) has no scheduled
principal payments due in any amount earlier than, any equivalent amount of
principal under the Indebtedness so retired; (iv) retiring any Indebtedness of a
Restricted Subsidiary of the Company in exchange for, or out of the proceeds of,
the substantially concurrent incurrence of Indebtedness of the Company or any
Restricted Subsidiary that is permitted under the covenant described under
" -- Limitation on Indebtedness" and that (A) is not secured by any assets of
the Company or any Restricted Subsidiary to a greater extent than the retired
Indebtedness was so secured, (B) has an Average Life at least as long as the
retired Indebtedness and (C) is subordinated in right of payment to the New
Notes at least to the same extent as the retired Indebtedness; (v) retiring any
Capital Stock of the Company or any Restricted Subsidiary of the Company held by
any member of the Company's (or any of its Subsidiaries') management pursuant to
any management equity subscription agreement or stock option plan in effect on
the Issue Date or upon the death or termination of such member, provided that
the aggregate price paid for all such retired Capital Stock shall not exceed, in
the aggregate, the sum of $2.0 million plus the aggregate cash proceeds received
by the Company subsequent to the Issue Date from any reissuance of Capital Stock
by the Company to members of management of the Company and its Subsidiaries;
(vi) making loans to members of management of the Company as required pursuant
to employment agreements with such members, provided that the aggregate amount
of all such loans shall not exceed $2.2 million; (vii) making Investments in an
aggregate amount not to exceed $20,000,000 in joint ventures or other risk
sharing arrangements (which may include partnerships, limited liability
companies, corporations or other arrangements) (each a "Joint Venture Entity")
the purpose of which is to engage in the same or complementary lines of business
as the Company or a Restricted Subsidiary or in businesses consistent with the
fundamental nature of the operating business of the Company or a Restricted
Subsidiary; provided the management and operations of any such Joint Venture
Entity are controlled by the Company pursuant to (a) the charter documents of
such Joint Venture Entity, or (b) an agreement between or among the holders of
the Voting Stock of such Joint Venture Entity, or (c) a management agreement of
a minimum duration of three or more years between the Company and such Joint
Venture Entity; (viii) permitting a Restricted Subsidiary which became a
Restricted Subsidiary as a result of an Investment by the Company or a
Restricted
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Subsidiary described in clause (vii) of this paragraph to declare or pay any
dividend or distribution on any Capital Stock of such Subsidiary to all holders
of Capital Stock of such Subsidiary on a pro rata basis; and (ix) permitting a
Restricted Subsidiary to pay a dividend with respect to any shares of Capital
Stock of such Subsidiary held by a lender, which shares of Capital Stock were
acquired by such lender in connection with the Secured Credit Facility.
Not later than the date of making any Restricted Payment (including any
Restricted Payment Permitted to be made pursuant to the previous paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available financial statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets to
the Company or any other Restricted Subsidiary of the Company, except: (a) any
encumbrance or restriction existing as of the Issue Date pursuant to an
agreement relating to the Secured Credit Facility or the Existing Indebtedness;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of assets or Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the assets or Property so acquired; (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is acquired
by the Company or any Restricted Subsidiary (other than Indebtedness issued by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition), provided that the EBITDA of such Restricted Subsidiary is not
taken into account in determining whether such acquisition is permitted by the
terms of the Indenture; (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted Refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such Refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements; (e) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or customary
provisions in certain agreements that restrict the assignment of such agreement
or any rights thereunder; (f) any temporary encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and (g)
any restriction on the sale or other disposition of assets or Property securing
Indebtedness as a result of a Permitted Lien on such assets or Property
permitted by the covenant described under "-- Limitation on Liens".
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary to
own any Capital Stock of any Restricted Subsidiary (other than directors'
qualifying shares), except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "-- Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's
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becoming a Restricted Subsidiary or otherwise being acquired by the Company; (d)
any Disqualified Stock permitted to be issued under "Limitation on
Indebtedness"; (e) Capital Stock of a Subsidiary issued to a lender or lenders
under the Secured Credit Facility in an aggregate amount not to exceed 7.25% of
the outstanding Capital Stock of such Subsidiary; and (f) Capital Stock of a
Person which became or will become a Restricted Subsidiary as a result of an
Investment by the Company or a Restricted Subsidiary described in clause (vii)
of the second paragraph of the covenant described under "Restricted Payments"
herein, provided that, (A) the Company or such Restricted Subsidiary, as the
case may be, receives net consideration at the time of such issuance at least
equal to the Fair Market Value (as evidenced by a Board Resolution delivered to
the Trustee) of the Capital Stock issued, (B) any consideration received by the
Company or such Restricted Subsidiary in respect of such issuance consist of
Cash Proceeds and/or Telecommunications Assets and (C) the Company or such
Restricted Subsidiary, as the case may be, within 270 days of such issuance,
uses the Net Cash Proceeds from such issuance to (1) reinvest (or enters a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such issuance in Telecommunications
Assets and/or (2) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) from such issuance to repurchase or redeem New Notes or to
permanently reduce Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary) that is pari passu with the New Notes or to permanently
reduce Indebtedness or preferred stock of any Restricted Subsidiary (other than
Indebtedness to, or preferred stock owned by, the Company or another Restricted
Subsidiary).
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction by
the Company or such Restricted Subsidiary with a Person that is not an Affiliate
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a Board
Resolution certifying that such Affiliate Transaction complies with clause (a)
above and that such Affiliate Transaction has been approved by a majority of the
Independent Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5.0 million, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary approved
by the Board of Directors and consistent with industry practice; (iii)
transactions between or among the Company and its Restricted Subsidiaries; (iv)
transactions permitted by the covenant described under "-- Restricted Payments";
(v) transactions pursuant to contracts existing on the Issue Date and listed in
a schedule to the Indenture; and (vi) loans and advances to employees and
officers of the Company or a Restricted Subsidiary in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, provided that the aggregate principal amount of all such loans and
advances shall not exceed $3.0 million at any one time outstanding, and
provided, further, that in the event the aggregate principal amount of all such
loans or advances exceeds $1.0 million
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at any one time outstanding, the Company shall, within 180 days of the date such
amount first exceeds $1.0 million, reduce such amount to an amount less than
$1.0 million.
Restricted and Unrestricted Subsidiaries
(a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of the
Company or a Restricted Subsidiary (other than Indebtedness to the Company or a
Restricted Subsidiary), and (i) such subsidiary has total assets of $1,000 or
less or (ii) such designation is effective immediately upon such Person becoming
a Subsidiary. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary thereof. Except as provided in
clause (a)(i), no Restricted Subsidiary may be redesignated as an Unrestricted
Subsidiary.
(b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness other than Indebtedness to the Company or a
Restricted Subsidiary at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action, transaction
or series of transactions, on a pro forma basis, (i) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur; provided, however,that the foregoing restriction shall not apply to a
Person which becomes a Restricted Subsidiary as a result of (a) an Investment
described in clause (ix) of the definition of "Permitted Investments" herein or
(b) an Investment described in clause (vii) of the second paragraph of the
covenant described under "Restricted Payments" herein. Subject to this clause
(b), an Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary.
(c) The designation of a Subsidiary as an Unrestricted Subsidiary or the
designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (b) shall be made by the Board of Directors pursuant to a
Board Resolution delivered to the Trustee and shall be effective as of the date
specified in such Board Resolution, which shall not be prior to the date such
Board Resolution is delivered to the Trustee.
Reports
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the SEC the annual reports, quarterly reports and other documents which the
Company would have been required to file with the SEC pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the SEC on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required to file them. The Company shall also (whether or not it is required to
file reports with the SEC), within 30 days of each Required Filing Date, (i)
transmit by mail to all holders of Notes, as their names and addresses appear in
the Security Register and to any Persons that request such reports in writing,
without cost to such holders or Persons, and (ii) file with the Trustee copies
of the annual reports, quarterly reports and other documents (without exhibits)
which the Company has filed or would have filed with the SEC pursuant to Section
13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this
covenant. The Company shall not be required to file any report with the SEC if
the SEC does not permit such filing. In addition to the foregoing, the Company
will file with the SEC and will thereafter transmit by mail to the Holders and
file with the Trustee within the same time periods as set forth in the second
next preceding sentence, unaudited information, on an aggregate Fiber Network
basis (before headquarter allocations) segmented by the calendar year in which
each
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such Fiber Network became operational, setting forth the investment in plant,
property and equipment to date, revenue, EBITDA, EBIT, access lines, fiber
miles, route miles, buildings connected and voice grade equivalents; provided,
however, that the Company will provide such unaudited information with respect
to (i) all Fiber Networks that were initially operational at any time prior to
December 31, 1995 (all such Fiber Networks shall be deemed to have become
operational in calendar year 1995) and (ii) all Fiber Networks that were
initially operational in each succeeding calendar year (including all or any
portion of the then current year); and provided, further, that the Company need
no longer comply with the information requirements of this sentence after four
consecutive fiscal quarters for which the ratio of EBITDA of the Company to
Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 or after the occurrence of a Change of Control.
Limitation on Construction of Fiber Networks
The Company may construct Fiber Networks in no more than 45 Metropolitan
Areas until the earlier of such time as (i) the ratio of EBITDA of the Company
to Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 for four consecutive fiscal quarters and (ii) the occurrence
of a Change of Control.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), no
Event of Default or Default shall have occurred and be continuing or would
result therefrom; and
(iii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), the
Company (or the Surviving Entity, if the Company is not continuing) would
(A) be permitted to incur $1.00 of additional Indebtedness pursuant to the
first paragraph of "-- Limitation on Indebtedness" or (B) have a Total
Market Capitalization of at least $1.0 billion and total Indebtedness in an
amount less than 40% of its Total Market Capitalization.
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EVENTS OF DEFAULT
Each of the following is an "Event Of Default" under the Indenture:
(a) default in the payment of interest on any New Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any New Note at its maturity, upon optional redemption, required
repurchase (including pursuant to a Change of Control Offer or an Asset
Sale Offer) or otherwise or the failure to make an offer to purchase any
New Note as required;
(c) the Company fails to comply with any of its covenants or
agreements contained in "-- Limitation on Indebtedness," "-- Limitation on
Sale and Leaseback Transactions" or "-- Restricted Payments," or fails to
perform or comply with the provisions described under "-- Repurchase at the
Option of the Holders Upon a Change of Control," "-- Asset Sales" or
"-- Consolidation, Merger, Conveyance, Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or
breach for a period of 30 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by holders
of at least 25% of the aggregate principal amount of the outstanding New
Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not
paid when due within the applicable grace period, if any, or is accelerated
by the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more
final judgments against the Company or any Restricted Subsidiary in an
uninsured or unindemnified aggregate amount in excess of $10 million which
is not discharged, waived, appealed, stayed, bonded or satisfied for a
period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or
(ii) a decree or order adjudging the Company or any Significant Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency or similar law,
or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or ordering the
winding up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or to
the commence-
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ment of any bankruptcy or insolvency case or proceeding against the Company
or any Significant Restricted Subsidiary; or (iii) the filing by the
Company or any Significant Restricted Subsidiary of a petition or answer or
consent seeking reorganization or relief under U.S. bankruptcy laws, as now
or hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law; or (iv) the consent by the
Company or any Significant Restricted Subsidiary to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or any Significant Restricted Subsidiary or of any
substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of New Notes may declare all unpaid principal of, and any
accrued and unpaid interest on, all New Notes then outstanding to be immediately
due and payable by a notice in writing to the Company (and to the Trustee if
given by holders of the New Notes), and upon any such declaration, such amount
will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, all unpaid principal of, and any
accrued and unpaid interest on, the New Notes then outstanding shall become
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of New Notes. In the event of a declaration of
acceleration because an Event of Default set forth in clause (e) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied, or cured or waived by
the holders of the relevant Indebtedness, within 60 days after such event of
default. Under certain circumstances, the holders of a majority in principal
amount of the outstanding New Notes by notice to the Company and the Trustee may
rescind an acceleration and its consequences.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of New Notes, enter into one or more
indentures supplemental to the Indenture (1) to evidence the succession of
another Person to the Company and the assumption by such successor of the
covenants of the Company in the Indenture and the New Notes; (2) to add to the
covenants of the Company, for the benefit of the holders, or to surrender any
right or power conferred upon the Company by the Indenture; (3) to add any
additional Events of Default; (4) to provide for uncertificated New Notes in
addition to or in place of certificated New Notes; (5) to evidence and provide
for the acceptance of appointment under the Indenture of a successor Trustee;
(6) to secure the New Notes; (7) to cure any ambiguity in the Indenture, to
correct or supplement any provision in the Indenture which may be inconsistent
with any other provision therein or to add any other provisions with respect to
matters or questions arising under the Indenture; provided such actions shall
not adversely affect the interests of the holders in any material respect; or
(8) to comply with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
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With the consent of the holders of not less than a majority in principal
amount of the outstanding New Notes, the Company and the Trustee may enter into
one or more indentures supplemental to the Indenture for the purpose or adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or modifying in any manner the rights of the holders; provided
that no such supplemental indenture shall, without the consent of the holders of
not less than 75% in principal amount of the outstanding New Notes, modify the
obligations of the Company to make offers to purchase New Notes upon a Change of
Control or from the proceeds of Asset Sales; and, provided, further, that no
such supplemental indenture shall, without the consent of the holder of each
outstanding New Note: (1) change the stated maturity of the principal of, or any
installment of interest on, any New Note, or reduce the principal amount thereof
(or premium, if any), or the interest thereon that would be due and payable upon
maturity thereof, or change the place of payment where, or the coin or currency
in which, any New Note or any premium or interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or after
the maturity thereof; (2) reduce the percentage in principal amount of the
outstanding New Notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with certain
provisions of the Indenture or certain Defaults thereunder; (3) subordinate in
right of payment, or otherwise subordinate, the New Notes to any other
Indebtedness; or (4) modify any provision of this paragraph (except to increase
any percentage set forth herein).
The holders of not less than a majority in principal amount of the
outstanding New Notes may, on behalf of the holders of all the New Notes, waive
any past Default under the Indenture and its consequences, except Default (1) in
the payment of the principal of (or premium, if any) or interest on any New
Note, or (2) in respect of a covenant or provision hereof which under the first
proviso to the prior paragraph cannot be modified or amended without the consent
of the holders of not less than 75% in principal amount of the outstanding New
Notes, or (3) in respect of a covenant or provision hereof which under the
second proviso to the prior paragraph cannot be modified or amended without the
consent of the holder of each outstanding New Note affected; provided with
respect to any past Default referred to in clause (2) of this paragraph, the
holders of not less than 75% in principal amount of the outstanding New Notes
may waive such Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding New Notes have been delivered to the Trustee for
cancellation or (B) all such New Notes not theretofore delivered to the Trustee
for cancellation have become due and payable, will become due and payable within
one year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the New Notes,
not theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the New Notes and the Indenture shall cease to be of
further effect as to all outstanding New Notes (except as to (i) rights of
registration of transfer, substitution and exchange of New Notes and the
Company's right of optional redemption, (ii) rights of holders to receive
payments of principal of, premium, if any, and interest on the New Notes (but
not the Change of Control Purchase Price or the Offer Purchase Price) and any
rights of the holders with respect to such amounts, (iii) the rights,
obligations and immunities of the Trustee under the Indenture and (iv) certain
other specified provisions in the Indenture) or (b) cease to be under any
obligation to comply with certain
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restrictive covenants including those described under "-- Certain Covenants,"
after the irrevocable deposit by the Company with the Trustee, in trust for the
benefit of the holders, at any time prior to the maturity of the New Notes, of
(A) money in an amount, (B) U.S. Government Obligations which through the
payment of interest and principal will provide, not later than one day before
the due date of payment in respect of the New Notes, money in an amount, or (C)
a combination thereof, sufficient to pay and discharge the principal of, and
interest on, the New Notes then outstanding on the dates on which any such
payments are due in accordance with the terms of the Indenture and of the New
Notes. Such defeasance or covenant defeasance shall be deemed to occur only if
certain conditions are satisfied, including, among other things, delivery by the
Company to the Trustee of an opinion of outside counsel acceptable to the
Trustee to the effect that (i) such deposit, defeasance and discharge will not
be deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) the Company's deposit will not result in the
trust or the Trustee being subject to regulation under the Investment Company
Act of 1940.
THE TRUSTEE
The Chase Manhattan Bank is the Trustee under the Indenture.
The holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of the
New Notes, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of such person's or
entity's status as a director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has been
the view of the SEC that such a waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form, without coupons. The New Notes will be deposited with, or on
behalf of DTC and registered in the name of Cede & Co. ("Cede") as DTC's
nominee, in the form of one or more global New Notes.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Accreted Value" means, as of any date prior to July 1, 2003, an amount per
$1,000 principal amount at maturity of Notes that is equal to the sum of (a) the
initial offering price ($599.89 per $1,000 principal amount at maturity of
Notes) of such Notes and (b) the portion of the excess of the principal amount
of such Notes over such initial offering price which shall have been amortized
through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each January 1 and July 1 at the rate of 10.625% per
annum from the date of original issue of the Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months,
and as of any date on or after July 1, 2003 the principal amount of each Note.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a Subsidiary
of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, neither the Company nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other; and provided, further, any lender under
the Secured Credit Facility and its Affiliates shall not be deemed to be
Affiliates of the Company or any Restricted Subsidiary solely as a result of the
existence of the Secured Credit Facility or their holdings of Capital Stock of
the Company or any Restricted Subsidiary acquired in connection with the Secured
Credit Facility. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "under common control with" and
"controlled by"), and as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of Voting Stock, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person shall be deemed to be
control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, by way of
consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under "-- Limitation on
Liens") by such Person or any of its Restricted Subsidiaries to any Person other
than the Company or a Restricted Subsidiary of the Company, in one transaction,
or a series of related transactions (each hereinafter referred to as a
"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2 million, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted under "-- Restricted Payments" and (iii) a Disposition by the Company
in connection with a transaction permitted under "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by such Person) of the payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) or
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until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act) (other
than any Permitted Holder or any Restricted Subsidiary of the Company) shall
have occurred; (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Exchange Act), other than any Permitted Holder, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the
total voting power of all classes of the Voting Stock of the Company and/or
warrants or options to acquire such Voting Stock, calculated on a fully diluted
basis, and such voting power percentage is greater than or equal to the total
voting power percentage then beneficially owned by the Permitted Holders in the
aggregate; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors (together
with any new directors whose election or appointment by such board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, (A) the sum of (i) the aggregate amount of cash and
non-cash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as
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determined on a consolidated basis in accordance with GAAP in respect of
Indebtedness (including, without limitation, (v) any amortization of debt
discount, (w) net costs associated with Interest Hedging Obligations (including
any amortization of discounts), (x) the interest portion of any deferred payment
obligation, (y) all accrued interest and (z) all commissions, discounts and
other fees and charges owed with respect to letters of credit, bankers'
acceptances or similar facilities) paid or accrued, or scheduled to be paid or
accrued, during such period; (ii) dividends or distributions with respect to
preferred stock or Disqualified Stock of such Person (and of its Restricted
Subsidiaries if paid to a Person other than such Person or its Restricted
Subsidiaries) declared and payable in cash; (iii) the portion of any rental
obligation of such Person or its Restricted Subsidiaries in respect of any
Capital Lease Obligation allocable to interest expense in accordance with GAAP;
(iv) the portion of any rental obligation of such Person or its Restricted
Subsidiaries in respect of any Sale and Leaseback Transaction allocable to
interest expense (determined as if such were treated as a Capital Lease
Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period and any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness of such Person and its Restricted
Subsidiaries prior to its stated maturity; in the case of both (A) and (B)
above, after elimination of intercompany accounts among such Person and its
Restricted Subsidiaries and as determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary, (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period; (iii) the
net income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition; (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan; (v) net gains (but not
net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries; (vi) the net income (but not net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person; (vii) with regard to
a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly owned Restricted Subsidiary's net income (or loss); and (viii) the
cumulative effect of changes in accounting principles.
"Consolidated Tangible Assets" of any Person means, as of any date, the sum
for such Person and its Restricted Subsidiaries (after eliminating intercompany
items) of the net book value of all Property and assets of such Person and its
Restricted Subsidiaries reflected on a balance sheet of such Person or such
Restricted Subsidiary, as the case may be, prepared in accordance with GAAP,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) un-amortized deferred financing
costs, debt discount and expenses.
"Debt to Capital Ratio" means, as at any date of determination, the ratio
of (i) the amount of Indebtedness of the Company and its Restricted Subsidiaries
then outstanding on a consolidated basis as at the date of determination to (ii)
the capital of the Company and its Restricted
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Subsidiaries on a consolidated basis as at such date. For purposes of this
calculation, "capital" shall mean stockholders' equity (deficit), except that
all Preferred Stock shall be included and retained earnings (deficit) shall be
excluded, each as determined in accordance with GAAP.
"Debt to EBITDA Ratio" means, as at any date of determination, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the date of determination occurs shall be calculated
as if such Indebtedness was so incurred or retired on the first day of the
fiscal quarter in which the date of determination occurs; and provided, further,
that (x) if the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio would have the effect of increasing or decreasing Indebtedness or
EBITDA in the future, Indebtedness or EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of such four fiscal
quarter period preceding the date of determination and (y) if during such four
fiscal quarter period the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the subject
of such Asset Sale and any related retirement of Indebtedness as if such Asset
Sale and related retirement of Indebtedness had occurred on the first day of
such period or (z) if during such four fiscal quarter period the Company or any
of its Restricted Subsidiaries shall have acquired any material assets outside
the ordinary course of business, EBITDA shall be calculated on a pro forma basis
as if such asset acquisition and related financing had occurred on the first day
of such period.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Default Amount" means, until July 1, 2003, the Accreted Value, and on or
after July 1, 2003, 100% of the principal amount of the Notes.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on which
the Notes mature.
"EBIT" means the amount calculated in the same manner as EBITDA, but not
including clauses (iii) and (iv) of the definition thereof.
"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent reflected
in the income statement of such Person for such period from which Consolidated
Net Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization
expense, (v) any non-cash expense related to the issuance to employees of such
Person of options to purchase Capital Stock of such Person and (vi) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity and minus, to the extent reflected
in such income statement, any non-cash credits that had the effect of increasing
Consolidated Net Income of such Person for such period. This definition of
EBITDA is used only for the purpose of this Description of the Notes and the
Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and
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surplus in excess of $500 million with a maturity date not more than one year
from the date of acquisition, (iii) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clause
(i) above entered into with any bank meeting the qualifications specified in
clause (ii) above, (iv) direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder thereof within ninety days after the date of acquisition thereof and, at
the time of acquisition, having a rating of A or better from Standard & Poor's
Ratings Group ("Standard & Poor's") or A-2 or better from Moody's Investors
Service, Inc. ("Moody's"), (v) commercial paper issued by the parent corporation
of any commercial bank organized in the United States having capital and surplus
in excess of $500 million and commercial paper issued by others having one of
the two highest ratings obtainable from either Standard & Poor's or Moody's and
in each case maturing within ninety days after the date of acquisition, (vi)
overnight bank deposits and bankers' acceptances at any commercial bank
organized in the United States having capital and surplus in excess of $500
million, (vii) deposits available for withdrawal on demand with a commercial
bank organized in the United States having capital and surplus in excess of $500
million and (viii) investments in money market funds substantially all of whose
assets comprise securities of the types described in clauses (i) through (vi).
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to Standard &
Poor's or Moody's at the time as of which any investment or rollover therein is
made.
"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture (other than under the Secured Credit Facility), including the 2005
Notes, the 2006 Notes and the 2007 Notes, and disclosed in a schedule attached
to the Indenture, and the incurrence by the Company of Indebtedness represented
by the 2005 Notes, the 2006 Notes and the 2007 Notes.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Company that serves a Metropolitan Area.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
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"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring," shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary of the Company shall be
deemed to have been incurred at the time at which it becomes a Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding trade accounts payable made in the ordinary course of
business, (iii) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (iv) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable for, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture; provided that if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability of any Guarantees at such date; provided that for purposes of
calculating the amount of the 2005 Notes, 2006 Notes or the Notes outstanding at
any date, the amount of such 2005 Notes, 2006 Notes or Notes shall be the
Accreted Value (as defined in the relevant indenture) thereof as of such date
unless cash interest has commenced to accrue pursuant to the relevant indenture,
in which case the amount of the 2005 Notes, 2006 Notes or Notes outstanding will
be determined pursuant to the relevant indenture and will not include any
accrued and unpaid cash interest which would otherwise be included in Accreted
Value because of clause (iii) of the definition thereof in the relevant
indenture.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such
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Person, or (iii) the acquisition, by purchase or otherwise, of all or
substantially all of the business, assets or stock or other evidence of
beneficial ownership of such Person; provided that Investments shall exclude
commercially reasonable extensions of trade credit. The amount of any Investment
shall be the original cost of such Investment, plus the cost of all additions
thereto and minus the amount of any portion of such investment repaid to such
Person in cash as a repayment of principal or a return of capital, as the case
may be, but without any other adjustments for increases or decreases in value,
or write-ups, write-downs or write-offs with respect to such Investment. In
determining the amount of any Investment involving a transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"Issue Date" means the date on which the Notes were first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Marketable Securities" means (i) U.S. Government Securities maturing not
more than two years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued by
or time deposit of an Eligible Institution; (iii) commercial paper maturing not
more than 270 days after the date of acquisition issued by a corporation (other
than an Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "A-1" (or higher) according to Standard & Poor's
or "P-1" (or higher) according to Moody's; (iv) any banker's acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
"Metropolitan Area" means the 32 metropolitan areas in which the Company,
as of March 31, 1998, has a Fiber Network and other metropolitan areas deemed in
the reasonable business judgment of the management of the Company to provide an
opportunity for the building and operation of such a Fiber Network with the
reasonable potential to produce financial results for the Company at least
substantially comparable to the metropolitan areas in which the Company has such
operational Fiber Networks.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale and (iii) all contractually required
distribu-
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tions and other payments made to minority interest holders (but excluding
distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; provided that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
Affiliates (other than the Company and the Restricted Subsidiaries) of each of
the foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the Indenture; (iv) Investments pursuant to
certain agreements or obligations of the Company or a Restricted Subsidiary, in
effect an the Issue Date, to make such Investments, and disclosed in a Schedule
attached to the Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; (vii) Exchange Rate Obligations; provided that such
Exchange Rate Obligations were entered into in connection with transactions in
the ordinary course of business or the incurrence of Indebtedness that is
permitted by the terms of the Indenture to be outstanding; (viii) bonds, notes,
debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "-- Asset Sales"; (ix) Investments
by the Company or a Restricted Subsidiary in or in respect of a Person to the
extent the consideration for such Investment consists of shares of Qualified
Stock of the Company; (x) Investments funded or financed with Purchase Money
Debt; and (xi) Investments in existence at the Issue Date.
"Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such merger or consolidation;
(ii) Liens on Telecommunications Assets existing during the time of the
construction thereof; (iii) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business consistent with industry practice;
(iv) Liens existing as of the Issue Date; (v) Liens to secure borrowings
permitted under clause (a) or clause (i) of the second paragraph of
"-- Limitation on Indebtedness"; (vi) any Lien on Property of the Company in
favor of the United States of America or any state thereof, or any
instrumentality of either, to secure certain payments pursuant to any contract
or statute; (vii) any Lien for taxes or assessments or other governmental
charges or levies not then due and payable (or which, if due and payable, are
being contested in good faith and for which adequate reserves are being
maintained, to the extent required by GAAP); (viii) easements, rights-of-way,
licenses and other similar restrictions on the use of Properties or minor
imperfections of title that, in the aggregate, are not material in amount and do
not in any case materially detract from the Properties subject thereto or
interfere with the
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ordinary conduct of the business of the Company or its Subsidiaries; (ix) any
Lien to secure obligations under workmen's compensation laws or similar
legislation, including any Lien with respect to judgments which are not
currently dischargeable; (x) any statutory warehousemen's, materialmen's or
other similar Liens for sums not then due and payable (or which, if due and
payable, are being contested in good faith and with respect to which adequate
reserves are being maintained, to the extent required by GAAP); (xi) any
interest or title of a lessor in Property subject to a Capital Lease Obligation;
(xii) Liens to secure any Vendor Financing Indebtedness; provided that such
Liens do not extend to any Property or assets other than the Property or assets
the acquisition of which was financed by such Indebtedness; (xiii) Liens in
favor of the Company or any Restricted Subsidiary; (xiv) Liens on Property or
assets of a Person existing prior to the time such Person is acquired by the
Company as a result of (a) an Investment described in clause (ix) of the
definition of "Permitted Investments" herein or (b) an Investment described in
clause (vii) of the second paragraph of the covenant described under "Restricted
Payments" herein; provided that such Liens were in existence prior to the
contemplation of such Investment and do not secure any Property or assets of the
Company or any of its Subsidiaries other than the Property or assets subject to
the Liens prior to such Investment; (xv) Liens securing reimbursement
obligations with respect to letters of credit that encumber documents and other
Property relating to such letters of credit and the products and proceeds
thereof; and (xvi) Liens to secure any permitted extension, renewal, refinancing
or refunding (or successive extensions, renewals, refinancings or refundings),
in whole or in part, of any Indebtedness secured by Liens referred to in the
foregoing clauses (i) through (v) and (xii), provided that such Liens do not
extend to any other Property or assets and the principal amount of the
Indebtedness secured by such Liens is not increased.
"Permitted Subordinated Financing" means Indebtedness or preferred stock of
the Company issued to a Permitted Holder on terms specified in the Indenture,
provided that (i) in the case of Permitted Subordinated Financing that
constitutes Indebtedness, such Indebtedness is subordinated in right of payment
to the Notes and has a maturity of 180 days or less and (ii) in the case of
Permitted Subordinated Financing that constitutes preferred stock, such
preferred stock is retired within 180 days of issuance.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Purchase Money Debt" means Indebtedness of the Company (including Acquired
Indebtedness and Indebtedness represented by Capital Lease Obligations, mortgage
financings and purchase money obligations) incurred for the purpose of financing
all or any part of the cost of construction, acquisition or improvement by the
Company or any Subsidiary of the Company or any joint venture of any
Telecommunications Assets of the Company, any Subsidiary of the Company or any
joint venture, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted
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Subsidiary, (ii) a payment made by the Company or any of its Restricted
Subsidiaries (other than to the Company or any Restricted Subsidiary) to
purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
the Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Notes and which was scheduled
to mature on or after the maturity of the Notes or (iv) an Investment in any
Person, including an Unrestricted Subsidiary or the designation of a Subsidiary
as an Unrestricted Subsidiary, other than (a) a Permitted Investment, (b) an
Investment by the Company in a Restricted Subsidiary or (c) an Investment by a
Restricted Subsidiary in the Company or a Restricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the AT&T Credit Facility as in effect on
the Issue Date and additional secured credit agreements to which the Company is
or becomes a party, in an aggregate amount not to exceed $35 million, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced from time to time.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act and the Exchange Act.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights-of-way, trademarks and licenses to use
copyrighted material), that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to the
Indenture. The determination of what constitutes Telecommunication Assets shall
be made by the Board of Directors and evidenced by a Board Resolution delivered
to the Trustee.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications-related network equipment, software and
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other devices for use in (i) above or (iii) evaluating, participating or
pursuing any other activity or opportunity that is related to those specified in
(i) or (ii) above.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
common stock of such Person (which shall not include any common stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the preceding 20 consecutive Trading
Days. If no such closing price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith as evidenced by a Board Resolution delivered to the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
"Vendor Financing Indebtedness" of any Person means an obligation owed by
such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 180 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences of the purchase, ownership and disposition of Notes as of the
date hereof. Except where noted, the following discussion deals only with Notes
held as capital assets by initial purchasers that purchased the Notes at their
original "issue price" (as described below) and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, tax-
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exempt entities, life insurance companies, persons holding Notes as a part of a
hedging, conversion or constructive sale transaction or a straddle or holders of
Notes whose "functional currency" is not the U.S. dollar. Furthermore, the
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified so as to result in United States federal income tax consequences
different from those discussed below. PERSONS CONSIDERING THE EXCHANGE OF OLD
NOTES FOR NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
As used herein, a "United States Holder" of a Note means a holder that is
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in section
7701(a)(30) of the Code. A "Non-United States Holder" is a holder that is not a
United States Holder.
ORIGINAL ISSUE DISCOUNT
The Notes were issued with original issue discount ("OID") in an amount
equal to the difference between their stated redemption price at maturity (the
sum of all payments of principal and interest due on the Note) and their "issue
price." United States Holders should be aware that they must include OID in
gross income on a daily economic accrual basis (as described more fully below),
regardless of their regular method of tax accounting and in advance of receipt
of the cash attributable to that income. However, United States Holders of such
Notes generally will not be required to include separately in income cash
payments received on the Notes, even if denominated as interest.
This summary is based upon final Treasury regulations addressing debt
instruments issued with OID (the "OID Regulations").
The "issue price" of each Note will be the first price at which a
substantial amount of that particular offering is sold (other than to an
underwriter, placement agent or wholesaler).
The amount of OID includible in income by the initial United States Holder
of a Note is the sum of the "daily portions" of OID with respect to the Note for
each day during the taxable year or portion of the taxable year in which such
United States Holder held such Note ("accrued OID"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the OID allocable to that accrual period. The "accrual period" for a Note may
be of any length and may vary in length over the term of the Note, provided that
each accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on the first day or the final day of an accrual
period. The amount of OID allocable to any accrual period is an amount equal to
the product of the Note's adjusted issue price at the beginning of such accrual
period and its yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the accrual
period). OID allocable to a final accrual period is the difference between the
amount payable at maturity and the adjusted issue price at the beginning of the
final accrual period. The "adjusted issue price" of a Note at the beginning of
any accrual period is equal to its issue price increased by the accrued OID for
each prior accrual period and reduced by any payments made on such Note on or
before the first day of the accrual period. Under these rules, a United States
Holder will have to include in income increasingly greater amounts of OID in
successive accrual periods. The Company is required to provide information
returns stating the amount of OID accrued on Notes held of record by persons
other than corporations and other exempt holders.
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SALE, EXCHANGE AND RETIREMENT OF NOTES
A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost therefor, increased by OID and reduced by any cash
payments received in respect of the Note. Upon the sale, exchange, retirement or
other disposition of a Note, a United States Holder will recognize gain or loss
equal to the difference between the amount realized upon the sale, exchange,
retirement or other disposition and the adjusted tax basis of the Note. Such
gain or loss will be capital gain or loss. Capital gains of individuals derived
in respect of capital assets held for more than one year are eligible for
reduced rates of taxation. The deductibility of capital losses is subject to
limitations.
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal or
interest (which for purposes of this discussion includes OID) on a Note owned by
a Non-United States Holder, provided (i) that the beneficial owner does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) the
beneficial owner is not a controlled foreign corporation that is related to the
Company through stock ownership, (iii) the beneficial owner is not a bank whose
receipt of interest on a Note is described in section 881(c)(3)(A) of the Code
and (iv) the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code and
the regulations thereunder;
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-United States Holder upon
the sale, exchange, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of death is
a Non-United States Holder will not be subject to United States federal estate
tax as a result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the company entitled to vote within the meaning
of section 871(h)(3) of the Code and provided that the interest payments with
respect to such Note would not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United States
trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner is
not a United States person. Currently, these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a United States person (which certification may be
made on an Internal Revenue Service ("IRS") Form W-8 (or successor form)) or (2)
a financial institution holding the Note on behalf of the beneficial owner
certifies, under penalties of perjury, that such statement has been received by
it and furnishes a paying agent with a copy thereof. Under recently finalized
Treasury regulations (the "Final Regulations"), the statement requirement
referred to in (a)(iv) above may also be satisfied with other documentary
evidence for interest paid after December 31, 1999 with respect to an offshore
account or through certain foreign intermediaries.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of interest
(including OID) made to such Non-United States Holder will be subject to a 30%
withholding tax unless the beneficial owner of the Note
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provides the Company or its paying agent, as the case may be, with a properly
executed (1) IRS Form 1001 (or successor form) claiming an exemption from (or
reduction in) withholding under the benefit of an applicable tax treaty or (2)
IRS Form 4224 (or successor form) stating that interest paid on the Note is not
subject to withholding tax because it is effectively connected with the
beneficial owner's conduct of a trade or business in the United States. Under
the Final Regulations, Non-United States Holders will generally be required to
provide IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224, although
alternative documentation may be applicable in certain situations.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest (including OID) on the Note is effectively connected
with the conduct of such trade or business, the Non-United States Holder,
although exempt from the withholding tax discussed above, will be subject to
United States federal income tax on such interest and OID on a net income basis
in the same manner as if it were a United States Holder. In addition, if such
holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% or lower rate under an applicable tax treaty of its effectively connected
earnings and profits for the taxable year, subject to adjustments. For this
purpose, interest (including OID) on a Note will be included in such foreign
corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with a trade
or business in the United States of the Non-United States Holder, or (ii) in the
case of a Non-United States Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and OID paid on a Note and to the proceeds upon
the sale of a Note made to United States Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
In general, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-United
States Holders if a statement described in (a)(iv) under "Non-United States
Holders" has been received (and the payor does not have actual knowledge that
the beneficial owner is a United States person).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a Note within the United States or conducted through
certain U.S. related financial intermediaries unless the statement described in
(a)(iv) under "Non-United States Holders" has been received (and the payor does
not have actual knowledge that the beneficial owner is a United States person)
or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes in the Exchange Offer will not
constitute a taxable event to holders. Consequently, no gain or loss will be
recognized by a holder upon receipt of a New Note, the holding period of the New
Note will include the holding period the Old Note and the basis of the New Note
will be the same as the basis of the Old Note immediately before the exchange.
103
<PAGE> 108
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR NEW NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 120 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 120 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer and will indemnify the holders of the Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
VALIDITY OF THE NOTES
The validity of the New Notes will be passed upon for the Company by its
counsel, Riley M. Murphy, Annapolis Junction, Maryland.
EXPERTS
The consolidated financial statements of e.spire Communications, Inc. as of
June 30, 1996, December 31, 1996 and December 31, 1997, and for the years ended
June 30, 1995 and 1996, the six months ended December 31, 1996 and the year
ended December 31, 1997, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
104
<PAGE> 109
GLOSSARY
ACCESS CHARGES -- The fees paid by an interexchange carrier (IXC) to a LEC
for originating and terminating long distance calls on their local networks.
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 switching 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
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 name for a category of local service
provider that appeared in the late 1980's, who competed with local telephone
companies by placing its own fiber optic cables in a city and sold various
private line telecommunications services in direct competition to the local
telephone company. 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).
CATVS -- Cable television service providers.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.
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 do not have the size or
the funds to support their own on-site PBX.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company, as recently allowed by changes in telecommunications
law and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.).
CO-CARRIER STATUS -- A relationship between a CLEC and an ILEC that affords
the same access and rights to the other's network, and provides access and
services on an equal basis.
COLLOCATION -- The ability to connect a network to the ILEC's central
offices. Physical collocation occurs upon placement of network connection
equipment inside the ILEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which the ILEC permits
connection to its network through the ILEC's central offices at competitive
prices, even though the network connection equipment is not physically located
inside the central offices of the ILEC.
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES -- Special access, switched transport and private line
services generally offered by CAPs, including the Company.
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
G-1
<PAGE> 110
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 threefold improvement in speed
and capacity over analog techniques, allowing much more efficient and
cost-effective transmission of voice, video and data.
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.
FCC (FEDERAL COMMUNICATIONS COMMISSION) -- The US Government organization
charged with the oversight of all public communications media.
FIBER MILES -- 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 has significantly greater bandwidth
capacity than copper cable, which is many times greater in size.
FIBER OPTIC RING NETWORK -- Most CAPs 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 in its networks.
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 that can occur. Frame Relay was designed
to operate at higher speeds on modern fiber optic networks.
ICP (INTEGRATED COMMUNICATIONS PROVIDER) -- A telecommunications carrier
that provides packaged or integrated services from among a broad range of
categories, including local exchange service, long distance service, enhanced
data service, cable TV service, and other communications services.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER) -- The local exchange carrier that
was the monopoly carrier, prior to the opening of local exchange services to
competition.
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.
INTERNET PROTOCOL (IP) -- A compilation of network- and transport-level
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK) -- An internationally agreed
upon standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video-conferencing over a single line, for example, and also
supports a multitude of value-added networking capabilities, reducing costs for
end-users and results in more efficient use of available facilities. ISDN
combines standards for highly flexible customers to network signaling with both
voice and data within a common facility.
G-2
<PAGE> 111
ISP (INTERNET SERVICE PROVIDER) -- An Internet service provider provides
customers with access to the Internet, normally for dial access customers, by
linking its network directly or through other ISPs to the Internet backbone
network.
IXC (INTEREXCHANGE CARRIERS) -- See Long Distance Carrier.
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 (LOCAL ACCESS AND TRANSPORT AREAS) -- The geographically defined
areas in which LECs are authorized to provide local switched services.
LEC (LOCAL EXCHANGE CARRIER) -- A company providing local telephone
services.
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.
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. Long distance carriers include, among others, AT&T, MCI,
Sprint, WorldCom and LCI, as well as resellers of long distance capacity.
NAP -- Network Access Points are points where the national ISPs
interconnect their networks, allowing a multitude of local and regional ISPs to
exchange data and access the Internet globally.
NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
OFF-NET -- A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
ON-NET -- A customer that is physically connected to one of the Company's
networks.
PBX (PRIVATE BRANCH EXCHANGE) -- 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.
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.
PRIVATE LINE -- A private, dedicated telecommunications connection between
end-user locations (excluding long distance carrier POPs).
RBOCS (REGIONAL BELL OPERATING COMPANIES) -- The seven regional local
telephone holding companies established by the modification of final judgment in
U.S. v. AT&T. These RBOCs are prohibited from providing interLATA services and
from manufacturing telecommunications equipment.
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.
G-3
<PAGE> 112
SONET (SYNCHRONOUS OPTICAL NETWORK) -- A transmission technology that is
used by carriers in both local and long distance telecommunications networks to
provide efficient, highly reliable communications channels.
SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a ILEC or a CAP
(such as the Company), whose lines or circuit 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.
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 -- The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks using
a local switch.
SWITCHED TRANSPORT SERVICES -- Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.
VGE (VOICE GRADE EQUIVALENT CIRCUITS) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.
G-4
<PAGE> 113
e.spire COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND 1997 AND
JUNE 30, 1997 AND 1998 (UNAUDITED)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and December
31, 1996 and 1997......................................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995 and 1996, the six months ended December 31,
1996, and the year ended December 31, 1997................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the year ended December 31,
1997...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995 and 1996, the six months ended December 31,
1996, the year ended December 31, 1997.................... F-7
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets as of December 31,
1997 and June 30, 1998 (unaudited)........................ F-26
Condensed Consolidated Statements of Operations (unaudited)
for the three months and six months ended June 30, 1997
and 1998.................................................. F-27
Condensed Consolidated Statements of Cash Flow (unaudited)
for the six months ended June 30, 1997 and 1998........... F-28
Notes to Unaudited Condensed Consolidated Interim Financial
Statements................................................ F-29
</TABLE>
F-1
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
e.spire Communications, Inc.:
We have audited the accompanying consolidated balance sheets of e.spire
Communications, Inc. and subsidiaries as of June 30, 1996 and December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended June 30, 1995 and 1996, the
six months ended December 31, 1996, and the year ended December 31, 1997. 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 e.spire
Communications, Inc. and subsidiaries as of June 30, 1996 and December 31, 1996
and 1997, and the results of their operations and their cash flows for the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996, and the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
February 12, 1998
F-2
<PAGE> 115
e.spire COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1996 1996 1997
-------- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1)........................ $134,115,981 $ 78,618,544 $ 260,836,929
Restricted cash and investments (note 1).................. 2,342,152 2,342,152 26,525,516
Trade accounts receivable, net of allowance for doubtful
accounts of $190,000, $432,000, and $1,921,000 at June
30, 1996, December 31, 1996, and December 31, 1997,
respectively (note 1)................................... 735,260 2,429,077 15,514,278
Other current assets...................................... 1,003,465 1,202,711 6,127,267
------------ ------------ -------------
Total current assets........................................ 138,196,858 84,592,484 309,003,990
Networks, equipment and furniture, gross (note 2)........... 80,147,964 144,403,123 282,152,543
Less: accumulated depreciation and amortization........... (3,408,698) (8,320,372) (31,675,227)
------------ ------------ -------------
76,739,266 136,082,751 250,477,316
Deferred financing fees, net of accumulated amortization of
$773,000, $1,071,000, and $3,649,000 at June 30, 1996,
December 31, 1996, and December 31, 1997, respectively.... 8,334,183 8,380,283 25,031,409
Intangible assets, net of accumulated amortization of
$776,000 (notes 1 and 13)................................. -- -- 8,132,191
Restricted cash and investments (note 1).................... -- -- 45,375,000
Other assets................................................ 329,584 982,649 875,466
------------ ------------ -------------
Total assets........................................ $223,599,891 $230,038,167 $ 638,895,372
============ ============ =============
LIABILITIES, REDEEMABLE STOCK AND OPTIONS, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable -- current portion (note 6)................. $ 252,809 $ 872,031 $ 437,500
Accounts payable.......................................... 21,317,346 33,587,407 18,308,370
Accrued interest.......................................... -- -- 13,360,415
Accrued employee costs.................................... 774,262 2,057,187 2,353,247
Other accrued liabilities................................. 886,692 2,074,945 2,310,664
------------ ------------ -------------
Total current liabilities................................... 23,231,109 38,591,570 36,770,196
Long-term liabilities:
Notes payable, less current portion (note 6).............. 184,129,361 209,538,226 460,847,677
Other long-term liabilities............................... -- -- 473,693
Dividends payable (note 3)................................ 4,942,313 6,945,943 --
------------ ------------ -------------
Total liabilities................................... 212,302,783 255,075,739 498,091,566
============ ============ =============
Redeemable stock and options:
Redeemable options (note 7)............................... 2,155,025 2,000,000 1,000,000
14 3/4% Redeemable Preferred Stock due 2008 (note 5)...... -- -- 55,060,661
12 3/4% Junior Redeemable Preferred Stock due 2009 (note
5)...................................................... -- -- 150,098,992
------------ ------------ -------------
Total redeemable stock and options.......................... 2,155,025 2,000,000 206,159,653
------------ ------------ -------------
Minority interest (note 6).................................. 160,270 -- --
------------ ------------ -------------
Stockholders' equity (deficit) (notes 3, 4, 5, 6 and 7):
Preferred stock, $1.00 par value, 186,664 shares
designated as 9% Series A-1 Convertible Preferred Stock
authorized, issued and outstanding at June 30, 1996 and
December 31, 1996, respectively, no shares issued and
outstanding at December 31, 1997........................ 186,664 186,664 --
Preferred stock, $1.00 par value, 277,500 shares
authorized and designated as 9% Series B Convertible
Preferred Stock; 277,500 and 227,500 shares issued and
outstanding at June 30, 1996 and December 31, 1996,
respectively, no shares issued and outstanding at
December 31, 1997....................................... 277,500 277,500 --
Common stock, $.01 par value, 75,000,000 shares
authorized, 6,645,691, 6,784,996, and 37,219,419 shares
issued and outstanding at June 30, 1996, December 31,
1996 and 1997, respectively............................. 65,837 67,850 372,194
Additional paid-in capital................................ 55,975,078 54,870,194 131,728,166
Accumulated deficit....................................... (47,523,266) (82,439,780) (197,456,207)
------------ ------------ -------------
Total stockholders' equity (deficit)........................ 8,981,813 (27,037,572) (65,355,847)
------------ ------------ -------------
Commitments and contingencies (notes 1, 6, 9 and 10)
Total liabilities, redeemable stock and options,
minority interest, and stockholders' equity
(deficit)......................................... $223,599,891 $230,038,167 $ 638,895,372
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 116
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED FOR THE YEAR ENDED MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues (note 1)............ $ 388,887 $ 3,415,137 $ 6,990,452 $ 59,000,450
------------ ------------ ------------ -------------
Operating expenses:
Network development and
operations............... 3,282,183 5,264,570 8,703,057 52,881,173
Selling, general, and
administrative........... 4,597,615 13,463,775 20,269,991 59,850,690
Non-cash stock compensation
(note 7)................. 6,419,412 2,735,845 549,645 4,273,669
Depreciation and
amortization............. 497,811 3,078,426 4,911,674 24,131,317
------------ ------------ ------------ -------------
Total operating expenses..... 14,797,021 24,542,616 34,434,367 141,136,849
Nonoperating income
(expenses):
Interest and other
income................... 217,525 4,409,733 2,757,461 8,685,473
Interest and other
expense.................. (170,095) (10,476,904) (10,390,330) (41,565,501)
Debt conversion expense.... (385,000) -- -- --
------------ ------------ ------------ -------------
Loss before minority
interest................... (14,745,704) (27,194,650) (35,076,784) (115,016,427)
Minority interest............ 48,055 412,606 160,270 --
------------ ------------ ------------ -------------
Net loss..................... (14,697,649) (26,782,044) (34,916,514) (115,016,427)
Preferred stock dividends and
accretion (notes 3 and
5)......................... (1,070,985) (3,871,328) (2,003,630) (11,629,712)
------------ ------------ ------------ -------------
Net loss to common
stockholders............... $(15,768,634) $(30,653,372) $(36,920,144) $(126,646,139)
============ ============ ============ =============
Basic and diluted net loss
per common share (note
8)......................... $ (3.30) $ (4.96) $ (5.48) $ (4.65)
============ ============ ============ =============
Weighted average number of
common shares
outstanding................ 4,771,689 6,185,459 6,733,759 27,233,642
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 117
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, THE SIX MONTHS ENDED DECEMBER 31,
1996, AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- -------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994......... 1,700 $ 1,700,000 -- $ -- -- $ -- 2,755,005 $ --
Preferred Stock exchange......... (1,700) (1,700,000) -- -- -- -- 548,387 --
Set par value for common stock... -- -- -- -- -- -- -- 33,033
Acquisition of Piedmont Teleport,
Inc............................ -- -- -- -- -- -- 62,000 --
Write-off of note receivable for
common stock................... -- -- -- -- -- -- -- --
Series A Preferred private
placement, net of related costs
(note 3)....................... -- -- 186,664 186,664 -- -- -- --
Series B Preferred private
placement, net of related costs
(note 3)....................... -- -- -- -- 227,500 227,500 -- --
Issuance of put right
obligations.................... -- -- -- -- -- -- -- --
Cancellation of put right
obligation..................... -- -- -- -- -- -- -- --
Warrant and stock option
exercises and stock grant...... -- -- -- -- -- -- 2,379,390 23,794
Establish limitation on common
stock put right obligation..... -- -- -- -- -- -- -- --
Series A Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances at June 30, 1995......... -- -- 186,664 186,664 227,500 227,500 5,744,782 56,827
Issuance of Series B-4 Preferred
Stock (note 3)................. -- -- -- -- 50,000 50,000 -- --
Issuance of detachable warrants
(note 6)....................... -- -- -- -- -- -- -- --
Warrants and stock options
exercised...................... -- -- -- -- -- -- 900,909 9,010
Series A and B Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Cancellation of and adjustments
to put right obligations....... -- -- -- -- -- -- -- --
Stock compensation expense....... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances at June 30, 1996......... -- -- 186,664 186,664 277,500 277,500 6,645,691 65,837
Warrants and stock options
exercised...................... -- -- -- -- -- -- 139,305 1,393
Series A and B Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. -- -- -- -- -- -- -- --
Cancellation of and adjustments
to put right obligations....... -- -- -- -- -- -- -- 620
Stock compensation expense....... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances December 31, 1996........ -- -- 186,664 186,664 277,500 277,500 6,784,996 67,850
Shares issued to CyberGate (note
13)............................ -- -- -- -- -- -- 1,030,000 10,300
Series A and B Preferred Stock
dividends (note 3)............. -- -- -- -- -- -- -- --
Issuance of common stock (note
4)............................. -- -- -- -- -- -- 8,660,000 86,600
Conversion of preferred shares
(note 3)....................... -- -- (186,664) (186,664) (277,500) (277,500) 17,377,275 173,773
Preferred dividends paid in stock
(note 4)....................... -- -- -- -- -- -- 1,650,207 16,502
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN ON SALE OF ACCUMULATED EQUITY
CAPITAL COMMON STOCK DEFICIT (DEFICIT)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994......... 1,080,566 (2,750) (6,043,573) (3,265,757)
Preferred Stock exchange......... 1,700,000 -- -- --
Set par value for common stock... (33,033) -- -- --
Acquisition of Piedmont Teleport,
Inc............................ -- -- -- --
Write-off of note receivable for
common stock................... (2,750) 2,750 -- --
Series A Preferred private
placement, net of related costs
(note 3)....................... 15,009,461 -- -- 15,196,125
Series B Preferred private
placement, net of related costs
(note 3)....................... 20,434,000 -- -- 20,661,500
Issuance of put right
obligations.................... (53,303) -- -- (53,303)
Cancellation of put right
obligation..................... 487,500 -- -- 487,500
Warrant and stock option
exercises and stock grant...... 349,030 -- -- 372,824
Establish limitation on common
stock put right obligation..... 4,510,962 -- -- 4,510,962
Series A Preferred Stock
dividends accrued (note 3)..... (1,070,985) -- -- (1,070,985)
Net loss......................... -- -- (14,697,649) (14,697,649)
----------- ------- ------------ ------------
Balances at June 30, 1995......... 42,411,448 -- (20,741,222) 22,141,217
Issuance of Series B-4 Preferred
Stock (note 3)................. 4,950,000 -- -- 5,000,000
Issuance of detachable warrants
(note 6)....................... 8,684,000 -- -- 8,684,000
Warrants and stock options
exercised...................... 289,360 -- -- 298,370
Series A and B Preferred Stock
dividends accrued (note 3)..... (3,871,328) -- -- (3,871,328)
Cancellation of and adjustments
to put right obligations....... 775,753 -- -- 775,753
Stock compensation expense....... 2,735,845 -- -- 2,735,845
Net loss......................... -- -- (26,782,044) (26,782,044)
----------- ------- ------------ ------------
Balances at June 30, 1996......... 55,975,078 -- (47,523,266) 8,981,813
Warrants and stock options
exercised...................... 175,945 -- -- 177,338
Series A and B Preferred Stock
dividends accrued (note 3)..... (2,003,630) -- -- (2,003,630)
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. 18,750 -- -- 18,750
Cancellation of and adjustments
to put right obligations....... 154,406 -- -- 155,026
Stock compensation expense....... 549,645 -- -- 549,645
Net loss......................... -- -- (34,916,514) (34,916,514)
----------- ------- ------------ ------------
Balances December 31, 1996........ 54,870,194 -- (82,439,780) (27,037,572)
Shares issued to CyberGate (note
13)............................ 8,744,700 -- -- 8,755,000
Series A and B Preferred Stock
dividends (note 3)............. (1,113,744) -- -- (1,113,744)
Issuance of common stock (note
4)............................. 39,866,172 -- -- 39,952,772
Conversion of preferred shares
(note 3)....................... 290,391 -- -- --
Preferred dividends paid in stock
(note 4)....................... 7,790,716 -- -- 7,807,218
</TABLE>
F-5
<PAGE> 118
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- -------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Warrants and stock options
exercised...................... -- -- -- -- -- -- 1,367,460 13,674
Expiration of put right
obligation (note 7)............ -- -- -- -- -- -- -- --
Stock compensation expense....... -- -- -- -- -- -- -- --
Warrants issued (note 7)......... -- -- -- -- -- -- -- --
Redeemable Preferred Warrants
(note 5)....................... -- -- -- -- -- -- -- --
Preferred stock
dividends/accretion (note 5)... -- -- -- -- -- -- -- --
NetRunner acquisition (note
13)............................ -- -- -- -- -- -- 51,166 511
Shares issued to AT&T (note 6)... -- -- -- -- -- -- 207,964 2,080
Shares issued under employee
stock purchase plan............ -- -- -- -- -- -- 90,351 904
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balance at December 31, 1997...... -- -- -- $ -- -- $ -- 37,219,419 $372,194
====== =========== ======== ========= ======== ========= ========== ========
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN ON SALE OF ACCUMULATED EQUITY
CAPITAL COMMON STOCK DEFICIT (DEFICIT)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Warrants and stock options
exercised...................... 3,254,481 -- -- 3,268,155
Expiration of put right
obligation (note 7)............ 1,000,000 -- -- 1,000,000
Stock compensation expense....... 4,273,669 -- -- 4,273,669
Warrants issued (note 7)......... 480,144 -- -- 480,144
Redeemable Preferred Warrants
(note 5)....................... 21,603,854 -- -- 21,603,854
Preferred stock
dividends/accretion (note 5)... (10,515,968) -- -- (10,515,968)
NetRunner acquisition (note
13)............................ 628,608 -- -- 629,119
Shares issued to AT&T (note 6)... (2,080) -- -- --
Shares issued under employee
stock purchase plan............ 538,279 -- -- 539,183
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. 18,750 -- -- 18,750
Net loss......................... -- -- (115,016,427) (115,016,427)
----------- ------- ------------ ------------
Balance at December 31, 1997...... 131,728,166 -- (197,456,207) (65,355,847)
=========== ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 119
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(14,697,649) $(26,782,044) $(34,916,514) $(115,016,427)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 497,811 3,078,426 4,911,674 23,525,781
Interest deferral and
accretion..................... -- 10,447,687 10,041,189 41,032,473
Amortization of deferred
financing fees................ 323,900 668,317 334,671 2,578,675
Provision for doubtful
accounts...................... 8,570 180,940 242,915 1,438,193
Loss from impairment of
assets........................ -- -- 318,737 --
Loss attributed to minority
interest...................... (48,055) (412,606) (160,270) --
Noncash compensation,
consultants, and other
expenses...................... 6,419,412 2,735,845 549,645 4,273,669
Accretion of consulting
agreement credit to exercise
price of warrants............. -- -- 18,750 18,750
Noncash debt conversion
expense....................... 385,000 -- -- --
Issuance of warrants under the
preferred provider
agreement..................... -- -- -- 480,144
Changes in operating assets and
liabilities:
Trade accounts receivable..... (359,007) (565,764) (1,936,732) (14,396,963)
Restricted cash related to
operating activities........ 200,000 -- -- --
Other current assets.......... (92,325) (911,140) (199,246) (4,887,960)
Other assets.................. (26,545) (107,574) (653,065) 126,026
Accounts payable.............. 3,170,885 17,474,179 12,270,061 (19,232,343)
Accrued financing fees........ 1,542,255 (1,542,255) -- --
Accrued employee costs........ 719,333 (62,247) 1,282,925 296,060
Other accrued liabilities..... 1,055,673 (382,792) 1,188,253 3,410,960
------------ ------------ ------------ -------------
Net cash (used in) provided by
operating activities.............. (900,742) 3,818,972 (6,707,007) (76,352,962)
------------ ------------ ------------ -------------
Cash flows from investing
activities:
Purchase of net assets of Piedmont
Teleport, Inc................... (19,135) -- -- --
Purchase of equipment and
furniture....................... (306,454) (2,966,987) (1,827,119) (7,575,081)
Restricted cash related to network
activities...................... (752,000) (1,590,152) -- (1,119,152)
Network development costs......... (14,996,303) (57,889,227) (62,746,777) (127,460,581)
------------ ------------ ------------ -------------
Net cash used in investing
activities........................ (16,073,892) (62,446,366) (64,573,896) (136,154,814)
------------ ------------ ------------ -------------
Cash flows from financing
activities:
Issuance of notes payable......... 3,510,349 166,888,210 16,329,923 223,697,586
Payment of deferred financing
fees............................ (310,175) (8,710,387) (380,771) (19,229,801)
Warrant and stock option
exercises....................... 372,824 298,370 177,338 3,268,155
Issuances of Series A Preferred
Stock, net of offering costs and
conversion of bridge
financing....................... 10,962,046 -- -- --
Issuances of Series B Preferred
Stock, net of offering costs.... 20,661,500 5,000,000 -- --
Issuance of warrants with 2005
Notes........................... -- 8,684,000 -- --
Issuance of notes payable --
stockholders.................... 250,000 -- -- --
Proceeds from sale of minority
interest in subsidiaries........ 242,457 378,474 -- --
</TABLE>
F-7
<PAGE> 120
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Payment of equipment financing.... $ -- $ -- $ (343,024) $ --
Payments of notes payable --
stockholders.................... (481,692) (146,083) -- (494,724)
Payments of bridge notes.......... (1,000,000) -- -- --
Payments of secured note.......... (75,000) -- -- --
Payments of secured convertible
note............................ (77,281) -- -- --
Other long-term liabilities....... -- -- -- (562,914)
Restricted cash related to notes
payable......................... -- -- -- (68,439,212)
Shares issued under the Employee
Stock Purchase Plan............. -- -- -- 539,183
Issuance of common stock.......... -- -- -- 39,952,772
Payment of dividends.............. -- -- -- (252,423)
Issuance of redeemable preferred
stock........................... -- -- -- 216,247,539
------------ ------------ ------------ -------------
Net cash provided by financing
activities........................ 34,055,028 172,392,584 15,783,466 394,726,161
------------ ------------ ------------ -------------
Net (decrease) increase in cash and
cash equivalents.................. 17,080,394 113,765,190 (55,497,437) 182,218,385
Cash and cash equivalents, beginning
of year........................... 3,270,397 20,350,791 134,115,981 78,618,544
------------ ------------ ------------ -------------
Cash and cash equivalents, end of
year.............................. $ 20,350,791 $134,115,981 $ 78,618,544 $ 260,836,929
============ ============ ============ =============
Supplemental disclosure of cash flow
information -- interest paid on
all debt obligations.............. $ 219,554 $ 29,217 $ 14,470 $ 2,085,380
============ ============ ============ =============
Supplemental disclosure of noncash
investing and financing
activities:
Equipment financing............... $ -- $ 343,024 $ -- $ --
Dividends declared in connection
with Series A and B Preferred
Stock........................... $ 1,070,985 $ 3,871,328 $ 2,003,630 $ 1,113,744
============ ============ ============ =============
Bridge financing, secured
convertible notes and notes
payable -- stockholders converted
to equity in connection with
private placements................ $ 4,080,079 $ -- $ -- $ --
============ ============ ============ =============
Cancellation of and adjustments to
put right obligations............. $ (487,500) $ (775,753) $ (155,025) $ (1,000,000)
============ ============ ============ =============
Write off of note receivable from
sale of common stock.............. $ 2,750 $ -- $ -- $ --
============ ============ ============ =============
Preferred stock exchange............ $ 1,700,000 $ -- $ -- $ --
============ ============ ============ =============
Purchase of Piedmont Teleport, Inc.
for common stock and related put
right obligation.................. $ 192,303 $ -- $ -- $ --
============ ============ ============ =============
Negotiation of right-of-way
agreement for option discount..... $ 201,000 $ -- $ -- $ --
============ ============ ============ =============
Purchase of CyberGate, Inc. --
1,030,000 shares.................. $ -- $ -- $ -- $ 8,755,000
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 121
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997
(1) BASIS OF PRESENTATION AND RELATED MATTERS
ORGANIZATION
The consolidated financial statements include the accounts of e.spire
Communications, Inc. and its wholly-owned subsidiaries (ESPI or the Company).
All material intercompany accounts and transactions have been eliminated in
consolidation.
Effective December 31, 1996, the Company changed its fiscal year from a
twelve-month period ending June 30 to a twelve-month period ending December 31.
The consolidated statements of operations, stockholders' equity (deficit) and
cash flows are presented for the twelve month periods ended June 30, 1995 and
1996, the six month period ended December 31, 1996, and the twelve month period
ended December 31, 1997.
BUSINESS AND OPERATING ENVIRONMENT
ESPI is an integrated communications provider. The Company owns and
operates digital fiber optic networks and offers a variety of telecommunications
services to long distance companies and business and government end users in
selected target markets, principally in the southern United States. The Company
provides nonswitched dedicated services, including special access, switched
transport, and private line services, as well as high speed data services, local
switched voice services and long-distance services using its own facilities and
on a resale basis.
To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds were two Preferred Stock private offerings completed in October 1994
and June 1995 (see note 3), and a credit facility from AT&T Credit Corporation
(see note 6). During the fiscal year ended June 30, 1996, the Company raised
additional funds through an additional sale of Preferred Stock (see note 3), two
private offerings of Senior Notes, one of which included detachable warrants and
further borrowings under the AT&T Credit Corporation Credit Facility. During the
year ended December 31, 1997, the Company raised additional funds through the
sale of Common Stock, two Preferred Stock offerings, one of which included
detachable warrants, and an offering of Senior Notes (see notes 3, 5 and 6). As
a result of the above described debt offerings, the Company will be required to
satisfy substantially higher periodic cash debt service obligations in the
future. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds to cover interest and principal
payments associated with currently outstanding and future debt obligations.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. In accordance with the
terms of its debt facilities, the Company has also deferred payment of most of
its interest charges. The Company's continued development, construction,
expansion, operation and potential acquisition of local networks, as well as the
further development of additional services, including local switched voice and
high-speed data services, will require substantial capital expenditures. The
Company's ability to fund these expenditures is dependent upon the Company
raising substantial financing. To meet its remaining capital requirements and to
fund operations and cash flow deficiencies, the Company will be required to sell
additional equity securities, increase its existing credit facility, acquire
additional credit facilities or sell additional debt securities, certain of
which would require the consent of the Company's bondholders. Before incurring
additional indebtedness, the Company may be required to seek additional equity
financing to maintain balance sheet and liquidity ratios under certain of its
debt instruments. There can be no assurance that the Company will be able to
obtain the additional
F-9
<PAGE> 122
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
financing necessary to satisfy its cash requirements or to successfully
implement its growth strategy. Failure to raise sufficient capital could compel
the Company to delay or abandon some or all of its plans or expenditures, which
could have a material adverse effect on its business, results of operations, and
financial condition. Management believes that the Company's current cash
resources will be sufficient to fund the Company's continuing negative cash flow
and required capital expenditures during 1998.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents. The Company's investments
consist of commercial paper, US Government Securities and money market
instruments, all with original maturities of 90 days or less. The fair market
value of such securities approximates amortized cost.
RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $2,342,000, $2,342,000, and $1,223,000 at June 30,
1996, December 31, 1996, and December 31, 1997, respectively. The face amount of
all bonds and letters of credit is approximately $6,300,000 as of December 31,
1997. In addition, the Company has placed approximately $70,677,000 into an
escrow account to fund the first five interest payments of its 13 3/4% senior
notes due 2007 (see note 6). Approximately $25,302,000 of the escrow account is
classified as current. The escrow account is invested in cash equivalents
consisting of government and commercial securities.
Pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, the Company's short- and long-term debt securities and
marketable equity securities are accounted for at market value. The fair market
value of short- and long-term investments is determined based on quoted market
prices. The Company's marketable securities have been classified as available
for sale and are recorded at current market value with an offsetting adjustment
to stockholders' equity (deficit). At June 30, 1996 and December 31, 1996 and
1997, fair market value approximated amortized cost.
NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized during the network development
stage include expenses associated with network engineering, design and
construction, negotiation of rights-of-way, obtaining legal and regulatory
authorizations and the amount of interest costs associated with the network
development.
Provisions for depreciation of networks, equipment, and furniture is
computed using the straight-line method over the estimated useful lives of the
assets beginning in the month a network is substantially complete and available
for use and equipment and furniture are acquired.
F-10
<PAGE> 123
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Networks:
Fiber optic cables and installation costs................. 20 years
Telecommunications equipment.............................. 3-10 years
Interconnection and collocation costs..................... 3-10 years
Leasehold improvements...................................... Life of lease
Furniture and fixtures...................................... 5 years
Capitalized network development costs....................... 3-20 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets include customer lists and goodwill. Goodwill is being
amortized on a straight-line basis over the period of expected benefit of ten
years. Amortization expense related to goodwill for the year ended December 31,
1997 was approximately $726,000.
The costs of purchased customer lists are amortized on a straight-line
basis over their estimated useful lives, generally over eighteen months. The
Company determines the useful lives of customer lists based upon the estimated
length of the acquired customers' future service. Amortization expense related
to purchased customer lists was approximately $50,000 for the year ended
December 31, 1997.
VALUATION OF LONG-LIVED ASSETS
The Company accounts for the valuation of long-lived assets under SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. 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 undiscounted 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 exceeds the estimated 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.
DEFERRED FINANCING FEES
Deferred financing fees include commitment fees and other costs related to
certain debt financing transactions and are being amortized using the effective
interest method over the initial term of the related debt. Deferred finance fees
also include payments to bondholders for debt modifications that do not result
in debt extinguishment.
REVENUE RECOGNITION
Revenue from telecommunications services is recognized as services are
provided. Billings to customers for services in advance of providing such
services are deferred and recognized as revenue when earned. The Company also
enters into managed services agreements with certain customers. Under such
agreements the Company provides use of Company owned equipment, collocation, and
network access services. Revenue is recognized on a monthly basis as these
services are provided to the customer.
F-11
<PAGE> 124
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The Company recognizes revenue associated with engineering and construction
contracts using the percentage-of-completion method, based primarily on contract
costs incurred to date compared with total estimated contract costs. Changes to
total estimated contract costs or losses, if any, are recognized in the period
in which they are determined.
EARNINGS (LOSS) PER COMMON SHARE
During 1997, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. The computations of basic and diluted earnings (loss) per common
share are based upon the weighted average number of common shares outstanding
and potentially dilutive securities. Potentially dilutive securities include
convertible preferred stock, stock options and warrants.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1995 and 1996 and
December 31, 1996 consolidated financial statements to conform to the December
31, 1997 presentation. Such reclassifications had no effect on net loss or total
stockholders' equity (deficit).
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 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 disclosure for employee stock option grants 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.
USE OF ESTIMATES
The preparation of the consolidated 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 dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
F-12
<PAGE> 125
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
RISKS AND UNCERTAINTIES
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. For the years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the year ended December
31, 1997 approximately 85%, 60%, 40%, and 20% of the Company's revenues were
attributable to services provided to three, four, four and five, respectively,
of the largest long distance telecommunications companies, respectively. The
loss of any one of these customers could have an adverse material impact on the
Company's results of operations.
The Company provides services to certain Internet Service Providers (ISPs).
Such companies operate in a highly competitive and uncertain environment.
Approximately 19% and 20% of the Company's revenues for the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, were
attributed to these companies. At December 31, 1996 and 1997, the Company had
trade accounts receivable of $923,000 and $5.0 million, respectively, from ISPs.
At December 31, 1997, the Company also has equipment with a carrying value of
approximately $11.7 million that is dedicated to providing service to these
ISPs. The Company believes that, if necessary, this equipment could be
redeployed throughout the Company's data network.
The Company has recorded revenues of approximately $1.6 million in 1997 for
reciprocal compensation relating to the transport and termination of Internet
traffic for local exchange carriers pursuant to various interconnection
agreements. These local exchange carriers have not paid and have disputed these
charges based on the belief that such charges are not local traffic as defined
by the various agreements. The resolution of these disputes will be based on
rulings by state public utility commissions and/or by the Federal Communications
Commission (FCC). To date, there have been no unfavorable final rulings by any
state public utility commission or the FCC that would indicate that calls placed
by end users to ISPs would not qualify as local traffic subject to the payment
of reciprocal compensation.
(2) NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Networks and telecommunications equipment........ $76,853,865 $139,129,495 $269,213,500
Furniture and fixtures........................... 1,982,910 3,334,147 5,799,262
Computer software................................ 948,848 1,558,384 5,954,662
Leasehold improvements........................... 362,341 381,097 1,185,119
----------- ------------ ------------
80,147,964 144,403,123 282,152,543
Less -- accumulated depreciation and
amortization................................... 3,408,698 8,320,372 31,675,227
----------- ------------ ------------
Total, net of accumulated depreciation and
amortization................................... $76,739,266 $136,082,751 $250,477,316
=========== ============ ============
</TABLE>
For the years ended June 30, 1995 and 1996, the Company capitalized
interest of approximately $536,000 and $3,051,000, respectively. For the six
months ended December 31, 1996 and the year ended December 31, 1997, the Company
capitalized interest of approximately $2,268,000 and $3,933,000, respectively.
F-13
<PAGE> 126
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(3) PRIVATE PLACEMENTS
In October 1994, the Company completed a private placement of its 9 percent
Series A Convertible Preferred Stock, $1.00 par value (the "Series A Preferred
Stock"). There were 138,889 shares issued for cash at $90 per share resulting in
proceeds of $10,962,046, net of placement agent commissions and related
placement fees and costs. In addition, bridge financing was converted and
several other obligations were retired with proceeds of the offering. A total of
186,664 shares of the Series A Preferred Stock were issued. Further, as
discussed in note 7 to the consolidated financial statements, certain parties
obtained warrants to purchase shares of the Company's common stock. In June
1995, the Series A Preferred Stock was exchanged for an identical number of 9
percent Series A-1 Convertible Preferred Stock, $1.00 par value (the "Series A-1
Preferred Stock").
In June 1995, the Company completed a private placement of its 9 percent
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9 percent
Series B-2 Convertible Preferred Stock (the "Series B-2 Preferred") and 9
percent Series B-3 Convertible Preferred Stock (the "Series B-3 Preferred"),
each having a par value of $1.00 per share. There were 227,500 shares issued for
cash at $100 per share with proceeds of $20,661,500, net of placement agent
commissions and related placement fees and costs. In November 1995, 50,000
shares of 9 percent Series B-4 Convertible Preferred Stock (the "Series B-4
Preferred") were issued for cash of $100 per share resulting in proceeds of
$5,000,000. The Series B-1 Preferred, the Series B-2 Preferred, the Series B-3
Preferred and the Series B-4 Preferred are hereafter collectively referred to as
the "Series B Preferred Stock." The Series A-1 Preferred Stock and the Series B
Preferred Stock are hereafter collectively referred to as the "Preferred Stock."
Further, as discussed in note 7 to the consolidated financial statements,
certain parties obtained warrants to purchase shares of the Company's common
stock.
During 1997, the Preferred Stock was converted into 17,377,275 shares of
common stock. In connection with its Series A-1 and Series B Preferred Stock,
the Company has recorded approximately $1,071,000, $3,871,000, $2,004,000 and
$1,114,000 for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, as a
reduction in additional paid-in capital, for the payment of anticipated
dividends. The Company's certificate of incorporation required the Company to
accrue dividends, on a quarterly basis, at an annual rate of 9 percent of the
face value of the Series A-1 and B Preferred Stock. These dividends were paid
during 1997 in connection with the conversion of the Preferred Stock.
(4) COMMON STOCK OFFERING
During 1997, the Company issued 8,660,000 shares of common stock for net
proceeds of approximately $40 million, net of underwriters discounts and other
expenses of the offering. Concurrently with this transaction, 186,664 shares of
the Company's Series A-1 Preferred Stock and 277,500 shares of the Company's
Series B Preferred Stock were converted into 17,377,275 shares of the Company's
Common Stock (see note 3). In addition, of the approximately $8,000,000 of
dividends accrued on the Preferred Stock prior to conversion, approximately
$7,750,000 was paid with 1,650,207 shares of the Company's common stock. The
remaining accrued dividends were paid in cash.
F-14
<PAGE> 127
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(5) REDEEMABLE PREFERRED STOCK
On July 10, 1997, the Company consummated the sale of 75,000 units
consisting of its 14 3/4% Redeemable Preferred Stock due 2008 (the "Redeemable
Preferred Stock due 2008") and warrants to purchase approximately 6,023,800
shares of its Common Stock yielding net proceeds to the Company of approximately
$70.2 million, net of underwriters fees and other related expenses. The value
attributed to the warrants was approximately $21.6 million. The number of shares
the warrants are exercisable into are subject to an increase of 1,698,375 in the
event the Company fails to raise net cash proceeds of at least $50 million
through the issuance and sale of the Company's common stock by December 31,
1998. The Company will be required to redeem all outstanding shares of the
14 3/4% Preferred Stock on June 30, 2008 at a price equal to $1,000 per share
plus any accrued and unpaid dividends.
The Redeemable Preferred Stock due 2008 may be redeemed, in whole or in
part, at the option of the Company, at any time after January 1, 2003, at the
redemption prices set forth below, plus any accrued and unpaid dividends as of
that date. The redemption prices, expressed in percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 107.375%
2004........................................................ 104.917%
2005........................................................ 102.458%
2006 and thereafter......................................... 100.000%
</TABLE>
On October 6, 1997, the Company consummated the sale of 150,000 shares of
its 12 3/4% Junior Redeemable Preferred Stock due 2009 (the "Junior Redeemable
Preferred Stock due 2009") for proceeds of approximately $146.0 million, net of
underwriters fees and other related expenses. The Company will be required to
redeem all outstanding shares of the Junior Redeemable Preferred Stock due 2009
on October 15, 2009 at $1,000 per share plus any accrued and unpaid dividends.
The Junior Redeemable Preferred Stock due 2009 may be redeemed, in whole or
in part, at the option of the Company, at any time after October 15, 2003 at the
redemption prices set forth below, plus any accrued and unpaid dividends as of
that date. The redemption prices, expressed in percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 106.375%
2004........................................................ 104.781%
2005........................................................ 103.188%
2006........................................................ 101.594%
2007 and thereafter......................................... 100.000%
</TABLE>
Dividends on the Redeemable Preferred Stock due 2008 and Junior Redeemable
Preferred Stock due 2009 (collectively "the Redeemable Preferred Stock") may be
paid, at the Company's option, either in cash or by the issuance of additional
shares of Redeemable Preferred Stock; provided, however, that after June 30,
2002, to the extent and so long as the Company is not precluded from paying cash
dividends on the Redeemable Preferred Stock by the terms of any then outstanding
indebtedness, the Company is required to pay dividends on the Redeemable
Preferred Stock in cash.
F-15
<PAGE> 128
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The holders of the Redeemable Preferred Stock are not entitled to vote on
any matter required or permitted to be voted upon by the stockholders of the
Company. If, however, after June 30, 2002, the Company violates certain
covenants, including the payment of dividends, the Redeemable Preferred
Stockholders are permitted to vote as a single class to elect not less than 25%
of the members of the Board of Directors.
A summary of the changes in the Redeemable Preferred Stock is as follows:
<TABLE>
<CAPTION>
JUNIOR
REDEEMABLE REDEEMABLE
PREFERRED PREFERRED
STOCK STOCK
DUE 2008 DUE 2009
----------- ------------
<S> <C> <C>
Balance at issuance, net of underwriters fees and
other related expenses.............................. $48,598,386 $146,045,299
Payment of dividends in shares of Redeemable Preferred
Stock............................................... 5,348,738 --
Accrued dividends..................................... -- 3,984,375
Accretion to redemption value......................... 1,113,537 69,318
----------- ------------
Balance at December 31, 1997.......................... $55,060,661 $150,098,992
=========== ============
</TABLE>
(6) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
AT&T Credit Corporation equipment and
working capital financing facility..... $ 14,971,122 $ 30,183,264 $ 35,000,000
2005 Senior Discount notes, interest at
13%, maturing November 1, 2005......... 102,432,137 109,402,071 126,043,037
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006........ 66,635,887 70,824,922 80,242,140
2007 Senior Notes, interest at 13 3/4%,
maturing July 15, 2007................. -- -- 220,000,000
Secured equipment note payable, interest
of 9.98%, payable in 36 equal monthly
installments of $2,766, including
interest commencing March 1, 1996...... 343,024 -- --
------------ ------------ ------------
Total long-term debt..................... 184,382,170 210,410,257 461,285,177
Less current portion..................... 252,809 872,031 437,500
------------ ------------ ------------
$184,129,361 $209,538,226 $460,847,677
============ ============ ============
</TABLE>
F-16
<PAGE> 129
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
Principal payments for each of the years from 1998 to 2002 and thereafter,
are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998....................................................... $ 437,500
1999....................................................... 2,187,500
2000....................................................... 3,937,500
2001....................................................... 5,687,500
2002....................................................... 7,437,500
Thereafter................................................. 441,597,677
------------
$461,285,177
============
</TABLE>
AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation agreed to provide financing for the development
and construction of fiber optic networks by certain of the Company's
subsidiaries. Pursuant to the AT&T Credit Facility, during 1996 the Company's
subsidiaries in Louisville, Fort Worth, Greenville, Columbia, and El Paso
entered into loan agreements with AT&T Credit Corporation providing for up to
$31.2 million in loans collateralized by the assets of such subsidiaries.
Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased 7.25% of
the outstanding capital stock of each of the Company's operating subsidiaries
for which it provided financing.
On December 30, 1997, the Company and AT&T Credit Corporation agreed to
amend the terms of the facility increasing the facility to $35 million and
transferring the loan agreements from the Company's five subsidiaries to the
Company as a whole. The amendment also changed the interest rates on the
outstanding loans from a range of 11.93% to 14.47% to a variable rate equal to
the three-month Commercial Paper Rate or LIBOR Rate plus 4.5 percent (10.35
percent at December 31, 1997). In addition, as part of the modification, the
Company issued 207,964 shares of common stock in exchange for all of AT&T Credit
Corporation's 7.25% ownership interest in the five subsidiaries. The Company has
pledged all of its shares of capital stock in its material subsidiaries and
Intercompany Notes to AT&T Credit Corporation. Under certain circumstances, the
pledge agreement also restricts the Company's ability to receive and retain
dividends in respect of the pledged collateral.
The AT&T Credit Facility includes covenants which impose certain
restrictions on the Company, including restrictions on the declaration or
payment of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or indebtedness, the disposition
of assets, transactions with affiliates and extraordinary corporate
transactions.
SENIOR NOTES
On November 14, 1995, the Company completed an offering of 190,000 Units
(the "Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "Warrants"). The
2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually. The 2005 Notes will mature November 1, 2005. The
Company received net proceeds of
F-17
<PAGE> 130
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
approximately $96.1 million from the sale of the Units. The value ascribed to
the Warrants was $8,684,000.
On March 21, 1996, the Company completed an offering of $120,000,000 of
12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in net
proceeds of approximately $61.8 million. The 2006 Notes will accrete at a rate
of 12 3/4% compounded semi-annually to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12 3/4% and will be payable in cash semi-annually.
The 2006 Notes will mature on April 1, 2006.
On July 23, 1997, the Company completed the sale of $220 million aggregate
principal amount of 13 3/4% Senior Notes due 2007 (the "2007 Notes"). Of the
total net proceeds of approximately $204.3 million, the Company placed
approximately $70 million, representing funds, together with interest thereon,
sufficient to pay the first five semi-annual interest payments on the 2007
Notes, into an escrow account for the benefit of the holders. The 2007 Notes
accrue interest at a rate of 13 3/4%, payable in cash semi-annually, on January
15 and July 15, commencing January 15, 1998. The 2007 Notes will mature on July
15, 2007.
The 2005 Notes, 2006 Notes, and 2007 Notes (collectively the "Notes") are
general, unsubordinated and unsecured senior obligations of the Company. The
Company's subsidiaries have no obligation to pay amounts due on the Notes and do
not guarantee the notes. Therefore, the Notes are effectively subordinated to
all liabilities of the Company's subsidiaries, including trade payables. Any
rights of the Company and its creditors, including the holders of the Notes, to
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiaries will be subject to the
prior claims of that subsidiary's creditors.
The Notes are subject to certain covenants which, among other things
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness, pay dividends, or make distributions.
In June of 1997, the Company notified the trustee of the 2005 and 2006
Notes that the Company had approximately $17.4 million of trade accounts payable
that were more than 60 days overdue. These overdue amounts constituted
indebtedness of the Company as defined by the 2005 Note Indenture and 2006 Note
Indenture. The incurrence of such indebtedness constituted an event of default
under each indenture. The Company cured such event of default during July of
1997.
(7) STOCK COMPENSATION AND STOCK PURCHASE WARRANTS
The Company has a stock option plan which provides for the granting of
options to officers, employees, directors, and consultants of the Company to
purchase shares of its common stock within prescribed periods.
In 1994, the Company entered into employment agreements with five executive
officers. Pursuant to the agreements, as amended, such officers were granted
options to purchase shares of Common Stock of the Company. In accordance with
their employment agreements, these individuals had the right to sell certain of
their shares to the Company (the put right) for a price equal to fair market
value. On June 26, 1995, the employment agreements were amended to limit the
purchase price paid by the Company pursuant to the put right to a maximum of
$2,500,000, which amount is subject to further reductions based on the
employees' sales of stock. During the year ended June 30, 1996, the limit was
further reduced to $2,000,000. During the year ended December 31, 1997, put
rights related to $1,000,000 expired without exercise.
F-18
<PAGE> 131
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
On March 6, 1997, the Company entered into a preferred provider agreement
with MCIMetro Access Transmission Services, Inc. In connection with the
agreement, the Company issued warrants to purchase 620,000 shares of the
Company's Common Stock at $9.86 per share. 360,000 of these warrants vested
during 1997. The value attributed to the vested warrants was approximately $1.3
million, which is being recognized as network cost over the five year term of
the agreement. During 1997, the Company recognized approximately $215,000 in
network expense related to these warrants. The Company also agreed to issue
warrants to purchase up to an aggregate of approximately 1.7 million additional
shares of the Company's Common Stock at fair market value on the date of grant
in tranches every six months subject to certain increases in revenue to the
Company generated under the agreement. At December 31, 1997, the Company had
issued 37,582 of such warrants with an exercise price of $9.503 per share. The
value attributed to these warrants was approximately $265,000 which was
recognized as network cost in 1997.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, compensation cost has been recognized for
its stock option plans based on the intrinsic value of the option at the date of
grant. The compensation cost that has been charged against income for stock
option plans was approximately $6.4 million, $2.7 million, $550,000, and $1.4
million for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996, and the year ended December 31, 1997, respectively. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates consistent with the method of FASB Statement 123 for all
options granted after June 30, 1995, and the intrinsic value for all options
granted prior to July 1, 1995, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net loss................... As reported: $(26,782,044) $(34,916,514) $(115,016,427)
Pro forma: (27,533,636) (36,828,677) (120,394,471)
Loss per common share...... As reported: (4.96) (5.48) (4.65)
Pro forma: (5.08) (5.77) (4.85)
</TABLE>
Pro forma net loss reflects compensation cost under SFAS No. 123 only for
options granted for the year ended June 30, 1996, the six months ended December
31, 1996, and the year ended December 31, 1997. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because compensation
cost is reflected over the vesting period and compensation cost under SFAS No.
123 for options granted prior to July 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in the year ended June 30, 1996, the six months
ended December 31, 1996, and the year ended December 31, 1997, respectively:
dividend yield of 0% for all periods; expected volatility of 50%, 50%, and 50%,
risk-free interest rates of 5.97%, 6.4%, and 6.0% and expected lives of 4.74,
4.37, and 4.06 years.
F-19
<PAGE> 132
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1995
and 1996, December 31, 1996, and December 31, 1997 and changes during the
periods ending on those dates is presented below:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE (000) PRICE
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 859 $2.22 5,042 $1.72 6,095 $2.21 7,457 $3.60
Granted................ 4,283 1.64 1,228 4.30 1,433 9.45 2,141 8.25
Exercised.............. -- 0.00 (105) 2.46 (48) 2.02 (926) 2.39
Forfeited.............. (100) 2.51 (70) 3.57 (23) 3.54 (845) 6.60
----- ----- ----- -----
Outstanding at end of
year................. 5,042 1.72 6,095 2.21 7,457 3.60 7,827 4.69
Options exercisable at
year-end............. 2,387 3,461 4,140 4,379
Weighted-average fair
value of options
granted during the
year................. $1.16 $3.35 $5.95 $4.96
</TABLE>
The following table summarizes information about fixed stock options at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE PRICE 12/31/97 PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 to 0.875 2,067,000 2.31 years $0.875 2,057,000 $0.875
2.25 to 3.10 1,995,000 3.98 2.50 1,574,000 2.46
3.27 to 8.50 1,964,000 5.92 6.36 526,000 5.67
9.00 to 11.64 1,801,000 6.47 9.70 222,000 9.37
--------- ---------- ------ --------- ------
$0.875 to 11.64 7,827,000 4.60 $4.69 4,379,000 $2.45
========= ========== ====== ========= ======
</TABLE>
During fiscal years ended June 30, 1995 and 1996, in connection with the
Series A-1 and Series B Preferred Stock private placements and related bridge
note conversions, warrants for 4,367,078 shares of common stock were issued at
prices ranging from $.01 to $3.10. In fiscal 1996, as part of the issuance of
the 2005 Notes, detachable warrants to purchase 2,432,000 shares of the
Company's common stock at a price of $7.15 per share were issued. During 1997,
as part of the issuance of the Redeemable Preferred Stock due 2008, the Company
issued warrants to purchase 6,023,850 shares of Common Stock $7.15 per share.
The Company also issued 657,582 warrants to MCIMetro Access Transmission
Services, Inc. during 1997. These warrants include certain anti-dilution
provisions.
F-20
<PAGE> 133
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
At December 31, 1997, unexercised warrants outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
---------- ----------------
<S> <C> <C>
Series A and Series B Preferred Stock placements....... 1,346,726 $0.01 -- 3.10
2005 Senior Discount Notes offering.................... 2,604,207 6.47
Redeemable Preferred Stock due 2008 offering........... 6,023,850 7.15
Other.................................................. 1,292,582 0.01 -- 9.86
---------- -------------
Total........................................ 11,267,365 $0.01 -- 9.86
========== =============
</TABLE>
The gross proceeds that would be received by the Company on the exercise of
all outstanding options and warrants is approximately $108 million.
The Company's Board of Directors has adopted an Annual Performance Plan,
through which it will award its 1997 performance bonuses to management and
employees. The Company has accrued approximately $2.9 million in non-cash
compensation cost at December 31, 1997, related to the future issuance of up to
213,000 shares of the Company's Common Stock for this purpose.
(8) BASIC AND DILUTED EARNINGS PER SHARE
The following tables present the computation of basic and diluted earnings
per share as defined under SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1995
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss.................................... (14,697,649)
Less: Preferred stock dividends/accretion... (1,070,985)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (15,768,634) 4,771,689 (3.30)
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1995, convertible
into 15,591,563 shares of Common Stock, and options and warrants to purchase
5,042,189 and 3,019,235 shares of Common Stock, respectively, were not included
in the computation of diluted earnings per share for the year ended June 30,
1995 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1996
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss.................................... (26,782,044)
Less: Preferred stock dividends/accretion... (3,871,328)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (30,653,372) 6,185,459 (4.96)
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1996, convertible
into 17,377,264 shares of Common Stock, and options and warrants to purchase
6,094,814 and 4,367,394 shares of Common Stock, respectively, were not included
in the computation of diluted earnings per share for the year ended June 30,
1996 as their inclusion would be anti-dilutive.
F-21
<PAGE> 134
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ----------
<S> <C> <C> <C>
Net loss.................................... (34,916,514)
Less: Preferred stock dividends/accretion... (2,003,630)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (36,920,144) 6,733,759 (5.48)
</TABLE>
Convertible Preferred Stock outstanding as of December 31, 1996,
convertible into 17,377,264 shares of Common Stock, and options and warrants to
purchase 7,457,085 and 4,771,836 shares of Common Stock, respectively, were not
included in the computation of diluted earnings per share for the six months
ended December 31, 1996 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net loss.................................. (115,016,427)
Less: Preferred stock
dividends/accretion..................... (11,629,712)
------------
Basic and diluted earnings per share:
Net loss to common stockholders......... (126,646,139) 27,233,642 (4.65)
</TABLE>
Options and warrants to purchase 7,827,318 and 11,267,365 shares of Common
Stock, respectively, were not included in the computation of diluted earnings
per share for the year ended December 31, 1997 as their inclusion would be
anti-dilutive.
(9) COMMITMENTS AND CONTINGENCIES
RETIREMENT PLAN
On February 1, 1996, the Company began sponsoring the e.spire
Communications, Inc. 401(k) Plan (the "Plan"), a defined contribution plan. All
individuals employed on February 1, 1996 were eligible to participate.
Participation to all other employees is available after three months of full-
time equivalent service. The Company contributions under the Plan are
discretionary and may be as much as 6% of an employee's gross compensation
subject to certain limits. Total expense under the Plan amounted to
approximately $30,000, $95,000, and $1,580,000 for the year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31, 1997,
respectively.
LEGAL PROCEEDINGS
A former employee of e.spire has initiated litigation against the Company
for damages in excess of $5 million, and the right to exercise options to
purchase 100,000 shares of Common Stock at $4.25 per share. The lawsuit alleges
four different counts: breach of contract; breach of the covenant of good faith
and fair dealing; negligent misrepresentation; and specific performance. The
Company believes it has meritorious defenses to this complaint and intends to
defend this lawsuit vigorously.
The Company is a party to certain litigation and regulatory proceedings
arising in the ordinary course of business. In the opinion of management, based
upon the advice of counsel, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
F-22
<PAGE> 135
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(10) LEASES
The Company is obligated under various noncancelable operating leases for
office and node space, telecommunications equipment, and office furniture. The
minimum future lease obligations under these noncancelable operating leases as
of December 31, 1997 are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -----------
<S> <C>
1998........................................................ $10,466,000
1999........................................................ 10,638,000
2000........................................................ 9,075,000
2001........................................................ 6,393,000
2002........................................................ 6,416,000
Thereafter.................................................. 13,983,000
-----------
$56,971,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the year ended December 31, 1997 was approximately
$200,000, $1,166,000, $1,700,000, and $6,111,000, respectively.
(11) RELATED-PARTY TRANSACTIONS
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of a former director of the Company. Pursuant to the agreement, the
Company will compensate SGC as follows: (1) a monthly fee of $5,000; and (2)
options to purchase up to 50,000 shares of the Company's Common Stock which
vested on July 1, 1997, and are exercisable on or before July 1, 1999. During
the term of the agreement, SGC earned a credit for the full exercise price of
those options.
(12) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs..... $ 3,733,898 $ 3,972,981 $ --
Stock options -- noncash compensation.... 3,848,128 4,085,146 3,681,305
Net operating loss carryforwards......... 8,791,091 23,659,463 72,279,998
Bond discounts........................... 3,390,071 7,651,263 17,195,346
Other accrued liabilities................ 496,634 964,786 940,269
----------- ----------- -----------
Total gross deferred assets................ 20,259,822 40,333,639 94,096,918
Less: valuation allowance................ 18,304,754 31,990,518 81,050,070
----------- ----------- -----------
Net deferred tax assets.................... 1,955,068 8,343,121 13,046,848
Deferred tax liabilities -- fixed assets
depreciation and amortization............ 1,955,068 8,343,121 13,046,848
----------- ----------- -----------
Net deferred tax assets (liabilities)...... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-23
<PAGE> 136
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The net change in the total valuation allowance for the year ended June 30,
1996, the six months ended December 31, 1996, and the year ended December 31,
1997 was an increase of $10,013,374, $13,685,764, and $49,059,552, respectively.
The valuation allowances at June 30, 1996 and December 31, 1996 and 1997 are a
result of the uncertainty regarding the ultimate realization of the tax benefits
related to the deferred tax assets. The utilization of the tax benefits
associated with net operating losses of approximately $184 million at December
31, 1997 is dependent upon the Company's ability to generate future taxable
income. The net operating loss carryforward period expires commencing in 2008
through the year 2012. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of the net
operating loss carryforward may have occurred.
No income tax provision has been provided for the year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31, 1997 as
the aforementioned deferred tax assets have provided no tax benefit.
(13) ACQUISITIONS
On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of CyberGate, Inc. in exchange for 1,030,000 shares of common stock plus
up to an additional 150,000 shares if certain performance goals are achieved for
an aggregate purchase price of approximately $8.8 million. CyberGate, a Florida
based ISP, delivers high-speed data communications services. The acquisition has
been accounted for using the purchase method and, therefore, the Company's
consolidated financial statements include the results of operations of CyberGate
from the date of acquisition. The purchase price of $8,755,000 plus transaction
expenses of approximately $500,000 has been allocated to assets and liabilities
acquired based on their fair values and goodwill of approximately $8,400,000 has
been recorded. The goodwill is being amortized on a straight line basis over a
ten year period.
On October 3, 1997, the Company acquired the customers and receivables of
NetRunner, Inc., a Florida based ISP. In conjunction with this acquisition, the
Company placed 181,871 shares of the Company's Common Stock in escrow. As of
December 31, 1997, 51,166 of these shares had been released. The Company
recorded an intangible asset of approximately $685,000, which is being amortized
over 18 months.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
The Company's short- and long-term debt securities are carried at fair
market value as determined by quoted market prices.
LETTERS OF CREDIT
The fair value of the letters of credit is based on fees currently charged
for similar agreements.
F-24
<PAGE> 137
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
The fair value of the Company's long-term debt and redeemable preferred
stock is estimated based on the quoted market prices for the same or similar
issues if available or based on the present value of expected cash flows at
rates currently available to the Company for borrowings with similar terms.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 were:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash).............................................. $332,737,445 $332,737,445
Letters of credit.................................... -- 15,000
Redeemable preferred stock........................... 205,159,653 242,625,000
Long-term debt....................................... 461,285,177 539,500,000
============ ============
</TABLE>
F-25
<PAGE> 138
E.SPIRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 260,837 $ 294,581
Restricted cash and investments........................... 26,526 29,213
Trade accounts receivable, net............................ 15,514 28,638
Other current assets...................................... 6,127 4,797
--------- ---------
Total current assets.............................. 309,004 357,229
--------- ---------
Networks, equipment and furniture, gross.................... 282,152 397,459
Less: accumulated depreciation and amortization........... (31,675) (48,192)
--------- ---------
250,477 349,267
Deferred financing fees, net of accumulated amortization of
$5,405 and $3,649 at June 30, 1998 and December 31, 1997,
respectively.............................................. 25,031 37,155
Intangible assets, net of accumulated amortization of $1,182
and $776 at June 30, 1998 and December 31, 1997,
respectively.............................................. 8,132 7,499
Restricted cash and investments............................. 45,375 30,250
Other assets................................................ 876 1,042
--------- ---------
Total assets...................................... $ 638,895 $ 782,442
========= =========
LIABILITIES, REDEEMABLE STOCK AND OPTIONS,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable -- current portion.......................... $ 438 $ 1,312
Accounts payable.......................................... 18,308 29,231
Accrued interest.......................................... 13,360 14,907
Accrued employee costs.................................... 2,353 2,093
Lease obligation.......................................... 0 7,353
Other accrued liabilities................................. 2,311 6,106
--------- ---------
Total current liabilities......................... 36,770 61,002
--------- ---------
Long Term Liabilities
Notes payable, less current portion....................... 460,848 474,082
Other long-term liabilities............................... 474 1,956
Lease obligation.......................................... 0 23,596
--------- ---------
Total liabilities................................. 498,092 560,636
--------- ---------
Redeemable stock and options:
Redeemable options........................................ 1,000 0
14 3/4% Redeemable Preferred Stock due 2008............... 55,060 62,272
12 3/4% Junior Redeemable Preferred Stock due 2009........ 150,099 159,987
--------- ---------
Total redeemable stock and options................ 206,159 222,259
Stockholders Equity:
Common Stock, $0.01 par value, 75,000,000 shares
authorized, 47,385,349 and 37,219,419 shares,
respectively, issued and outstanding................... 372 474
Additional paid-in capital................................ 131,728 261,069
Accumulated deficit....................................... (197,456) (261,996)
--------- ---------
Total stockholders' deficit................................. (65,356) (453)
--------- ---------
Total liabilities, redeemable stock and options and
stockholders' deficit..................................... $ 638,895 $ 782,442
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-26
<PAGE> 139
E.SPIRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $ 11,616 $ 35,752 $ 19,793 $ 63,221
Operating Expenses
Network, development and
operations...................... 10,400 23,344 19,640 43,597
Selling, general and
administrative.................. 14,851 21,648 28,205 41,454
Non-cash compensation expense...... 584 1,794 823 3,427
Depreciation and amortization...... 5,339 9,777 9,457 17,383
---------- ---------- ---------- ----------
Total Operating Expenses............. 31,174 57,563 58,125 105,861
Loss from Operations................. (19,558) (21,811) (38,332) (42,640)
Non-operating income/expenses
Interest and other income.......... (194) (5,615) (1,078) (9,991)
Interest and other expense......... 6,288 16,249 12,421 31,891
---------- ---------- ---------- ----------
Net loss............................. (25,652) (32,445) (49,675) (64,540)
Preferred stock
dividends/accretion................ 106 8,607 1,095 17,100
---------- ---------- ---------- ----------
Net loss to common stockholders...... $(25,758) $(41,052) $(50,770) $(81,640)
========== ========== ========== ==========
Basic and Diluted Loss per Share..... $(0.92) $(0.91) $(2.82) $(1.97)
========== ========== ========== ==========
Average number of common/common
equivalent shares outstanding...... 28,025,238 45,281,794 17,994,161 41,495,538
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-27
<PAGE> 140
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net Loss.................................................... $(49,675) $(64,540)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization............................. 9,456 17,383
Interest deferral and accretion........................... 12,239 14,108
Amortization of deferred financing fees................... 474 1,756
Noncash compensation...................................... 823 3,427
In-kind revenue........................................... -- (4,606)
Changes in operating assets and liabilities:
Restricted cash related to operating activities........ (2,814) --
Trade accounts receivable.............................. (4,224) (13,124)
Other current assets................................... (259) 1,330
Other assets........................................... 365 (166)
Accounts payable....................................... (4,162) 10,923
Other accrued liabilities.............................. 965 4,234
-------- --------
Net cash used in operating activities....................... (36,812) (29,275)
Cash flows from investing activities
Networks, equipment and furniture......................... (73,213) (79,752)
-------- --------
Net cash used in investing activities....................... (73,213) (79,752)
Cash flows from financing activities
Issuance of common stock.................................. 40,702 135,227
Payment of deferred financing fees........................ (3,299) (14,669)
Restricted cash related to financing activities........... -- 12,438
Exercise of warrants, options and other................... 2,502 9,775
-------- --------
Net cash provided by financing activities................... 39,905 142,771
Net (decrease) increase in cash & cash equivalents.......... (70,120) 33,744
Cash and cash equivalents -- beginning of period............ 78,619 260,837
-------- --------
Cash and cash equivalents -- end of period.................. $ 8,499 $294,581
======== ========
Supplemental disclosure of cash flow information
Interest paid............................................. $ -- $ 14,453
Assets acquired under capital lease....................... $ -- $ 37,045
Accrual of stock bonuses.................................. $ -- $ 1,859
Dividends declared with preferred stock................... $ 1,095 $ --
Increase in goodwill...................................... $ (8,119) $ --
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-28
<PAGE> 141
E.SPIRE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
e.spire Communications, Inc. ("e.spire" or the "Company") and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
The condensed consolidated balance sheet as of June 30, 1998, the condensed
consolidated statements of operations for the three and six months ended June
30, 1998 and 1997, and the condensed consolidated statements of cash flows for
the six months ended June 30, 1998 and 1997 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, which include
normal recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1998, and for all periods
presented, have been made. Certain amounts in the 1997 consolidated statements
have been reclassified to conform to the 1998 presentation. Operating results
for the three and six months ended June 30, 1998 are not necessarily indicative
of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements and the related notes included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $1,213,000 at June 30, 1998 and $1,223,000 at
December 31, 1997. The face amount of all bonds and letters of credit is
approximately $6,769,000 as of June 30, 1998 and $6,300,000 as of December 31,
1997. In addition, as of June 30, 1998, the Company currently has approximately
$58,244,000 in an escrow account to be used to fund the next four interest
payments of its 13 3/4 percent senior notes due 2007. Approximately $27,994,000
of the escrow account is classified as current. The escrow account is invested
in cash equivalents consisting of government and commercial securities.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company's
short- and long-term debt securities and marketable equity securities are
accounted for at market value. The fair market value of short- and long-term
investments is determined based on quoted market prices. The Company's
marketable securities have been classified as available for sale and are
recorded at current market value with an offsetting adjustment to stockholders'
equity (deficit). At June 30, 1998 and December 31, 1997, fair market value
approximated amortized cost.
USE OF ESTIMATES
The preparation of the condensed consolidated 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 dates of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from those
estimates.
F-29
<PAGE> 142
E.SPIRE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
RISKS AND UNCERTAINTIES
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. The loss of any one of these
customers could have an adverse material impact on the Company's results of
operations.
The Company provides services to certain Internet Service Providers (ISPs).
Such companies operate in a highly competitive and uncertain environment.
Approximately 7% and 11% of the Company's revenues for the three and six months
ended June 30, 1998 was attributed to these companies. At June 30, 1998, the
Company had trade accounts receivable of $4.7 million from ISPs. At June 30,
1998, the Company also had equipment with a carrying value of approximately
$13.3 million that is dedicated to providing service to these ISPs. The Company
believes that, if necessary, this equipment could be redeployed throughout the
Company's data network.
The Company has recorded revenues of approximately $4.1 million and $6.6
million for the three and six months ended June 30, 1998 for reciprocal
compensation relating to the transport and termination of Internet traffic for
incumbent local exchange carriers ("ILECs") pursuant to various interconnection
agreements. To date, one ILEC has begun to make payments, and three ILECs have
agreed to pay these amounts subject to record verifications pursuant to the
governing interconnection agreements with the Company. Historically, these ILECs
have not paid and have disputed these charges based on the belief that such
charges are not local traffic as defined by the various agreements. The
resolution of these disputes will be based on rulings by state public utility
commissions and/or by the Federal Communications Commission (FCC). To date,
there have been no unfavorable final rulings by any state public utility
commission in a state in which the Company provides switched services or the FCC
that would indicate that calls placed by end users to ISPs would not qualify as
local traffic subject to the payment of reciprocal compensation. At June 30,
1998, the Company had approximately $8.2 million in trade accounts receivable
related to these interconnection agreements.
NOTE 3: FINANCING ACTIVITIES
To date, the Company has funded the construction of its networks and its
operations with external financings, as described in the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 (FAS No. 130), "Reporting
Comprehensive Income." FAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company adopted the provisions of this Statement in the quarter ended March
31, 1998. The adoption of this statement had no impact in the manner of the
presentation of the Company's financial statements as currently or previously
reported.
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this statement.
F-30
<PAGE> 143
E.SPIRE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
On March 4, 1998, the American Institute of Certified Public Accountants
Issued Statement of Position 98-1 ("SOP"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
capitalizing certain costs related to computer software developed or obtained
for internal use. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has not completed its analysis of
the impact on the financial statements that will be caused by the adoption of
this statement.
In April 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"). This statement requires that the costs of
start-up activities, including organization costs, be expensed as incurred and
is effective for fiscal years beginning after December 31, 1998. The Company has
not completed its analysis of the impact on the financial statements that will
be caused by the adoption of this statement.
F-31
<PAGE> 144
Internet Access Service
Frame Relay Service
ATM Service
Bundled Internet Solutions
Custom Network Services
Managed Network Service
<PAGE> 145
THE CHASE MANHATTAN BANK
EXCHANGE OFFER
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmissions: By Hand:
The Chase Manhattan Bank (Eligible Institutions Only) The Chase Manhattan Bank
450 West 33rd Street (212) 815-6339 Corporate Trust -- Services
15th Floor Window
New York, New York 10001-2697 Confirm by Telephone: 55 Water Street -- Room 234
Sharon Lewis: (212) 638-0454 North Building
Carlos Esteves: (212) 638-0828 New York, New York 10041
</TABLE>
<PAGE> 146
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE
AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES OR 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 NOR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information............... i
Documents Incorporated by Reference.. i
Summary.............................. 1
Risk Factors......................... 10
Use of Proceeds...................... 20
Capitalization....................... 21
Selected Consolidated Financial
Data............................... 22
Exchange Offer....................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 32
Business............................. 45
Management........................... 63
Principal Stockholders............... 66
Description of Capital Stock......... 67
Description of Certain
Indebtedness....................... 69
Description of the Notes............. 73
Certain Federal Income Tax
Considerations..................... 100
Plan of Distribution................. 104
Validity of the Notes................ 104
Experts.............................. 104
Glossary............................. G-1
Index to Financial Statements........ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
---------------------------------------------
PROSPECTUS
---------------------------------------------
[e.spire LOGO]
OFFER TO EXCHANGE ITS
10.625% SENIOR DISCOUNT NOTES
DUE 2008, WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933,
AS AMENDED, FOR ITS
OUTSTANDING 10.625% SENIOR
DISCOUNT NOTES DUE 2008
OCTOBER 20, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Third Amended and Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability, (i) for any breach of the director's duty of loyalty to
such corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemption as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
The Third Amended and Restated Certificate of Incorporation and the Amended
and Restated By-laws further provide that directors and officers of the Company
(as well as agents and employees of the Company at the discretion of the Board)
shall, to the fullest extent authorized by the DGCL or any other applicable laws
then in effect, be indemnified against liabilities arising from their service as
directors and officers. The Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties.
Section 145 of the DGCL empowers a corporation to 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, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) 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 or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Insofar as indemnification for liabilities arising under the Securities Act
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 SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnifica-
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<PAGE> 148
tion against such liabilities (other than the payment by the Registrant of
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
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 Securities Act and will be governed by
the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
3.1 Third Amended and Restated Certificate of Incorporation of
the Company. ............................................... (ooo)
3.2 Certificate of Designation of the Company's 14.75%
Redeemable Preferred Stock due 2008. ....................... --
3.3 Certificate of Amendment of the Certificate of Designation
of the Company's 14.75% Redeemable Preferred Stock due
2008. ...................................................... --
3.4 Amended and Restated By-Laws of the Company. ............... *****
3.5 Governance Agreement dated November 8, 1995, between the
Company and the holders of its Preferred Stock. ............ ++
3.6 Certificate of Designation of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009. ....................... *****
3.7 Certificate of Correction dated March 11, 1996. ............ -
3.8 Supplemental Governance Agreement dated February 26,
1996. ...................................................... -
4.1 Specimen Certificate of the Company's Common Stock. ........ *
4.2 Indenture dated November 14, 1995, between the Company and
Chemical Bank, as trustee, relating to $190,000,000 in
principal amount of 13% Senior Discount Notes due 2005,
including the form of global note (the "1995
Indenture"). ............................................... ++
4.3 March 11, 1996 Supplement to 1995 indenture. ............... ++++
4.4 Initial Global Note dated November 14, 1995. ............... ++
4.5 Warrant Agreement dated November 14, 1995, between the
Company and Smith Barney Inc. and Salomon Brothers Inc. .... +++
4.6 Initial Global Warrant dated November 14, 1995. ............ +++
4.7 Indenture dated March 21, 1996, between the Company and
Chemical Bank, as trustee, relating to $120,000,000 in
principal amount of 12 3/4% Senior Discount Notes due 2006,
including the form of global note (the "1996
Indenture"). ............................................... +++++
4.8 Supplemental Indenture dated as of January 13, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... ++++
4.9 Supplemental Indenture dated as of January 13, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... ++++
4.10 Supplemental Indenture dated as of July 7, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... --
4.11 Supplemental Indenture dated as of July 7, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... --
4.12 Specimen Certificate of the Company's 14.75% Redeemable
Preferred Stock due 2008. .................................. --
</TABLE>
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<PAGE> 149
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
4.13 Warrant Agreement dated as of July 10, 1997, between the
Company and The Chase Manhattan Bank, as warrant agent. .... --
4.14 Form of Warrant. ........................................... --
4.15 Indenture dated as of July 23, 1997, between the Company and
The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................... --
4.16 Escrow and Disbursement Agreement dated as of July 23, 1997,
among the Company, The Bank of New York, as escrow agent,
and The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................... --
4.17 Specimen Certificate of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009......................... *****
4.18 Supplemental Indenture dated February 27, 1998, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... (oooo)
4.19 Supplemental Indenture dated February 27, 1998, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... (oooo)
4.20 Supplemental Indenture dated February 27, 1998, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated July 23, 1997, as amended, relating to the
Company's 13 3/4% Senior Discount Notes due 2007. .......... (oooo)
4.21 Indenture dated as of July 24, 1998, between the Company and
The Chase Manhattan Bank, as trustee, relating to the
Company's 10.625% Senior Discount Notes due July 1, 2008,
including the form of global note...........................
-----
5 Opinion of Riley M. Murphy. ................................
-----
9.1 Standstill Agreement dated June 26, 1995, between the
Company and certain of its Preferred Stockholders. ......... ****
9.2 Standstill Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ......... ++
9.3 Voting Rights Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ......... ++
9.4 Amendment to Voting Rights Agreement dated December 14,
1995. ...................................................... -
10.1 Exchange Agreement, dated June 1, 1994, between the Company
and certain of its Preferred Shareholders. ................. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company
and its 9% Series A Preferred Shareholders. ................ **
10.3 Company's Amended 1994 Stock Option Plan. .................. ++
10.4 Company's Employee Stock Purchase Agreement. ............... ++++
10.5 Registration Rights Agreement dated July 1, 1992, between
American Lightwave, Inc. and persons named therein. ........ *
10.6 Supplemental Registration Rights Agreement dated June 26,
1995. ...................................................... ****
10.7 Management Registration Rights Agreement dated June 30,
1995. ...................................................... ****
10.8 Registration Rights Agreement dated June 26, 1995, between
the Company and certain Preferred Stockholders. ............ **
10.9 Form of Warrant Agreement issued to certain Preferred
Stockholders on June 26, 1995. ............................. ****
10.10 Form of $.01 Warrant Agreement. ............................ ****
10.11 Form of $1.79 Warrant Agreement. ........................... ****
10.12 Form of $2.25 Warrant Agreement. ........................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ................ ****
</TABLE>
II-3
<PAGE> 150
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
10.14 Third Amended and Restated Employment Agreement between the
Company and Anthony J. Pompliano. .......................... ****
10.15 Third Amended and Restated Employment Agreement between the
Company and Riley M. Murphy. ............................... ****
10.16 Employment Agreement between the Company and Jack E.
Reich. ..................................................... ****
10.17 Employment Agreement between the Company and David L.
Piazza. .................................................... ++++
10.18 Form of Stock Option Certificates, as amended, issued to
executive officers under employment agreements. ............ ****
10.19 Agreement, dated October 19, 1994, between the Company and
Marvin Saffian & Company. .................................. *
10.20 Lease Agreement for the Company's executive offices at 131
National Business Parkway, Suite 100, Annapolis Junction,
Maryland, as amended........................................ ****
10.21 Consulting Agreement, dated October 25, 1993, between the
Company and Thurston Partners, Inc. ........................ *
10.22 Consulting Agreement, dated June 16, 1994, between the
Company and Thurston Partners, Inc. and Global Capital,
Inc. ....................................................... *
10.23 Note Purchase Agreement, dated June 28, 1994................ *
10.24 Stock Purchase Agreement dated December 17, 1996 by and
between the Company and Cybergate, Inc. .................... ++++
10.25 Stock Purchase Agreement, dated May 12, 1995, by and among
the Company, Piedmont Teleport, Inc., Randal Holcombe and
Karen Holcombe, as amended.................................. ****
10.26 Stock and Warrant Purchase Agreement, dated June 26, 1995,
between the Company and the Purchasers named therein........ **
10.27 Form of Indemnity Agreement between the Company and its
Directors, as amended....................................... ****
10.28 Assignment and Assumption Agreement dated June 21, 1995,
between the Company and Apex Investment Fund II, L.P. ...... ****
10.29 Letter Agreement dated November 14, 1995, between the
Company and ING Equity Partners, L.P. I, with respect to the
purchase of 50,000 shares of the Company's 9% Series B-4
Convertible Preferred Stock and warrants to purchase 214,286
shares of Common Stock. .................................... ++
10.30 Warrant to Purchase Shares of American Communications
Services, Inc. Common Stock dated December 28, 1995, between
the Company and Gerard Klauer, Mattison & Co. ("GKM Warrant
I"). ....................................................... ++
10.31 Warrant to Subscribe For and Purchase Common Stock of
American Communications Services, Inc. dated December 28,
1995, between the Company and Gerard Klauer, Mattison & Co.
("GKM Warrant II"). ........................................ ++
10.32 Amendment to Amended 1994 Stock Option Plan of the
Company. ................................................... (o)
10.33 Registration Rights Agreement dated as of July 10, 1997,
among the Company, BT Securities Corporation, Alex. Brown &
Sons Incorporated, The Huff Alternative Income Fund, L.P.,
General Motors Domestic Group Pension Trust, Societe
Generale Securities Corporation, ING Baring (U.S.)
Securities, Inc. and McDermott Inc. Master Trust............ --
10.34 Registration Rights Agreement dated as of July 23, 1997
among the Company and BT Securities Corporation as
representatives of the Initial Purchasers named therein..... --
10.35 Supplemental Registration Rights Agreement, dated as of July
10, 1997, among the Company, The Huff Alternative Income
Fund, L.P., General Motors Domestic Group Pension Trust and
McDermott Inc. Master Trust. ............................... (oo)
10.36 Loan and Security Agreement dated December 30, 1997 between
the Company and AT&T Commercial Finance Corporation.........
----
10.37 Employment Agreement between the Company and Ronald E.
Spears. .................................................... (oooo)
10.38 Lease Agreement for the Company's executive offices at 133
National Business Parkway, Suite 200, Annapolis Junction,
Maryland.................................................... (oooo)
</TABLE>
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<PAGE> 151
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
10.39 Registration Rights Agreement, dated as of July 24, 1998,
between the Company and Goldman Sachs & Co., Bear, Stearns &
Co. Inc. and ING Furman Selz LLC............................
-----
11.1 Statement re: computation of per share earnings (loss). .... (ooooo)
12.1 Statement re: Ratio of Earnings to Fixed Charges............
-----
16.1 Letter re: change in certifying accountant. ................ ***
21.1 Subsidiaries of the Registrant. ............................
-----
23.1 Consent of KPMG Peat Marwick LLP. ..........................
-----
23.2 Consent of Riley M. Murphy (included in Exhibit 5). ........
-----
24.1 Power of Attorney (included in signature pages). ...........
-----
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Chase Manhattan Bank under the Indenture dated July 24,
1998. ......................................................
-----
99.1 Form of Letter of Transmittal. .............................
-----
99.2 Form of Notice of Guaranteed Delivery. .....................
-----
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees. ..............................
-----
99.4 Form of Letter to Clients. .................................
-----
99.5 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9. ..............
-----
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated June 26, 1995, and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.
***** Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-34395)
+ Previously filed as an exhibit to the Company's Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- Previously filed as an exhibit to the Company's Current Report on 8-K
dated January 20, 1998 and incorporated herein by reference thereto.
----- Previously filed as an exhibit hereto.
( )(o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
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<PAGE> 152
( )(oo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-35925)
( )(ooo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-58457), and incorporated
herein by reference thereto.
( )(oooo) Previously filed as an exhibit to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997, and incorporated herein
by reference thereto.
( )(ooooo) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, and the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998, both of which are incorporated herein by
reference thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 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.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under rule 424(b)(1), or (4) or 497(h) under
the Securities Act shall be deemed to be a part of this registration statement
as of the time it was declared it effective.
For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
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<PAGE> 153
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANNAPOLIS JUNCTION, STATE
OF MARYLAND, ON THIS 19TH DAY OF OCTOBER, 1998.
e.spire COMMUNICATIONS, INC.,
Registrant
By: /s/ DAVID L. PIAZZA
------------------------------------
David L. Piazza
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the October 19, 1998
- ------------------------------------------------ Board of Directors
Anthony J. Pompliano
* Director, President and October 19, 1998
- ------------------------------------------------ Chief Executive Officer
Jack E. Reich (Principal Executive Officer)
/s/ DAVID L. PIAZZA Chief Financial Officer October 19, 1998
- ------------------------------------------------ (Principal Financial and
David L. Piazza Accounting Officer)
* Director October 19, 1998
- ------------------------------------------------
George M. Middlemas
Director
- ------------------------------------------------
Edwin M. Banks
* Director October 19, 1998
- ------------------------------------------------
Christopher L. Rafferty
Director
- ------------------------------------------------
Benjamin P. Giess
</TABLE>
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<PAGE> 154
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director October 19, 1998
- ------------------------------------------------
Olivier L. Trouveroy
Director
- ------------------------------------------------
Peter C. Bentz
*By: /s/ DAVID L. PIAZZA
-----------------------------------------
Attorney-in-fact
</TABLE>
II-8
