AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1997
REGISTRATION NO. 333-23377
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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
--------------------------
NEXTLINK COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON 4813 91-1738221
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
Incorporation or
Organization)
--------------------------
155 108TH AVENUE N.E., 8TH FLOOR, BELLEVUE, WASHINGTON 98004, (206) 519-8900
(Address, including ZIP code, and telephone number, including area code, of
the Registrant's principal executive offices)
--------------------------
R. BRUCE EASTER JR., ESQ.
155 108TH AVENUE N.E., 8TH FLOOR
BELLEVUE, WASHINGTON 98004
(206) 519-8900
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
BRUCE R. KRAUS, ESQ.
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
(212) 821-8000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED OFFER TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER UNIT(1) PRICE FEE
14% Senior Exchangeable Redeemable Preferred
Shares, par value $.01 per share................ 5,700,000 $48.07 $274,000,000 $83,031(2)
14% Senior Exchangeable Redeemable Preferred
Shares, par value $.01 per share................ 5,641,797 $50.00 $282,089,850 $85,482
14% Senior Subordinated Notes due 2009............ $274,000,000 (4) (4) (4)
14% Senior Subordinated Notes due 2009............ $282,089,850 (5) (5) (5)
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid on March 14, 1997.
(3) Represents shares of 14% Senior Exchangeable Redeemable Preferred Shares,
par value $.01 per share that may be issued as dividends on the 14% Senior
Exchangeable Redeemable Preferred Shares.
(4) The 14% Senior Exchangeable Redeemable Preferred Shares are exchangeable, in
whole but not in part, upon the occurrence of certain events, at the option
of the Company, for the 14% Senior Subordinated Notes due 2009. No
additional registration fee is payable in respect thereof.
(5) Represents aggregate principal amount of 14% Senior Subordinated Notes due
2009 that may be issued as interest payments on the 14% Senior Subordinated
Notes due 2009. No additional registration fee is payable in respect
thereof.
--------------------------
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, AS AMENDED, 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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NEXTLINK COMMUNICATIONS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-4 ITEM NUMBER LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. Summary; Risk Factors; Business; Selected
Consolidated Financial and Operating Data
4. Terms of the Transaction............................. Summary; Risk Factors; The Exchange Offer;
Description of the New Preferred Shares;
Description of the Exchange Notes; Plan of
Distribution
5. Pro Forma Financial Information...................... Summary; Selected Consolidated Financial and
Operating Data
6. Material Contracts with the Company Being Acquired... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... Not Applicable
8. Interests of Named Experts and Counsel............... Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
10. Information with Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
14. Information with Respect to Registrants Other than
S-3 or S-2 Registrants............................. Summary; Risk Factors; Business; Capitalization;
Selected Consolidated Financial and Operating Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations
15. Information with Respect to S-3 Companies............ Not Applicable
i
FORM S-4 ITEM NUMBER LOCATION IN PROSPECTUS
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16. Information with Respect to S-2 or S-3 Companies..... Not Applicable
17. Information with Respect to Companies Other Than S-3
or S-2 Companies................................... Not Applicable
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer.... Summary; Management; Certain Relationships and
Related Transactions; Security Ownership of Certain
Beneficial Owners and Management; Description of
Capital Stock
ii
SUBJECT TO COMPLETION, DATED APRIL 22, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
NEXTLINK COMMUNICATIONS, INC.
OFFER TO EXCHANGE ALL OUTSTANDING 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED
SHARES
($285,000,000 AGGREGATE LIQUIDATION PREFERENCE) FOR
14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES
OF NEXTLINK COMMUNICATIONS, INC.
THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NEXTLINK Communications, Inc., a Washington corporation (the "Company" or
"NEXTLINK"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal", and together with this Prospectus, the "Exchange Offer") to
exchange one (1) 14% Senior Exchangeable Redeemable Preferred Share
(collectively, the "New Preferred Shares"), which has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus constitutes
a part, for each outstanding 14% Senior Exchangeable Redeemable Preferred Share
(collectively, the "Old Preferred Shares") of the Company. The New Preferred
Shares and the Old Preferred Shares are collectively referred to herein as the
"Preferred Shares". There will be no cash proceeds to the Company from the
Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of Old
Preferred Shares being tendered or accepted for exchange. The Exchange Offer
will expire at 5:00 p.m., New York City time, on , 1997, unless extended
(the "Expiration Date"). The date of acceptance for exchange of the Old
Preferred Shares (the "Exchange Date") will be the first business day following
the Expiration Date, upon surrender of the Old Preferred Shares. Old Preferred
Shares tendered pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date; otherwise such tenders are irrevocable. The
Exchange Offer is subject to certain conditions which may be waived by the
Company and to the terms and provisions of the Preferred Registration Rights
Agreement (as defined herein). See "The Exchange Offer".
The terms of the New Preferred Shares are the same in all respects
(liquidation preference, dividend rate, mandatory redemption and ranking) as the
terms of the Old Preferred Shares for which they may be exchanged pursuant to
the Exchange Offer, except that the New Preferred Shares have been registered
under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Preferred Shares and will not be
entitled to registration rights. Following the completion of the Exchange Offer,
none of the Preferred Shares will be entitled to the benefits of the Preferred
Registration Rights Agreement relating to contingent increases in the dividend
rate provided for pursuant thereto. See "The Exchange Offer".
Dividends on the New Preferred Shares are payable out of legally available
funds and are cumulative from the most recent dividend payment date to which
dividends on the Old Preferred Shares were paid (the "Accrual Date"). Holders of
Old Preferred Shares whose shares of Old Preferred Shares are accepted for
exchange will be deemed to have waived the right to receive any payment in
respect of dividends on the Old Preferred Shares accumulated from the Accrual
Date to the date of the issuance of the New Preferred Shares. Consequently,
holders who exchange their Old Preferred Shares for New Preferred Shares will
receive the same dividend payment on the next dividend payment date (expected to
be May 1, 1997) that they would have received had they not accepted the Exchange
Offer, except that if such dividend is not paid in cash, it will be paid in
shares of New Preferred Shares instead of Old Preferred Shares. Dividends on the
New Preferred Shares are payable quarterly in arrears on February 1, May 1,
August 1 and November 1 of each year, commencing May 1, 1997, accumulating from
the Accrual Date at the annual rate of 14% per share of New Preferred Shares.
Before February 1, 2002, dividends may, at the option of the Company, be
paid in cash or by issuing fully paid and nonassessable New Preferred Shares
with an aggregate liquidation preference equal to the amount of such dividends.
After February 1, 2002, dividends must be paid in cash. The New Preferred Shares
have a liquidation preference of $50 per share, plus accumulated and unpaid
dividends thereon.
(COVER CONTINUED ON FOLLOWING PAGE.)
SEE "RISK FACTORS" ON PAGE FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
The Old Preferred Shares were originally issued and sold on January 31, 1997
in a transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of, and Rule 144A under, the Securities Act
(the "Offering"). Accordingly, the Old Preferred Shares 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 no-action letters
issued by the staff of the Securities and Exchange Commission (the "Commission")
to third parties, the Company believes the New Preferred Shares issued pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than a "Restricted Holder," being (i) a
broker-dealer who acquires such New Preferred Shares directly from the Company
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (ii) a person that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act or (iii) broker-dealers who
acquired Old Preferred Shares as a result of market-making or other trading
activities), without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Preferred Shares are
acquired in the ordinary course of such holders' business and such holders have
no arrangements with any person to participate in the distribution of such New
Preferred Shares. Eligible holders wishing to accept the Exchange Offer must
represent to the Company that such conditions have been met. Each broker-dealer
that receives New Preferred Shares pursuant to the Exchange Offer in exchange
for Old Preferred Shares acquired for its own account as a result of
market-making activities or other trading activities may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Preferred Shares. The Letter of Transmittal 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 resales of New Preferred Shares received in
exchange for Old Preferred Shares where such Old Preferred Shares were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that it will make this Prospectus and any
amendment or supplement to this Prospectus available to any broker-dealer for
use in connection with any such resale for a period of 90 days from the date of
this Prospectus, or such shorter period as will terminate when all Old Preferred
Shares acquired by broker-dealers for their own accounts as a result of
market-making activities or other trading activities have been exchanged for New
Preferred Shares and resold by such broker-dealers. Any holder that cannot rely
upon such interpretations must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. See "Plan of Distribution".
Subject to certain conditions, the New Preferred Shares are exchangeable in
whole, but not in part, at the option of the Company, on any dividend payment
date, for the 14% Senior Subordinated Notes due 2009 (including any such notes
paid in lieu of cash interest, as described herein, the "Exchange Notes") of the
Company. Interest on the Exchange Notes will be payable at a rate of 14% per
annum and will accrue from the date of issuance thereof. Interest on the
Exchange Notes will be payable semi-annually in cash or, at the option of the
Company, on or prior to February 1, 2002 in additional Exchange Notes, in
arrears on each February 1 and August 1, commencing on the first such date and
shall become redeemable following a Covenant Amendment (as defined), at the
option of the Company, in whole or in part, on or after February 1, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest to the date
of redemption. In addition, prior to February 1, 2000 and following a Covenant
Amendment, the Company may, at its option, redeem up to $99.75 million aggregate
principal amount of Exchange Notes with the net cash proceeds from one or more
Qualifying Events (as defined) at a redemption price equal to 114.0% of the
principal amount thereof, plus, without duplication, accrued and unpaid interest
to the redemption date; provided, however, that after any such redemption the
aggregate principal amount of the Exchange Notes outstanding must equal at least
$185.25 million. The Exchange Notes will be subordinated to all existing and
future Senior Debt (as defined) of the Company and effectively subordinated to
obligations of the Company's subsidiaries. As of December 31, 1996, there was
approximately $374.9 million of Senior Debt outstanding and $29.2 million of
obligations of the Company's subsidiaries.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD PREFERRED SHARES IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Preferred Shares and the New Preferred Shares constitute new issues
of securities with no established public trading market. If a market for the New
Preferred Shares should develop, the New Preferred Shares could trade at a
discount from their aggregate liquidation preference. The Company does not
intend to list the New Preferred Shares on a national securities exchange or to
apply for quotation of the New Preferred
Shares through the National Association of Securities Dealers Automated
Quotation System. There can be no assurance that an active public market for the
New Preferred Shares will develop. As of the date of this Prospectus, the New
Preferred Shares have not been rated by a nationally recognized statistical
rating organization as defined in the Securities Exchange Act of 1934.
The Company has been advised by Merrill Lynch & Co. and Toronto Dominion
Securities (USA) Inc. that they intend to make a market in the New Preferred
Shares; however, such entities are under no obligation to do so and any market
making activities with respect to the New Preferred Shares may be discontinued
at any time.
Any Old Preferred Shares not tendered and accepted in the Exchange Offer
will remain outstanding. To the extent that Old Preferred Shares are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered, and
tendered but unaccepted, Old Preferred Shares could be adversely affected.
Following consummation of the Exchange Offer, the holders of Old Preferred
Shares will continue to be subject to the existing restrictions on transfer
thereof and the Company will have no further obligation to such holders to
provide for the registration under the Securities Act of the Old Preferred
Shares except under certain limited circumstances. See "Description of the
Preferred Shares -- Registration Covenant; Exchange Offer". No assurance can be
given as to the liquidity of the trading market for either the Old Preferred
Shares or the New Preferred Shares.
(END OF COVER)
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement", which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the New Preferred Shares
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are necessarily summaries of those
documents, and, with respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
NEXTLINK has filed periodic reporting and other information pursuant to the
requirements of the Securities Exchange Act of 1934 (the "Exchange Act").
Periodic reports and other information filed by the Company with the Commission
may be inspected at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New
York, New York 10048. In addition, the Commission maintains a website that
contains periodic reports and other information filed by the Company. This
website can be accessed at www.sec.gov. Copies of such material can be also be
obtained from the Company upon request.
The Company is required by the terms of the Certificate of Designations of
the Powers, Preferences and Relative, Participating, Optional and Other Special
Rights of the Preferred Shares and Qualifications, Limitations and Restrictions
Thereof (the "Certificate of Designations") to furnish the transfer agent and
registrar for the Preferred Shares (the "Transfer Agent") with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three quarters
of each fiscal year.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. 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 A SOLICITATION OF AN OFFER TO BUY, THE NEW PREFERRED SHARES IN ANY
JURISDICTION WHERE, 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 IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
i
TABLE OF CONTENTS
PAGE
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SUMMARY....................................................................................................
RISK FACTORS...............................................................................................
Consequences of Exchange and Failure to Exchange.........................................................
Negative Cash Flow and Operating Losses; Limited History of Operations...................................
Significant Future Capital Requirements; Substantial Indebtedness........................................
Risk Associated with Implementation of Growth Strategy...................................................
Need to Obtain and Maintain Permits and Rights-of-Way....................................................
Competition..............................................................................................
Regulation...............................................................................................
Dependence on Large Customers............................................................................
Rapid Technological Changes..............................................................................
Dependence on Key Personnel..............................................................................
Variability of Quarterly Operating Results...............................................................
Control by Mr. Craig O. McCaw; Potential Conflicts of Interests..........................................
Risks Associated with the Preferred Shares and the Exchange Notes........................................
Forward Looking Statements...............................................................................
USE OF PROCEEDS............................................................................................
THE EXCHANGE OFFER.........................................................................................
Purpose of the Exchange Offer............................................................................
Terms of the Exchange....................................................................................
Expiration Date; Extensions; Termination; Amendments.....................................................
How to Tender............................................................................................
Terms and Conditions of the Letter of Transmittal........................................................
Withdrawal Rights........................................................................................
Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred Shares........................
Conditions to the Exchange Offer.........................................................................
Exchange Agent...........................................................................................
Solicitation of Tenders; Expenses........................................................................
Appraisal Rights.........................................................................................
Federal Income Tax Consequences..........................................................................
Other....................................................................................................
CAPITALIZATION.............................................................................................
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA.........................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................
Overview.................................................................................................
Results of Operations....................................................................................
Liquidity and Capital Resources..........................................................................
BUSINESS...................................................................................................
Overview.................................................................................................
ii
PAGE
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Market Opportunity.......................................................................................
Business Strategy........................................................................................
The Company's Telecommunications Services................................................................
Sales and Customer Care..................................................................................
Network Development......................................................................................
Network Architecture.....................................................................................
Implementation of Local Telecommunications...............................................................
Regulatory Overview......................................................................................
Competition..............................................................................................
Purchasing and Distribution..............................................................................
Properties...............................................................................................
Employees................................................................................................
Trademarks and Trade Names...............................................................................
Legal Proceedings........................................................................................
MANAGEMENT.................................................................................................
Employment Agreements....................................................................................
NEXTLINK Communications, L.L.C. Equity Option Plan.......................................................
NEXTLINK Communications, Inc. Stock Option Plan..........................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................................................
DESCRIPTION OF CAPITAL STOCK...............................................................................
Common Stock.............................................................................................
Preferred Stock..........................................................................................
Director and Officer Indemnification.....................................................................
Provisions Affecting Acquisitions and Business Combinations..............................................
DESCRIPTION OF NEW PREFERRED SHARES........................................................................
Ranking..................................................................................................
Dividends................................................................................................
Mandatory Redemption.....................................................................................
Permitted Amendments Relating to Optional Redemption.....................................................
Procedure for Redemption.................................................................................
Exchange.................................................................................................
Liquidation Preference...................................................................................
Voting Rights............................................................................................
Change of Control........................................................................................
Certain Covenants........................................................................................
Transfer Agent and Registrar.............................................................................
DESCRIPTION OF THE EXCHANGE NOTES..........................................................................
General..................................................................................................
Subordination............................................................................................
Permitted Amendments Relating to Optional Redemption.....................................................
Mandatory Redemption; Sinking Fund.......................................................................
Covenants................................................................................................
Mergers, Consolidations and Certain Sales of Assets......................................................
iii
PAGE
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Events of Default........................................................................................
Satisfaction and Discharge of the Indenture..............................................................
Defeasance...............................................................................................
Modification and Waiver..................................................................................
No Personal Liability of Members, Managers, Officers, Employees and Stockholders.........................
Governing Law............................................................................................
The Trustee..............................................................................................
DEFINITIONS................................................................................................
PLAN OF DISTRIBUTION.......................................................................................
LEGAL MATTERS..............................................................................................
EXPERTS....................................................................................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
GLOSSARY................................................................................................... A-1
iv
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO, CONTAINED HEREIN. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "NEXTLINK" OR THE "COMPANY" REFER TO NEXTLINK
COMMUNICATIONS, INC., A WASHINGTON CORPORATION, ITS CONSOLIDATED SUBSIDIARIES
AND 40% MEMBERSHIP INTEREST IN TELECOMMUNICATIONS OF NEVADA, LLC, WHICH OWNS A
NETWORK THAT IS MANAGED BY THE COMPANY. THE COMPANY IS THE SUCCESSOR TO NEXTLINK
COMMUNICATIONS, L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY THAT MERGED WITH
AND INTO THE COMPANY EFFECTIVE JANUARY 31, 1997. ALL FINANCIAL AND OPERATIONAL
DATA PRESENTED FOR PERIODS PRIOR TO JANUARY 31, 1997 RELATE TO NEXTLINK
COMMUNICATIONS, L.L.C. ALL OPERATIONAL STATISTICS OF THE COMPANY INCLUDED IN
THIS PROSPECTUS INCLUDE 100% OF THE OPERATIONAL STATISTICS OF TELECOMMUNICATIONS
OF NEVADA, LLC. CAPITALIZED TERMS USED IN THIS PROSPECTUS, WHICH ARE NOT
OTHERWISE DEFINED HEREIN, HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM IN THE
GLOSSARY INCLUDED AS ANNEX A HERETO. SEE "RISK FACTORS-- FORWARD LOOKING
STATEMENTS" FOR CERTAIN INFORMATION RELATING TO STATEMENTS CONTAINED IN THIS
PROSPECTUS THAT ARE NOT HISTORICAL FACTS.
THE COMPANY
NEXTLINK was founded in 1994 by Mr. Craig O. McCaw, its Chief Executive
Officer and principal equity owner, to provide local facilities-based
telecommunications services with a focus on delivering switched services to
commercial customers. In July 1996, NEXTLINK became one of the first competitive
local exchange carriers ("CLECs") in the United States to provide
facilities-based local dial tone services under the Telecommunications Act of
1996 (the "Telecom Act"), which opened the entire local exchange market to
competition. In each of the markets it serves, NEXTLINK's goal is to become the
principal competitor to the incumbent local exchange carrier ("ILEC") for its
targeted customer base of small and medium sized businesses by offering a single
source for local, long distance and enhanced communications services.
The Company currently offers a bundled package of switched local dial tone
and long distance services in eight markets and anticipates launching these
services in an additional 14 markets, 13 of which are anticipated to be launched
by the end of June 1997. In addition, the Company offers dedicated transmission
and competitive access services to long distance carriers and end users in 18 of
its markets, including those markets where the Company has not yet launched
switched local dial tone and long distance services. NEXTLINK also offers
enhanced communications services, including a series of interactive voice
response ("IVR") products, a virtual communications center for mobile
professionals and workgroups and an interactive communications tool for the
World Wide Web and intranet applications called the Intermind Communicator.
To date, NEXTLINK has acquired and constructed telecommunications networks
in seven states, with operations currently active or under construction in 22
markets containing an aggregate of approximately four million addressable
business lines. As of December 31, 1996, the Company's operations included
approximately 1,080 route miles of installed and operational high capacity fiber
optic cable with a combined total of approximately 66,000 fiber miles which
connect to 403 buildings and an additional 400 route miles under construction.
The Company seeks to encompass the significant business concentrations in each
area it serves, focusing on direct connections to end-user locations and ILEC
central offices. The Company constructs its networks utilizing high capacity
fiber optic cable, with a backbone density generally ranging from 72 to 240
fibers, and self-healing SONET transmission equipment. In addition, the Company
employs a uniform technology platform for each of its networks that is based on
the Nortel DMS 500 digital local and long distance combination switching system
and associated distribution technology. As of December 31, 1996, the Company had
five operational Nortel DMS 500
1
switches serving eight markets, had installed three switches during the first
quarter of 1997 and anticipates installing one switch in the second quarter
1997, allowing the Company to service in the aggregate 14 additional markets.
The Company plans to install a tenth switch in its NEXTLAB facility, a fully
functional model of one of the Company's networks, which will serve as the
Company's network operations control center and a testing facility for switch
software and the Company's products and services.
NEXTLINK has interconnection agreements covering 15 markets and is currently
negotiating two additional interconnection agreements that will cover its seven
additional markets. These agreements provide the Company with the ability to
exchange telecommunications traffic between its customers and the customers of
the ILEC. The Company accelerated its offering of switched local dial tone
services by establishing initial interconnection agreements while longer term
agreements are negotiated. The operating experience gained by the Company under
these agreements gives the Company critical knowledge for negotiating longer
term arrangements, which the Company believes provides it with an advantage over
other CLECs in modifying its ongoing relationships with the ILECs.
MARKET OPPORTUNITY
Industry sources estimate that in 1995 the total revenues from local and
long distance telecommunications services were approximately $175 billion, of
which approximately $101 billion were derived from local exchange services and
approximately $74 billion from long distance services. Although the Modified
Final Judgment relating to the breakup of AT&T (the "MFJ") established the
preconditions for competition in the market for long distance services in 1984,
the market for local exchange services has until recently been virtually closed
to competition and has largely been dominated by regulated monopolies. Efforts
to open the local exchange market began in the late 1980s on a state-by-state
basis when competitive access providers ("CAPs") began offering dedicated
private line transmission and access services. These types of services together
currently account for approximately 12% ($12 billion) of the total local
exchange revenues. CAPs were restricted, often by state laws, from providing the
other, more frequently used services such as basic dial tone and switched
services, which today account for approximately 88% ($89 billion) of local
exchange revenues.
The Telecom Act and the FCC's issuance of rules for competition,
particularly those requiring the interconnection of all networks and the
interchange of traffic among the ILECs and the CLECs, as well as pro-competitive
policies already developed by state regulatory commissions, have caused
fundamental changes in the structure of the local exchange markets. Although the
U.S. Court of Appeals for the Eighth Circuit has issued a partial stay of the
FCC's rules implementing the local competition provisions of the Telecom Act,
the stay is limited to issues relating to pricing of interconnection and a
CLEC's ability to impose "most favored nation" requirements on ILECs. Both
issues remain subject to scrutiny and oversight by state regulatory commissions.
See "Business--Regulatory Overview."
These developments create opportunities for new entrants offering local
exchange services to capture a portion of the current monopolists' nearly 100%
market share. The development of facilities-based switched local dial tone
services competition, however, is in its early stages. Even though other CLECs
have begun to offer on-network switched local services, the Company believes
that to date less than 1% of the total business lines in the United States have
changed from an ILEC to a CLEC for such switched services. As competition
develops, the Company anticipates that the market will become increasingly
segmented, with the ILECs and the CLECs focusing on particular customer and
geographic segments.
BUSINESS STRATEGY
The Company has built an end user-focused, locally oriented organization
dedicated to providing a broad range of products and services at competitive
prices primarily to small and medium sized businesses. The key components of the
Company's strategy to maximize penetration of its targeted customer base are:
2
FOCUS ON SMALL AND MEDIUM SIZED BUSINESSES. The Company primarily
focuses marketing efforts for its switched local, long distance and enhanced
communications services on small and medium sized businesses and
professional groups with 10 to 50 business lines. The Company's market
research indicates that these customers prefer a single source for all of
their telecommunications requirements, including products, billing,
installation, maintenance and customer service. The Company has chosen to
focus on this segment, based on its expectations that higher gross margins
will generally be available on services provided to these customers, as
compared with larger businesses, and that ILECs may be less likely to apply
significant resources towards retaining these customers. The Company expects
to attract these customers through a direct sales effort by offering: (i)
bundled facilities-based local dial tone and resold long distance services,
as well as the Company's enhanced communications services; (ii) a 10% to 15%
discount to comparable pricing by the ILEC, depending on the individual
market; and (iii) responsive customer service and support provided on a
local level.
DEVELOP A DIRECT SALES FORCE AND A CUSTOMER CARE ORGANIZATION. NEXTLINK
is building a highly motivated and experienced direct sales force and
customer care organization that is designed to establish a direct and
personal relationship with its customers. Salespeople are given incentives
through a commission structure that targets 40% of a salesperson's
compensation to be based on performance. To ensure customer satisfaction,
each customer will have a single point of contact for customer care who is
responsible for solving problems and responding to customer inquiries.
Management believes that the quality of its sales force and the
responsiveness of its customer care organization will help to attract and
retain customers and provide a key competitive advantage in competing with
the ILEC in the local exchange market.
STANDARDIZE PROCESSES TO ACCELERATE REVENUE GROWTH. The Company
believes that the immediate challenge for CLECs will be developing the
ability to implement effective provisioning systems, which include the
complex process of transitioning ILEC customers to the Company's switched
local dial tone services. Accordingly, the Company has begun to identify and
will focus, as a key competitive strategy, on implementing best provisioning
practices in each of its markets that will provide for rapid and seamless
transitions of customers from the ILEC to the Company. To support the
provisioning of its services, the Company has begun a long-term development
program relating to a comprehensive information technology platform geared
toward delivering information and automated ordering and provisioning
capability directly to the end-user as well as to the Company's internal
staff. The Company believes that these practices and its comprehensive
information technology platform, as developed, will provide the Company with
a long-term competitive advantage and allow it to implement more rapidly
switched local dial tone services in its markets and to shorten the time
between the sale of its services and the generation of revenues.
DEVELOP HIGH CAPACITY NETWORKS WITH BROAD MARKET COVERAGE. NEXTLINK has
and intends to continue to approach network design with a long-term view
focusing on three key elements. First, the Company designs and builds its
networks to provide extensive coverage of principal business concentrations,
featuring direct physical connection of the Company's network to a high
percentage of the commercial buildings and a majority of the ILEC central
offices. This broad coverage is expected to result in a higher proportion of
traffic that is both originated and terminated on the Company's networks,
which should provide higher long-term operating margins. Second, the Company
constructs high capacity networks that utilize large fiber bundles capable
of carrying high volumes of voice, data, video and Internet traffic as well
as other high bandwidth services. This strategy should reduce potential
"overbuild" costs and provide added network capacity as the Company adds
high bandwidth services in the future. Third, the Company employs a uniform
technology platform based on Nortel DMS 500 switches, associated
distribution technology and other common transmission technologies enabling
the Company to (i) deploy features and functions quickly in all of its
networks, (ii) expand switching capacity in a cost effective manner and
3
(iii) lower maintenance costs through reduced training and spare parts
requirements. The Company also utilizes unbundled loops from the ILEC to
connect the Company's switch and network to end user buildings and is
evaluating other alternatives for building connectivity, including wireless
connections, for the "last mile" of transport.
OFFER ENHANCED COMMUNICATIONS SERVICES. NEXTLINK offers customers
value-added services that are not dependent on the Company's local
facilities. As a result, the Company believes it can establish a customer
base in a market in advance of constructing network facilities as well as
offer additional services in markets where the Company has constructed
facilities. These enhanced communications services include: (i) IVR
services, which provide an interface between NEXTLINK's clients and their
customers for a variety of applications; (ii) Xpress (formerly Magic
Number), NEXTLINK's virtual communications center that allows mobile
professionals and workgroups to access a suite of commonly used
communications services from any telephone in the public switched network;
and (iii) the Intermind Communicator, an interactive communications tool for
the World Wide Web and intranet applications. The Company plans to focus the
marketing of its enhanced communications service offerings in all of its
markets, as well as in areas of planned network expansion. This should
increase the Company's visibility, develop customer relationships and assist
the Company in attracting local exchange customers when it operates networks
in these markets.
CONTINUE MARKET EXPANSION. The Company currently operates or is
constructing networks in 22 markets in seven states. These markets, in the
aggregate, have approximately four million addressable business lines. The
Company's goal is to add or expand markets and market clusters in order to
increase its market potential to approximately 11 million addressable
business lines by the end of 1998. NEXTLINK believes that its strategy of
operating its networks in clusters (i) offers substantial advantages
including economies of scale in management, marketing, sales and network
operations, (ii) enables the Company to capture a greater percentage of
regional traffic and to develop regional pricing plans, because the Company
believes that a significant level of traffic terminates within 300 miles of
its origination and (iii) provides opportunities in smaller markets and
those markets that are too small to develop on a stand alone basis. The
Company anticipates continuing to expand into new geographic areas as
opportunities arise either through building new networks, acquiring existing
networks or acquiring capacity. Most recently, the Company acquired an 80
mile fiber optic network located in Los Angeles and six adjacent markets and
reached an agreement in principle to acquire an existing operational fiber
optic network in downtown Philadelphia in order to extend its existing
network in Pennsylvania.
The Company believes that a critical factor in the successful implementation
of the Company's strategy is the quality of its management team and their
extensive experience in the telecommunications industry. The Company has built a
management team that it believes is well suited to challenge the dominance of
the ILECs in the local exchange market. Mr. Craig O. McCaw, the Company's Chief
Executive Officer, and Mr. James F. Voelker, the Company's President, each has
in excess of 17 years of experience in leading companies in competitive segments
of the telecommunications industry. In addition, the Company has recruited
experienced entrepreneurs and industry executives to head each of its operating
subsidiaries, many of whom have previously built and led their own start-up
telecommunications businesses. Many of the Company's mid-level and senior
managers were associated with Mr. McCaw during the early years at McCaw Cellular
Communications, Inc. (now known as AT&T Wireless Services, Inc.), where the
organizational themes included an unyielding focus on the customer, developing a
first-class, differentiated product offering, decentralized management
decision-making and building a high capacity system.
4
RECENT DEVELOPMENTS
Since the offering in April 1996 of the Company's 12 1/2% Senior Notes due
April 15, 2006, the Company has achieved the following:
- launched switched on-network local dial tone services and long distance
services in eight markets;
- acquired substantially all of the assets of Linkatel Pacific, L.P.
("Linkatel"), an operator of an 80 mile fiber optic network in Los Angeles
and six adjacent markets, and obtained access to rights-of-way for
approximately 250 miles;
- reached an agreement in principle to acquire an existing three mile
operational fiber optic network in downtown Philadelphia in order to
extend its existing network in Pennsylvania;
- acquired the ITC Companies ("ITC"), a long distance reseller located in
Salt Lake City, Utah with annual revenues for 1996 of approximately $11.4
million;
- executed six interconnection agreements covering 15 markets;
- acquired exclusive marketing rights to the Intermind Communicator in
NEXTLINK's service areas; and
- increased its property and equipment from approximately $56 million to
approximately $112 million on a pro forma basis after giving effect to the
acquisition of Linkatel.
THE EXCHANGE OFFER
Issuer....................... NEXTLINK Communications, Inc. The principal office of the
Company is located at 155 108th Avenue, N.E., 8th Floor,
Bellevue, Washington 98004, and its telephone number at that
address is (206) 519-8900.
The Exchange Offer........... The Company is offering to exchange up to 5,700,000 14%
Senior Exchangeable Redeemable Preferred Shares (the "New
Preferred Shares") for up to 5,700,000 14% Senior
Exchangeable Redeemable Preferred Shares that were issued
and sold on January 31, 1997 in a transaction (the
"Offering") exempt from registration under the Securities
Act (the "Old Preferred Shares" and, collectively with the
New Preferred Shares, the "Preferred Shares"). The terms of
the New Preferred Shares are substantially identical in all
respects (including liquidation preference, dividend rate,
mandatory redemption and ranking) to the terms of the Old
Preferred Shares for which they may be exchanged pursuant to
the Exchange Offer, except that the New Preferred Shares
have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer
except as provided herein (see "The Exchange Offer--Terms of
the Exchange") and will not be entitled to registration
rights. In addition, following completion of the Exchange
Offer, none of the Preferred Shares will be entitled to the
benefits of the Preferred Registration Rights Agreement (as
defined), relating to contingent increases in the dividend
rate provided pursuant thereto.
New Preferred Shares issued pursuant to the Exchange Offer
in exchange for Old Preferred Shares may be offered for
resale, resold
5
and otherwise transferred by holders thereof (other than any
holder which is (i) an affiliate of the Company within the
meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Old
Preferred Shares directly from the Company or (iii)
broker-dealers who acquired Old Preferred Shares as a result
of market-making or other trading activities) without
compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New
Preferred Shares are acquired in the ordinary course of such
holders' business and such holders are not engaged in, and
do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a
distribution of such New Preferred Shares.
Accrued Dividends on the New
Preferred Shares and the
Old Preferred Shares....... Dividends on the New Preferred Shares will accumulate from
the most recent dividend payment date to which dividends on
the Old Preferred Shares were paid (the "Accrual Date").
Holders of Old Preferred Shares whose shares of Old
Preferred Shares are accepted for exchange will be deemed to
have waived the right to receive any payment in respect of
dividends on such Old Preferred Shares accumulated from the
Accrual Date to the date of the issuance of the New
Preferred Shares. Consequently, holders who exchange their
Old Preferred Shares for New Preferred Shares will receive
the same dividend payment on the next dividend payment date
(expected to be May 1, 1997) that they would have received
had they not accepted the Exchange Offer, except that if
such dividend is not paid in cash, it will be paid in shares
of New Preferred Shares instead of Old Preferred Shares. See
"The Exchange Offer-- Dividends on the New Preferred
Shares".
Minimum Condition............ The Exchange Offer is not conditioned upon any minimum
number of Old Preferred Shares being tendered for exchange.
Expiration Date.............. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1997 unless extended (the "Expiration
Date").
Exchange Date................ The first date of acceptance for exchange for the Old
Preferred Shares will be the first business day following
the Expiration Date (the "Exchange Date").
Conditions to the Exchange
Offer...................... The obligation of the Company to consummate the Exchange
Offer is subject to certain conditions. See "The Exchange
Offer-- Conditions to the Exchange Offer". The Company
reserves the right to terminate or amend the Exchange Offer
at any time prior to the Expiration Date upon the occurrence
of any such condition.
Withdrawal Rights............ Tenders may be withdrawn at any time prior to the Expiration
Date. Any Old Preferred Shares not accepted for any reason
will be returned without expense to the tendering holders
thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
6
Procedures for Tendering Old
Preferred Shares........... See "The Exchange Offer--How to Tender".
Federal Income Tax
Consequences............... The exchange of Old Preferred Shares for New Preferred
Shares by holders will not be a taxable exchange for federal
income tax purposes, and holders should not recognize any
taxable gain or loss or any interest income as a result of
such exchange. See "The Exchange Offer--Federal Income Tax
Consequences".
Effect on Holders of Old
Preferred Shares........... As a result of the making of this Exchange Offer, and upon
acceptance for exchange of all validly tendered Old
Preferred Shares pursuant to the terms of this Exchange
Offer, the Company will have fulfilled a covenant contained
in the Preferred Exchange and Registration Rights Agreement
(the "Preferred Registration Rights Agreement") dated as of
January 31, 1997, among the Company, Merrill Lynch & Co. and
Toronto Dominion Securities (USA) Inc. (collectively, the
"Initial Purchasers") and, accordingly, the holders of the
Old Preferred Shares will have no further registration or
other rights under the Preferred Registration Rights
Agreement, except that under certain limited circumstances,
the Company shall file with the Commission a shelf
registration statement on an appropriate form under Rule 415
under the Securities Act (the "Shelf Registration
Statement"). See "Description of Capital Stock--Preferred
Shares--Old Preferred Shares". Holders of the Old Preferred
Shares who do not tender their Old Preferred Shares in the
Exchange Offer will continue to hold such Old Preferred
Shares and will be entitled to all the rights and
limitations applicable thereto. All untendered, and tendered
but unaccepted, Old Preferred Shares will continue to be
subject to the restrictions on transfer provided for in the
Certificate of Designations. To the extent that Old
Preferred Shares are tendered and accepted in the Exchange
Offer, the trading market, if any, for the Old Preferred
Shares could be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange".
7
TERMS OF THE NEW PREFERRED SHARES AND EXCHANGE NOTES
The Exchange Offer applies to 5,700,000 Old Preferred Shares. The terms of
the New Preferred Shares are the same as the terms of the Old Preferred Shares
except that the New Preferred Shares have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer thereof. In
addition, the terms of notes issuable in exchange for the New Preferred Shares
have the same terms as the notes issuable in exchange for the Old Preferred
Shares. See "Description of the New Preferred Shares".
THE NEW PREFERRED SHARES
Liquidation Preference....... $50 per share.
Optional Redemption.......... In the event certain covenants relating to the Company's
12 1/2% Senior Notes due April 15, 2006 (the "Senior Notes")
shall have been defeased, extinguished or amended (a
"Covenant Amendment"), the Company may at its election and
without the consent of any holder of New Preferred Shares
amend the Certificate of Designations to add provisions
making the New Preferred Shares subject to redemption prior
to February 1, 2009 at the option of the Company in two
instances: (i) in whole or in part, at any time on or after
February 1, 2002 at the redemption prices set forth herein,
plus, without duplication, accumulated and unpaid dividends
to the date of redemption; and (ii) prior to February 1,
2000, in part, out of the net cash proceeds of one or more
Qualifying Events (as defined) in an amount not to exceed
35% of the aggregate liquidation preference of the Old
Preferred Shares originally issued in the Offering at a
redemption price equal to 114.0% of the liquidation
preference thereof, plus, without duplication, accumulated
and unpaid dividends to the date of redemption; provided,
however, that after any such redemption, the New Preferred
Shares outstanding must equal at least 65% of the aggregate
liquidation preference of the Old Preferred Shares
originally issued in the Offering.
Mandatory Redemption......... The Company is required, subject to certain conditions, to
redeem all of the New Preferred Shares outstanding on
February 1, 2009 at a redemption price equal to 100% of the
liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of redemption.
Dividends.................... Dividends will accrue from the Accrual Date and will be
payable quarterly commencing May 1, 1997 at a rate per annum
of 14% of the liquidation preference thereof. Dividends may
be paid, at the Company's option, on any dividend payment
date occurring on or before February 1, 2002 either in cash
or by issuing additional fully paid and nonassessable New
Preferred Shares with an aggregate liquidation preference
equal to the amount of such dividends. After February 1,
2002 dividends are payable only in cash.
Voting....................... The New Preferred Shares will be non-voting, except as
otherwise required by law and except in certain
circumstances described herein, including (i) amending
certain rights of the holders of the New Preferred Shares
and (ii) the issuance of any class of equity
8
securities that ranks senior to or, in certain
circumstances, on a parity with the New Preferred Shares. In
addition, if: (i) the Company fails to pay dividends in cash
or, to the extent permitted by the Certificate of
Designations, by the issuance of additional New Preferred
Shares in respect of six or more quarters in the aggregate
(whether or not consecutive); (ii) the Company fails to make
the mandatory redemption or an Offer to Purchase (as
defined) upon a Change of Control; or (iii) the Company
fails to comply with the covenants contained in the
Certificate of Designations or make certain payments on its
indebtedness, holders of a majority of the outstanding
Preferred Shares, voting as a class, will be entitled to
elect a number of directors of the Company equal to the
lesser of two directors or that number of directors
constituting at least 25% of the board of directors of the
Company.
Exchange Provision........... The Company may, at its option, subject, to certain notice
and other administrative conditions, among others, on any
scheduled dividend payment date, exchange the New Preferred
Shares, in whole but not in part, for the Exchange Notes;
provided that (i) on the date of such exchange there are no
accumulated and unpaid dividends on the New Preferred Shares
(including the dividend payable on such date) or other
contractual impediment to such exchange and (ii) immediately
after giving effect to such exchange, no Default or Event of
Default (each as defined in the Indenture pursuant to which
the Exchange Notes will be issued (the "Exchange
Indenture")) would exist under the Exchange Indenture and no
default or event or default would exist under the Indenture
pursuant to which the Company's Senior Notes have been
issued (the "Senior Indenture"). The exchange of the New
Preferred Shares into Exchange Notes would be restricted by
covenants contained in the Senior Indenture relating, among
other things, to the incurrence of indebtedness.
Ranking...................... The New Preferred Shares will, with respect to dividend
rights and rights upon liquidation, winding-up and
dissolution of the Company, rank senior to all Junior Shares
(as defined) of the Company.
Change of Control............ Within 30 days following a Change of Control (as defined),
the Company will be required to offer to purchase all
outstanding New Preferred Shares at a purchase price equal
to 101% of the liquidation preference thereof, plus, without
duplication, accumulated and unpaid dividends to the date of
purchase. The Company does not currently have adequate
financial resources to effect a repurchase of the New
Preferred Shares upon a Change of Control and there can be
no assurance that the Company will have such resources in
the future. In addition, there are currently and may be in
the future restrictions contained in the instruments
evidencing indebtedness incurred by the Company or its
subsidiaries which restrict or prohibit the ability of the
Company to effect any repurchase of New Preferred Shares
required in connection with a Change of Control.
Certain Covenants............ The Certificate of Designations contains covenants that
limit the ability of the Company and its subsidiaries to
incur indebtedness
9
and the ability of the Company to merge or consolidate with
or sell all or substantially all of its assets to any other
person. The Certificate of Designations contains provisions
that allow for the modification and amendment of the
covenants contained in the Certificate of Designations by a
vote of holders owning a majority of the outstanding
Preferred Shares, including the covenant relating to a
Change of Control, except during the pendency of an Offer to
Purchase. In addition, the holders of a majority of the
outstanding Preferred Shares, on behalf of all holders of
New Preferred Shares, may waive compliance by the Company
with certain provisions of the Certificate of Designations.
THE EXCHANGE NOTES
Issue........................ 14% Senior Subordinated Notes due 2009 issuable in exchange
for the New Preferred Shares in an aggregate principal
amount equal to the then aggregate liquidation preference of
the New Preferred Shares, plus, without duplication,
accumulated and unpaid dividends to the date fixed for the
exchange thereof (the "Note Exchange Date"), plus any
additional Exchange Notes issued in lieu of cash interest.
Interest..................... Interest on the Exchange Notes will be payable semi-annually
in cash or, at the option of the Company, on or prior to
February 1, 2002, in additional Exchange Notes, in arrears
on each February 1 and August 1, commencing on the first
such date.
Maturity..................... February 1, 2009.
Ranking...................... The Exchange Notes will be subordinated to all existing and
future Senior Debt (as defined) of the Company and
effectively subordinated to obligations of the Company's
subsidiaries. As of December 31, 1996, there was
approximately $374.9 million of Senior Debt outstanding and
$29.2 million of obligations of the Company's subsidiaries.
Optional Redemption.......... Following a Covenant Amendment, the Company may at its
election and without the consent of any holder of Exchange
Notes amend the Exchange Indenture (as defined) to add
provisions making the Exchange Notes redeemable at the
option of the Company: (i) in whole or in part, at any time
on or after February 1, 2002 at the redemption prices set
forth herein, plus, without duplication, accrued and unpaid
interest to the date of redemption; and (ii) prior to
February 1, 2000, in part, out of the net cash proceeds of
one or more Qualifying Events in an amount up to $99.75
million of the aggregate principal amount of Exchange Notes
at a redemption price equal to 114.0% of the principal
amount thereof, plus, without duplication, accrued and
unpaid interest to the date of redemption; provided,
however, that after any such redemption, the aggregate
principal amount of the Exchange Notes outstanding must
equal at least $185.25 million.
10
Change of Control............ Within 30 days following a Change of Control, the Company
will be required to offer to purchase all outstanding
Exchange Notes at a purchase price equal to 101% of the
principal amount thereof, plus, without duplication, accrued
and unpaid interest to the date of purchase. The Company
does not currently have adequate financial resources to
effect a repurchase of the Exchange Notes upon a Change of
Control and there can be no assurance that the Company will
have such resources in the future. In addition, there are
currently and may be in the future restrictions contained in
the instruments evidencing indebtedness incurred by the
Company or its subsidiaries which restrict or prohibit the
ability of the Company to effect any repurchase of Exchange
Notes required in connection with a Change of Control.
Certain Covenants............ The Exchange Indenture will contain certain covenants that,
among other things, limit the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted payments, (iii)
permit restrictions on the ability of subsidiaries to pay
dividends or make certain payments to the Company, (iv) sell
assets, (v) create certain liens, (vi) enter into certain
transactions with affiliates or (vii) merge or consolidate
with or sell all or substantially all of its assets to any
other person. The Exchange Indenture will contain provisions
that allow for the modification and amendment of the
covenants contained in the Exchange Indenture by a vote of
holders owning a majority of the Exchange Notes (as defined
in the Exchange Indenture), including the covenant relating
to a Change of Control, except during the pendency of an
Offer to Purchase. In addition, the holders of a majority in
aggregate principal amount of the Exchange Notes, on behalf
of all holders of Exchange Notes, may waive compliance by
the Company with certain restrictive provisions of the
Exchange Indenture. See "Description of the Exchange
Notes--Modification and Waiver".
11
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
($ IN THOUSANDS)
The summary historical consolidated financial data presented below (other
than the pro forma data) as of and for the period from inception (September 16,
1994) to December 31, 1994 and for the years ended December 31, 1995 and 1996
are derived from and qualified by reference to the audited Consolidated
Financial Statements of the Company contained elsewhere in this Prospectus. The
Company's Consolidated Financial Statements as of December 31, 1995 and 1996,
for the period from inception (September 16, 1994) to December 31, 1994, and for
the years ended December 31, 1995 and 1996, have been audited by Arthur Andersen
LLP, independent public accountants. The unaudited pro forma consolidated
statements of operations data for the years ended December 31, 1995 and 1996
give effect to certain acquisitions that are described in the Pro Forma
Consolidated Financial Information using the purchase method of accounting and
assuming that such transactions were consummated on January 1, 1995 and 1996,
respectively. The operating data presented below are derived from the Company's
records. All of the data should be read in conjunction with and are qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Consolidated Financial Statements of the Company
and notes thereto contained elsewhere in this Prospectus.
PERIOD FROM
INCEPTION
(SEPTEMBER 16, YEAR ENDED DECEMBER 31,
1994) TO ------------------------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1994 1995 1996 1995(1) 1996(2)
----------------- ---------- ---------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ -- $ 7,552 $ 25,686 $ 25,620 $ 36,277
Costs and expenses:
Operating.................................. 106 6,618 25,094 16,507 32,400
Selling, general and administrative........ 232 9,563 31,353 15,367 35,238
Deferred compensation...................... -- 375 9,914 375 9,914
Depreciation and amortization.............. 14 3,458 10,340 8,663 14,966
------ ---------- ---------- ----------- -----------
Loss from operations......................... (352) (12,462) (51,015) (15,292) (56,241)
Interest expense, net........................ -- (499) (20,430) (814) (22,851)
------ ---------- ---------- ----------- -----------
Loss before minority interest................ (352) (12,961) (71,445) (16,106) (79,092)
Minority interest............................ 3 230 344 114 344
------ ---------- ---------- ----------- -----------
Net loss..................................... $ (349) $ (12,731) $ (71,101) $ (15,992) $ (78,748)
------ ---------- ---------- ----------- -----------
------ ---------- ---------- ----------- -----------
OTHER DATA:
EBITDA(3).................................... $ (338) $ (8,629) $ (30,761) $ (6,254) $ (31,361)
Summary Cash Flow Information:
Net cash used in operating activities...... (396) (9,180) (40,563) -- --
Net cash used in investing activities...... (600) (35,417) (227,012) -- --
Net cash provided by financing
activities............................... 1,021 45,922 343,032 -- --
Capital expenditures, including acquisitions
of businesses (net of cash acquired) and
investments in affiliates (4).............. 600 49,230 85,872 -- --
Ratio of earnings to combined fixed charges
(5)........................................ -- -- -- -- --
(FOOTNOTES BEGIN ON FOLLOWING PAGE)
12
AS OF DECEMBER 31,
-------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1995 1996 1996(6) 1996(7)
--------- ----------- ----------- ------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............... $ 1,350 $ 124,520 $ 89,524 $ 363,524
Working capital................................................ (6,232) 137,227 100,542 374,542
Property and equipment, net.................................... 29,664 97,784 111,950 111,950
Total assets................................................... 53,461 390,683 392,753 666,753
Long-term debt and capital lease obligations, less current
portion...................................................... 1,590 356,262 356,262 356,262
Preferred Shares, net of issuance costs........................ -- -- -- 274,000
Equity units subject to redemption............................. -- 4,950 4,950 4,950
Members' equity (deficit):
Contributed capital.......................................... 49,799 65,527 65,527 65,527
Accumulated deficit.......................................... (13,080) (84,181) (84,181) (84,181)
--------- ----------- ----------- ------------
Total members' equity (deficit)............................ 36,719 (18,654) (18,654) (18,654)
PRO FORMA
AS OF AS OF AS OF AS OF AS OF
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996(8)
----------- ----------- --------------- -------------- --------------
OPERATING DATA(9):
Route miles(10).......................... 496 801 900 1,080 1,160
Fiber miles(11).......................... 39,681 42,217 55,701 66,046 71,655
Buildings connected(12).................. 206 277 299 403 411
Switches installed(13)................... 6 6 6 7 7
Employees................................ 255 387 456 568 580
- ------------------------
(1) Gives effect to the following transactions as if each had occurred on
January 1, 1995: (i) the acquisitions of Tel-West Central Services, Inc. and
Sound Response Corporation, which were completed during 1995, (ii) the
recapitalization of the Company and four of the Company's operating
subsidiaries which was completed effective January 1, 1996 (the
"Recapitalization"), (iii) the acquisition of ITC which was completed in
December 1996 and (iv) the acquisition of Linkatel which was completed in
February 1997. See "Pro Forma Consolidated Financial Information."
(2) Gives effect to the acquisitions of ITC and Linkatel as if those
transactions had occurred on January 1, 1996. See "Pro Forma Consolidated
Financial Information."
(3) EBITDA consists of earnings (loss) before interest expense, minority
interests, depreciation, amortization and deferred compensation expense.
EBITDA is commonly used to analyze companies on the basis of operating
performance, leverage and liquidity. While EBITDA should not be construed as
a substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Company to meet
future debt service, capital expenditures and working capital requirements.
See "Consolidated Statement of Cash Flows."
13
(4) Total capital expenditures, acquisitions, and investments in affiliates were
funded as follows:
PERIOD FROM
INCEPTION
(SEPTEMBER 16, YEAR ENDED DECEMBER
1994) TO 31,
DECEMBER 31, ----------------------
1994 1995 1996
----------------- ---------- ----------
Cash expended............................................................ $ 600 $ 35,417 $ 72,042
Debt issued and assumed.................................................. -- 6,554 8,228
Equity issued............................................................ -- 7,259 5,602
----- ---------- ----------
Total.................................................................... $ 600 $ 49,230 $ 85,872
----- ---------- ----------
----- ---------- ----------
(5) For the period from inception (September 16, 1994) to December 31, 1994 and
for the years ended December 31, 1995 and 1996, earnings were insufficient
to cover fixed charges during the periods presented by the amount of loss
before minority interests of $352, $12,961 and $71,445, respectively.
(6) Gives effect to the acquisition of Linkatel as if that transaction had
occurred on December 31, 1996. See "Pro Forma Consolidated Financial
Information."
(7) As adjusted to give effect to the Offering as if the Offering had occurred
on December 31, 1996 and net of approximately $11,000 in estimated issuance
costs.
(8) Gives effect to the acquisition of Linkatel.
(9) The operating data for all periods subsequent to March 1996 include the
statistics of the Las Vegas network, which the Company manages and in which
the Company has a 40% membership interest.
(10) Route miles refers to the number of miles of the telecommunications path in
which the Company-owned or leased fiber optic cables are installed.
(11) Fiber miles refers to the number of route miles installed along a
telecommunications path, multiplied by the Company's estimate of the number
of fibers along that path.
(12) Represents on-net building connections.
(13) Represents four (five as of December 31, 1996) Nortel DMS 500 switches that
are currently operational as well as two Siemens EWSD switches which were
included as part of the Company's acquisition of its Ohio operations and are
currently being replaced by the Company with Nortel DMS 500 switches.
14
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE
TENDERING THEIR OLD PREFERRED SHARES FOR THE NEW PREFERRED SHARES OFFERED
HEREBY, HOLDERS OF OLD PREFERRED SHARES SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, WHICH (OTHER THAN "CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE"
AND "ABSENCE OF PUBLIC MARKET") ARE GENERALLY APPLICABLE TO THE OLD PREFERRED
SHARES AS WELL AS THE NEW PREFERRED SHARES. THIS PROSPECTUS CONTAINS STATEMENTS
WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF
PLACES IN THIS PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS PRIMARILY
WITH RESPECT TO THE FUTURE OPERATING PERFORMANCE OF THE COMPANY. PROSPECTIVE
PARTICIPANTS IN THE EXCHANGE OFFER ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE
FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING
INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH
BELOW, IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. SEE "RISK
FACTORS-- FORWARD LOOKING STATEMENTS."
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Old Preferred Shares who do not exchange their Old Preferred
Shares for New Preferred Shares pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of such Old Preferred Shares as set
forth in the legend thereon as a consequence of the issuance of the Old
Preferred Shares pursuant to exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. In general, the Old Preferred Shares may not be offered or
sold, unless registered under the Securities Act and applicable state securities
laws, or pursuant to an exemption therefrom. Except under certain limited
circumstances, the Company does not intend to register the Old Preferred Shares
under the Securities Act. In addition, any holder of Old Preferred Shares who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the New Preferred Shares may be deemed to have received restricted securities
and, if so, will be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. To the extent Old Preferred Shares are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Old Preferred Shares could
be adversely affected. See "The Exchange Offer" and "Description of Capital
Stock--Preferred Shares--Old Preferred Shares".
NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED HISTORY OF OPERATIONS
The development of the Company's businesses and the installation and
expansion of its networks require significant expenditures, a substantial
portion of which must be made before any revenues may be realized. Certain of
the expenditures are expensed as incurred, while certain other expenditures are
capitalized. These expenditures, together with the associated early operating
expenses, result in negative cash flow and operating losses until an adequate
revenue base is established. There can be no assurance that an adequate revenue
base will be established for any of the Company's networks. Since inception, the
Company's operations have resulted in net losses of $0.3 million for the period
from September 16, 1994 through December 31, 1994, $12.7 million for the year
ended December 31, 1995 and $71.1 million for the year ended December 31, 1996.
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 sufficient positive cash flow to
service its debt and to pay cash dividends on the Preferred Shares.
The Company was formed in September 1994. A significant portion of the
Company's revenue for the years ended December 31, 1995 and 1996 was derived
from the operations of the Company's IVR
15
enhanced service offering, which was acquired by the Company in September 1995.
Prospective investors, therefore, have very limited historical financial
information about the Company upon which to base an evaluation of the Company's
performance. Although the Company generates revenues from its current
operations, the Company has only recently commenced operations as a single
source service provider of telecommunications services in eight markets and will
not commence such operations in 14 additional markets until later in 1997. Given
the Company's limited operating history, there can be no assurance that it will
be able to compete successfully in the telecommunications business and to
generate sufficient cash flow to service its debt and to pay cash dividends on
the Preferred Shares.
SIGNIFICANT FUTURE CAPITAL REQUIREMENTS; SUBSTANTIAL INDEBTEDNESS
Expansion of the Company's existing networks and services and the
development and acquisition of new networks and services will require
significant capital expenditures. The Company estimates that the cash required
to fund its anticipated capital expenditures and operating losses (excluding
acquisitions) for 1997 will approximate $200 million. The Company's planned
growth subsequent to 1997 will require substantial additional capital. The
Company will also continue to evaluate additional revenue opportunities in each
of its markets and, as and when attractive additional opportunities develop, the
Company plans to make capital investments in its networks that might be required
to pursue such opportunities. The Company expects to meet its additional capital
needs with the proceeds from credit facilities and other borrowings, the
proceeds from sales of debt securities, the sale or issuance of equity
securities and through joint ventures. There can be no assurance, however, that
the Company will be successful in raising sufficient additional capital on terms
that it will consider acceptable or that the Company's operations will produce
positive cash flow in sufficient amounts to service its debt and to pay cash
dividends on the Preferred Shares. Failure to raise and generate sufficient
funds may require the Company to delay or abandon some of its planned future
expansion or expenditures, which could have a material adverse effect on the
Company's growth and its ability to compete in the telecommunications services
industry. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
The Company expects to incur substantial additional indebtedness (including
secured indebtedness) during the next few years to finance the acquisition,
construction and expansion of networks, the purchase of additional switches, the
offering of local dial tone and Centrex services, the introduction of other new
service offerings and the development and implementation of a comprehensive
information technology platform. The debt service requirements of any additional
indebtedness could make it more difficult for the Company to service its debt
and to pay cash dividends on the Preferred Shares.
The future funding requirements discussed above are based on the Company's
current estimates. There can be no assurance that actual expenditures and
funding requirements will not be significantly higher or lower.
RISK ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY
The expansion and development of the Company's operations (including the
construction and acquisition of additional networks) will depend on, among other
things, the Company's ability to assess markets, identify, finance and complete
suitable acquisitions, design fiber optic network backbone routes, install fiber
optic cable and facilities, including switches, and obtain rights-of-way,
building access rights and any required government authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions. In addition, the Company has experienced rapid growth
since its inception, and the Company believes that sustained growth places a
strain on operational, human and financial resources. In order to manage its
growth, NEXTLINK must continue to improve its operating and administrative
systems including the continued development of effective systems relating to
ordering, provisioning and billing for telecommunications services. NEXTLINK
must also continue to attract and retain qualified managerial, professional and
technical
16
personnel. As a result, there can be no assurance that the Company will be able
to implement and manage successfully its growth strategy. The Company's growth
strategy also involves the following risks:
QUALIFIED PERSONNEL. NEXTLINK believes that a critical component for its
success will be the attraction and retention of qualified managerial,
professional and technical personnel. During the last six months the Company has
experienced significant competition in the attraction and retention of personnel
that possess the skill sets that the Company is seeking. Although the Company
has been successful in attracting and retaining qualified personnel, there can
be no assurance that NEXTLINK will not experience a shortage of qualified
personnel in the future.
SWITCH AND EQUIPMENT INSTALLATION. An essential element of the Company's
current strategy is the provision of switched local dial tone service. To
provide dial tone service, the Company has installed eight Nortel DMS 500
switches and intends to install an additional two Nortel DMS 500 switches during
the second quarter of 1997. There can be no assurance, however, that the
installation of the required switches, fiber optic cable and associated
electronics will be completed on time or that, during the testing of these
switches and related equipment, the Company will not experience technological
problems that cannot be resolved. The failure of the Company to have its
switches and related equipment operational could have a material adverse effect
upon the Company's ability to enter rapidly the telecommunications market as a
single source provider of telecommunications services.
INTERCONNECTION AGREEMENTS. The Company has executed agreements for the
interconnection of its networks with the networks of the ILEC covering each
market in which NEXTLINK either has or is constructing a network, with the
exception of those markets in California. NEXTLINK may be required to negotiate
new interconnection agreements as it enters new markets in the future. There can
be no assurance that the Company will successfully negotiate such other
agreements for interconnection with the ILEC or renewals of existing
interconnection agreements. The failure to negotiate required interconnection
agreements could have a material adverse effect upon the Company's ability to
enter rapidly the telecommunications market as a single source provider of
telecommunications services.
ORDERING, PROVISIONING AND BILLING. The Company has developed processes and
procedures and is working with external vendors in the implementation of
customer orders for services, the provisioning, installation and delivery of
such services and monthly billing for those services. In connection with its
development of a comprehensive information technology platform, the Company is
developing automated internal systems for processing customer orders,
provisioning and billing. The failure to develop effective internal processes
and systems for these service elements or the failure of the Company's current
vendors to deliver effectively ordering, provisioning and billing services could
have a material adverse effect upon the Company's ability to achieve its growth
strategy.
PRODUCTS AND SERVICES. The Company expects to continue to enhance its
systems in order to offer its customers switched local dial tone and other
enhanced products and services in all of its networks as quickly as practicable
and as permitted by applicable regulations. The Company believes its ability to
offer, market and sell these additional products and services will be important
to the Company's ability to meet its long-term strategic growth objectives, but
is dependent on the Company's ability to obtain the needed capital, additional
favorable regulatory developments and the acceptance of such products and
services by the Company's customers. No assurance can be given that the Company
will be able to obtain such capital or that such developments or acceptance will
occur.
ACQUISITIONS. The Company intends to use the net proceeds of the Offering
to expand its networks and service offerings through internal development and
acquisitions. Such acquisitions, if made, could divert the resources and
management time of the Company and would require integration with the Company's
existing networks and services. There can be no assurance that any such
acquisitions will
17
occur or that any such acquisitions, if made, would be on terms favorable to the
Company or would be successfully integrated into the Company's operations.
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
In order to acquire and develop its networks the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way 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--Company Network
Architecture."
COMPETITION
In each of the markets served by the Company's networks, the Company
competes principally with the ILEC serving that area. ILECs are established
providers of 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 telecommunications 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 dial tone 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 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 the ILECs' 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.
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including long distance carriers
seeking to enter, reenter or expand entry into the local exchange market place
such as AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint
Corporation ("Sprint") and from other CLECs, CAPs, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users. In addition, a continuing trend
toward combinations and strategic alliances in the telecommunications industry
could give rise to significant new competitors. The Telecom Act includes
provisions which impose certain regulatory requirements on all local exchange
carriers, including competitors such as the Company, while granting the FCC
expanded authority to reduce the level of regulation applicable to any or all
telecommunications carriers, including ILECs. The manner in which these
provisions of the Telecom Act are implemented and enforced could have an adverse
effect on the Company's ability to successfully compete against ILECs and other
telecommunications service providers. The Company also competes with equipment
vendors and installers, and telecommunications management companies with respect
to certain portions of its business. Many of the Company's current and potential
18
competitors have financial, personnel and other resources substantially greater
than those of the Company, as well as other competitive advantages over the
Company.
REGULATION
The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of return
regulation, nor is it currently required to obtain FCC authorization for the
installation, acquisition or operation of its network facilities. Further, the
FCC has determined that non-dominant carriers, such as the Company and its
subsidiaries, are not required to file interstate tariffs for domestic long
distance service on an ongoing basis. On February 13, 1997, the United States
Court of Appeals for the District of Columbia granted motions for stay of the
FCC detariffing order pending judicial review of that order. The result of this
stay is that carriers must continue to file tariffs for interstate long distance
services. The FCC requires the Company and its subsidiaries to file interstate
tariffs on an ongoing basis for international traffic and access services. The
Company's subsidiaries that provide or will provide intrastate services are also
generally subject to certification and tariff or price list filing requirements
by state regulators. Although passage of the Telecom Act 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 Telecom Act provides incentives
to the ILECs that are subsidiaries of Regional Bell Operating Companies
("RBOCs") to enter the long distance service market, 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. See "Business--Regulatory Overview."
The Federal-State Joint Board on Universal Service consisting of FCC, state
PUC commissioners and state consumer advocates (the "Joint Board") in its
Recommended Decision that was issued on November 8, 1996 (the "Recommended
Decision") recommended that the FCC establish a federal telecommunications
subsidy regime for schools and libraries that would probably significantly
expand the current subsidy program. The Joint Board recommended the adoption of
a cap of $2.25 billion per year for the program. The Joint Board also
recommended the expansion of federal subsidies to low-income consumers of
telecommunications services. In addition, the Telecom Act requires the FCC to
adopt a subsidy scheme for the provision of telecommunications services to rural
health care providers. The Joint Board recommended that the FCC require all
providers of interstate telecommunications services, including in all likelihood
the Company, to pay for these and other subsidy programs based on their gross
revenues from the sale of telecommunications services minus payments made to
other telecommunications carriers. The FCC must establish final universal
service rules by May 8, 1997. The Company cannot at this time predict the level
of its mandatory contribution, but the Company believes that it will likely be a
significant expenditure if the FCC adopts the Joint Board recommendations.
DEPENDENCE ON LARGE CUSTOMERS
To date the Company has been dependent on certain large customers of its IVR
enhanced communication service offerings, the loss of one or more of which could
have a material adverse effect on the Company. The Company's 10 largest
customers accounted for approximately 66% and 51% of the Company's revenues in
1995 and 1996, respectively. The Company does not have service contracts with
all of these customers. The Company will continue to be dependent upon a small
number of customers for the majority of its revenues until such time as the
Company generates substantial revenues from the provision of switched local and
long distance communications services, which there can be no assurance the
Company will be able to do.
19
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. The effect of technological changes, including changes relating
to emerging wireline and wireless transmission and switching technologies, on
the businesses of the Company cannot be predicted.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, the loss of certain of whom could have a material adverse effect on
the Company. The Company believes that its future success will depend in large
part on its ability to develop a large and sophisticated sales force and its
ability to attract and retain highly skilled and qualified personnel. Most of
the executive officers of the Company, including the presidents of its operating
subsidiaries, do not have employment agreements. Although the Company has been
successful in attracting and retaining qualified personnel, there can be no
assurance that NEXTLINK will not experience a shortage of qualified personnel in
the future.
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the significant expenses associated with the expansion and
development of its networks and services and the variability of the level of
revenues generated through sales of NEXTLINK's IVR enhanced communications
services, the Company anticipates that its operating results could vary
significantly from period to period.
CONTROL BY MR. CRAIG O. MCCAW; POTENTIAL CONFLICTS OF INTERESTS
Mr. Craig O. McCaw, primarily through his majority ownership and control of
Eagle River Investments, L.L.C., a Washington limited liability company ("Eagle
River"), controls approximately 88% of the Company's total voting power. As a
result, Mr. McCaw will have the ability to control the direction and future
operations of the Company. In addition to his investment in the Company through
Eagle River, Mr. McCaw has significant investments in other communications
companies, including Nextel Communications, Inc., Teledesic Corporation and
AT&T, some of which could compete with the Company as a single source provider
of telecommunications services or act as a supplier to the Company of certain
telecommunications services. The Company does not have a noncompetition
agreement with either Mr. McCaw or Eagle River. In addition, although Mr. McCaw
is the Company's Chief Executive Officer, Mr. McCaw devotes only a portion of
his time to the business of the Company.
RISKS ASSOCIATED WITH THE PREFERRED SHARES AND THE EXCHANGE NOTES
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE EXCHANGE NOTES.The
Company is a holding company that derives substantially all of its revenues from
its subsidiaries. The Company intends to lend or contribute substantially all of
the net proceeds from the Offering to certain of its subsidiaries. The Company
will be dependent upon payments from its subsidiaries to generate the funds
necessary to meet its obligations, including the payment of cash dividends on
the Preferred Shares, the redemption price of the Preferred Shares, as well as
principal of, and cash interest on, the Exchange Notes. The ability of the
Company's subsidiaries to make such payments will be subject to, among other
things, the availability of sufficient cash and may be subject to restrictive
covenants in future debt agreements. The Company's subsidiaries are party to
certain capital lease obligations and the Company may borrow funds at the
subsidiary level in the future.
RESTRICTIONS ON THE COMPANY'S ABILITY TO PAY DIVIDENDS ON THE PREFERRED
SHARES. To date, the Company has not paid dividends on its shares of capital
stock. In addition, the Indenture (the "Senior Indenture") pursuant to which the
Company's Senior Notes were issued contains covenants that restrict the
Company's ability to pay, or prevent the payment of, cash dividends on the
Preferred Shares. In
20
addition to the limitations imposed on the payment of dividends by the Senior
Indenture, under Washington law the Company is permitted to pay dividends on its
capital stock, including the Preferred Shares, only if after giving effect to
the dividend, the Company would be able to pay its debts as they become due in
the usual course of business or the Company's total assets would not be less
than the sum of its total liabilities plus, unless the Company's Articles of
Incorporation permit otherwise, the amount that would be needed, if the Company
were to be dissolved at the time of the dividend, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are superior
to those receiving the dividend. There can be no assurance that the Company will
be able to pay cash dividends on the Preferred Shares.
SUBORDINATION OF EXCHANGE NOTES. The payment of principal, premium, if any,
and interest on and any other amounts owing in respect of, the Exchange Notes,
if issued, will be subordinated to the prior payment in full of all existing and
future Senior Debt and effectively subordinated to obligations of the Company's
subsidiaries insofar as the assets of that subsidiary are concerned. As of
December 31, 1996, there was approximately $374.9 million of Senior Debt
outstanding and $29.2 million of obligations of the Company's subsidiaries. The
Senior Indenture and the Indenture pursuant to which the Exchange Notes would be
issued permit the incurrence by the Company and its subsidiaries of additional
indebtedness, all of which may constitute Senior Debt, under certain
circumstances. In the event of the bankruptcy, liquidation, dissolution,
reorganization or winding-up of the Company, the assets of the Company will be
available to pay obligations of the Exchange Notes only after all Senior Debt
has been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Exchange Notes. In addition, under certain
circumstances, the Company may not pay principal of, premium, if any, or
interest on, or any other amounts owing in respect of, the Exchange Notes, or
purchase, redeem or otherwise retire the Exchange Notes, if a payment default or
a non-payment default exists with respect to certain Senior Debt, including
Senior Debt under the Senior Indenture and, in the case of non-payment default,
if a payment blockage notice has been received by the Trustee (as defined).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Dividends on the Preferred Shares
that are paid to Non-U.S. Holders may be subject to a 30% withholding tax.
Unless a Non-U.S. Holder provides the Company with appropriate documentation
indicating its exemption from the withholding tax, such Non-U.S. Holder will be
required to pay the Company the amount of this withholding tax and, in the event
such payment is not timely made, the Company will withhold a number of Preferred
Shares sufficient to reimburse it for the withholding tax obligation. For
purposes of this Prospectus, a Non-U.S. Holder is any holder that is not an
individual who is a citizen or resident of the United States, a corporation,
partnership or other entity created under the laws of the United States or any
political subdivision thereof, an estate that is subject to United States
federal income taxation without regard to the source of income, or a trust, the
income of which is includible in gross income for United States federal income
tax purposes, regardless of source or, for tax years beginning after December
31, 1996 (and, if the trustee so elects, for tax years beginning after August
20, 1996), a trust if a United States court is able to exercise primary
supervision over the administration of that trust and one or more United States
fiduciaries have the authority to control all substantial decisions of such
trust.
ABSENCE OF A PUBLIC MARKET FOR THE PREFERRED SHARES; POSSIBLE VOLATILITY OF
PRICE. The Preferred Shares are new securities for which there is currently no
market. The Company does not intend to apply for listing of Preferred Shares on
any securities exchange or for the inclusion of the Preferred Shares in any
automated quotation system. The Old Preferred Shares have been designated for
trading in the PORTAL market as part of a unit. Although the Company has been
advised by the Initial Purchasers that the Initial Purchasers intend to make a
market in the Preferred Shares, they are not obligated to do so and any such
market making activities may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Preferred Shares. If a market for the Preferred Shares were to
develop, the Preferred Shares could trade at prices that may be
21
higher or lower than their initial offering price depending upon many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Historically, the market for securities such as
the Preferred Shares has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Preferred
Shares. There can be no assurance that, if a market for the Preferred Shares
were to develop, such a market would not be subject to similar disruptions.
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements, such as the Company's plans to build and acquire
networks in new areas, the market opportunity presented by larger metropolitan
areas, its anticipation of installation of local exchange service lines and
revenues from designated markets during 1997, and 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 above and herein in this Prospectus regarding
matters that are not historical facts, are only predictions. No assurance can be
given that the future results will be achieved; actual events or results may
differ materially as a result of risks facing the Company. Such risks include,
but are not limited to, the Company's ability to successfully market its
services to current and new customers, access markets, identify, finance and
complete suitable acquisitions, design and construct fiber optic networks,
install cable and facilities, including switching electronics, and obtain
rights-of-way, building access rights and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to vary
materially from the future results indicated, expressed or implied, in such
forward-looking statements.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
22
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the Preferred Registration Rights Agreement.
The Old Preferred Shares were originally issued and sold on January 31, 1997
(the "Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) of, and Rule 144A under,
the Securities Act. In connection with the sale of the Old Preferred Shares, the
Company agreed to file with the Commission a registration statement relating to
an exchange offer (the "Exchange Offer Registration Statement") pursuant to
which preferred shares of the Company covered by such registration statement and
containing the same terms as the Old Preferred Shares, except as set forth in
this Prospectus, would be offered in exchange for Old Preferred Shares tendered
at the option of the holders thereof.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Exchange Offer Registration Statement of which this Prospectus is a part (the
"Letter of Transmittal"), one (1) New Preferred Share for each Old Preferred
Share. The terms of the New Preferred Shares are identical in all respects to
the terms of the Old Preferred Shares for which they may be exchanged pursuant
to this Exchange Offer, except that (i) the New Preferred Shares will generally
be freely transferable by holders thereof and (ii) the holders of the New
Preferred Shares will not be entitled to registration rights under the
Registration Rights Agreement. See "Description of Capital Stock--Preferred
Shares--Old Preferred Shares".
The Exchange Offer is not conditioned upon any minimum number of Old
Preferred Shares being tendered or accepted for exchange.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Preferred Shares issued pursuant to the Exchange Offer may be offered
for resale, resold and otherwise transferred by holders thereof (other than a
"Restricted Holder," being (i) a broker-dealer who acquires such New Preferred
Shares directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (ii) a person that is an Affiliate
or (iii) a broker-dealer who acquired Old Preferred Shares as a result of
market-making or other trading activities), without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such New Preferred Shares are acquired in the ordinary course of such
holders' business and such holders have no arrangements with any person to
participate in the distribution of such New Preferred Shares. Eligible holders
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Each broker-dealer that receives New Preferred Shares
pursuant to the Exchange Offer in exchange for Old Preferred Shares acquired for
its own account as a result of market-making activities or other trading
activities may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Preferred Shares. The Letter of
Transmittal 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 resales of New Preferred Shares received in exchange for Old Preferred
Shares where such Old Preferred Shares were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that it will make this Prospectus and any amendment or supplement to this
Prospectus available to any broker-dealer for use in connection with any such
resale for a period of 90 days from the date of this Prospectus, or such shorter
period as will terminate when all Old Preferred Shares acquired by
broker-dealers for their own accounts as a result of market-making
23
activities or other trading activities have been exchanged for New Preferred
Shares and resold by such broker-dealers. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
Tendering holders of Old Preferred Shares will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Preferred
Shares pursuant to the Exchange Offer.
Dividends on the New Preferred Shares are payable out of legally available
funds and are cumulative from the Accrual Date. Holders of Old Preferred Shares
whose shares of Old Preferred Shares are accepted for exchange will be deemed to
have waived the right to receive any payment in respect of dividends on the Old
Preferred Shares accumulated from the Accrual Date to the date of the issuance
of the New Preferred Shares. Consequently, holders who exchange their Old
Preferred Shares for New Preferred Shares will receive the same dividend payment
on the next dividend payment date (expected to be May 1, 1997) that they would
have received had they not accepted the Exchange Offer, except that if such
dividend is not paid in cash, it will be paid in shares of New Preferred Shares
instead of Old Preferred Shares. Dividends on the New Preferred Shares are
payable quarterly in arrears on February 1, May 1, August 1 and November 1 of
each year, commencing May 1, 1997, if applicable, accumulating from the Accrual
Date at the annual rate of 14% per share of New Preferred Shares.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
THE EXCHANGE OFFER WILL EXPIRE ON THE EXPIRATION DATE. The term "Expiration
Date" means 5:00 p.m., New York City time, on , 1997 unless the Company in
its sole discretion extends the period during which the Exchange Offer is open,
in which event the term "Expiration Date" means the latest time and date on
which the Exchange Offer, as so extended by the Company, expires. The Company
reserves the right to extend the Exchange Offer at any time and from time to
time prior to the Expiration Date by giving written notice to Continental Stock
Transfer & Trust Company (the "Exchange Agent") and by timely public
announcement communicated by no later than 5:00 p.m. on the next business day
following the Expiration Date, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Old Preferred Shares previously tendered
pursuant to the Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Preferred Shares for any
reason, including if any of the events set forth below under "--Conditions to
the Exchange Offer" shall have occurred and shall not have been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Old Preferred Shares. If any such termination
or amendment occurs, the Company will notify the Exchange Agent in writing and
will either issue a press release or give written notice to the holders of the
Old Preferred Shares as promptly as practicable. Unless the Company terminates
the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration
Date, the Company will exchange the New Preferred Shares for the Old Preferred
Shares on the Exchange Date.
If the Company waived any material condition to the Exchange Offer, or
amends the Exchange Offer in any other material respect, and if at the time that
notice of such waiver or amendment is first published, sent or given to holders
of Old Preferred Shares in the manner specified above, the Exchange Offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the fifth business day from, and including, the date that such notice is
first so published, sent or given, then the Exchange Offer will be extended
until the expiration of such period of five business days.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Old Preferred
Shares and will be furnished to brokers, banks and
24
similar persons whose names, or the names of whose nominees, appear on the lists
of holders for subsequent transmittal to beneficial owners of Old Preferred
Shares.
HOW TO TENDER
The tender to the Company of Old Preferred Shares by a holder thereof
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
GENERAL PROCEDURES.
A holder of an Old Preferred Share may tender the same by (i) properly
completing and signing the Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Old Preferred Shares being tendered
and any required signature guarantees (or a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") pursuant to the procedure described
below), to the Exchange Agent at its address set forth on the back cover of this
Prospectus on or prior to the Expiration Date or (ii) complying with the
guaranteed delivery procedures described below.
If tendered Old Preferred Shares are registered in the name of the signer of
the Letter of Transmittal and the New Preferred Shares to be issued in exchange
therefor are to be issued (and any untendered Old Preferred Shares are to be
reissued) in the name of the registered holder, the signature of such signer
need not be guaranteed. In any other case, the tendered Old Preferred Shares
must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Company and duly executed by the registered holder and the
signature on the endorsement or instrument of transfer must be guaranteed by a
bank, broker, dealer, credit union, savings association, clearing agency or
other institution (each an "Eligible Institution") that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act. If the New Preferred Shares and/or Old Preferred
Shares not exchanged are to be delivered to an address other than that of the
registered holder appearing on the transfer books for the Old Preferred Shares,
the signature on the Letter of Transmittal must be guaranteed by an Eligible
Institution.
Any beneficial owner whose Old Preferred Shares are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender Old Preferred Shares should contact such holder promptly and
instruct such holder to tender Old Preferred Shares on such beneficial owner's
behalf. If such beneficial owner wishes to tender such Old Preferred Shares
himself, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering such Old Preferred Shares, either make
appropriate arrangements to register ownership of the Old Preferred Shares in
such beneficial owner's name or follow the procedures described in the
immediately preceding paragraph. The transfer of record ownership may take
considerable time.
BOOK-ENTRY TRANSFER.
The Exchange Agent will make a request to establish an account with respect
to the Old Preferred Shares at The Depository Trust Company (the "Book-Entry
Transfer Facility") for purpose of the Exchange Offer within two business days
after receipt of this Prospectus, and any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of Old Preferred Shares by causing the Book-Entry Transfer Facility to
transfer such Old Preferred Shares into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of Old Preferred
Shares may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the Letter of Transmittal, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to
25
and received by the Exchange Agent at the address specified on the back cover
page of this Prospectus on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
THE METHOD OF DELIVERY OF OLD PREFERRED SHARES AND ALL OTHER DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
GUARANTEED DELIVERY PROCEDURES. If a holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Old Preferred Shares
to reach the Exchange Agent before the Expiration Date, a tender may be effected
if the Exchange Agent has received at its office listed on the back cover hereof
on or prior to the Expiration Date a letter, telegram or facsimile transmission
from an Eligible Institution setting forth the name and address of the tendering
holder, the principal amount of the Old Preferred Shares being tendered, the
names in which the Old Preferred Shares are registered and, if possible, the
certificate numbers of the Old Preferred Shares to be tendered, and stating that
the tender is being made thereby and guaranteeing that within three New York
Stock Exchange trading days after the date of execution of such letter, telegram
or facsimile transmission by the Eligible Institution, the Old Preferred Shares,
in proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Preferred Shares being tendered by the
above-described method (or a timely Book-Entry Confirmation) are deposited with
the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by Eligible Institutions for the
purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Preferred Shares (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of New Preferred Shares in exchange
for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Preferred
Shares (or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Preferred Shares will
be determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Company, be unlawful. The Company also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. Neither the Company, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Preferred Shares for exchange (the "Transferor")
exchanges, assigns and transfers the Old Preferred Shares to the Company and
irrevocably constitutes and appoints the
26
Exchange Agent as the Transferor's agent and attorney-in-fact to cause the Old
Preferred Shares to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Preferred Shares and to acquire New
Preferred Shares issuable upon the exchange of such tendered Old Preferred
Shares, and that, when the same are accepted for exchange, the Company will
acquire good and unencumbered title to the tendered Old Preferred Shares, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Preferred Shares. The Transferor further agrees that acceptance of
any tendered Old Preferred Shares by the Company and the issuance of New
Preferred Shares in exchange therefor shall constitute performance in full by
the Company of its obligations under the Preferred Registration Rights Agreement
and that the Company shall have no further obligations or liabilities thereunder
(except in certain limited circumstances). All authority conferred by the
Transferor will survive the death or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By tendering Old Preferred Shares and executing the Letter of Transmittal,
the Transferor certifies that it is not an Affiliate of the Company, that it is
not a broker-dealer that owns Old Preferred Shares acquired directly from the
Company or an Affiliate of the Company, that it is acquiring the New Preferred
Shares offered hereby in the ordinary course of such Transferor's business and
that such Transferor has no arrangement with any person to participate in the
distribution of such New Preferred Shares.
WITHDRAWAL RIGHTS
Old Preferred Shares tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth on the back cover of this Prospectus prior to the Expiration Date. Any
such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Old Preferred Shares to be withdrawn, the
certificate numbers of Old Preferred Shares to be withdrawn, the number of Old
Preferred Shares to be withdrawn, a statement that such holder is withdrawing
his election to have such Old Preferred Shares exchanged, and the name of the
registered holder of such Old Preferred Shares, and must be signed by the holder
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Company that the person withdrawing the tender has succeeded
to the beneficial ownership of the Old Preferred Shares being withdrawn. The
Exchange Agent will return the properly withdrawn Old Preferred Shares promptly
following receipt of notice of withdrawal. All questions as to the validity of
notices of withdrawal, including time of receipt, will be determined by the
Company, and such determination will be final and binding on all parties.
ACCEPTANCE OF OLD PREFERRED SHARES FOR EXCHANGE; DELIVERY OF NEW PREFERRED
SHARES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Preferred Shares validly tendered and not
withdrawn and the issuance of the New Preferred Shares will be made on the
Exchange Date. For the purposes of the Exchange Offer, the Company shall be
deemed to have accepted for exchange validly tendered Old Preferred Shares when,
as and if the Company has given written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old
Preferred Shares for the purposes of receiving New Preferred Shares from the
Company and causing the Old Preferred Shares to be assigned, transferred and
exchanged. Upon the terms and subject to the conditions of the Exchange
27
Offer, delivery of New Preferred Shares to be issued in exchange for accepted
Old Preferred Shares will be made by the Exchange Agent promptly after
acceptance of the tendered Old Preferred Shares. Old Preferred Shares not
accepted for exchange by the Company will be returned without expense to the
tendering holders (or in the case of Old Preferred Shares tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the procedures described above, such non-exchanged Old Preferred
Shares will be credited to an account maintained with such Book-Entry Transfer
Facility) promptly following the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue New Preferred
Shares in respect of any properly tendered Old Preferred Shares not previously
accepted and may terminate the Exchange Offer (by oral or written notice to the
Exchange Agent and by timely public announcement, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service)
or, at its option, modify or otherwise amend the Exchange Offer, if (a) there
shall be threatened, instituted or pending any action or proceeding before, or
any injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency or
commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof, or (iii) resulting in
a material delay in the ability of the Company to accept for exchange or
exchange some or all of the Old Preferred Shares pursuant to the Exchange Offer;
(b) any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the Exchange
Offer or any of the transactions contemplated by the Exchange Offer by any
government or governmental authority, domestic or foreign, or any action shall
have been taken, proposed or threatened, by any government, governmental
authority, agency or court, domestic or foreign, that in the sole judgment of
the Company might directly or indirectly result in any of the consequences
referred to in clauses (a)(i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Preferred Shares having obligations
with respect to resales and transfers of New Preferred Shares which are greater
than those described in the interpretations of the Commission referred to on the
cover page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or (c) a material adverse change shall have occurred in
the business, condition (financial or otherwise), operations, or prospects of
the Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in whole
or in part at any time or from time to time in its sole discretion. The failure
by the Company at any time to exercise any of the foregoing rights will not be
deemed a waiver of any such right, and each right will be deemed an ongoing
right which may be asserted at any time or from time to time. In addition, the
Company has reserved the right, notwithstanding the satisfaction of each of the
foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Preferred
Shares tendered and no New Preferred Shares will be issued in exchange for any
such Old Preferred Shares, if at such time any stop order shall be threatened or
in effect with respect to the Exchange Offer Registration Statement of which
this Prospectus constitutes a part or qualification of the Exchange Note
Indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act").
28
EXCHANGE AGENT
Continental Stock Transfer & Trust Company has been appointed as the
Exchange Agent for the Exchange Offer. Letters of Transmittal must be addressed
to the Exchange Agent at its address set forth on the back cover page of this
Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting and legal fees, will be paid by
the Company and are estimated at approximately $500,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Preferred Shares in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Preferred Shares in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF OLD PREFERRED SHARES WILL NOT HAVE DISSENTERS' RIGHTS OR
APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange for New Preferred Shares by holders of Old Preferred Shares
will not be a taxable exchange for federal income tax purposes, and such holders
should not recognize any taxable gain or loss or any dividend income as a result
of such exchange.
OTHER
Participation in the Exchange Offer is voluntary, and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Preferred Shares. Holders of the Old Preferred Shares are urged to consult their
financial and tax advisors in making their own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Preferred Shares pursuant to the terms of this Exchange
Offer, the Company will have fulfilled a covenant
29
contained in the Preferred Registration Rights Agreement. Holders of the Old
Preferred Shares who do not tender their certificates in the Exchange Offer will
continue to hold such certificates and will be entitled to all the rights, and
subject to all the limitations applicable thereto, under the Certificate of
Designations, except for any such rights under the Preferred Registration Rights
Agreement, which by their terms terminate or cease to have further effect as a
result of the making of this Exchange Offer. See "Description of Capital
Stock--Preferred Shares--Old Preferred Shares". All untendered Old Preferred
Shares will continue to be subject to the restriction on transfer set forth in
the Certificate of Designations. To the extent that Old Preferred Shares are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Old Preferred Shares could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange".
The Company may in the future seek to acquire untendered Old Preferred
Shares in the open market or privately negotiated transactions, through
subsequent exchange offers or otherwise. The Company has no present plan to
acquire any Old Preferred Shares which are not tendered in the Exchange Offer.
30
CAPITALIZATION
($ IN THOUSANDS)
The following table sets forth at December 31, 1996 (i) the pro forma
capitalization of the Company after giving effect to the merger of NEXTLINK
Communications, L.L.C. with and into the Company and the acquisition of
Linkatel, as if those transactions had occurred on December 31, 1996 and (ii)
such pro forma capitalization as further adjusted to reflect the issuance of the
Old Preferred Shares and the Contingent Warrants (as defined) pursuant to the
Offering. This table should be read in conjunction with the Selected
Consolidated Financial and Operating Data and the Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996
-------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
----------- ------------
Cash, cash equivalents and marketable securities(1).................................... $ 89,524 $ 363,524
----------- ------------
----------- ------------
Current portion of long-term obligations and payable to affiliate...................... 2,694 2,694
Capital lease obligations, less current portion........................................ 6,262 6,262
12 1/2% Senior Notes due April 15, 2006................................................ 350,000 350,000
----------- ------------
Total debt........................................................................... 358,956 358,956
----------- ------------
Minority interests(2).................................................................. 308 308
Preferred Stock, par value $.01 per share, 25,000,000 authorized and 5,700,000 issued
and outstanding, net of issuance costs(3)............................................ -- 274,000
Class B Common Stock, par value $.01 per share subject to redemption by the
Company(4)........................................................................... 4,950 4,950
Shareholder's equity (deficit):
Class A Common Stock, par value $.01 per share, 250,000,000 authorized and 0 issued
and outstanding.................................................................... -- --
Class B Common Stock, par value $.01 per share, 100,000,000 authorized and
83,123,084(5) issued and outstanding............................................... 831 831
Additional paid in capital........................................................... 64,696 64,696
Accumulated deficit.................................................................. (84,181) (84,181)
----------- ------------
Total shareholders' equity (deficit)................................................. (18,654) (18,654)
----------- ------------
Total capitalization................................................................. $ 345,560 $ 619,560
----------- ------------
----------- ------------
- --------------------------
(1) Does not include $101,438 of pledged securities.
(2) Minority interests primarily represent a nominal equity investment in
substantially all of the Company's subsidiaries from a company that is
wholly owned by Mr. Craig O. McCaw.
(3) The Company has not ascribed any value to the Contingent Warrants to
purchase an aggregate of 5% of each class of Junior Shares of the Company on
a fully diluted basis as of February 1, 1998 (the "Contingent Warrants").
Issuance costs in the Offering were estimated to be approximately $11,000.
(4) The Company issued 900,000 Class A Units valued at $5.50 per unit in
connection with the acquisition of ITC, which were converted to 1,178,128
shares of Class B Common Stock, par value $.01 per share, of the Company as
of January 31, 1997. The Company has provided the seller with the option to
require the Company to repurchase such units at $11.50 per unit beginning
three years from the date of closing of the acquisition in the event the
Company has not completed a public offering of its equity securities prior
to that time.
(5) Does not include 3,571,364 shares of Class B Common Stock issuable upon
exercise of an option granted to Mr. James F. Voelker.
31
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
($ IN THOUSANDS)
The selected consolidated financial and operating data presented below
(other than the pro forma data) as of and for the period from inception
(September 16, 1994) to December 31, 1994 and for the years ended December 31,
1995 and 1996 are derived from and qualified by reference to the audited
Consolidated Financial Statements of the Company contained elsewhere in this
Prospectus. The Company's Consolidated Financial Statements as of December 31,
1995 and 1996, for the period from inception (September 16, 1994) to December
31, 1994, and for the years ended December 31, 1995 and 1996, have been audited
by Arthur Andersen LLP, independent public accountants. The unaudited pro forma
consolidated statements of operations data for the years ended December 31, 1995
and 1996 gives effect to certain acquisitions that are described in the Pro
Forma Consolidated Financial Information using the purchase method of accounting
and assuming that such transactions were consummated on January 1, 1995 and
1996, respectively. The operating data presented below are derived from the
Company's records. All of the data should be read in conjunction with and are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
of the Company and notes thereto contained elsewhere in this Prospectus.
PERIOD FROM
INCEPTION
(SEPTEMBER 16, YEAR ENDED DECEMBER 31,
1994) TO ------------------------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1994 1995 1996 1995(1) 1996(2)
----------------- ---------- ---------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $ -- $ 7,552 $ 25,686 $ 25,620 $ 36,277
Costs and expenses:
Operating.......................................... 106 6,618 25,094 16,507 32,400
Selling, general and administrative................ 232 9,563 31,353 15,367 35,238
Deferred compensation.............................. -- 375 9,914 375 9,914
Depreciation and amortization...................... 14 3,458 10,340 8,663 14,966
------ ---------- ---------- ----------- -----------
Loss from operations................................. (352) (12,462) (51,045) (15,292) (56,241)
Interest expense, net................................ -- (499) (20,430) (814) (22,851)
------ ---------- ---------- ----------- -----------
Loss before minority interest........................ (352) (12,961) (71,445) (16,106) (79,092)
Minority interest.................................... 3 230 344 114 344
------ ---------- ---------- ----------- -----------
Net loss............................................. $ (349) $ (12,731) $ (71,101) $ (15,992) $ (78,748)
------ ---------- ---------- ----------- -----------
------ ---------- ---------- ----------- -----------
OTHER DATA:
EBITDA(3)............................................ $ (338) $ (8,629) $ (30,761) $ (6,254) $ (31,361)
Summary Cash Flow Information:
Net cash used in operating activities.............. (396) (9,180) (40,563) -- --
Net cash used in investing activities.............. (600) (35,417) (227,012) -- --
Net cash provided by financing activities.......... 1,021 45,922 343,032 -- --
Capital expenditures, including acquisitions of
businesses (net of cash acquired) and investments
in affiliates (4).................................. 600 49,230 85,872 -- --
Ratio of earnings to combined fixed
charges (5)........................................ -- -- -- -- --
(FOOTNOTES BEGIN ON FOLLOWING PAGE)
32
AS OF DECEMBER 31,
--------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1995 1996 1996(6) 1996(7)
---------- ----------- ----------- ------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............. $ 1,350 $ 124,520 $ 89,524 $ 363,524
Working capital.............................................. (6,232) 137,227 100,542 374,542
Property and equipment, net.................................. 29,664 97,784 111,950 111,950
Total assets................................................. 53,461 390,683 392,753 666,753
Long-term debt and capital lease obligations, less current
portion.................................................... 1,590 356,262 356,262 356,262
Preferred Shares, net of issuance costs...................... -- -- -- 274,000
Equity units subject to redemption........................... -- 4,950 4,950 4,950
Members' equity (deficit):
Contributed capital........................................ 49,799 65,527 65,527 65,527
Accumulated deficit........................................ (13,080) (84,181) (84,181) (84,181)
---------- ----------- ----------- ------------
Total members' equity (deficit).......................... 36,719 (18,654) (18,654) (18,654)
PRO FORMA
AS OF AS OF AS OF AS OF AS OF
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996(8)
----------- ----------- --------------- -------------- --------------
OPERATING DATA(9):
Route miles(10).......................... 496 801 900 1,080 1,160
Fiber miles(11).......................... 39,681 42,217 55,701 66,046 71,655
Buildings connected(12).................. 206 277 299 403 411
Switches installed(13)................... 6 6 6 7 7
Employees................................ 255 387 456 568 580
- --------------------------
(1) Gives effect to the following transactions as if each had occurred on
January 1, 1995: (i) the acquisitions of Tel-West Central Services, Inc. and
Sound Response Corporation, which were completed during 1995, (ii) the
recapitalization of the Company and four of the Company's operating
subsidiaries which was completed effective January 1, 1996 (the
"Recapitalization"), (iii) the acquisition of ITC which was completed in
December 1996 and (iv) the acquisition of Linkatel, which was completed in
February 1997. See "Pro Forma Consolidated Financial Information."
(2) Gives effect to the acquisitions of ITC and Linkatel as if those
transactions had occurred on January 1, 1996. See "Pro Forma Consolidated
Financial Information."
(3) EBITDA consists of earnings (loss) before interest expense, minority
interests, depreciation, amortization and deferred compensation expense.
EBITDA is commonly used to analyze companies on the basis of operating
performance, leverage and liquidity. While EBITDA should not be construed as
a substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Company to meet
future debt service, capital expenditures and working capital requirements.
See "Consolidated Statement of Cash Flows."
33
(4) Total capital expenditures, acquisitions, and investments in affiliates were
funded as follows:
PERIOD FROM
INCEPTION
(SEPTEMBER 16, YEAR ENDED DECEMBER
1994) TO 31,
DECEMBER 31, --------------------
1994 1995 1996
----------------- --------- ---------
Cash expended........................................ $ 600 $ 35,417 $ 72,042
Debt issued and assumed.............................. -- 6,554 8,228
Equity issued........................................ -- 7,259 5,602
----- --------- ---------
Total................................................ $ 600 $ 49,230 $ 85,872
----- --------- ---------
----- --------- ---------
(5) For the period from inception (September 16, 1994) to December 31, 1994 and
for the years ended December 31, 1995 and 1996, earnings were insufficient
to cover fixed charges during the periods presented by the amount of loss
before minority interests of $352, $12,961 and $71,445, respectively.
(6) Gives effect to the acquisition of Linkatel as if that transaction had
occurred on December 31, 1996. See "Pro Forma Consolidated Financial
Information."
(7) As adjusted to give effect to the Offering as if the Offering had occurred
on December 31, 1996 and net of approximately $11,000 in estimated issuance
costs.
(8) Gives effect to the acquisition of Linkatel.
(9) The operating data for all periods subsequent to March 1996 include the
statistics of the Las Vegas network, which the Company manages and in which
the Company has a 40% membership interest.
(10) Route miles refers to the number of miles of the telecommunications path in
which the Company-owned or leased fiber optic cables are installed.
(11) Fiber miles refers to the number of route miles installed along a
telecommunications path, multiplied by the Company's estimate of the number
of fibers along that path.
(12) Represents on-net building connections.
(13) Represents four (five as of December 31, 1996) Nortel DMS 500 switches that
are currently operational as well as two Siemens EWSD switches which were
included as part of the Company's acquisition of its Ohio operations and are
currently being replaced by the Company with Nortel DMS 500 switches.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1994, the Company has executed a strategy of
constructing and acquiring fiber optic networks and acquiring related
telecommunications businesses. Over this period, the Company has begun
construction of, acquired, or entered into agreements to acquire
telecommunications networks in 22 markets in seven states.
The Company commenced the offering of switched local dial tone
telecommunications services in seven of its markets on July 4, 1996 and in an
eighth market on January 1, 1997. The Company expects to commence the offering
of switched local dial tone and long distance services in its remaining 14
markets later in 1997. See "Business--Network Development; --The Company's
Networks."
In addition, the Company offers enhanced communications services including:
(i) interactive voice response services, which provide an interface between the
Company's clients and their customers for a variety of applications; (ii)
Xpress, the Company's virtual communications center that allows mobile
professionals and workgroups to access a suite of commonly used communications
services from any telephone in the public switched telephone network; and (iii)
the Intermind Communicator, an interactive communications tool for the World
Wide Web and intranet applications.
The Company plans to acquire and build networks in new areas, expand its
current networks, and also explore the acquisition or licensing of additional
enhanced communications services and other telecommunications service providers.
These efforts should allow the Company to increase its presence in the
marketplace, and facilitate providing a single source solution for the
telecommunications needs of its customers.
The development of the Company's businesses and the construction,
acquisition and expansion of its systems require significant expenditures, a
substantial portion of which is incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate customer base is established.
However, as the 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 the
strategic decision to build high capacity networks with broad market coverage,
which initially increases its level of capital expenditures and operating
losses. The Company believes that over the long term this will enhance the
Company's financial performance by increasing the traffic flow over the
Company's networks. See "Risk Factors--Significant Future Capital Requirements;
Substantial Indebtedness."
Prior to January 31, 1997, the Company was a limited liability company that
was classified and taxed as a partnership for federal and state income tax
purposes. On January 31, 1997, the Company was merged with and into NEXTLINK
Communications, Inc., a Washington corporation, and will be subject to federal
and state income tax. See Note 12 to Consolidated Financial Statements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Revenue increased 240% to $25.7 million for 1996, compared to $7.6 million
in 1995. The increase was due to recording a full year of revenue during 1996
for acquisitions completed during 1995 as well as growth in dedicated and
enhanced communications services revenues. The 1996 revenues included $15.3
million derived from enhanced communications services, $6.4 million from
competitive access and dedicated line services, $3.8 million from local and long
distance resale services and $0.2 million from switched local dial tone and
other services. This compares to $3.4 million derived from enhanced
communications services, $3.2 million from competitive access and dedicated line
services and $1.0
35
million from local exchange resale services during 1995. The Company's
interactive voice response subsidiary, which was acquired in September 1995,
provided 52% of the Company's revenues during 1996, including one customer who
accounted for 23% of the Company's total revenues. The revenues generated by
this subsidiary, while generally increasing over time, have tended to fluctuate
on a quarter to quarter basis as a substantial portion of the revenues are
derived from a small number of customers and the revenues are generally
nonrecurring in nature. The Company began offering switched local dial tone
services in seven of its markets in July 1996. Revenues from the provision of
local dial tone services, while not material during 1996, are expected to
represent an increasing component of total revenues in future periods.
Operating expenses consist of costs directly related to providing
facilities-based network and enhanced communications services and include
salaries and benefits, right-of-way fees and local and long distance service
costs. Operating expenses increased 279% due to the effect of acquisitions and
the Company's continued addition of employees as well as other related costs in
order to expand the Company's switched local dial tone service businesses in its
existing and planned markets. In addition, the Company experienced increased
network costs related to the provision of local and long distance services.
SG&A includes salaries and benefits, sales and marketing, consulting and
legal fees, property taxes, facilities expense and billing and systems
development costs. Selling, general and administrative expenses ("SG&A")
increased 228% due to acquisitions completed during 1995, the Company's
continued addition of employees as well as other related costs in order to
expand the Company's switched local dial tone service businesses in its existing
and planned markets and to a lesser degree due to activities associated with the
marketing of the Company's enhanced communications service offerings.
Deferred compensation expenses are recorded in connection with the Company's
Equity Option Plan. The option grants under this plan are considered
compensatory and are accounted for similar to stock appreciation rights. The
Company recorded noncash charges of $9.9 million and $0.4 million during 1996
and 1995, respectively, resulting from an increase in value of the options as
well as the grant of additional options. See Note 10 to Consolidated Financial
Statements.
Depreciation expense increased during 1996 primarily due to placement in
service of additional telecommunications network assets, including switches,
fiber optic cable, network electronics and related equipment as well as due to
acquisitions completed during 1995 and early 1996. Amortization of intangible
assets increased as a result of acquisitions completed during 1995 and 1996.
Interest expense during 1996 (net of $0.9 million capitalized) primarily
reflects the interest expense associated with the Senior Notes. See "Liquidity
and Capital Resources." Pursuant to Statement of Financial Accounting Standards
No. 34, the Company capitalizes a portion of its interest costs as part of the
construction cost of its communications networks. Interest income results from
certain securities that have been pledged as collateral for interest payments on
the Senior Notes and investment of excess cash.
PERIOD FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994 VS. DECEMBER
31, 1995
From inception through December 31, 1995, the Company acquired certain
operating assets and one company. These acquisitions have been accounted for
utilizing the purchase method of accounting, and accordingly, the Company's
Consolidated Financial Statements include the results of operations of these
acquisitions from the dates of acquisition. The acquired assets and liabilities
were recorded at their estimated fair value on the acquisition dates, and
appropriate amounts were allocated to intangible assets, including goodwill.
36
The Company generated its first revenues, a total of $7.6 million, in 1995.
Of these revenues, $3.2 million were derived from competitive access and
dedicated line services, $1.0 million from local exchange resale services and
$3.4 million from interactive voice response services.
As reflected in the Consolidated Financial Statements, operating expenses
increased from $106,000 in 1994 to $6.6 million in 1995. This increase is due to
the acquisitions described above and expansion of the business.
SG&A increased from $232,000 in 1994 to $9.6 million in 1995. SG&A increased
substantially as a result of acquisitions and the development of the Company's
systems and structure to support the anticipated growth of its business.
Depreciation increased from $6,500 in 1994 to $1.1 million in 1995 due to
the added property, plant and equipment as a result of the acquisitions and
expansion of the networks completed in 1995. Amortization of intangible assets
increased from $7,000 in 1994 to $2.3 million in 1995 due to the acquisitions
and the resulting increase in intangible assets.
Interest expense was $499,000 in 1995 and related primarily to a note to
Eagle River that was subsequently converted to contributed capital on December
1, 1995.
Minority interest in net losses increased from $3,000 in 1994 to $230,000 in
1995, due to increases in losses and the addition of minority members' interest
in certain of the Company's acquired subsidiaries. The net loss before minority
interest was $13.0 million and the net loss was $12.7 million in 1995 compared
to $352,000 and $349,000, respectively for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The competitive local telecommunications service business is a capital
intensive business. The Company's existing operations have required and will
continue to require substantial capital investment for the acquisition and
installation of fiber, electronics and related equipment in order to provide
switched services in the Company's networks and the funding of operating losses
during the start-up phase of each market. In addition, the Company's strategic
plan calls for expansion into additional market areas. Such expansion will
require significant additional capital for: potential acquisitions of businesses
or assets; design, development and construction of new networks; and the funding
of operating losses during the start-up phase of each market. During 1996, the
Company used $40.6 million in cash for operating activities, compared to $9.2
million in 1995. The increase was primarily due to a substantial increase in the
Company's activities associated with the development and initiation of
competitive switched local dial tone services and to a lesser degree due to the
activities associated with the marketing of the Company's enhanced
communications service offerings. During 1996, the Company also invested an
additional $72.0 million in property and equipment, acquisitions of
telecommunications assets and equity investments in telecommunications
businesses. During 1995, the Company invested $35.4 million in capital equipment
and acquisitions of telecommunications assets and businesses.
On February 4, 1997 the Company completed the acquisition of substantially
all of the assets of Linkatel, a Los Angeles-based competitive access
telecommunications provider. At the time of acquisition, Linkatel operated an 80
mile fiber optic telecommunications network covering several markets in the
Orange and Los Angeles county areas. The total purchase price of $42.5 million
consisted of a cash payment of $36.1 million (including the release of $6.0
million which was deposited into escrow during 1996) plus the payoff of debt of
$5.6 million and the assumption of net liabilities totaling $0.8 million.
In December 1996, the Company completed the acquisition of ITC, a
switched-based long distance reseller based in Salt Lake City, Utah with
operations in Utah, Colorado, Arizona, New Mexico and Idaho. ITC has
approximately 9,000 long distance customers and recorded 1996 revenues of $11.4
million. The purchase price for ITC consisted of a cash payment of $4.0 million
(of which $2.6 million was placed into
37
escrow to be paid during 1998) plus the issuance of 900,000 Class A Units of the
Company, which were valued at $5.50 per unit. The Company has granted the seller
an option to require the Company to repurchase such units at $11.50 per unit
beginning three years from the date of closing of the acquisition in the event
that the Company has not completed a public offering of its equity securities
prior to that time.
In January 1997, the Company obtained rights-of-way to expand its existing
Salt Lake City network into Provo and Orem, Utah. In December 1996, the Company
reached an agreement in principle to acquire an existing fiber optic network in
downtown Philadelphia in order to extend its existing network in Pennsylvania,
which acquisition is anticipated to be consummated during the second quarter of
1997.
Since inception, the Company has funded its expenditures with approximately
$55.0 million of cash equity investments from two entities that are controlled
by Mr. Craig O. McCaw and with the proceeds from the issuance of long-term debt
and redeemable preferred stock. On April 25, 1996, the Company raised net
proceeds of approximately $190 million through the issuance of $350 million in
Senior Notes. The Company used $117.7 million of the gross proceeds to purchase
U.S. government securities, representing funds sufficient to provide for payment
in full of interest on the Senior Notes through April 15, 1999 and used an
additional $32.2 million to repay certain advances and accrued interest from
Eagle River. In addition, the Company incurred costs of $9.8 million in
connection with the financing. Interest payments on the Senior Notes are due
semi-annually. On January 31, 1997, the Company completed the sale of $285
million of Old Preferred Shares which after deducting issuance costs, resulted
in net proceeds to the Company of approximately $274 million. The Old Preferred
Shares will accrue dividends at the rate of 14% per annum. Before February 1,
2002, dividends may, at the option of the Company, be paid in cash or by issuing
additional Old Preferred Shares with an aggregate liquidation preference equal
to the amount of such dividends. After February 1, 2002, dividends must be paid
in cash. Since inception, the Company also has issued $15.5 million of Class A
Units primarily for the acquisition of certain telecommunications assets and the
stock of ITC, which Units were converted to shares of Class B Common Stock of
the Company on January 31, 1997.
The Company will continue to use the remaining proceeds from the sale of the
Senior Notes and the Old Preferred Shares for expenditures relating to the
construction, acquisition and operation of telecommunications networks and
service providers and the offering of telecommunications services in those areas
where the Company currently operates or intends to operate. Expenditures for the
construction and operation of networks include (i) the purchase and installation
of switches and related electronics in existing networks and in networks to be
constructed or acquired in new or adjacent markets, (ii) the purchase and
installation of fiber optic cable and electronics to expand existing networks
and develop new networks, including the connection of new buildings, (iii) the
development of its comprehensive information technology platform and (iv) the
funding of operating losses and working capital. The Company may also acquire or
invest in businesses that consist of existing networks or companies engaged in
businesses similar to those engaged in by the Company and its subsidiaries or
other complementary businesses.
As of December 31, 1996, the Company had unrestricted cash and investments
of $124.5 million. On a pro forma basis, after giving effect to the Linkatel
acquisition and the Offering, the Company would have had $363.5 million of
unrestricted cash and investments. The Company estimates that the cash required
to fund its anticipated capital expenditures and operating losses (excluding
acquisitions) for 1997 will approximate $200 million.
The Company's planned growth subsequent to 1997 will require substantial
additional capital to fund capital expenditures, acquisition opportunities,
working capital and any future operating losses. The Company will continue to
evaluate additional revenue opportunities in each of its markets and, as and
when attractive additional opportunities develop, the Company plans to make
additional capital investments in its networks to pursue such opportunities. The
Company expects to meet its additional
38
capital needs with the proceeds from sales or issuance of equity securities,
credit facilities and other borrowings, sales of additional debt securities, and
through joint ventures. There can be no assurance, however, that the Company
will be successful in raising sufficient additional capital on terms that it
will consider acceptable or that the Company's operations will produce positive
consolidated cash flow in sufficient amounts to service the Senior Notes and to
pay cash dividends on the Preferred Shares. Failure to raise and generate
sufficient funds may require the Company to delay or abandon some of its planned
future expansion or expenditures, which could have a material adverse effect on
the Company's growth and its ability to compete in the telecommunications
services industry.
In addition, the Company's operating flexibility with respect to certain
business matters is, and will continue to be, limited by covenants associated
with the Senior Notes and the Exchange Notes, if issued. Among other things,
these covenants limit the ability of the Company and its subsidiaries to incur
additional indebtedness, create liens upon assets, apply the proceeds from the
disposal of assets, make dividend payments and other distributions on capital
stock and redeem capital stock. In addition, the terms of the Old Preferred
Shares contain certain covenants that may limit the Company's operating
flexibility with respect to the incurrence of indebtedness and issuance of
additional preferred shares. There can be no assurance that such covenants will
not adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the
interest of the Company. The Company was in compliance with all covenants
associated with the Senior Notes as of December 31, 1996.
39
BUSINESS
OVERVIEW
NEXTLINK was founded in 1994 by Mr. Craig O. McCaw, its Chief Executive
Officer and principal equity owner, to provide local facilities-based
telecommunications services with a focus on delivering switched services to
commercial customers. In July 1996, NEXTLINK became one of the first CLECs in
the United States to provide facilities-based local dial tone services under the
Telecom Act, which opened the entire local exchange market to competition. In
each of the markets it serves, NEXTLINK's goal is to become the principal
competitor to the ILEC for its targeted customer base of small and medium sized
businesses by offering a single source for local, long distance and enhanced
communications services.
The Company currently offers a bundled package of switched local dial tone
and long distance services in eight markets and anticipates launching these
services in an additional 14 markets, 13 of which are anticipated to be launched
by the end of June 1997. In addition, the Company offers dedicated transmission
and competitive access services to long distance carriers and end users in 18 of
its markets, including those markets where the Company has not yet launched
switched local dial tone and long distance services. NEXTLINK also offers
enhanced communications services, including a series of IVR products, a virtual
communications center for mobile professionals and workgroups and an interactive
communications tool for the World Wide Web and intranet applications called the
Intermind Communicator.
To date, NEXTLINK has acquired and constructed telecommunications networks
in seven states, with operations currently active or under construction in 22
markets containing an aggregate of approximately four million addressable
business lines. As of December 31, 1996, the Company's operations included
approximately 1,080 route miles of installed and operational high capacity fiber
optic cable with a combined total of approximately 66,000 fiber miles which
connect to 403 buildings and an additional 400 route miles under construction.
The Company seeks to encompass the significant business concentrations in each
area it serves, focusing on direct connections to end-user locations and ILEC
central offices. The Company constructs its networks utilizing high capacity
fiber optic cable, with a backbone density generally ranging from 72 to 240
fibers, and self-healing SONET transmission equipment. In addition, the Company
employs a uniform technology platform for each of its networks that is based on
the Nortel DMS 500 digital local and long distance combination switching system
and associated distribution technology. As of December 31, 1996, the Company had
five operational Nortel DMS 500 switches serving eight markets, had installed
three switches during the first quarter of 1997 and anticipates installing one
switch in the second quarter 1997, allowing the Company to service in the
aggregate 14 additional markets. The Company plans to install a tenth switch in
its NEXTLAB facility, a fully functional model of one of the Company's networks,
which will serve as the Company's network operations control center and a
testing facility for switch software and the Company's products and services.
NEXTLINK has interconnection agreements covering 15 markets and is currently
negotiating two additional interconnection agreements that will cover its seven
additional markets. These agreements provide the Company with the ability to
exchange telecommunications traffic between its customers and the customers of
the ILEC. The Company accelerated its offering of switched local dial tone
services by establishing initial interconnection agreements while longer term
agreements are negotiated. The operating experience gained by the Company under
these agreements gives the Company critical knowledge for negotiating longer
term arrangements, which the Company believes provides it with an advantage over
other CLECs in modifying its ongoing relationships with the ILECs.
40
MARKET OPPORTUNITY
Prior to 1984, AT&T dominated both the local exchange and long distance
marketplace by owning the operating entities that provided both local exchange
and long distance services to most of the U.S. population. While long distance
competition began to emerge in the late 1970s, the critical event triggering the
growth of long distance competition was the breakup of AT&T and the separation
of its local and long distance businesses as mandated by the MFJ in 1984. To
foster competition in the long distance market, the MFJ prohibited AT&T's
divested local exchange businesses, the RBOCs, from acting as a single source
provider of telecommunications services.
The Company believes that a similarly critical event occurred in 1996 with
the passage of the Telecom Act. In most locations throughout the United States,
the ILEC has operated with a virtual monopoly over the provision of most local
exchange services. However, just as competition slowly emerged in the long
distance business prior to the MFJ, competitive opportunities also have slowly
emerged over the last 10 years at the local level.
Industry sources estimate that in 1995 the total revenues from local and
long distance telecommunications services were approximately $175 billion, of
which approximately $101 billion were derived from local exchange services and
approximately $74 billion from long distance services. Although the MFJ relating
to the breakup of AT&T established the preconditions for competition in the
market for long distance services in 1984, the market for local exchange
services has until recently been virtually closed to competition and has largely
been dominated by regulated monopolies. Efforts to open the local exchange
market began in the late 1980s on a state-by-state basis when CAPs began
offering dedicated private line transmission and access services. These types of
services together currently account for approximately 12% ($12 billion) of the
total local exchange revenues. CAPs were restricted, often by state laws, from
providing the other, more frequently used services such as basic dial tone and
switched services, which today account for approximately 88% ($89 billion) of
local exchange revenues.
The Telecom Act and the FCC's issuance of rules for competition,
particularly those requiring the interconnection of all networks and the
interchange of traffic among the ILECs and the CLECs, as well as pro-competitive
policies already developed by state regulatory commissions, have caused
fundamental changes in the structure of the local exchange markets. Although the
U.S. Court of Appeals for the Eighth Circuit has issued a partial stay of the
FCC's rules implementing the local competition provisions of the Telecom Act,
the stay is limited to issues relating to pricing of interconnection and a
CLEC's ability to impose "most favored nation" requirements on ILECs. Both
issues remain subject to scrutiny and oversight by state regulatory commissions.
See "--Regulatory Overview."
These developments create opportunities for new entrants offering local
exchange services to capture a portion of the current monopolists' nearly 100%
market share. The development of facilities-based switched local dial tone
services competition, however, is in its early stages. Even though other CLECs
have begun to offer on-network switched local services, the Company believes
that to date less than 1% of the total business lines in the United States have
changed from an ILEC to a CLEC for such switched services. As competition
develops, the Company anticipates that the market will become increasingly
segmented, with the ILECs and the CLECs focusing on particular customer and
geographic segments.
NEXTLINK believes that the provisions of the Telecom Act requiring the ILECs
to cooperate on a technical level with competitors are as significant as the
Telecom Act's provisions eliminating state laws barring competitors from
entering the local exchange services market. Under the Telecom Act, the FCC and
state regulators are required to ensure that ILECs implement:
- Interconnection--provides competitors the right to connect to the ILECs'
networks at any technically feasible point and to obtain access to its
rights-of-way;
41
- Unbundling of the Local Network--allows competitors to purchase and
utilize components of the ILECs' network selectively;
- Reciprocal Compensation--establishes the framework for pricing between the
CLEC and the ILEC; and
- Number Portability--allows ILEC customers to retain their current
telephone numbers when they switch to a CLEC.
In addition, the Telecom Act provides that ILECs that are subsidiaries of
RBOCs cannot combine in-region, long distance services across local access and
transport areas ("LATAs") with the local services they offer until they have
demonstrated that they have complied with certain regulatory requirements
relating to local competition. See "--Regulatory Overview." The Company believes
it will have an opportunity to gain market share in certain markets by combining
local and long distance services in a single offering to its customers before
that market's ILEC, if it is a subsidiary of a RBOC, is permitted to do so.
BUSINESS STRATEGY
The Company has built an end user-focused, locally oriented organization
dedicated to providing a broad range of products and services at competitive
prices primarily to small and medium sized businesses. The key components of the
Company's strategy to maximize penetration of its targeted customer base are:
FOCUS ON SMALL AND MEDIUM SIZED BUSINESSES. The Company primarily
focuses marketing efforts for its switched local, long distance and enhanced
communications services on small and medium sized businesses and
professional groups with 10 to 50 business lines. The Company's market
research indicates that these customers prefer a single source for all of
their telecommunications requirements, including products, billing,
installation, maintenance and customer service. The Company has chosen to
focus on this segment, based on its expectations that higher gross margins
will generally be available on services provided to these customers, as
compared with larger businesses, and that ILECs may be less likely to apply
significant resources towards retaining these customers. The Company expects
to attract these customers through a direct sales effort by offering: (i)
bundled facilities-based local dial tone and resold long distance services,
as well as the Company's enhanced communications services; (ii) a 10% to 15%
discount to comparable pricing by the ILEC, depending on the individual
market; and (iii) responsive customer service and support provided on a
local level.
DEVELOP A DIRECT SALES FORCE AND A CUSTOMER CARE ORGANIZATION. NEXTLINK
is building a highly motivated and experienced direct sales force and
customer care organization that is designed to establish a direct and
personal relationship with its customers. Salespeople are given incentives
through a commission structure that targets 40% of a salesperson's
compensation to be based on performance. To ensure customer satisfaction,
each customer will have a single point of contact for customer care who is
responsible for solving problems and responding to customer inquiries.
Management believes that the quality of its sales force and the
responsiveness of its customer care organization will help to attract and
retain customers and provide a key competitive advantage in competing with
the ILEC in the local exchange market.
STANDARDIZE PROCESSES TO ACCELERATE REVENUE GROWTH. The Company
believes that the immediate challenge for CLECs will be developing the
ability to implement effective provisioning systems, which include the
complex process of transitioning ILEC customers to the Company's switched
local dial tone services. Accordingly, the Company has begun to identify and
will focus, as a key competitive strategy, on implementing best provisioning
practices in each of its markets that will provide for rapid and seamless
transitions of customers from the ILEC to the Company. To support
42
the provisioning of its services, the Company has begun a long-term
development program relating to a comprehensive information technology
platform geared toward delivering information and automated ordering and
provisioning capability directly to the end-user as well as to the Company's
internal staff. The Company believes that these practices and its
comprehensive information technology platform, as developed, will provide
the Company with a long-term competitive advantage and allow it to implement
more rapidly switched local dial tone services in its markets and to shorten
the time between the sale of its services and the generation of revenues.
DEVELOP HIGH CAPACITY NETWORKS WITH BROAD MARKET COVERAGE. NEXTLINK has
and intends to continue to approach network design with a long-term view
focusing on three key elements. First, the Company designs and builds its
networks to provide extensive coverage of principal business concentrations,
featuring direct physical connection of the Company's network to a high
percentage of the commercial buildings and a majority of the ILEC central
offices. This broad coverage is expected to result in a higher proportion of
traffic that is both originated and terminated on the Company's networks,
which should provide higher long-term operating margins. Second, the Company
constructs high capacity networks that utilize large fiber bundles capable
of carrying high volumes of voice, data, video and Internet traffic as well
as other high bandwidth services. This strategy should reduce potential
"overbuild" costs and provide added network capacity as the Company adds
high bandwidth services in the future. Third, the Company employs a uniform
technology platform based on Nortel DMS 500 switches, associated
distribution technology and other common transmission technologies enabling
the Company to (i) deploy features and functions quickly in all of its
networks, (ii) expand switching capacity in a cost effective manner and
(iii) lower maintenance costs through reduced training and spare parts
requirements. The Company also utilizes unbundled loops from the ILEC to
connect the Company's switch and network to end user buildings and is
evaluating other alternatives for building connectivity, including wireless
connections, for the "last mile" of transport.
OFFER ENHANCED COMMUNICATIONS SERVICES. NEXTLINK offers customers
value-added services that are not dependent on the Company's local
facilities. As a result, the Company believes it can establish a customer
base in a market in advance of constructing network facilities as well as
offer additional services in markets where the Company has constructed
facilities. These enhanced communications service offerings include: (i) IVR
services, which provide an interface between NEXTLINK's clients and their
customers for a variety of applications; (ii) Xpress, NEXTLINK's virtual
communications center that allows mobile professionals and workgroups to
access a suite of commonly used communications services from any telephone
in the public switched network; and (iii) the Intermind Communicator, an
interactive communications tool for the World Wide Web and intranet
applications. The Company plans to focus the marketing of its enhanced
communications services in all of its markets, as well as in areas of
planned network expansion. This should increase the Company's visibility,
develop customer relationships and assist the Company in attracting local
exchange customers when it operates networks in these markets.
CONTINUE MARKET EXPANSION. The Company currently operates or is
constructing networks in 22 markets in seven states. These markets, in the
aggregate, have approximately four million addressable business lines. The
Company's goal is to add or expand markets and market clusters in order to
increase its market potential to approximately 11 million addressable
business lines by the end of 1998. NEXTLINK believes that its strategy of
operating its networks in clusters (i) offers substantial advantages
including economies of scale in management, marketing, sales and network
operations, (ii) enables the Company to capture a greater percentage of
regional traffic and to develop regional pricing plans, because the Company
believes that a significant level of traffic terminates within 300 miles of
its origination and (iii) provides opportunities in smaller markets and
those markets that are too small to develop on a stand alone basis. The
Company anticipates continuing to expand into new geographic areas as
opportunities arise either through building new
43
networks, acquiring existing networks or acquiring capacity. Most recently
the Company acquired an 80 mile fiber optic network located in Los Angeles
and six adjacent markets and reached an agreement in principle to acquire an
existing operational fiber optic network in downtown Philadelphia in order
to extend its existing network in Pennsylvania.
The Company believes that a critical factor in the successful implementation
of the Company's strategy is the quality of its management team and their
extensive experience in the telecommunications industry. The Company has built a
management team that it believes is well suited to challenge the dominance of
the ILECs in the local exchange market. Mr. Craig O. McCaw, the Company's Chief
Executive Officer, and Mr. James F. Voelker, the Company's President, each has
in excess of 17 years of experience in leading companies in competitive segments
of the telecommunications industry. In addition, the Company has recruited
experienced entrepreneurs and industry executives to head each of its operating
subsidiaries, many of whom have previously built and led their own start-up
telecommunications businesses. Many of the Company's mid-level and senior
managers were associated with Mr. McCaw during the early years at McCaw Cellular
Communications, Inc. (now known as AT&T Wireless Services, Inc.), where the
organizational themes included an unyielding focus on the customer, developing a
first-class, differentiated product offering, decentralized management
decision-making and building a high capacity system.
THE COMPANY'S TELECOMMUNICATIONS SERVICES
LOCAL AND LONG DISTANCE SERVICES
The Company commenced the offering of switched local dial tone and long
distance services in seven markets on July 4, 1996, and in an eighth market on
January 1, 1997. The Company expects to commence the offering of switched local
dial tone and long distance services in its remaining 14 markets later in 1997.
The Company focuses its product offering on basic telecommunications services,
which it believes are the core of local exchange services. Pricing, which is
determined and implemented by the Company's operating subsidiary in each local
market, has been generally 10% to 15% lower than the pricing for comparable
local services from the ILEC. The Company's current product offering includes:
- Standard dial tone, including touch tone dialing, 911, and operator
assisted calling;
- Multi-trunk services, including direct inward dialing (DID) and direct
outward dialing (DOD);
- Long distance service, including 1+, 800/888 and operator services;
- Voice messaging with personalized greetings, send, transfer, reply and
remote retrieval capabilities; and
- Directory listings and assistance.
Currently, the Company offers CAP services in 18 of its markets, focusing on
long distance carriers and the private line needs of high volume customers. In
addition, data services that are currently offered by the Company include
Ethernet, TOKEN rings, and Fiber Distributed Data Interface (FDDI).
The Company's CAP services, which are used as both primary and back-up
circuits, fall into three principal categories: (i) special access circuits that
connect end-users to long distance carriers; (ii) special access circuits that
connect long distance carriers' facilities to one another; and (iii) private
line circuits that connect several facilities owned by the same end-user.
44
ENHANCED COMMUNICATIONS SERVICES
NEXTLINK's IVR platform allows a consumer to dial into a computer-based
system using a toll-free number and a touch tone phone, and, by following a
customized menu, to access a variety of information and to leave simultaneously
a profile of the caller behind for use by either NEXTLINK or its clients.
Currently, NEXTLINK provides four types of IVR services:
- LeaveWord--prompts the consumer to leave messages of any length or
complexity, ranging from catalog requests and contest entries to specific
product questions and surveys;
- Dealer Locator--helps a consumer to locate the nearest dealer of the
client's products by instantly identifying the consumer's area and
responding with the names, addresses and phone numbers of the client's
locations within any desired mileage radius;
- Automated Order Entry--allows consumers to purchase products using the
interactive phone service 24-hours a day, with real-time order and credit
card confirmation as well as arranging for delivery of the new item to the
consumer's desired address; and
- Interactive Call Center--provides the consumer with a menu of selections
that include Dealer Locator, Automated Order Entry and other functions,
including receiving a catalog, registering the warranty of a product,
contest entry and an option for callers to be forwarded to a live
operator.
NEXTLINK also provides a virtual communications center for mobile
professionals and workgroups through its Xpress service, which offers a suite of
personal communications services. These services are made available through a
specialized personal telephone number. The key services provided by this center
are the following:
- Follow-Me--instructs the communications center to forward any calls to an
Xpress number to a particular local telephone number;
- Voice Messaging--allows subscribers to receive, send, keep, transfer,
instantly reply to or request future delivery for voice messages;
- Call-out---enables subscribers to make calls from the communications
center without hanging up between calls or dialing another PIN number;
- Paging--notifies subscribers via pager of new and urgent messages;
- Caller ID--provides the ability to capture the telephone number of anyone
who calls the subscriber, which is also displayed on the subscriber's
pager;
- Fax Messaging--stores an incoming fax and delivers it to the nearest fax
machine designated by the subscriber when the subscriber calls in to
retrieve it; and
- Teleconferencing--handles all teleconferencing needs through a
teleconferencing operator.
The Intermind Communicator is a new category of interactive communications
software for the World Wide Web and intranet applications. The Intermind
Communicator provides functions similar to the Company's IVR services for use on
the Internet. The Intermind Communicator utilizes hypercommunications, which is
a special type of publish/subscribe application. The Company markets the
Intermind Communicator to businesses that are seeking to deliver and receive
(that is, "push and pull") information over the Internet. The Intermind
Communicator allows these businesses to interact with end users by providing
requested information and simultaneously receiving specific communications
anonymously from that end user.
The Company has developed its enhanced communications service offerings
through acquisitions, marketing agreements and equity investment. In June 1995,
the Company acquired certain enhanced communications services assets from City
Signal, Inc. These assets are used by the Company to offer its
45
Xpress service. In September 1995, the Company acquired a fully operational
interactive voice response business through which the Company offers its IVR
services. In June 1996, the Company invested in the preferred stock of Intermind
Corporation, an Internet communications tool software developer. Simultaneously,
the Company executed an exclusive marketing agreement, which provides that the
Company is the exclusive telecommunications company authorized to market the
Intermind Communicator in each of the Company's current geographic service
areas. The Company anticipates that it will continue to explore other enhanced
communications services opportunities and may acquire, invest in or establish
marketing relationships with, additional service providers in the future that
support its overall business and marketing strategies.
SALES AND CUSTOMER CARE
OVERVIEW
The Company utilizes a two-pronged sales strategy in each of its markets.
The initial sales efforts in the Company's markets are for switched local dial
tone and long distance services focusing on small and medium sized businesses
and professional groups with 10 to 50 business lines. The Company's market
research indicates that these customers prefer a single source for all of their
telecommunications requirements, including products, billing, installation,
maintenance and customer service. The Company utilizes a direct sales effort
offering combined local and long distance services with prices that are
generally at a 10% to 15% discount from the ILEC. Providing a combination of
local and long distance services provides the Company's customers a level of
convenience that has been generally unavailable since the break-up of AT&T. The
Company is also marketing its enhanced communications services through a
separate direct sales force in each market, which is expected to increase the
number of customers for all of NEXTLINK's telecommunications services in that
market at a faster rate. In addition, the Company is continuing its sales
efforts for traditional CAP services to long distance carriers and large
commercial users.
SALES FORCE
The Company is building a highly motivated and experienced direct sales
force and customer care organization that is designed to establish a direct and
personal relationship with its customers. The Company seeks to recruit
salespeople with strong sales backgrounds, including salespeople from long
distance companies, telecommunications equipment manufacturers and the ILECs.
Salespeople are given incentives through a commission structure that targets 40%
of a salesperson's compensation to be based on performance. With respect to
traditional CAP services, the Company currently utilizes a national sales force
to establish and expand long distance company access service sales. Sales
efforts for long distance carriers are centralized in order to provide a single
point of contact for these customers.
The Company anticipates that its enhanced communications service offerings
will continue to be sold across the country by its existing national sales force
for these services. The Company has also augmented these efforts with a
separate, targeted, locally based sales force in each of its markets. The
Company believes that this two-pronged approach to each market will provide
revenues that are incremental to its local exchange operations.
CUSTOMER CARE
The Company is augmenting its direct sales approach with superior customer
care and support through locally based customer care representatives. The
Company is structuring its customer care organization in such a manner that each
customer will have a single point of contact for customer care who is
responsible for solving problems and responding to customer inquiries. The
Company seeks to provide a customer care group that has the ability and
resources to respond to and resolve customer
46
problems as they arise. The Company believes that customer care representatives
will be the most effective if they are based in the community in which the
Company is offering services.
NETWORK DEVELOPMENT
GENERAL
In developing its networks, the Company has executed a strategy of (i)
acquiring fully or partially constructed fiber optic networks and (ii) designing
and constructing high capacity fiber optic networks with broad coverage. The
Company is constantly evaluating markets as locations for expansion of the
Company's current networks and the development of additional networks. The
decision to build, acquire or utilize capacity of an existing network is not
based on any single factor, but on a combination of a number of factors
including:
- demographic, economic, competitive and telecommunications demand
characteristics of the market and the surrounding markets;
- availability of rights-of-way;
- actual and potential competitors; and
- potential for the Company to cluster additional networks in the region.
If a particular market targeted for development is deemed to present an
attractive market opportunity, the Company determines whether acquisition
opportunities are available. In some cases a large network can be acquired, and
in other cases a small existing network can serve as a starting point for market
entry. If the Company decides to build a new network, or substantially expand a
small acquired system, the Company designs a proposed new or expanded network
that can connect a large number of businesses, long distance carriers points of
presence and the ILEC's principal central offices in the area to be served,
utilizing existing rights-of-way and/or rights-of-way that the Company will
construct. Concurrently, the Company's market development personnel visit the
location of the proposed network to begin discussions with city officials,
right-of-way providers, potential end-users and long distance companies.
Based on the data developed during these preliminary studies and visits, the
Company develops detailed financial estimates of the costs of constructing a
network, including the cost of fiber optic cable, transmission and other
electronic equipment, as well as costs related to switching, engineering,
building entrance requirements and right-of-way acquisition. If the financial
estimates are satisfactory to the Company, the Company's market development
personnel prepare a detailed business and financial plan for the proposed
network, including competitive, regulatory and right-of-way analyses. Based upon
its review of these analyses the Company determines whether to proceed. The
Company anticipates continuing the expansion of its networks into new markets
utilizing the market development analysis described above. The Company will seek
to continue to expand its operations in states where it has established one or
more networks, by continuing to construct or acquire networks in adjacent areas
to leverage its existing networks, switches and telecommunications equipment,
thereby establishing a cost effective and operationally efficient cluster of
networks in various geographic regions.
47
THE COMPANY'S NETWORKS
The Company currently operates or is constructing networks in 22 markets in
seven states. The following table provides certain information on the Company's
networks.
AS OF DECEMBER 31, 1996
-------------------------------------------
ROUTE FIBER BUILDINGS
STATE/MARKET LAUNCH DATE(1) MILES(2) MILES(3) CONNECTED(4)
- -------------------------------------------------------- ------------------- ----------- ----------- -----------------
Tennessee............................................... 384 32,342 260
MEMPHIS............................................... July 1996
NASHVILLE............................................. July 1996
Pennsylvania............................................ 357 20,219 37
ALLENTOWN............................................. July 1996
HARRISBURG............................................ July 1996
LANCASTER............................................. July 1996
READING............................................... July 1996
SCRANTON/WILKES BARRE................................. June 1997
PHILADELPHIA(5)....................................... June 1997
Washington.............................................. 1 152 16
SPOKANE............................................... July 1996
Ohio.................................................... 17 2,499 2
CLEVELAND............................................. April 1997
COLUMBUS.............................................. April 1997
AKRON................................................. December 1997
Utah.................................................... 10 1,440 10
SALT LAKE CITY........................................ January 1997
PROVO/OREM............................................ April 1997
Nevada.................................................. 311 9,394 78
LAS VEGAS............................................. April 1997
California(6)........................................... 80 5,609 8
LOS ANGELES........................................... June 1997
ANAHEIM............................................... June 1997
COSTA MESA............................................ June 1997
GARDEN GROVE.......................................... June 1997
IRVINE................................................ June 1997
ORANGE................................................ June 1997
SANTA ANA............................................. June 1997
----- ----------- ---
Total............................................... 1,160 71,655 411
----- ----------- ---
----- ----------- ---
- ------------------------
(1) Actual/Anticipated launch date of local dial tone services.
(2) Route miles refers to the number of miles of the telecommunications path in
which the Company-owned or leased fiber optic cables are installed.
(3) Fiber miles refers to the number of route miles installed along a
telecommunications path, multiplied by the Company's estimate of the number
of fibers along that path.
(4) Represents on-net building connections.
(5) Acquisition anticipated to be completed during the second quarter of 1997.
(6) Acquisition completed in February 1997.
48
TENNESSEE. In January 1995, the Company acquired from City Signal, Inc. an
extensive, fully operational network in Memphis, Tennessee and another network
then under development in Nashville, Tennessee. Since the date of acquisition,
the Memphis network has provided dedicated private line services, long distance
carrier access services, high speed data transmission, and video conferencing
and, beginning in July 1996, local dial tone and long distance services. The
Company's Memphis network currently is the most mature and extensive of the
Company's networks and provides a model for the route design of the networks the
Company envisions for the other areas it serves. In Nashville, the initial
backbone network was completed in December 1995, and the Company also began
providing local dial tone and long distance services to customers in this area
in July 1996.
PENNSYLVANIA. In April 1995, the Company began construction of an extensive
regional fiber optic network connecting Harrisburg, Reading, Lancaster, and
Allentown, Pennsylvania. The backbone network connecting these four areas and
covering 21 counties was completed in the first quarter of 1996. The Company
believes that this network provides it with the foundation for significant
regional service offerings. The Company commenced offering switched local dial
tone services to customers utilizing its Pennsylvania networks in July 1996. The
Company recently completed an extension of the network to the Scranton/Wilkes
Barre market. The Company recently entered into an agreement in principle which
will enable it to extend this network into downtown Philadelphia during 1997.
WASHINGTON. In April 1995, the Company acquired a local exchange service
reseller located in Spokane, Washington. Currently serving approximately 880
business customers with approximately 7,300 lines serving the central business
district of Spokane, the Company completed the construction of a fiber optic
ring in the downtown area to provide facilities-based local telecommunications
services directly to these customers. The Company commenced offering switched
local dial tone services to customers utilizing its Spokane network in July
1996. The Company is in the process of migrating its current resale customers to
the fiber optic network as portions of that network are completed.
OHIO. In January 1996, the Company acquired existing fiber optic networks
and switching facilities in the downtown business centers of Cleveland, Columbus
and Akron, Ohio. The Company's networks in Ohio currently are limited to the
downtown cores, but the Company will be expanding the route and fiber miles of
each of these networks during 1997. In addition, the Company is currently
replacing the switches that were acquired in Ohio with two Nortel DMS 500
switches, the Company's standard switching platform. The Company anticipates
that it will begin offering switched local and long distance services in
Cleveland and Columbus during the second quarter of 1997 and in Akron during the
fourth quarter of 1997.
UTAH. In March 1996, the Company admitted a 10% member to the subsidiary
conducting the Company's operations in Utah, which member provided access to its
rights-of-way, franchises, and other valuable services in order for the Company
to commence the construction of a fiber optic network in Salt Lake City and the
Wasatch Valley, which the Company believes is among the fastest growing areas in
the United States. Construction of the downtown fiber optic ring began in the
second quarter of 1996. The switching facilities were installed during the
fourth quarter of 1996 with switched local and long distance service starting
January 1, 1997. The Company recently executed a right-of-way agreement which
will enable the expansion of this network to Provo and Orem during the first
quarter of 1997.
NEVADA. In April 1996, the Company became a 40% member in, and manager of,
a joint venture that will provide local telecommunications services in Las
Vegas, which the Company believes is one of the fastest growing areas in the
United States. The Company has provided a license to the joint venture to
operate under the name NEXTLINK Nevada. The joint venture currently provides
competitive access services over a fiber optic network covering approximately
300 route miles throughout Las Vegas. The Company will provide strategic
planning and management of the business for a ten year period through one of its
subsidiaries. The Company anticipates that it will begin offering switched local
and long distance services in this market during the second quarter of 1997.
49
CALIFORNIA. On February 4, 1997, the Company acquired substantially all the
assets of Linkatel, a Los Angeles-based competitive access telecommunications
provider. At the time of the acquisition, Linkatel operated an 80 mile fiber
optic telecommunications network covering several markets from the downtown Los
Angeles area to the City of Irvine in Orange County. The Los Angeles/Orange
County area represents one of the largest telecommunications markets in the
United States, with over 2 million addressable business lines. The Company
assumed management of this operation in November 1996. As part of the assets
acquired, the Company obtained access to approximately 250 route miles of right-
of-way, of which 80 miles have been completed, and the Company is currently
constructing an additional 110 miles. The network is currently providing
competitive access services with the launch of switched local and long distance
services scheduled for June 1997.
NETWORK ARCHITECTURE
DESIGN
The Company builds or acquires its own fiber optic networks because it
believes that facilities-based full service telecommunications companies whose
networks are directly connected to their customers will have the ability to
respond more quickly to customer needs for capacity and services. Moreover, the
Company believes that facilities-based carriers develop a more knowledgeable,
cooperative relationship with their customers, improving their ability to
provide new services and other telecommunications solutions, which should result
in higher long-term operating margins.
The Company believes that the future telecommunications market will be an
interconnected network of networks. The Company believes that calls will flow
between local networks, with customers selecting their service provider based on
high quality and differentiated products, responsive customer service and price.
In some circumstances, depending in part upon regulatory conditions, the Company
will utilize its own network for one portion of a call and resell the services
of another carrier for the remaining portion of a call. In other instances, both
the origination and termination of calls will take place on the Company's
networks. The Company's networks are designed to maximize connectivity directly
with significant numbers of business end-users, and to easily interconnect and
provide a least-cost routing flow of traffic between the Company's network and
other networks in the marketplace.
In general, the Company seeks to build wide, expansive networks, rather than
a simple core ring in a downtown metropolitan area. This construction focus is
one factor that distinguishes the Company from traditional CAPs, which primarily
focus on connecting high volume long distance users with their selected long
distance carrier. Because the Company's product focus is much broader than
traditional CAPs, its construction efforts reflect the Company's goal of
connecting to a greater number of customers, including those without
particularly high long distance traffic volumes. The Company believes that this
type of broad coverage of the markets in which it operates will result in the
following advantages:
- an increased number of buildings that can be directly connected to the
Company's network, which should maximize the number of businesses to which
the Company can offer its services;
- a higher volume of telecommunications traffic both originating and
terminating on the Company's network, which should result in improved
operating margins;
- the ability to leverage its investment in high capacity switching
equipment and electronics; and
- the opportunity for the Company's network to provide backhaul carriage for
other telecommunications service providers such as long distance and
wireless carriers.
The Company seeks to build high capacity networks using a backbone density
ranging between 72 and 240 strands. A single pair of glass fibers on the
Company's networks can currently transmit 32,256 simultaneous voice
conversations, whereas a typical pair of copper wires can currently carry a
maximum of 24 digitized simultaneous voice conversations. Although the ILECs
commonly use copper wire in their
50
networks, the ILECs are currently deploying fiber optic cable to upgrade
portions of their copper-based networks. The Company believes that installing
high count fiber strands will allow the Company to offer a higher volume of
voice and broadband services without incurring significant additional
construction costs.
CONSTRUCTION
The construction period of a new network varies depending upon the scope of
the activities, such as the number of backbone route miles to be installed,
whether the construction is underground or aerial, whether the conduit is in
place or requires construction, the initial number of buildings targeted for
connection to the network backbone and the general configuration for its
deployment. After installing the network backbone, extensions to additional
buildings and expansions to other areas of a market are evaluated, based on
detailed assessments of market potential.
The Company's network backbones are installed in conduits that are either
owned by the Company or leased from third parties. The Company leases conduit or
pole space from entities such as utilities, railroads, long distance carriers,
state highway authorities, local governments and transit authorities. These
arrangements are generally for multi-year terms with renewal options, and are
nonexclusive. The availability of these arrangements is an important part of the
Company's evaluation of a market. Cancellation of any of the Company's material
right-of-way agreements could have an adverse effect on the Company's business
in that area and could have a material adverse effect on the Company.
Office buildings are connected primarily by network backbone extensions to
one of a number of physical rings of fiber optic cable, which originate and
terminate at the Company's central node. Alternatively, the Company may access
an end-user's location through interconnection with the ILEC's central office.
The Company is also evaluating other alternatives for building connectivity,
including wireless connections, for the "last mile" of transport. Signals are
generally sent through a network backbone to the central node simultaneously on
both primary and alternate protection paths. Most buildings served have a
discrete Company presence (referred to as a "remote hub") located in the
building. Within each building, Company-owned internal wiring connects the
remote hub to the customer premises. Customer equipment is connected to
Company-provided electronic equipment generally located in the remote hub, where
customer transmissions are digitized, combined and converted to an optical
signal. The traffic is then transmitted through the network backbone to the
Company's central node where originating traffic is reconfigured for routing to
its ultimate destination. After completion of network construction, the Company
employs maintenance and line crews that are responsible for responding to
outages and routine maintenance of the network.
UNIFORM TECHNOLOGY PLATFORM
The Company is implementing a consistent technology platform based on the
Nortel DMS 500 switch throughout its networks. Unlike a traditional long
distance or local switch, the Nortel DMS 500 switch will enable the Company to
provide local and long distance services from a single platform. The Company
believes that having a standardized switch platform will enable it to (i) deploy
features and functions quickly in all of its networks, (ii) expand switch
capacity in a cost effective manner and (iii) lower maintenance costs through
reduced training and spare parts requirements. In addition, the scalability and
capacity of these switches will allow the Company to switch calls from more than
one market, which enhances the Company's ability to use a clustered approach to
the building of its networks.
The Company also is establishing a uniform transmission technology utilizing
SONET design and standardized digital access and cross connect systems ("DACCS")
and other ancillary transmission equipment. DACCS provide the ability to
aggregate and disaggregate capacity along the fiber optic network. Using the
DACCS, the capacity of 24 DS-0s can be aggregated to form a DS-1 and, again
through the DACCS, 28 DS-1s can be aggregated to form a DS-3.
51
The Company has begun construction of a test site that will house a fully
functional Nortel DMS 500 switch in a configuration that simulates the working
environment of the Company's operational switches, distribution and ancillary
equipment. Located in Dallas, Texas, this site, which will be referred to as
NEXTLAB, will operate separate and apart from the Company's operational switches
as both the Company's network operations control center (NOCC) and as a testing
facility. NEXTLAB will provide the Company with a means to test switch software
and service configurations prior to their release on the Company's networks. The
Company believes that this process should: (i) minimize network outages; (ii)
save network operating and training costs; and (iii) improve levels of customer
service.
IMPLEMENTATION OF LOCAL TELECOMMUNICATIONS
A company preparing to offer local exchange services not only requires an
installed switch, but also must have numerous network and routing arrangements
in place. NEXTLINK has established all of these arrangements for Pennsylvania,
Tennessee, Washington, Utah, and Ohio. These key elements include:
INTERCONNECTION. The Company has executed interconnection agreements for
all of its current operating networks: in Nashville and Memphis, Tennessee, with
BellSouth; in Harrisburg, Reading, Lancaster and Allentown, Pennsylvania, with
Bell Atlantic; and in Spokane, Washington, and Salt Lake City and Provo/Orem,
Utah with US West. In each of the Tennessee, Pennsylvania and Washington
markets, the Company began providing switched local dial tone services on July
4, 1996, and the Company was the first CLEC to interconnect with the ILEC for
local traffic. The Company began providing local switched dial tone services in
Salt Lake City on January 1, 1997. The Company has executed interconnection
agreements with Ameritech for Cleveland, Columbus and Akron, Ohio, with
Sprint/Centel for Las Vegas, Nevada. The Company anticipates executing two
interconnection agreements with the ILECs for Los Angeles and the surrounding
cluster of markets in the second quarter of 1997. In addition, the Company
believes that interconnection arrangements between the ILECs and other CLECs or
the Company will be in place in other markets that the Company may enter. The
Company likely will initially "piggy-back" on these other arrangements while
pursuing more favorable long-term arrangements.
The Company's approach to interconnection has been a two-step process. To
accelerate its launch of switched local dial tone services, the Company has
entered into initial interconnection arrangements that allow for the immediate
exchange of local traffic with the ILEC. These arrangements allow the Company to
commence service immediately and then work to optimize its arrangements with the
ILEC. The Company's ILEC agreements are now being re-negotiated under Sections
251 and 252 of the Telecom Act. The actual operating experience gained through
the Company's initial interconnection agreements gives the Company critical
knowledge for negotiating longer term arrangements, and the Company believes
this knowledge provides it with an advantage over other CLECs in modifying these
relationships with the ILEC. In some cases, where agreement on a long-term
arrangement cannot be reached, the Company will pursue binding arbitration
before the state utility commissions as provided under the Telecom Act. Should
it choose to do so, the Company has the right to initiate arbitration in its
four initial operating markets in the first quarter of 1997. There can be no
assurance, however, that the Company will be able to negotiate longer term
relationships on terms and conditions satisfactory to the Company or that the
arbitrations will result in rates, terms and conditions satisfactory to the
Company.
TELEPHONE NUMBERS. The Company has been offered interim number portability
arrangements by the ILEC in each of its markets, and the Company also is engaged
in industry negotiations to establish permanent number portability. Number
portability arrangements will allow ILEC customers to retain their telephone
numbers when changing local exchange service carriers. In addition, the Company
has been allocated multiple blocks of 10,000 telephone numbers for each of its
Tennessee, Washington, Pennsylvania, Ohio, Utah and Las Vegas networks for use
in assigning new numbers to its customers. These numbers, known as NXX numbers,
are the first three digits of a customer's seven digit local phone number. In
each of these cases, the NXX is fully loaded into the Local Exchange Routing
Guide or LERG,
52
which instructs ILECs and other carriers to send a call using a NEXTLINK NXX to
the appropriate NEXTLINK switch, for delivery to the NEXTLINK customer.
SS7 POINT CODES. For each of the Company's switches, the Company has been
assigned Point Codes for use with the advanced signaling system known as SS7
which is a separate or "out of band" communications channel used between
telecommunications carriers to set up and control traffic on and between
networks. The Company has designed its network to fully utilize SS7 signaling,
which improves call processing times and frees capacity for voice, data, and
video transmissions. The Company has entered into an agreement with a national
SS7 service provider that will allow the Company to utilize SS7 signaling in its
current and new markets nationwide.
REGULATORY OVERVIEW
OVERVIEW
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC generally exercises jurisdiction over the facilities
of, and services offered by, telecommunications common carriers that provide
interstate or international communications. The state regulatory commissions
retain jurisdiction over the same facilities and services to the extent they are
used to provide intrastate communications. Local governments sometimes impose
franchise or licensing requirements on CAPs and local exchange carriers and
regulate street opening and construction activities.
The Telecom Act imposes on ILECs certain interconnection obligations that,
taken together, grant competitive entrants such as the Company what is commonly
referred to as "co-carrier status." In addition, the Telecom Act generally
preempts state or local legal requirements that prohibit or have the effect of
prohibiting any entity from providing telecommunications service. The Telecom
Act allows state regulatory authorities to continue to impose competitively
neutral requirements designed to promote universal service, protect public
safety and welfare, maintain quality of service and safeguard the rights of
consumers. The Telecom Act also preserves the ability of state and local
authorities to manage and require compensation for the use of public
rights-of-way by telecommunications providers including CAPs and other
competitors of the ILECs in the local market.
It is anticipated that co-carrier status and the preemption of state and
local prohibitions on entry could permit the Company to become a full service
provider of switched telecommunications services anywhere in the United States.
The following table summarizes the interconnection rights granted by the Telecom
Act that are most important to the achievement of this goal and the Company's
belief as to the anticipated effect of the new requirements, if properly
implemented.
ISSUE DEFINITION ANTICIPATED EFFECT
- --------------------- -------------------------------------------- --------------------------------------------
Interconnection Efficient network interconnection to Allows competitive telecommunications
transfer calls back and forth between ILECs provider to service and terminate calls to
and competitive networks (including 911, 0+, customers not directly connected to its
directory assistance, etc.) networks
Local Loop Allows competitors to selectively gain Reduces the capital and operating costs of a
Unbundling access at cost-based rates to ILEC wires competitive telecommunications provider to
from central offices to customer premises serve customers not directly connected to
its networks
Reciprocal Mandates reciprocal compensation for local Improves the competitive telecommunications
Compensation traffic exchange between ILECs and provider's margins for local service
competitors
53
ISSUE DEFINITION ANTICIPATED EFFECT
- --------------------- -------------------------------------------- --------------------------------------------
Number Portability Allows customers to change local carriers Allows customers to switch to competitive
without changing numbers; true portability telecommunications provider's local service
allows incoming calls to be routed directly without changing phone numbers
to a competitor. Interim portability allows
incoming calls to be routed through the ILEC
to a competitor at the economic equivalent
of true portability
Access to Phone Mandates assignment of new telephone numbers Allows competitive telecommunications
Numbers to competitive telecommunications provider's providers to provide telephone numbers to
customers new customers on the same basis as the ILEC
While the interconnection rights established in the Telecom Act are a
necessary prerequisite to the introduction of full local competition, they must
be properly implemented to be effective. Significant implementation issues
remain to be resolved before the barriers to entry into the local telephone
business are sufficiently lowered to permit widespread competitive entry. See
"Federal Legislation" below for a more complete explanation of the potential
effect of the Telecom Act on the Company's business.
FEDERAL LEGISLATION
The Telecom Act, enacted on February 8, 1996, substantially revised the
Communications Act of 1934. The Telecom Act establishes a regulatory framework
for the introduction of local competition throughout the United States. Among
other things, the Telecom Act preempts any state or local government from
prohibiting any entity from providing telecommunications service. This provision
sweeps away prohibitions on entry found in almost half of the states in the
country at the time the Telecom Act was passed.
The Telecom Act also establishes a dual federal-state regulatory scheme for
eliminating other barriers to competition faced by competitors to the ILECs and
other new entrants into the local telephone market. Specifically, the Telecom
Act imposes on ILECs certain interconnection obligations to be implemented by
FCC regulations. The Telecom Act contemplates that states will apply the federal
regulations as they oversee interconnection negotiations between ILECs and their
new competitors.
The FCC has significant responsibility in the manner in which the Telecom
Act will be implemented. The details of the rules adopted by the FCC
implementing the Telecom Act's requirements will have a significant effect in
determining the extent to which barriers to competition in local services are
removed, as well as the time frame within which such barriers are eliminated.
The FCC may also grant ILECs increased pricing flexibility to enable them to
respond to competition. To the extent such pricing flexibility is granted, the
Company's ability to compete for certain services may be adversely affected.
The state PUCs also have significant responsibility in implementing the
Telecom Act. Specifically, the states have authority to establish
interconnection pricing, including unbundled loop charges, reciprocal
compensation and wholesale pricing. The states are also charged under the
Telecom Act with overseeing the arbitration process for resolving
interconnection negotiation disputes between CLECs and the ILECs.
In addition, the Telecom Act provides that ILECs that are subsidiaries of
RBOCs cannot combine in-region, long distance services across local access and
transport areas ("LATAs") with the local services they offer until they have
demonstrated that (i) they have entered into an approved interconnection
54
agreement with a facilities-based CLEC or that no such CLEC has requested
interconnection as of a statutorily determined deadline, (ii) they have
satisfied a 14-element checklist designed to ensure that the ILEC is offering
access and interconnection to all local exchange carriers on competitive terms
and (iii) the FCC has determined that in-region, inter-LATA approval is
consistent with the public interest, convenience and necessity.
FEDERAL REGULATION
The FCC was granted authority to eliminate tariff and reporting requirements
for non-dominant carriers such as the Company. Acting under that authority, the
FCC has eliminated tariff filing requirements for such carriers providing
interstate long distance services. On February 13, 1997, the United States Court
of Appeals for the District of Columbia granted motions for stay of the FCC
detariffing order pending judicial review of that order. The result of this stay
is that carriers must continue to file tariffs for interstate long distance
services. Regulatory compliance measures remain in place for international
traffic and for access services. In addition, the Telecom Act now requires that
ILECs provide CLECs with physical collocation on rates, terms and conditions
that are just and reasonable, unless the ILEC can demonstrate to state
regulators that physical collocation is not practical. The Company believes that
either physical or virtual collocation of its facilities in a timely fashion for
appropriate rates and terms will accommodate its purposes.
The FCC has taken two actions related to the assignment of telephone
numbers, first in July 1995 mandating that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the RBOCs and a few other ILECs to a neutral entity, and second
in July 1996 adopting a regulatory structure under which a wide range of number
portability issues would be resolved.
On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, long distance companies and state PUCs regarding
several provisions of the Telecom Act. The rules include, among other things,
FCC guidance on: (1) discounts for end-to-end resale of ILEC local exchange
services (which the FCC has suggested should be in the range of 17%-25%); (2)
availability of unbundled local loops and other unbundled ILEC network elements;
(3) the use of Total Element Long Run Incremental Costs ("TELRIC") in the
pricing of these unbundled network elements; (4) average default proxy prices
for unbundled local loops in each state; (5) mutual compensation proxy rates for
termination of ILEC/CLEC local calls; (6) an access charge transition plan that:
(a) leaves access charges in place with respect to situations involving resale
of ILEC local exchange services; (b) leaves access charges in place with respect
to situations involving use of ILEC unbundled switching to provide local
exchange access services except for 25% of the transport interconnection charge
("TIC"); and (c) permits avoidance of access charges only when the ILEC switch
is not utilized; and (7) the ability of CLECs and other interconnectors to opt
into portions of interconnection agreements negotiated by the ILECs with other
parties on a most favored nation (or a "pick and choose") basis.
In a combined Report and Order and Notice of Proposed Rulemaking released on
December 24, 1996, the FCC made changes and proposed further changes in the
interstate access charge structure. In the Report and Order, the FCC removed
restrictions on ILECs' ability to lower access prices and relaxed the regulation
of new switched access services in those markets where there are other providers
of access services. If this increased pricing flexibility is not effectively
monitored by federal regulators, it could have a material adverse effect on the
Company's ability to compete in providing interstate access services. In the
Notice of Proposed Rulemaking, the FCC proposed rules to reform the interstate
access charge rate structure. The FCC also proposed to bring interstate access
rate levels more in line with costs either by granting ILECs levels of increased
pricing flexibility upon demonstrations of increased competition (or potential
competition) in relevant markets or by mandating lower rates regardless of the
level of competition (or through some combination of the two approaches).
55
In its Recommended Decision, the Joint Board recommended that the FCC
establish a federal telecommunications subsidy regime that would probably
significantly expand the current subsidy program. For example, the Recommended
Decision proposes a new subsidy regime for services provided to qualifying
schools and libraries. The Joint Board recommended the adoption of a cap of
$2.25 billion per year for the program. The Joint Board also recommended the
expansion of federal subsidies to low-income consumers of telecommunications
services. In addition, the Telecom Act requires the FCC to adopt a subsidy
scheme for the provision of telecommunications services to rural health care
providers. The Joint Board recommended that the FCC require all providers of
interstate telecommunications services, including in all likelihood the Company,
to pay for these and other subsidy programs based on their gross revenues from
the sale of telecommunications services minus payments made to other
telecommunications carriers. The FCC must establish final universal service
rules by May 8, 1997. The Company cannot at this time predict the level of its
mandatory contribution, but the Company believes that it will likely be a
significant expenditure if the FCC adopts the Joint Board recommendations.
The Company anticipates that the FCC will initiate a number of additional
proceedings, of its own volition and as a result of requests from CLECs and
others, as a result of the Telecom Act. Such proceedings will further define and
construe the Telecom Act's terms.
COURT OF APPEALS DECISION
Various parties, including ILECs and state PUCs, filed appeals of the FCC's
August 8, 1996 order in various U.S. Courts of Appeal, and several parties
petitioned the FCC and the courts to stay the effectiveness of the FCC's rules
included in the FCC's order, pending a ruling on the appeals. Many of the
appeals were consolidated and transferred to the U.S. Court of Appeals for the
Eight Circuit. On October 15, 1996, the Eighth Circuit issued a partial stay of
the FCC's rules until the full appeal on the FCC's rules could be heard. The
stay was limited to two areas of the FCC's rules: (1) the pricing rules other
than those dealing with commercial mobile radio service providers; and (2) the
CLECs' ability to utilize a most favored nation procedure to select favorable
provisions from other interconnectors' agreements.
The Company believes that the stay will not have a material adverse effect
on it, because the Company already has interconnection agreements in place, or
expects to have such agreements in place after state PUC arbitration
proceedings, under the provisions of the FCC's order and the Telecom Act which
have not been stayed by the Court. The stay does not delay the implementation of
the Telecom Act by the parties and by the state PUCs, but rather suspends the
guidance on pricing and most favored nation procedures that the FCC sought to
provide to the parties and the state PUCs.
STATE REGULATION
The Company expects that as it offers local exchange and other intrastate
services in an increasing number of states, it will be subject to direct state
PUC regulation in most if not all such states. In all states where certification
as a common carrier is currently required, the Company's operating subsidiaries
are certificated.
In most states, the Company is required to file tariffs or price lists
setting forth the terms, conditions and prices for services which are classified
as intrastate. In some states, the Company's tariff can list a range of prices
for particular services, and in others, such prices can be set on an individual
customer basis. The Company is not subject to price cap or to rate of return
regulation in any state in which it currently provides services.
As noted above, states retain a significant regulatory role under the
Telecom Act. The Telecom Act allows state regulatory authorities to continue to
impose competitively neutral requirements designed to promote universal service,
protect public safety and welfare, maintain quality of service and safeguard the
rights of consumers. The Company anticipates that state PUCs will play a major
role in determining
56
the specific charges for local network interconnection. In some states, those
charges are being determined by generic cost proceedings and in other states
they are being established through arbitration proceedings.
LOCAL GOVERNMENT AUTHORIZATIONS
In certain locations, the Company is required to obtain local franchises,
licenses or other operating rights and street opening and construction permits
to install and expand its fiber-optic networks. In some of the areas where the
Company provides network services, the Company's subsidiaries pay license or
franchise fees based on a percentage of gross revenues or on a per linear foot
basis. There is no assurance that certain cities that do not currently impose
fees will not seek to impose such fees in the future, nor is there any assurance
that, following the expiration of existing franchises, fees will remain at their
current levels. Under the Telecom Act, state and local governments retain the
right to manage the public rights-of-way and to require fair and reasonable
compensation from telecommunications providers, on a competitively neutral and
nondiscriminatory basis, for use of public rights-of-way.
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company were forced to remove
its fiber from the streets or abandon its network in place, such termination
would have a material adverse effect on the Company's subsidiary in that area
and could have a material adverse effect on the Company. The Company believes
that the provisions of the Telecom Act barring state and local requirements that
prohibit or have the effect of prohibiting any entity from providing
telecommunications service should be construed to preclude any such action.
However, there can be no assurance that one or more local authorities will not
attempt to take such action. Nor is it clear that the Company would prevail in
any judicial or regulatory proceeding to resolve such a dispute.
COMPETITION
As noted above, the regulatory environment in which the Company operates is
changing rapidly. The passage of the Telecom Act combined with other actions by
the FCC and state regulatory authorities continues to promote competition in the
provision of telecommunications services.
ILECS
In each market served by its networks, the Company faces, and expects to
continue to face, significant competition from the ILECs, which currently
dominate their local telecommunications markets.
The Company competes with the ILECs in its markets for local exchange
services on the basis of product offerings, reliability, state-of-the-art
technology, price, route diversity, ease of ordering and customer service.
However, the ILECs have long-standing relationships with their customers and
provide those customers with various transmission and switching services that
the Company, in many cases, does not currently offer. The Company has sought,
and will continue to seek, to achieve parity with the ILECs in order to become
able to provide a full range of local telecommunications services. See
"Regulatory Overview" for additional information concerning the regulatory
environment in which the Company operates. Existing competition for private line
and special access services is based primarily on quality, capacity and
reliability of network facilities, customer service, response to customer needs,
service features and price, and is not based on any proprietary technology. As a
result of the comparatively recent installation of the Company's fiber optic
networks, its dual path architectures and the state-of-the-art technology used
in its networks, the Company may have cost and service quality advantages over
some currently available ILEC networks.
57
OTHER COMPETITORS
The Company also faces, and expects to continue to face, competition from
other potential competitors in certain of the markets in which the Company
offers its services. In addition to the ILECs and CAPs, potential competitors
capable of offering private line and special access services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end-users.
The Company believes that the Telecom Act as well as a recent series of
completed and proposed transactions between ILECs and long distance companies
and cable companies increase the likelihood that barriers to local exchange
competition will be removed. The Telecom Act states that entry barriers must be
lowered in the areas served by ILECs that are subsidiaries of RBOCs before such
ILECs are permitted to provide in-region, interLATA services. When ILECs that
are RBOC subsidiaries are permitted to provide such services, they will be in a
position to offer single source service. ILECs that are not RBOC subsidiaries
may offer single source service presently.
In some cases, cable television companies are upgrading their networks with
fiber optics and installing facilities to provide fully interactive transmission
of broadband voice, video and data communications. In addition, under the
Telecom Act, electric utilities may install fiber optic telecommunications cable
and may facilitate provision of telecommunications services by electric
utilities over those networks if granted regulatory authority to do so.
Cellular and PCS providers may also be a source of competitive local
telephone service. However, the Company believes these operators will be large
users of CAP access services to transport their calls among their radio
transmitter/receiver sites through networks that avoid the ILECs with whom they
compete.
The Company also competes with equipment vendors and installers, and
telecommunications management companies, with respect to certain portions of its
business.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. In addition, many of the Company's existing and potential competitors
have financial, personnel and other resources significantly greater than those
of the Company.
With respect to the Company's enhanced communications service offerings,
each is subject to competition. For example, there are several competitors that
offer IVR services, such as Call Interactive, which the Company believes focuses
its sales efforts on large volume IVR service users. Another competitor,
Telemedia, which is owned by Sprint, also offers significant call volume
capacity. With respect to Xpress, the Company's virtual communications center,
there are numerous competitors with product offerings that include some or all
of the services offered by Xpress. Similarly, the Company's Intermind offering
faces competition from the services and products offered by such companies and
Netscape, Marimba, Backweb and others.
PURCHASING AND DISTRIBUTION
With respect to the Company's fiber optic networks, which constitute the
Company's most significant capital investments, the Company has entered into
general purchase agreements with key equipment suppliers for fiber and fiber
optic transmission equipment, with Nortel for telecommunications switches, and
with other suppliers for various other components of each system. These
agreements provide the basic framework under which purchase orders for these
system components will be made. The specific purchases made for each network
depend upon the configuration and other factors related to the network, such as
the prospective customer base and location and the services to be offered over
the network. Once these decisions are made, purchase orders for the appropriate
fiber and selected equipment types are placed under the general purchase
agreements.
58
PROPERTIES
Neither the Company nor any of its subsidiaries owns any real property. The
Company leases space for, among other things, offices, equipment rooms,
collocation sites and general storage space.
EMPLOYEES
As of December 31, 1996, the Company employed 568 people, including
full-time and part-time employees. The Company considers its employee relations
to be good. None of the employees of the Company is covered by a collective
bargaining agreement.
TRADEMARKS AND TRADE NAMES
The Company uses the name "NEXTLINK" as its primary business name. In July
1995, the Company filed for federal trademark protection of this name. In
addition, filings have been made to register the distinctive floating X and
related marks as protected trademarks under federal law. These filings all are
pending. The Company has no assurance that they will be granted.
LEGAL PROCEEDINGS
The Company is not currently the party to any legal proceedings, other than
regulatory and other proceedings that are in the normal course of its business.
59
MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers and members of the Company's board of directors. Their
respective backgrounds are described following the table.
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Craig O. McCaw....................................... 47 Chief Executive Officer and Director
James F. Voelker(1).................................. 46 President and Director
Jan Loichle.......................................... 48 Vice President, Chief of Local Exchange Operations
Kathleen H. Iskra.................................... 40 Vice President, Chief Financial Officer and Treasurer
R. Bruce Easter, Jr.................................. 39 Vice President, General Counsel and Secretary
Charles P. Daniels................................... 40 Vice President, Chief Marketing Officer
Gordon Sileo......................................... 46 Vice President, Chief Information Officer
Dennis Weibling(2)................................... 45 Director
Scot Jarvis(1)....................................... 35 Director
C. James Judson(2)................................... 52 Director
William A. Hoglund(1)................................ 42 Director
- --------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The following persons are the presidents of the Company's operating
subsidiaries:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Hugh C. Cathey....................................... 46 President of NEXTLINK Ohio, L.L.C.
Greg Green........................................... 33 President of NEXTLINK Washington, L.L.C.
Don Hillenmeyer...................................... 50 President of NEXTLINK Tennessee, L.L.C.
Robert Kingery....................................... 42 President of NEXTLINK Interactive, L.L.C.
Dwayne Nielson....................................... 41 President of NEXTLINK Utah, L.L.C.
Gary Rawding......................................... 45 President of NEXTLINK Pennsylvania, L.P.
Donald W. Sessamen................................... 64 President of NEXTLINK California, L.L.C.
All of the officers identified above serve at the discretion of the Board of
Directors of the Company. There are no family relationships between any person
identified above. The following are brief biographies of persons identified
above.
CRAIG O. MCCAW has been Chief Executive Officer of NEXTLINK since September
1994. Mr. McCaw is also Chairman and Chief Executive Officer of Eagle River, a
company formed and owned by Mr. McCaw to make strategic investments in
telecommunications ventures. Mr. McCaw was the founder, chairman and chief
executive officer of McCaw Cellular Communications, Inc. ("McCaw Cellular"), the
nation's leading provider of wireless communications services, until the company
was sold to AT&T in August 1994. Prior to entering the cellular telephone
business in 1973, Mr. McCaw took over daily operation of a small cable
television operation in Centralia, Washington, that he and his three brothers
owned. Under his leadership, this one-system operation serving 4,000 subscribers
eventually grew to be the nation's 20th largest cable operator serving 450,000
subscribers. In 1974, he expanded the cable company's services by entering the
paging and conventional mobile telephone industries and eventually became the
fifth largest paging operator in the country, serving approximately 320,000
subscribers in 13 states. In 1981, Mr. McCaw saw the revolutionary potential of
wireless communications and committed the company to developing broad-based
cellular telephone services. Later, McCaw Cellular
60
became the nation's largest cellular telephone operator, with cellular system
positions in more than 100 U.S. cities, representing more than 100 million
potential customers. The company also had interests in wireless data
transmissions, personal communications services, air-to-ground phone systems and
satellite communications at the time of its sale to AT&T. Mr. McCaw is one of
the two principal owners of Teledesic Corporation, which in March 1994 announced
plans for a worldwide satellite-based telecommunications system. Mr. McCaw is
indirectly a significant stockholder, a director and Chairman of the Operating
Committee of Nextel Communications, Inc., a provider of wireless
telecommunications services.
JAMES F. VOELKER has been the President of NEXTLINK since April 1995 and is
responsible for developing the company vision and guiding overall operations. He
is recognized as one of the early entrepreneurs in the business of building and
delivering competitive local exchange service. Mr. Voelker's career in
telecommunications spans almost two decades and includes experience in very
different segments of the industry in a variety of executive positions. From
1981 to 1984 he served as vice president of sales, marketing and customer
service for Lexitel Corporation, the forerunner of Allnet Communications. Mr.
Voelker co-founded Digital Signal Inc. and served as chief operating officer and
chief executive officer from 1985 through the company's sale to SP Telecom in
1990. Digital Signal operated a nation wide fiber optic network supplying
capacity, engineering, provisioning and operational support to over one hundred
interexchange carriers. In the CAP arena, Mr. Voelker became vice chairman of
City Signal Inc. in 1992, which constructed and operated networks in six
markets. Subsequently, he served as its chief executive officer after the
company merged with its sister company Teledial America to form U S Signal.
Based in Grand Rapids, Michigan, U S Signal was one of the first fully certified
CLECs in the country. Mr. Voelker has served as vice chairman of ALTS, the
industry Association of Local Telephone Service providers and as a director of
Phoenix Network Inc., a publicly held long distance company. Mr. Voelker is also
a member of the Compensation Committee of the Board of Directors.
JAN LOICHLE has been Vice President, Chief of Local Exchange Operations of
NEXTLINK since October 1996. Prior to that, Ms. Loichle was the President of
NEXTLINK Solutions (the virtual communications center) from July 1995. Prior to
joining NEXTLINK, Ms. Loichle was Executive Vice President at U.S. Signal in
Detroit and Grand Rapids, Michigan from April 1993 to July 1995. At U.S. Signal
Ms. Loichle led the development of an enhanced service platform (Magic Number)
from concept through production system and implementation. From 1990 to 1993,
Ms. Loichle was Assistant Vice President of Finance for SP Telecom in San
Francisco. Prior to that, Ms. Loichle was Vice President of Financial Operations
for Lexitel/Allnet/ALC in Birmingham, Michigan from December 1980 to October
1989.
KATHLEEN H. ISKRA has been Vice President, Chief Financial Officer and
Treasurer of NEXTLINK since January 1996. Prior to that, she was President and
Chief Executive Officer of Horizon Air, a wholly owned subsidiary of Alaska Air
Group. Prior to her appointment at Horizon Air, Ms. Iskra served as staff vice
president of finance and controller of Alaska Airlines and Alaska Air Group. Ms.
Iskra's service with Alaska began in 1987, when she was appointed Controller.
Prior to joining Alaska, she was an audit manager with Arthur Andersen.
R. BRUCE EASTER, JR. has been Vice President, General Counsel and Secretary
of NEXTLINK since January 1995. From 1986 to December 1994, Mr. Easter was an
associate and then partner in the law firm of Davis Wright Tremaine in Seattle,
Washington, where he focused on communications law and media matters. Prior to
joining Davis Wright Tremaine, Mr. Easter was a legal assistant at Home Box
Office, Inc. from 1980 through 1986.
CHARLES P. DANIELS has been Vice President, Chief Marketing Officer of
NEXTLINK since November 1995. Mr. Daniels is responsible for Marketing, Market
Development, Product Development, and Engineering. From 1992 to 1995, Mr.
Daniels worked for MCI where he was the founder and Program
61
Manager of the network MCI Developers Lab. Mr. Daniels was also a founding
member of MCI's Advanced Technology Group. Prior to joining MCI, Mr. Daniels
worked for Manufacturers Hanover Trust from 1989 to 1992 as Vice
President/Strategic Technology & Research, where he was responsible for
evaluating and implementing new technologies that either reduced costs or
generated new revenue.
GORDON SILEO has been Vice President, Chief Information Officer of NEXTLINK
since August 1995. Mr. Sileo is responsible for designing and implementing the
NEXTLINK information technology, corporate communications and infrastructure.
Prior to joining NEXTLINK, Mr. Sileo was Vice President of Information Services
for US Signal from June 1994 to July 1995. From September 1991 to July 1993, Mr.
Sileo was Vice President of Management Information Services for SP Telecom.
DENNIS WEIBLING has been a director of the Company since January 1997 and
had been Executive Vice President of NEXTLINK since September 1994. Mr. Weibling
is also President of Eagle River, Inc., since October 1993. Mr. Weibling is a
director and member of Nextel Communications, Inc.'s board, operations, audit
and compensation committees. Nextel is a leading provider of integrated wireless
communications services for teams of mobile workers. Mr. Weibling serves on the
board and executive committee of Teledesic Corporation, a satellite
telecommunications company backed by Mr. McCaw and Microsoft founder Mr. William
Gates. Mr. Weibling is a director of Cable Plus, one of the leading providers of
private cable television and telephony service to residential apartment
complexes. A licensed certified public accountant in Washington, Mr. Weibling is
a member of the American Society of Certified Public Accountants and the
Washington Society of Certified Public Accountants. In addition, Mr. Weibling is
a licensed attorney in Ohio and a member of the American Bar Association and
Ohio State Bar Association. Mr. Weibling is also a member of the Audit Committee
of the Board of Directors.
SCOT JARVIS has been a director of the Company since January 1997 and had
been Executive Vice President of NEXTLINK since September 1994, was a Vice
President of Eagle River, Inc. from October 1994 through April 1996. Mr. Jarvis
is the co-founder and since March 1997 has been a member of Cedar Grove
Partners, LLC. Prior to that, Mr. Jarvis was the acting President of the Company
from September 1994 to April 1995. Prior to joining Eagle River, Inc., Mr.
Jarvis served as Vice President of McCaw Development Corporation from 1993 to
1994 and of McCaw Cellular from 1985 through 1994. During his tenure at McCaw
Cellular, Mr. Jarvis served in the positions of General Manager from 1990 to
1993, Vice President of Acquisitions and Development from 1988 to 1990 and
Assistant Vice President from 1985 to 1988. Mr. Jarvis also recently served on
the Board of Directors or executive committees of: NEXTEL Communications, Inc.,
PriCellular Corporation, Horizon Cellular Group, Los Angeles Cellular Telephone
Company, Cellular 2000 Partnership, Cybertel Cellular Telephone Company (St.
Louis), Northwest Cellular Partnership, and Movitel del Noroeste (Mexico
Region). Mr. Jarvis has also served as the President of the Iberia Cellular
Telephone Company from 1991 to 1994. Mr. Jarvis is also a member of the
Compensation Committee of the Board of Directors.
C. JAMES JUDSON has been a director of the Company since January 1997 and
had been Executive Vice President of NEXTLINK since February 1995. Mr. Judson is
also Vice President and General Counsel of Eagle River, Inc. since January 1995.
Prior to joining Eagle River, Inc., from January 1, 1975 through January 1995,
Mr. Judson was a partner in the Seattle law firm of Davis Wright Tremaine where
he focused his practice primarily in the areas of corporation law and taxation.
Mr. Judson is also a member of the Audit Committee of the Board of Directors.
WILLIAM A. HOGLUND has been a director of the Company since January 1997 and
had been Executive Vice President of NEXTLINK since February 1996. Mr. Hoglund
is also Vice President and Chief Financial Officer of Eagle River, Inc. since
January 1996. Prior to joining Eagle River, Inc., Mr. Hoglund was a Managing
Director of J.P. Morgan & Co. in its investment banking group. Mr. Hoglund was
employed by J.P. Morgan & Co. from 1977 through 1995, focusing for the past nine
years on clients in the telecommunications, cable and media industries. Mr.
Hoglund is also a member of the Compensation Committee of the Board of
Directors.
62
The following individuals are the senior management of the Company's
subsidiaries.
HUGH C. CATHEY has been the President of NEXTLINK Ohio since August 1996.
Prior to joining NEXTLINK, Mr. Cathey had nearly 20 years of experience in the
telecommunications industry. From 1993 to 1996, Mr. Cathey was president and
chief executive officer of Digital Network, Inc., a publicly traded,
facilities-based long distance company based in Dallas, Texas. From 1989 to
1993, Mr. Cathey served as president and chief executive officer of United
Telemanagement, Inc. Prior to that, Mr. Cathey held sales and product management
positions of increasing responsibility with AT&T, culminating as the senior
executive of a business unit of AT&T with annual revenues of approximately $100
million. During Mr. Cathey's tenure at United Telemanagement, Inc., that company
filed a petition under the Federal bankruptcy laws.
GREG GREEN has been the President of NEXTLINK Washington since March 1995.
Prior to that, from 1985 through March 1995, Mr. Green was the founder and
former President of Tel-West Communications, Inc. ("Tel-West") until the
Company's acquisition of certain assets of that company. At Tel-West, Mr. Green
provided overall management of business development, sales and customer service.
Mr. Green successfully negotiated with the Washington State Utilities and
Transportation Commission to become the second competitive local exchange
carrier in Washington State's history and the first in the city of Spokane.
DON HILLENMEYER has been the President of NEXTLINK Tennessee since March
1995. Prior to joining NEXTLINK in March of 1995, Mr. Hillenmeyer was president
of MCMG, Inc., a Nashville-based wireless communications management consulting
and operations firm specializing in running Rural Service Areas for independent
cellular telephone owners. Before founding MCMG, Inc., Mr. Hillenmeyer held
various senior management positions at McCaw Cellular and was responsible for 13
southern states from August 1986 to February 1990.
ROBERT KINGERY has been the President of NEXTLINK Interactive (the
interactive voice response provider) since joining the Company in August 1995.
Prior to joining NEXTLINK, Mr. Kingery was the President and Chief Executive
Officer of Sound Response Corporation, an interactive voice services business he
co-founded in 1991.
DWAYNE NIELSON has been President of NEXTLINK Utah since February 1996.
Prior to joining NEXTLINK, Mr. Nielson was Assistant Vice President, Consumer
and Small Business Market, at Sprint Corporation from October 1994 to February
1996. Prior to that, from August 1985 through October 1994, Mr. Nielson held a
variety of sales and marketing positions at Sprint and United Telephone.
GARY RAWDING has been President of NEXTLINK Pennsylvania since September
1994. Prior to founding Penns Light Communications, Inc., certain assets of
which were acquired by the Company in September 1994, he served as Vice
President of Sales & Marketing at Eastern TeleLogic Corporation from 1989 until
1993. Prior to joining Eastern TeleLogic, Mr. Rawding held various positions
with Bell Atlantic Corporation.
DONALD W. SESSAMEN has been President of NEXTLINK California since November
1996. Prior to that, Mr. Sessamen acted as a consultant to NEXTLINK. Prior to
acting as a consultant to the Company, Mr. Sessamen joined Brooks Fiber
California in 1994 as president, after the company acquired Phoenix Fiberlink.
At Brooks Fiber California, Mr. Sessamen completed the installation of the San
Jose system and managed the entry into switched services in the Sacramento
market. From 1991 to 1994, Mr. Sessamen was executive vice president of
operations, engineering and MIS at SP Telecom, a fiber optic systems
construction and wholesale transmission company using Southern Pacific Railroad
rights-of-way east of the Mississippi River. At SP Telecom, Mr. Sessamen led SP
Telecom's entry into switch-based products utilizing the Northern Telecom DMS
250 Super Node, introducing innovative switch-based products.
63
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal year ended December 31, 1996,
individual compensation information for the Chief Executive Officer of the
Company and each of the four other most highly compensated executive officers of
the Company who were serving as executive officers at December 31, 1996 (the
"Named Executive Officers").
ANNUAL COMPENSATION
------------------------------------------------------------------------------------------------
OTHER SECURITIES ALL OTHER
NAME AND PRINCIPAL ANNUAL UNDERLYING COMPENSATION
POSITION FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS(#)(1) ($)(2)
- ------------------------------ ------------- ----------- ----------- ------------------ -------------- -------------------
McCaw, Craig O................ 1995 -0- -0- -0- -0- -0-
CEO 1996 -0- -0- -0- -0- -0-
Voelker, James J.............. 1995 89,405 87,000 11,542(3) 1,000,000 -0-
President 1996 160,609 -0- -0- 15,000 6,523
Kingery, Robert............... 1995 65,589 88,082 -0- 98,347(4) -0-
President of NEXTLINK 1996 225,000 30,000 -0- 5,000 5,625
Interactive
Iskra, Kathleen H............. 1995 -0- -0- -0- -0- -0-
Vice President, Chief 1996 121,233 65,250 -0- 153,500 1,575
Financial Officer and
Treasurer
Daniels, Charles P............ 1995 14,423 25,000 -0- 100,000 -0-
Vice President, Chief 1996 100,000 84,750 -0- 7,500 2,512
Marketing Officer
- --------------------------
(1) Represents Class B membership units granted in connection with the Company's
equity option plan during 1995 and 1996, respectively.
(2) Represents contributions made by the Company on behalf of the executive
officer under the Company's 401(k) Plan.
(3) Of this amount, $11,238 was allocated to temporary housing expenses.
(4) This represents the number of options to acquire Class B units granted in
connection with the Recapitalization of the Company and its subsidiaries.
Prior to the Recapitalization, this executive held options to acquire
membership interests in Nextlink Interactive.
64
OPTION GRANTS IN LAST FISCAL YEAR(1)
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATES
----------------------- OF SHARES PRICE
NUMBER OF % OF TOTAL OPTIONS APPRECIATION FOR OPTION TERM(2)
SECURITIES GRANTED TO EXERCISE OR -----------------------------------------
NAME AND PRINCIPAL UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION 5% 10%
POSITION GRANTED(#) YEAR(%) ($/SH) DATE(3) ($) ($)
- ----------------------- ------------------- ----------------------- --------------- ------------------- --------- ---------
McCaw, Craig O., -0- -0- -0- N/A
Voelker, James F. 15,000 1.79 .44 August 19, 2011 600 46,200
Kingery, Robert 5,000 0.60 .44 August 19, 2011 200 15,400
Iskra, Kathleen H. 75,000 8.96 .01 January 2, 2011 -0- 122,250
75,000 8.96 .44 January 2, 2011 3,000 231,000
3,500 .42 .44 August 19, 2011 140 10,780
Daniels, Charles P. 7,500 .90 .44 August 19, 2011 300 23,100
- --------------------------
(1) Effective on January 31, 1997, NEXTLINK Communications, L.L.C. was merged
with and into NEXTLINK Communications, Inc. The information presented in
this table reflects the grant of options pursuant to the Amended and
Restated Equity Option Plan of NEXTLINK Communications, L.L.C. (the "EOP").
The Company has adopted a Stock Option Plan and is currently preparing
documentation to cause the options to be options to purchase the Company's
Class A Common Stock. See Note 12 to the Consolidated Financial Statements.
(2) The value of the Company's Class B Units is determined in accordance with
the EOP. Although Class B Units, when exercised, would constitute an
ownership interest in the Company, the interest is limited to the
appreciation in value of the Company, that is the distributable profits
interests, if any, of the Company. Pursuant to the EOP, the Administrative
Committee, which is comprised of two representatives from Eagle River and
the President of the Company, determines the appreciation interest value of
the options. During 1995, the members of the Administrative Committee were
Messrs. Weibling, Jarvis and Voelker. During the period in which theses
options were granted, the EOP provided that the valuation would be based
upon financial data dated as of the close of the most recent tax year.
Because of the small amount of capital invested at December 31, 1994, and
because there had been no appreciation in the value of Class A Units at
December 31, 1994, there was no fair market value ascribed to the unit
options in excess of the $0.01 exercise price at the time of their grants
during 1994 and 1995. Further, and consistent with the EOP, no separate
determination of value was made for the grants until the end of 1995. The
appreciation value was determined by the Administrative Committee by
applying a rate of return to the capital invested based on expected rates of
return for similar investments in comparable telecommunications businesses
and accounting for payment of the preferred return described above and the
return of capital to the Class A unit holders, and dividing that amount by
the total Class A Units issued at December 31, 1996 and 1995. Based upon
this valuation process, the appreciation interest per unit at years ended
1996 and 1995 for Class B Units was determined to be $3.50 and $0.44,
respectively, and for Class A Units was determined to be $4.36 and $1.45,
respectively. A compensation expense was then booked accordingly for the
Class B Units to reflect the difference between the appreciation interest
value and the exercise price at year end for the vested portion of the
options granted during 1995. Commencing July 1, 1995, the EOP was revised to
provide that the Administrative Committee could revalue the Company based on
such financial data as the Administrative Committee deemed appropriate.
The dollar amounts under the 5% and 10% columns are the result of
calculations required by the rules of the Securities and Exchange Commission
("SEC") and, therefore, are not intended to forecast possible future
appreciation, if any, of the Company's Class B Units. The amounts shown
reflect the difference between (a) the appreciation of each unit at the
SEC's assumed annual rates of appreciation through the fifteenth anniversary
of the date of the grant based on the per unit valuation at the time of the
grant and (b) the sum of (i) payment of the exercise price, (ii) the return
of capital to the Class A unit holders, and (iii) the payment of a preferred
return to the Class A unit holders. Pursuant to the Company's limited
liability company agreement, the Class A unit holders are entitled to a
preferred return on their capital contributions equal to the prime rate plus
2%. The Company utilized a prime rate of 8.25% in calculating the above
returns under the SEC's assumed rates of return.
(3) Options granted during 1996 vest either 20% at employment and 20% at the end
of each subsequent year or 25% at the end of each of the next four years
after grant.
65
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 AT DECEMBER 31, 1996 (1)
---------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------- ------------ -------------- ------------- --------------
McCaw, Craig O...................................... -0- -0- -0- -0-
Voelker, James F.................................... 400,000 615,000 $ 1,400,000 $ 2,152,500
Kingery, Robert..................................... 39,339 64,008 137,687 224,028
Iskra, Kathleen H................................... 60,000 93,500 210,000 327,250
Daniels, Charles P.................................. 40,000 67,500 140,000 236,250
- --------------------------
(1) Reflects the difference between the exercise price and a valuation of $3.50
per unit. Because there is no public market for the Company's membership
units, pursuant to the Equity Option Plan, the Plan's Administrative
Committee determines the value of the Class B options at least as often as
the end of each fiscal year. The valuation set forth above reflects the
Administrative Committee's determination of per unit valuation at December
31, 1996.
EMPLOYMENT AGREEMENTS
NEXTLINK Pennsylvania, L.P., an operating subsidiary of the Company, has
entered into an employment agreement with Gary A. Rawding, its President, for a
term expiring on September 15, 1997, subject to automatic month-to-month
extensions unless either party gives 30 days notice not to renew. The agreement
provides for a base salary of $110,000, with a total bonus of $50,000 for the
five-quarter period ended December 31, 1995 based on the attainment of goals and
milestones outlined in the agreement and $10,000 per quarter thereafter. If
NEXTLINK Pennsylvania, L.P. fails to renew the agreement or if employment is
terminated due to the cessation of its business, NEXTLINK Pennsylvania, L.P.
must pay Mr. Rawding his then-current monthly salary until one year after
termination. The agreement also contains non-compete, non-solicitation and
confidentiality provisions.
NEXTLINK Interactive, L.L.C. ("NEXTLINK Interactive"), an operating
subsidiary of the Company, has entered into an employment agreement with Robert
Kingery, its President, for a term expiring on August 31, 1998, subject to
earlier termination. The agreement provides for a base salary of $225,000, with
a bonus based on the attainment of goals and milestones to be agreed to by
NEXTLINK Interactive and Mr. Kingery. If NEXTLINK Interactive terminates Mr.
Kingery's employment on 30 days notice, Mr. Kingery is entitled to receive a
bonus as if he had been employed for each year of the initial term of the
agreement. The agreement also contains non-compete, non-solicitation and
confidentiality provisions.
NEXTLINK Washington, L.L.C. ("NEXTLINK Washington"), an operating subsidiary
of the Company, has entered into an employment agreement with Gregory Green as
its President for a term expiring March 28, 1998, subject to earlier
termination. The agreement provides for a base salary of $100,000 with a bonus
of $30,000 during the first year, $35,000 during the second year and $40,000
during the third year, in each case upon the achievement of objectives. The
agreement also contains non-compete, non-solicitation and confidentiality
provisions.
NEXTLINK COMMUNICATIONS, L.L.C. EQUITY OPTION PLAN
The Company adopted an Amended and Restated Equity Option Plan (the "EOP").
Pursuant to the EOP, the Company could grant any employee of the Company or its
Affiliates (as defined in the EOP) the right to acquire Class B membership
interests ("Equity Interests") in the Company (an "Option"). The
66
EOP has been superseded by the NEXTLINK Communications, Inc. Stock Option Plan,
described below, which was adopted in connection with the incorporation of the
Company on January 31, 1997. The Company anticipates granting replacement
options under the NEXTLINK Communications, Inc. Stock Option Plan to the holders
of options granted under the EOP. The Option Plan is administered by a committee
comprised of three members (the "Administrative Committee"). Two of the members
were appointed by Eagle River, the primary member of the Company, and the third
was the President of the Company. The Administrative Committee had sole and
unfettered discretionary authority to administer the EOP and to alter, modify,
change or terminate the EOP at any time.
An Option granted under the EOP must be evidenced by a written agreement
between the Company and the employee. Such agreement set forth the quantity of
Equity Interests with respect to which the Option is granted, the Option price,
the date the Option was granted, and such other terms, conditions, and
restrictions as the Company deemed advisable and which were not inconsistent
with the terms of the EOP. The holder of an Option (an "Option Holder") did not
acquire any voting or other rights in the Company or in management of the
Company upon the grant of an Option. In addition, the holder of an Equity
Interest obtained upon exercise of an Option would not have voting or other
management rights in the Company.
An Option could have been exercised, in whole or in part, at any time after
December 31, 1996 and within a 15-year period following the date the Option was
granted, subject to ratable vesting of the Option over four Years of Service (as
defined in the EOP) and provisions in the EOP relating to early termination of
the Option in the case of termination of employment. Any portion of an Option
that was not exercised by the end of the 15-year term would terminate unless
extended by the Company.
Under the EOP, the Company had the right to purchase an Option from an
Option Holder (or his or her trustee, personal representative, guardian,
executor or administrator) (collectively the "Transferee") at a purchase price
equal to the then Fair Market Value (as defined in the EOP) of the Option upon
the occurrence of (a) the bankruptcy of the Transferee (b) an adjudication by a
court that the Transferee is insane or incompetent; (c) any general assignment
by the Transferee for the benefit of his creditors; (d) the death of the
Transferee; (e) the termination, for any reason, of the Transferee's employment
with the Company or an Affiliate (as defined in the EOP); or (f) any other event
which would cause an interest in the Company to be sold, assigned, awarded,
confirmed, or otherwise transferred, for consideration or otherwise, to any
person, whether voluntarily, involuntarily or by operation of law.
NEXTLINK COMMUNICATIONS, INC. STOCK OPTION PLAN
The Company established the NEXTLINK Communications, Inc. Stock Option Plan
(the "Plan") to replace the EOP and to provide a performance incentive for
certain officers, employees, and individuals who provide services to the
Company, and to enable these individuals to acquire or increase proprietary
interest in the success of the Company.
Pursuant to the terms of the Plan, the Company's Board of Directors (the
"Board") has reserved the right to terminate, modify, or amend the Plan subject
to the following restriction: The Board must obtain shareholder approval for any
amendment that (1) increases the number of shares of Class A Common Stock
available under the Plan, (2) changes the Plan's eligibility provisions, or (3)
requires shareholder approval under applicable law.
The Plan Administrator may modify or amend outstanding options granted under
the Plan, provided modification or amendment of an outstanding option shall not,
without the consent of the optionee, impair or diminish any of the optionee's
rights or any of the obligations of the Company. Except as otherwise provided in
the Plan, no outstanding option shall be terminated without the consent of the
optionee. Unless the optionee agrees otherwise, any change or adjustment to an
outstanding incentive stock option shall be made so as not to constitute a
"modification," as defined in Section 424(h) of the
67
Internal Revenue Code of 1986, as amended (the "Code"), and so as not to cause
the option to cease qualifying as an incentive stock option, as defined in Code
Section 422(b).
The "Plan Administrator" is the Compensation Committee of the Board, and its
members are Messrs. Voelker, Jarvis and Hoglund. The Board may from time to time
remove members from, or add members to, the Compensation Committee. Vacancies on
the committee, however caused, may be filled by the Board.
The Plan Administrator acts as the manager of the Plan, possessing
discretionary authority to determine all matters relating to the options to be
granted. The Plan Administrator has the sole authority to interpret the
provisions of the Plan, any option issued under the Plan, and any rule or
regulation applicable to the Plan. The Plan Administrator's interpretation is
conclusive and binding on all interested parties, so long as the interpretation
and construction with respect to incentive stock options corresponds to the
requirements of Code Section 422, the regulations thereunder, and any amendments
thereto.
The stock available under the stock options granted under the Plan are
shares of the Company's authorized but unissued Class A Common Stock, par value
$.01 per share ("Class A Common Stock"). The total number of shares that may be
issued pursuant to options under the Plan, including both incentive and
non-statutory options, shall not exceed an aggregate of 10,000,000 shares.
Incentive stock options may be granted only to officers and other employees
of the Company (or a parent or subsidiary corporation of the Company), including
Board members who are also employees of the Company (or employees of a parent or
subsidiary corporation of the Company). Non-statutory options may be granted to
both employees and non-employees of the Company (or a corporate or non-corporate
parent or subsidiary), including non-employee Board members. Certain limitations
apply to 10% shareholders.
Within the parameters established by the Plan, the Plan Administrator has
the sole discretion to determine the options to be granted under the Plan,
including selection of the individuals receiving option grants, the number of
shares available under each option, the exercise price, and all other terms and
conditions of the options. Separate option grants under the Plan need not be
identical in any respect, even when made simultaneously. The Plan Administrator
shall issue each optionee an individual "option agreement," which describes the
relevant terms of the option.
The purchase price per share of Class A Common Stock under each incentive
stock option shall be not less than the fair market value of the Class A Common
Stock on the date the option is granted, except where the option is a
substituted or assumed option from another plan, and the exercise price relates
to the original exercise price, in accordance with applicable provisions of the
Code. Certain additional limitations apply to 10% shareholders. The purchase
price per share of Class A Common Stock under each non-statutory stock option
shall be not less than 85% of the fair market value of the Class A Common Stock
on the date the option is granted, except where the option is a substituted or
assumed option from another plan, and the exercise price relates to the option's
original exercise price.
The aggregate shares of Class A Common Stock available to an optionee
through incentive stock options, which are exercisable for the first time during
a calendar year, shall not exceed $100,000 in value. For purposes of this limit,
the Class A Common Stock shall be valued at its fair market value as of the
option grant date. To the extent an incentive stock option exceeds this
limitation, it shall be considered a non-statutory stock option.
An optionee must exercise his or her option, if at all, before it expires.
Each option shall expire on the date specified in the individual option
agreement, which date shall not be later than the tenth anniversary of the date
on which the option was granted with respect to incentive stock options, the
15th anniversary with respect to non-statutory options and the fifth anniversary
in the case of a 10% stockholder.
68
Options granted under the Plan and the rights and privileges conferred
thereby may not be transferred, assigned, pledged, or hypothecated in any manner
(whether by operation of law or otherwise), other than by will or applicable
laws of descent and distribution; provided that non- statutory stock options may
be transferred to a revocable trust established by the optionee for his or her
descendants, to an immediate family member, or to a partnership in which only
immediate family members or such estate-planning trusts are partners. Options
shall not be subject to execution, attachment, or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of any
option under the Plan, or any rights or privilege conferred by the Plan,
contrary to the provisions of the Plan, or upon the sale or levy or any
attachment or similar process upon the rights and privileges conferred by the
Plan, such option shall thereupon terminate and become void. No person may
create a lien on any funds, securities, or other property held under the Plan.
Options granted under the Plan shall generally expire on the earlier of the
following two events: (i) the date of expiration expressed in the individual
option agreement, or (ii) three months after termination of employment (unless
the termination is for cause, in which case the option shall immediately
expire). Special rules apply in the event of an optionee's death or disability.
In addition, options shall terminate if the shareholders of the Company receive
cash, stock, or other property in exchange for or in connection with their
shares of Class A Common Stock as a result of a merger, consolidation,
acquisition of property or stock, separation, reorganization, or liquidation of
the Company (other than a mere reincorporation, creation of a holding company,
or merger in which the Company's shareholders receive a corresponding number of
shares of Class A Common Stock in the survivor corporation). Prior to such an
event, the optionee shall have the right to exercise his or her option, in whole
or in part, to the extent vested.
69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From the inception of NEXTLINK through the end of 1995, NEXTLINK's capital
and operational funding was provided on an as needed basis, primarily by Eagle
River. During this period, under NEXTLINK's limited liability company agreement,
one equity unit was issued for each dollar in cash or assets contributed to
NEXTLINK. The equity ownership units issued from time to time during the course
of this period thus reflect this one dollar to one equity unit equivalency. As
of December 31, 1996, Eagle River had contributed approximately $53.9 million to
NEXTLINK and had received approximately 53.9 million Class A Units in NEXTLINK
Communications, L.L.C., which were converted to approximately 72.3 million
shares of Class B Common Stock of the Company on January 31, 1997, including
certain issuances described below.
On September 15, 1994, NEXTLINK lent $100,000 to Gary A. Rawding, President
of NEXTLINK Pennsylvania, L.P. This loan is unsecured and is due September 15,
2004, or upon the sale of more than one-half of his interest in NEXTLINK
Pennsylvania, L.P. This loan bears interest at the prime rate and requires
annual interest payments on September 15.
On August 18, 1995, NEXTLINK lent $93,141 to James F. Voelker, NEXTLINK's
President, in connection with his relocation to Washington. This loan bears
interest at the prime rate and principal and interest are due on the earlier of
December 31, 1998 or the sale of Mr. Voelker's former residence.
On September 1, 1995, NEXTLINK agreed to pay $3.0 million to BWP, Inc. in
connection with the acquisition of certain assets of Sound Response Corporation.
A payment of $1.5 million was made on September 1, 1996 and an additional
payment of $1.5 million is due September 1, 1997. In addition, NEXTLINK issued
approximately 4.4 million Class A Units in NEXTLINK Communications, L.L.C.,
which were converted to approximately 5.9 million shares of Class B Common Stock
of the Company on January 31, 1997, to BWP, Inc. in connection with this asset
acquisition.
On January 31, 1995, Eagle River lent NEXTLINK $3.3 million in connection
with the acquisition of certain assets from City Signal, Inc. The note was
unsecured and bore interest at the prime rate plus 2%. The note plus accrued
interest was repaid with a portion of the net proceeds of NEXTLINK's offering of
Senior Notes. NEXTLINK's principal equity owner, Mr. Craig O. McCaw, through
Eagle River made advances to NEXTLINK primarily to fund NEXTLINK's capital
expenditures (excluding acquisitions) and operating losses between January 1996
and April 1996. These advances of approximately $32.2 million, including accrued
interest, were repaid using a portion of the net proceeds of the offering of the
Senior Notes.
During 1995, Eagle River lent NEXTLINK $7.3 million in connection with asset
acquisitions and operating expenses. The note bore interest at the prime rate
plus 2% and, on December 1, 1995, was converted to equity and approximately 7.3
million Class A Units in NEXTLINK Communications, L.L.C., which, along with the
other Units owned by Eagle River, were converted to shares of Class B Common
Stock of the Company on January 31, 1997.
During 1995, NEXTLINK incurred expenses for administrative services provided
by U.S. Signal, a minority member of NEXTLINK, pursuant to temporary agreements
related to the acquisitions of certain assets from City Signal, Inc. NEXTLINK
recorded expenses in connection with fees to this affiliate of $1.5 million in
1995.
Each share of the Company's Class B Common Stock is convertible at the
option of the holder thereof, at any time, into one share of Class A Common
Stock. The Company and the current holders of the Company's Class B Common Stock
and the holders of options to purchase Class B Common Stock will enter into a
Registration Rights Agreement (the "Company Registration Rights Agreement") as
of the consummation of the Incorporation, which, among other things, will
provide that at any time after a Qualifying IPO (as defined) and upon the
request of holders of at least 4% of the outstanding Class B Common Stock that
is subject to the Company Registration Rights Agreement, the Company will
70
register under the Securities Act any of the shares of Class A Common Stock
currently held by, or to be acquired in the future by, such holders, for sale in
accordance with such holders' intended method of disposition thereof (a "Demand
Registration"). The holders of the Class B Common Stock will have the right to
request two Demand Registrations. The holders of the Class B Common Stock also
will have the right, at any time after the Qualifying IPO, to include the shares
of Class A Common Stock held by them in certain other registrations of common
equity securities of the Company initiated by the Company on its own behalf or
on behalf of its shareholders. The holders' rights under the Company
Registration Rights Agreement are not transferable. In addition, the holders of
Class B Common Stock and options to purchase Class B Common Stock have agreed to
pay their pro rata share of all costs and expenses incurred in connection with
each registration of their respective shares of Class A Common Stock. For
purposes of the Company Registration Rights Agreement, "Qualifying IPO" means a
public offering of Class A Common Stock that results in net proceeds to the
Company of not less than $75,000,000 or such lesser amount as the Board of
Directors of the Company may, in their discretion, determine to be adequate to
commence the rights of the holders under the Company Registration Rights
Agreement.
71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
THE COMPANY. The following table sets forth certain information as of
January 31, 1997, with respect to the beneficial ownership of NEXTLINK's capital
stock by (i) each person known by the Company to own beneficially 5% or more of
the outstanding shares of capital stock, (ii) the Company's Board of Directors,
(iii) the Company's Chief Executive Officer and each of the Named Executive
Officers and (iv) all directors and executive officers as a group.
CLASS A COMMON STOCK
AMOUNT AND NATURE OF PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (%)
- ------------------------------------------------------------------ ---------------------- ---------------------
James F. Voelker.................................................. 400,000(1) 21.66
155 108th Avenue, N.E., Suite 810
Bellevue, WA 98004
Don Hillenmeyer................................................... 136,943(1) 7.42
105 Molloy Street
Suite 300
Nashville, TN 37201
Greg Breetz....................................................... 136,943(1) 7.42
105 Molloy Street
Suite 300
Nashville, TN 37201
Russ Land......................................................... 136,943(1) 7.42
105 Molloy Street
Suite 300
Nashville, TN 37201
Craig O. McCaw.................................................... 0 --
Dennis Weibling................................................... 0 --
Scot Jarvis....................................................... 0 --
C. James Judson................................................... 0 --
William A. Hoglund................................................ 0 --
Robert Kingery.................................................... 39,339(1) 2.13
Kathleen H. Iskra................................................. 60,000(1) 3.25
Charles P. Daniels................................................ 40,000(1) 2.17
All directors and executive officers as a group (19 persons)...... 1,020,050(1) 56.86
- ------------------------
(1) Represents shares that are anticipated to be eligible for acquisition upon
exercise of stock options during the next 60 days from January 31, 1997,
which the Company anticipates granting as replacement options for options
granted under the NEXTLINK Communications, L.L.C. EOP.
72
CLASS B COMMON STOCK
AMOUNT AND NATURE OF PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (%)
- -------------------------------------------------------------------- ---------------------- ---------------------
Eagle River, LLC.................................................... 72,307,914 83.41
2300 Carillon Point
Kirkland, WA 98033
BWP, Inc............................................................ 5,914,497(1) 6.82
707 S.W. Washington, 8th Floor
Portland, OR 97205
Craig O. McCaw...................................................... 72,911,686(2) 84.10
2300 Carillon Point
Kirkland, WA 98033
Dennis Weibling..................................................... 72,307,914(3) 83.41
2300 Carillon Point
Kirkland, WA 98033
James F. Voelker.................................................... 3,571,364(4) 4.12
Scot Jarvis......................................................... 670,283(5) *
C. James Judson..................................................... 0 --
William A. Hoglund.................................................. 0 --
Robert Kingery...................................................... 2,081,312(6) 2.50
Kathleen H. Iskra................................................... 0 --
Charles P. Daniels.................................................. 0 --
All directors and executive officers as a group (19 persons)........ 80,110,582(7) 92.41
- ------------------------
(1) Represents shares of Class B Common Stock held beneficially by Douglas Bean
and Robert F. Kingery, who own 39.88% and 35.19%, respectively of the total
shares held by BWP, Inc.
(2) Represents shares of Class B Common Stock held beneficially by Mr. McCaw as
a result of his ownership interests in Eagle River and NEXTLINK, Inc.
(3) Mr. Weibling, who is President of Eagle River, Inc., an affiliate of Eagle
River, disclaims beneficial ownership in all securities held by Eagle River,
except to the extent of his pecuniary interest therein.
(4) Represents shares of Class B Common Stock that are eligible for acquisition
upon exercise of a stock option during the next 60 days from January 31,
1997.
(5) Includes 134,057 shares of Class B Common Stock held by the Rowena Family
Limited Liability Company, of which Mr. Jarvis is the sole managing member.
(6) Represents shares of Class B Common Stock held beneficially by Mr. Kingery
as a result of his ownership in BWP, Inc.
(7) See notes (2), (3), (4) and (6) above.
* Less than 1%.
73
EAGLE RIVER. The following table sets forth certain information as of
January 31, 1997, with respect to the beneficial ownership of Eagle River's
member interests by (i) each person known by Eagle River to own beneficially 5%
or more of the outstanding member interests, (ii) the Company's Board of
Directors, (iii) the Company's Chief Executive Officer and each of the Named
Executive Officers and (iv) all directors and executive officers as a group.
AMOUNT AND NATURE OF PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) (%)
- -------------------------------------------------------------------- ---------------------- ---------------------
Craig O. McCaw...................................................... 31,122(2) 97.07
2300 Carillon Point
Kirkland, WA 98033
Dennis Weibling..................................................... 940 2.93
2300 Carillon Point
Kirkland, WA 98033
James F. Voelker.................................................... 0 --
Scot Jarvis......................................................... 0 --
C. James Judson..................................................... 0 --
William A. Hoglund.................................................. 0 --
Robert Kingery...................................................... 0 --
Kathleen H. Iskra................................................... 0 --
Charles P. Daniels.................................................. 0 --
All directors and executive officers as a group %
(19 persons)...................................................... 32,062 100
- ------------------------
(1) Represents Class A Units.
(2) Represents Class A Units held beneficially by Mr. McCaw as a result of his
ownership interests in Eagle River and Eagle River, Inc.
74
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company and NEXTLINK Capital, Inc. ("Capital") have issued $350,000,000
aggregate principal amount of Senior Notes, pursuant to an Indenture, dated as
of April 25, 1996, by and among the Company, Capital and The United States Trust
Company of New York, as trustee (the "Senior Indenture"), all of which are still
outstanding. The Senior Notes accrue interest at the rate of 12 1/2% per annum,
payable semi-annually in arrears on October 15 and April 15 of each year,
commencing on October 15, 1996.
The Senior Notes are senior obligations of the Company, rank PARI PASSU in
right of payment with all existing and future senior obligations of the Company
and will rank senior in right of payment to any future subordinated obligations
of the Company, including the Exchange Notes, if issued. Holders of secured
obligations of the Company will, however, have claims that are prior to the
claims of the holders of the Senior Notes with respect to the assets securing
such obligations. The Senior Notes are effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables) of
the Company's subsidiaries. In connection with the issuance of the Senior Notes,
the Company used $117.7 million of the net proceeds to purchase a portfolio of
securities, initially consisting of U.S. government securities (including any
securities substituted in respect thereof, the "Pledged Securities"), that was
pledged as security for payment of interest on the Senior Notes through April
15, 1999 and, under certain circumstances, as security for repayment of the
principal of the Senior Notes. Proceeds from the Pledged Securities may be used
by the Company to make interest payments on the Senior Notes through April 15,
1999.
The Senior Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after April 15, 2001 at the redemption prices set
forth in the Senior Indenture plus accrued and unpaid interest, if any, to the
date of redemption. In the event that, on or before April 15, 1999, the Company
receives net proceeds from a sale of its Common Equity (as defined in the Senior
Indenture), up to a maximum of 33 1/3% of the aggregate principal amount of the
Senior Notes originally issued may, at the option of the Company, be redeemed
from the net cash proceeds of such sale at a redemption price equal to 112.50%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any, to the date of redemption, provided, however, that Senior Notes in an
aggregate principal amount equal to at least $175.0 million remain outstanding
after such redemption.
The Senior Indenture contains a change of control repurchase requirement
which is substantially identical to that of the Exchange Indenture. See
"Description of the Exchange Notes--Change of Control." The Senior Indenture
also contains certain covenants that, among other things, limit the ability of
the Company and its subsidiaries to incur additional indebtedness, issue stock
in subsidiaries, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its subsidiaries, and enter into
certain mergers and consolidations. The Senior Indenture contains provisions
that allow for the modification and amendment of the covenants contained in the
Senior Indenture by a vote of holders owning a majority of the Outstanding Notes
(as defined in the Senior Indenture), including the covenant relating to a
change of control, except during the pendency of an Offer to Purchase (as
defined in the Senior Indenture). In addition, the holders of a majority in
aggregate principal amount of the Outstanding Notes, on behalf of all holders of
Senior Notes, may waive compliance by the Company and Capital with certain
restrictive provisions of the Senior Indenture.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of: (i) 350,000,000
shares of common stock, $.01 par value per share, which is divided into two
classes, consisting of 250,000,000 shares of Class A Common Stock and
100,000,000 shares of Class B Common Stock (together the "Common Stock"); and
(ii) 25,000,000 shares of preferred stock, $.01 par value per share (the "Serial
Preferred Stock").
75
COMMON STOCK
Except as outlined below, the Class A Common Stock and Class B Common Stock
are identical in all respects. Each share of Class B Common Stock may be
converted, at any time and at the option of the holder thereof, into one share
of Class A Common Stock. The Class A Common Stock and the Class B Common Stock
are entitled to vote on all matters which come before the shareholders, voting
together as a single class. Each share of Class A Common Stock has one (1) vote
and each share of Class B Common Stock has ten (10) votes on all matters on
which holders of Common Stock are entitled to vote. Accordingly, holders of a
majority of the shares of Class B Common Stock entitled to vote in any election
of directors may elect all of the directors standing for election unless a
Voting Rights Triggering Event has occurred. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor, subject to any
preferential dividend rights of outstanding Serial Preferred Stock. Upon the
liquidation, dissolution or winding-up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Serial Preferred Stock. Holders of Common Stock have
no preemptive, subscription or redemption rights. All the outstanding shares of
Common Stock are fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Serial
Preferred Stock (including the Preferred Shares) that the Company may designate
and issue in the future.
PREFERRED STOCK
Upon consummation of the Offering, there will be 5,700,000 shares of Serial
Preferred Stock outstanding consisting of the Preferred Shares issued in the
Offering and up to 6,000,000 additional Preferred Shares designated and reserved
for issuance as dividends on the Preferred Shares in accordance with the terms
thereof. Under the terms of the Company's Articles of Incorporation (the
"Articles"), the Board of Directors of the Company is authorized to issue the
remaining shares of Serial Preferred Stock in one or more series without
shareholder approval, subject to any limitations prescribed by law and those
contained in the Certificate of Designations. Each such series of Serial
Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation privileges, as shall be determined by the
Board of Directors.
The purpose of authorizing the Board of Directors to issue Serial Preferred
Stock and determine its rights and preferences is to eliminate delays associated
with a shareholder vote on specific issuances. The issuance of Serial Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company.
OLD PREFERRED SHARES
The Old Preferred Shares will, with respect to dividend rights and rights on
liquidation, winding-up and dissolution, rank (i) senior to each other class of
capital stock outstanding or established hereafter by the Company the terms of
which do not expressly provide that it ranks senior to, or on a parity with, the
Old Preferred Shares as to dividend rights and rights on liquidation, winding-up
and dissolution of the Company (collectively referred to as "Junior Shares");
(ii) subject to certain conditions, on a parity with each other class of
preferred stock established hereafter by the Company the terms of which
expressly provide that such class or series will rank on a parity with the Old
Preferred Shares as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively referred to as "Parity Shares"); and (iii) subject to
certain conditions, junior to each class of preferred stock established after
the date hereof by the Company the terms of which expressly provide that such
class or series will rank
76
senior to the Old Preferred Shares as to dividend rights and rights upon
liquidation, winding-up and dissolution of the Company (collectively referred to
as the "Senior Shares"). The Company may not authorize any new class of Senior
Shares without the approval of the holders of at least two-thirds of the Old
Preferred Shares then outstanding, voting or consenting as a separate class. In
addition, the Company may not authorize or issue any Parity Shares (other than
additional Old Preferred Shares issued as dividends on the Old Preferred Shares
and Exchange Shares (as defined)) without the approval of the holders of at
least a majority of the Old Preferred Shares then outstanding, voting or
consenting as a separate class, if after giving effect to the issuance of such
Parity Shares the aggregate liquidation preference of outstanding Parity Shares
(other than the Old Preferred Shares (including additional Old Preferred Shares
issued as dividends on the Old Preferred Shares) and Exchange Shares) would
exceed the sum of (x) $50 million and (y) the aggregate amount of gross proceeds
received after the Issue Date and on or prior to the date of issuance of such
Parity Shares from the issuance of Qualified Junior Shares.
Holders of the outstanding Old Preferred Shares will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
legally available therefor, dividends on the Old Preferred Shares at a rate per
annum equal to 14% of the liquidation preference per Preferred Share, payable
quarterly. In the event that dividends on the Old Preferred Shares are in
arrears and unpaid for six or more quarterly dividend periods (whether or not
consecutive), holders of Old Preferred Shares will be entitled to certain voting
rights. All dividends will be cumulative, whether or not earned or declared, on
a daily basis from the Issue Date and will be payable quarterly in arrears on
February 1, May 1, August 1 and November 1 of each year (each a "Dividend
Payment Date"), commencing on May 1, 1997, to holders of record on the January
15, April 15, July 15 and October 15 immediately preceding the relevant Dividend
Payment Date. Dividends may be paid at the Company's option on any Dividend
Payment Date occurring on or before February 1, 2002 either in cash or by
issuing additional fully paid and nonassessable Old Preferred Shares with an
aggregate liquidation preference equal to the amount of such dividends. After
February 1, 2002 dividends are payable only in cash. Dividends payable on the
Old Preferred Shares for any period shorter than a quarterly dividend period
will be computed on the basis of a 360-day year of twelve 30-day months and the
actual number of days elapsed. The Senior Indenture relating to the Senior Notes
limits the Company's ability to pay cash dividends on its Capital Stock,
including the Old Preferred Shares. See "Description of Certain Indebtedness."
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Shares for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment set apart for such payment on the Old Preferred
Shares. If full dividends are not so paid, the Old Preferred Shares will share
dividends PRO RATA with the Parity Shares. No dividends may be paid or set apart
for such payment on Junior Shares (except dividends on Junior Shares payable in
additional Junior Shares) if full cumulative dividends have not been paid in
full (or deemed paid) on the Old Preferred Shares. Dividends on account of
arrears for any past Dividend Period and dividends in connection with any
optional redemption may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to holders of record of Old Preferred Shares
on such date, not more than forty-five (45) days prior to the payment thereof,
as may be fixed by the Board of Directors of the Company. So long as any Old
Preferred Shares are outstanding, the Company shall not make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the purchase, redemption or other retirement of, any Parity Shares or
Junior Shares, or any warrants, rights, calls or options to purchase any Parity
Shares or Junior Shares, and shall not permit any corporation or other entity
directly or indirectly controlled by the Company to purchase or redeem any
Parity Shares or Junior Shares or any such warrants, rights, calls or options,
unless full cumulative dividends determined in accordance herewith on the Old
Preferred Shares have been paid (or are deemed paid) in full.
77
The Old Preferred Shares will be subject to mandatory redemption (subject to
the legal availability of funds therefor) in whole on February 1, 2009, at a
price equal to 100% of the liquidation preference thereof, plus, without
duplication, all accumulated and unpaid dividends to the date of redemption.
Future agreements of the Company may restrict or prohibit the Company from
redeeming the Old Preferred Shares.
Following a Covenant Amendment, the Company may, at its election and without
the consent of any holder of Old Preferred Shares, amend the Certificate of
Designations to add provisions making the Old Preferred Shares redeemable at the
option of the Company (subject to contractual and other restrictions with
respect thereto and the legal availability of funds therefor): (i)at any time on
or after February 1, 2002, in whole or in part, at the option of the Company, at
the redemption prices (expressed in percentages of the liquidation preference
thereof) set forth below, plus, without duplication, an amount in cash equal to
all accumulated and unpaid dividends to the redemption date (including an amount
in cash equal to a prorated dividend for the period from the Dividend Payment
Date immediately prior to the redemption date), if redeemed during the 12-month
period beginning February 1 of each of the years set forth below:
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
2002............................................................................. 107.00%
2003............................................................................. 105.25
2004............................................................................. 103.50
2005............................................................................. 101.75
2006 and thereafter.............................................................. 100.00
(ii) prior to February 1, 2000, in part, in an amount not to exceed 35% of the
initial aggregate liquidation preference of the Old Preferred Shares originally
issued out of the net cash proceeds of one or more Qualifying Events (other than
any Qualifying Event that results in a Change of Control) at a redemption price
of 114.0% of the liquidation preference thereof plus, without duplication, an
amount in cash equal to all accumulated and unpaid dividends to the redemption
date (including an amount in cash equal to a prorated dividend for the period
from the Dividend Payment Date immediately prior to the redemption date);
provided, however, that after any such redemption, the aggregate liquidation
preference of the Old Preferred Shares outstanding must equal at least 65% of
the initial aggregate liquidation preference of the Old Preferred Shares
originally issued in the Offering. Any such redemption will be required to occur
on or prior to 60 days after the receipt by the Company of the proceeds of such
Qualifying Event. In the event of redemption of only a portion of the then
outstanding Old Preferred Shares, the Company shall effect such redemption on a
PRO RATA basis.
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date occurring on or after the Issue Date, exchange
the Old Preferred Shares, in whole but not in part, for the Exchange Notes;
provided that (i) on the date of such exchange there are no accumulated and
unpaid dividends on the Old Preferred Shares (including the dividend payable on
such date) or other contractual impediment to such exchange and (ii) immediately
after giving effect to such exchange, no Default or Event of Default (each as
defined in the Exchange Indenture) would exist under the Exchange Indenture and
no default or event or default would exist under the Senior Indenture. The
exchange of the Old Preferred Shares into Exchange Notes would be restricted by
covenants contained in the Senior Indenture relating, among other things, to the
incurrence of indebtedness.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Old Preferred Shares will be entitled to be paid, out of
the assets of the Company available for distribution to the shareholders, the
liquidation preference of $50 per Preferred Share, plus, without duplication, an
amount in cash equal to all accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend for the period from the last Dividend Payment Date to the date
fixed for liquidation, dissolution or winding-up),
78
before any distribution is made on any Junior Shares, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Old Preferred Shares and all other Parity Shares are not paid in
full, the holders of the Old Preferred Shares and the Parity Shares will share
equally and ratably in any distribution of assets of the Company in proportion
to the full liquidation preference, including, without duplication, all accrued
and unpaid dividends to which each is entitled. After payment of the full amount
of the liquidation preference and accumulated and unpaid dividends to which they
are entitled, the holders of Old Preferred Shares will not be entitled to any
further participation in any distribution of assets of the Company. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more entities shall be deemed to be a liquidation, dissolution or winding-up
of the affairs of the Company.
The holders of Old Preferred Shares, except as otherwise required under
applicable law or as set forth below, shall not be entitled or permitted to vote
on any matter required or permitted to be voted upon by the shareholders of the
Company. The Certificate of Designations provides that if (i) dividends on the
Old Preferred Shares are in arrears and unpaid (and, if after February 1, 2002,
such dividends are not paid in cash) for six or more quarterly dividend periods
(whether or not consecutive); (ii) the Company fails to redeem the Old Preferred
Shares on February 1, 2009 or fails otherwise to discharge any redemption
obligation with respect to the Old Preferred Shares; (iii) the Company fails to
make an Offer to Purchase if the provisions set forth under "--Change of
Control" below require such Offer of Purchase to be made, or fails to purchase
Old Preferred Shares from holders who elect to have such shares purchased
pursuant to such an Offer to Purchase; (iv) a breach or violation of any of the
provisions described under the caption "--Certain Covenants" occurs and the
breach or violation continues for a period of 30 days or more after the Company
receives notice thereof specifying the default from the holders of at least 25%
of the Old Preferred Shares then outstanding; or (v) the Company fails to pay at
the final stated maturity (giving effect to any extensions thereof) the
principal amount of any Debt of the Company or any Subsidiary of the Company, or
the final stated maturity of any such Debt is accelerated, if the aggregate
principal amount of such Debt, together with the aggregate principal amount of
any other such Debt in default for failure to pay principal at the final stated
maturity (giving effect to any extensions thereof) or which has been
accelerated, aggregates $15 million or more at any time, in each case, after a
10-day period during which such default shall not have been cured or such
acceleration rescinded, then the number of directors constituting the Board of
Directors of the Company will be adjusted to permit the holders of a majority of
the then outstanding Old Preferred Shares, voting together with any outstanding
Parity Shares separately as a single class, to elect the lesser of two directors
and that number of directors constituting 25% of the members of such Board of
Directors. Such voting rights will continue until such time as, in the case of a
dividend default, all accumulated dividends in arrears on the Old Preferred
Shares are paid in full (and, in the case of dividends payable after February 1,
2002, paid in cash) and, in all other cases, the failure, breach or default
giving rise to such Voting Rights Triggering Event is remedied or waived by the
holders of at least a majority of the Old Preferred Shares then outstanding, at
which time the term of any directors elected pursuant to the provisions of this
paragraph shall terminate. Each such event described in clauses (i) through (v)
above is referred to herein as a "Voting Rights Triggering Event." The voting
rights provided herein shall be the holders' exclusive remedy at law or in
equity.
In addition to the provisions described above the Certificate of
Designations also provides that the Company will not, without the approval of
the holders of two-thirds of the Old Preferred Shares then outstanding amend,
alter or repeal any of the provisions of the Company's Certificate of
Incorporation (including the Certificate of Designations) or the bylaws of the
Company so as to affect adversely the powers, preferences or rights of the
holders of the Old Preferred Shares or reduce the time for any notice to which
the holders of the Old Preferred Shares may be entitled. Subject to the
provisions described above under "Ranking", the Certificate of Designations
provides that an amendment of the Company's
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Certificate of Incorporation to authorize or create, or to increase the
authorized amount, of Junior Shares, Parity Shares or Senior Shares shall not be
deemed to affect adversely the powers, preferences or rights of the holders of
the Old Preferred Shares.
Notwithstanding the foregoing, modifications and amendments of the terms of
Certificate of Designations described below under "--Change of Control" and
"--Certain Covenants" may be made by the Company with the consent of the holders
of a majority of the Old Preferred Shares; provided, however, that following the
mailing of any Offer to Purchase and until the Expiration Date of that Offer to
Purchase no such modification or amendment may, without the consent of the
holder of each outstanding Preferred Share affected thereby, modify any Offer to
Purchase for the Old Preferred Shares required under the "Change of Control"
covenant contained in the Certificate of Designations in a manner materially
adverse to the holders of outstanding Old Preferred Shares. In addition, the
holders of a majority of the outstanding Old Preferred Shares, on behalf of all
holders of Old Preferred Shares, may waive compliance by the Company with the
covenants described below under "--Certain Covenants" and may waive any past
default of the provisions of the Certificate of Designations described below
under "--Change of Control" and "--Certain Covenants", except a default arising
from failure to purchase any Old Preferred Shares tendered pursuant to an Offer
to Purchase.
The Certificate of Designations provides that within 30 days of the
occurrence of a Change of Control, the Company will be required to make an Offer
to Purchase all outstanding Old Preferred Shares at a purchase price equal to
101% of the liquidation preference thereof, plus, without duplication, all
accumulated and unpaid dividends per share to the date of purchase (including an
amount in cash equal to a prorated dividend for the period from the Dividend
Payment Date immediately prior to the date of purchase (as defined below) to the
date of purchase) provided, that the Company will not repurchase or redeem any
Old Preferred Shares pursuant to the foregoing provision prior to the Company's
repurchase of such Senior Notes as are required to be repurchased pursuant to
the Change of Control covenant in the Senior Indenture. A "Change of Control"
will be deemed to have occurred at such time as either (a) any Person or any
Persons acting together that would constitute a "group" (a "Group") for purposes
of Section 13(d) of the Securities Exchange Act of 1934, or any successor
provision thereto (other than Eagle River, Mr. Craig O. McCaw and their
respective Affiliates or an underwriter engaged in a firm commitment
underwriting on behalf of the Company), shall beneficially own (within the
meaning of Rule 13d-3 under the Exchange Act, or any successor provision
thereto) more than 50% of the aggregate voting power of all classes of Voting
Stock of the Company or (b) neither Mr. Craig O. McCaw nor any person designated
by him to the Company as acting on his behalf shall be a director of the Company
or (c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by the Board of Directors of the
Company or whose nomination for election by the shareholders of the Company was
proposed by a vote of a majority of the directors of the Company 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 of the Company then in
office.
The Certificate of Designations provides that the Company may not, and may
not permit any Restricted Subsidiary of the Company to, Incur any Debt unless
either (a) the ratio of (i) the aggregate consolidated principal amount of Debt
of the Company outstanding as of the most recent available quarterly or annual
balance sheet, after giving pro forma effect to the Incurrence of such Debt and
any other Debt Incurred since such balance sheet date and the receipt and
application of the proceeds thereof to (ii) Consolidated Cash Flow Available for
Fixed Charges for the four full fiscal quarters next preceding the Incurrence of
such Debt for which consolidated financial statements are available, determined
on a pro forma basis as if any such Debt had been Incurred and the proceeds
thereof had been applied at the beginning of such four fiscal quarters, would be
less than 5.5 to 1 for such four-quarter periods ending on or prior to December
31, 1999 and 5.0 to 1 for such periods ending thereafter, or (b) the Company's
Consolidated Capital Ratio as of the most recent available quarterly or annual
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balance sheet, after giving pro forma effect to the Incurrence of such Debt and
any other Debt Incurred since such balance sheet date and the receipt and
application of the proceeds thereof, is less than 2.0 to 1.
Notwithstanding the foregoing limitation, the Company and any Restricted
Subsidiary may Incur the following: (i) Debt under any one or more Bank Credit
Agreements or Vendor Financing Facilities in an aggregate principal amount at
any one time not to exceed $125 million, and any renewal, extension, refinancing
or refunding thereof in an amount which, together with any principal amount
remaining outstanding or available under all Bank Credit Agreements and Vendor
Financing Facilities of the Company and its Restricted Subsidiaries, plus the
amount of any premium required to be paid in connection with such refinancing
pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount
of expenses incurred in connection with such refinancing, does not exceed the
aggregate principal amount outstanding or available under all such Bank Credit
Agreements and Vendor Financing Facilities of the Company and its Restricted
Subsidiaries immediately prior to such renewal, extension, refinancing or
refunding; (ii) Purchase Money Debt Incurred to finance the construction,
acquisition or improvement of Telecommunications Assets, provided that the net
proceeds of such Purchase Money Debt do not exceed 80% of the cost of
construction, acquisition or improvement price of the applicable
Telecommunications Assets; (iii)Debt owed by the Company to any Wholly-Owned
Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of
the Company to the Company or a Wholly-Owned Restricted Subsidiary of the
Company; provided, however, that upon either (x) the transfer or other
disposition by such Wholly-Owned Restricted Subsidiary or the Company of any
Debt so permitted to a Person other than the Company or another Wholly-Owned
Restricted Subsidiary of the Company or (y) the issuance (other than directors'
qualifying shares), sale, lease, transfer or other disposition of shares of
Capital Stock (including by consolidation or merger) of such Wholly-Owned
Restricted Subsidiary to a Person other than the Company or another such Wholly-
Owned Restricted Subsidiary, the provisions of this clause (iii) shall no longer
be applicable to such Debt and such Debt shall be deemed to have been Incurred
at the time of such transfer or other disposition; (iv) Debt Incurred to renew,
extend, refinance or refund (each, a "refinancing") Debt (a) referred to in
clause (vi) below or (b) Incurred pursuant to the preceding paragraph or clause
(ii) of this paragraph in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Debt so refinanced
plus the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt so refinanced or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the amount of expenses of the Company incurred in connection with such
refinancing; provided, however, that, the refinancing Debt by its terms, or by
the terms of any agreement or instrument pursuant to which such Debt is issued,
(x) does not provide for payments of principal of such Debt at the stated
maturity thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder), in each case
prior to the time the same are required by the terms of the Debt being
refinanced and (y) does not permit redemption or other retirement (including
pursuant to a required offer to purchase made by the Company) of such Debt at
the option of the holder thereof prior to the final stated maturity of the Debt
being refinanced, other than a redemption or other retirement at the option of
the holder of such Debt (including pursuant to an Offer to Purchase made by the
Company) which is conditioned upon a change substantially similar to those
described under "--Change of Control" or which is pursuant to provisions
substantially similar to those described under "Description of the Exchange
Notes--Covenants--Limitation on Asset Dispositions"; (v) Debt consisting of
Permitted Interest Rate and Currency Protection Agreements; (vi) Debt
outstanding at the Issue Date; (vii)Subordinated Debt invested by (a) a group of
employees of the Company, which includes the Chief Executive Officer of the
Company, who own, directly or indirectly, through an employee stock ownership
plan or arrangement, shares of the Company's Capital Stock or (b) any other
Person that controls the Company (i) on
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the Issue Date or (ii) after a Change of Control, provided that the Company is
not in default with respect to its obligations described under "Change of
Control" above; (viii) Debt consisting of performance and other similar bonds
and reimbursement obligations Incurred in the ordinary course of business
securing the performance of contractual, franchise or license obligations of the
Company or a Restricted Subsidiary, or in respect of a letter of credit obtained
to secure such performance; and (ix) Debt not otherwise permitted to be Incurred
pursuant to clauses (i) through (viii) above, which, together with any other
outstanding Debt Incurred pursuant to this clause (ix), has an aggregate
principal amount or, in the case of Debt issued at a discount, an accreted
amount (determined in accordance with generally accepted accounting principles)
at the time of Incurrence not in excess of $10 million at any time outstanding.
The Certificate of Designations provides that, without the affirmative vote
of the holders of a majority of the issued and outstanding Old Preferred Shares,
voting or consenting as a separate class, the Company will not, in a single
transaction or a series of related transactions, consolidate with or merge with
or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets to, another Person or adopt a plan of
liquidation unless (i) either (1) the Company is the surviving or continuing
Person or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person that acquires by
conveyance, transfer or lease the properties and assets of the Company
substantially as an entirety or in the case of a plan of liquidation, the Person
to which assets of the Company have been transferred, shall be a corporation,
limited liability company, partnership or trust organized and existing under the
laws of the United States or any State thereof or the District of Columbia; (ii)
the Old Preferred Shares shall be converted into or exchanged for and shall
become shares of Capital Stock of such successor, transferee or resulting
Person, having in respect of such successor, transferee or resulting Person the
same powers, preferences and relative participating, optional or other special
rights and the qualifications, limitations or restrictions thereon, that the Old
Preferred Shares had immediately prior to such transaction; (iii) immediately
after giving pro forma effect to such transactions, no Voting Rights Triggering
Event shall have occurred or be continuing; and (iv) the Company has delivered
to the Transfer Agent for the Old Preferred Shares prior to the consummation of
the proposed transaction an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer complies with the
Certificate of Designations and that all conditions precedent in the Certificate
of Designations relating to such transaction have been satisfied. For purposes
of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a
single transaction or series of related transactions) of all or substantially
all of the properties and assets of one or more Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties or assets of the
Company, will be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Company has entered into the Preferred Registration Rights Agreement
pursuant to which the Company agreed, for the benefit of the holders of the Old
Preferred Shares, (i) to file with the Commission, within 45 days following the
Issue Date, the Exchange Offer Registration Statement under the Securities Act
relating to an Exchange Offer pursuant to which preferred stock substantially
identical to the Old Preferred Shares (except that such preferred stock will not
contain terms with respect to transfer restrictions) (the "Exchange Shares")
would be offered in exchange for the then outstanding Old Preferred Shares
tendered at the option of the holders thereof and (ii) to use their reasonable
best efforts to cause the Exchange Offer Registration Statement to become
effective as soon as practicable thereafter. The Company has further agreed to
commence the Exchange Offer promptly after the Exchange Offer Registration
Statement has become effective, hold the offer open for at least 30 days, and
exchange Exchange Shares for all Old Preferred Shares tendered and not withdrawn
before the expiration of the offer. For each Preferred Share surrendered
pursuant to the Exchange Offer, the holder who surrendered such share will
receive an Exchange Share having a liquidation preference equal to that of the
surrendered Preferred Share. Dividends on the Exchange Shares will accumulate
from the last Dividend Payment Date on which dividends were paid or added to the
liquidation preference of the Old
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Preferred Shares surrendered in exchange therefor or, if no dividends have been
paid or added to the liquidation preference of such Old Preferred Shares, from
the Issue Date.
In the event that (i) the Company has not filed the registration statement
relating to the Exchange Offer (or, if applicable, the Resale Registration)
within 45 days following January 31, 1997, (ii) such registration statement (or,
if applicable, the Resale Registration) has not become effective within 120 days
following January 31, 1997, (iii) the Exchange Offer has not been consummated
within 30 business days following the effective date of the Exchange Offer
Registration Statement or (iv) any registration statement required by the
Preferred Registration Rights Agreement is filed and declared effective but
shall thereafter cease to be effective (except as specifically permitted
therein) without being succeeded immediately by an additional registration
statement filed and declared effective (any such event referred to in clauses
(i) through (iv), a "Registration Default"), then additional dividends will
accrue (in addition to the stated dividends on the Old Preferred Shares) at the
rate of 0.25% per annum on the liquidation preference of the Old Preferred
Shares for the period from the occurrence of the Registration Default until such
time as no Registration Default is in effect. Such additional dividends (the
"Special Dividends") will be payable quarterly in arrears on each regular
Dividend Payment Date. For each 90-day period that the Registration Default
continues, the per annum rate of such Special Dividends will increase by an
additional 0.25%; provided that such rate shall in no event exceed 1.0% per
annum in the aggregate. At such time as such Registration Default is no longer
in effect, the dividend rate on the Old Preferred Shares shall be the rate
stated on the cover page hereof and no further Special Dividends will accrue.
DIRECTOR AND OFFICER INDEMNIFICATION
The Washington Business Corporation Act provides that a Washington
corporation may include provisions in its articles of incorporation relieving
each of its directors of monetary liability arising out of his or her conduct as
a director for breach of his or her fiduciary duty except liability for (i) acts
or omissions of a director that involve intentional misconduct or a knowing
violation of law, (ii) conduct in violation of Section 23B.08.310 of the
Washington Business Corporation Act (which section relates to unlawful
distributions) or (iii) any transaction from which a director personally
received a benefit in money, property or services to which the director was not
legally entitled. The Company's Articles include such provisions.
The Company's Articles and Bylaws provide that the Company shall, to the
fullest extent permitted by the Washington Business Corporation Act, as amended
from time to time, indemnify and advance expenses to each of its currently
acting and former directors and officers, and may so indemnify and advance
expenses to each of its current and former employees and agents. The Company
believes the foregoing provisions are necessary to attract and retain qualified
persons as directors and officers.
PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS
The Washington Business Corporation Act, Section 23B.19 of the Revised Code
of Washington, prohibits a "target corporation," with certain exceptions, from
engaging in certain "significant business transactions" (such as a merger or
sale of assets) with an "acquiring person" who acquires more than 10% of the
voting securities of the target corporation for a period of five years after
such acquisition, unless the transaction is approved by a majority of the
members of the target corporation's board of directors prior to the date of the
significant business transaction or the purchase of the shares made by the
acquiring person or unless the aggregate amount of the cash and the market value
of non-cash consideration received by holders of outstanding shares of any class
or series of stock of the target corporation is equal to certain minimum
amounts. The Company's Articles provide that it will be subject to such
prohibitions and shall remain subject to such prohibitions even if they are ever
repealed. Such prohibitions do not apply to any shareholders who beneficially
own ten percent or more of the Company's outstanding voting securities prior to
the Offering.
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DESCRIPTION OF NEW PREFERRED SHARES
The summary contained herein of certain provisions of the New Preferred
Shares to be issued by the Company does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the Certificate of Designations of rights and preferences relating
thereto ("Certificate of Designations"), copies of which may be obtained from
the Company upon request. See "Definitions" below for the definitions of certain
capitalized terms used herein.
RANKING
The New Preferred Shares will, with respect to dividend rights and rights on
liquidation, winding-up and dissolution, rank (i) senior to each other class of
capital stock outstanding or established hereafter by the Company the terms of
which do not expressly provide that it ranks senior to, or on a parity with, the
New Preferred Shares as to dividend rights and rights on liquidation, winding-up
and dissolution of the Company (collectively referred to as "Junior Shares");
(ii) subject to certain conditions, on a parity with each other class of
preferred stock established hereafter by the Company the terms of which
expressly provide that such class or series will rank on a parity with the New
Preferred Shares as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively referred to as "Parity Shares"); and (iii) subject to
certain conditions, junior to each class of preferred stock established after
the date hereof by the Company the terms of which expressly provide that such
class or series will rank senior to the New Preferred Shares as to dividend
rights and rights upon liquidation, winding-up and dissolution of the Company
(collectively referred to as the "Senior Shares"). The Company may not authorize
any new class of Senior Shares without the approval of the holders of at least
two-thirds of the New Preferred Shares then outstanding, voting or consenting as
a separate class. In addition, the Company may not authorize or issue any Parity
Shares (other than additional New Preferred Shares issued as dividends on the
New Preferred Shares and Exchange Shares (as defined)) without the approval of
the holders of at least a majority of the New Preferred Shares then outstanding,
voting or consenting as a separate class, if after giving effect to the issuance
of such Parity Shares the aggregate liquidation preference of outstanding Parity
Shares (other than the New Preferred Shares (including additional New Preferred
Shares issued as dividends on the New Preferred Shares) and Exchange Shares)
would exceed the sum of (x) $50 million and (y) the aggregate amount of gross
proceeds received after the Issue Date and on or prior to the date of issuance
of such Parity Shares from the issuance of Qualified Junior Shares.
DIVIDENDS
Holders of the outstanding New Preferred Shares will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
legally available therefor, dividends on the New Preferred Shares at a rate per
annum equal to 14% of the liquidation preference per Preferred Share, payable
quarterly. In the event that dividends on the New Preferred Shares are in
arrears and unpaid for six or more quarterly dividend periods (whether or not
consecutive), holders of New Preferred Shares will be entitled to certain voting
rights. See "--Voting Rights" below. All dividends will be cumulative, whether
or not earned or declared, on a daily basis from the Issue Date and will be
payable quarterly in arrears on February 1, May 1, August 1 and November 1 of
each year (each a "Dividend Payment Date"), commencing on May 1, 1997, to
holders of record on the January 15, April 15, July 15 and October 15
immediately preceding the relevant Dividend Payment Date. Dividends may be paid
at the Company's option on any Dividend Payment Date occurring on or before
February 1, 2002 either in cash or by issuing additional fully paid and
nonassessable New Preferred Shares with an aggregate liquidation preference
equal to the amount of such dividends. After February 1, 2002 dividends are
payable only in cash. Dividends payable on the New Preferred Shares for any
period shorter than a quarterly dividend period will be computed on the basis of
a 360-day year of twelve 30-day months and the actual number of days elapsed.
The Senior Indenture relating to the Senior Notes limits the Company's ability
to pay
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cash dividends on its Capital Stock, including the New Preferred Shares. See
"Description of Certain Indebtedness."
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Shares for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment set apart for such payment on the New Preferred
Shares. If full dividends are not so paid, the New Preferred Shares will share
dividends pro rata with the Parity Shares. No dividends may be paid or set apart
for such payment on Junior Shares (except dividends on Junior Shares payable in
additional Junior Shares) if full cumulative dividends have not been paid in
full (or deemed paid) on the New Preferred Shares. Dividends on account of
arrears for any past Dividend Period and dividends in connection with any
optional redemption may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to holders of record of New Preferred Shares
on such date, not more than forty-five (45) days prior to the payment thereof,
as may be fixed by the Board of Directors of the Company. So long as any New
Preferred Shares are outstanding, the Company shall not make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the purchase, redemption or other retirement of, any Parity Shares or
Junior Shares, or any warrants, rights, calls or options to purchase any Parity
Shares or Junior Shares, and shall not permit any corporation or other entity
directly or indirectly controlled by the Company to purchase or redeem any
Parity Shares or Junior Shares or any such warrants, rights, calls or options,
unless full cumulative dividends determined in accordance herewith on the New
Preferred Shares have been paid (or are deemed paid) in full.
MANDATORY REDEMPTION
The New Preferred Shares will be subject to mandatory redemption (subject to
the legal availability of funds therefor) in whole on February 1, 2009, at a
price equal to 100% of the liquidation preference thereof, plus, without
duplication, all accumulated and unpaid dividends to the date of redemption.
Future agreements of the Company may restrict or prohibit the Company from
redeeming the New Preferred Shares.
PERMITTED AMENDMENTS RELATING TO OPTIONAL REDEMPTION
Following a Covenant Amendment, the Company may, at its election and without
the consent of any holder of New Preferred Shares, amend the Certificate of
Designations to add provisions making the New Preferred Shares redeemable at the
option of the Company (subject to contractual and other restrictions with
respect thereto and the legal availability of funds therefor): (i)at any time on
or after February 1, 2002, in whole or in part, at the option of the Company, at
the redemption prices (expressed in percentages of the liquidation preference
thereof) set forth below, plus, without duplication, an amount in cash equal to
all accumulated and unpaid dividends to the redemption date (including an amount
in cash equal to a prorated dividend for the period from the Dividend Payment
Date immediately prior to the redemption date), if redeemed during the 12-month
period beginning February 1 of each of the years set forth below:
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
2002............................................................................. 107.00%
2003............................................................................. 105.25
2004............................................................................. 103.50
2005............................................................................. 101.75
2006 and thereafter.............................................................. 100.00
(ii) prior to February 1, 2000, in part, in an amount not to exceed 35% of the
initial aggregate liquidation preference of the New Preferred Shares originally
issued out of the net cash proceeds of one or more
85
Qualifying Events (other than any Qualifying Event that results in a Change of
Control) at a redemption price of 114.0% of the liquidation preference thereof
plus, without duplication, an amount in cash equal to all accumulated and unpaid
dividends to the redemption date (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the redemption date); provided, however, that after any such
redemption, the aggregate liquidation preference of the New Preferred Shares
outstanding must equal at least 65% of the initial aggregate liquidation
preference of the New Preferred Shares originally issued in the Offering. Any
such redemption will be required to occur on or prior to 60 days after the
receipt by the Company of the proceeds of such Qualifying Event. In the event of
redemption of only a portion of the then outstanding New Preferred Shares, the
Company shall effect such redemption on a pro rata basis.
PROCEDURE FOR REDEMPTION
On and after the redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accumulate on New
Preferred Shares called for redemption and all rights of holders of such shares
will terminate except for the right to receive the redemption price, without
interest; provided, however, that if a notice of redemption shall have been
given as provided in the succeeding sentence and the funds necessary for
redemption (including an amount in respect of all dividends that will accrue to
the redemption date) shall have been segregated and irrevocably set apart by the
Company, in trust for the equal and ratable benefit of the holders of the shares
called for redemption, then dividends shall cease to accumulate on the
redemption date on the shares to be redeemed then, at the close of business of
the day on which such funds are segregated and set apart, the holders of the
shares to be redeemed shall cease to be shareholders of the Company and shall be
entitled only to receive the redemption price for such shares, without interest.
The Company will send a written notice of redemption by first class mail to each
holder of record of New Preferred Shares, not fewer than 30 days nor more than
60 days prior to the date fixed for such redemption at its registered address.
New Preferred Shares issued and reacquired will have the status of authorized
but unissued preferred stock of the Company undesignated as to series and may,
with any and all other authorized but unissued preferred stock of the Company,
be designated or redesignated and issued or reissued, as the case may be, as
part of any series of preferred stock of the Company, except that any issuance
or reissuance of New Preferred Shares must be in compliance with the Certificate
of Designations.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date occurring on or after the Issue Date, exchange
the New Preferred Shares, in whole but not in part, for the Exchange Notes;
provided that (i) on the date of such exchange there are no accumulated and
unpaid dividends on the New Preferred Shares (including the dividend payable on
such date) or other contractual impediment to such exchange and (ii) immediately
after giving effect to such exchange, no Default or Event of Default (each as
defined in the Exchange Indenture) would exist under the Exchange Indenture and
no default or event or default would exist under the Senior Indenture. The
exchange of the New Preferred Shares into Exchange Notes would be restricted by
covenants contained in the Senior Indenture relating, among other things, to the
incurrence of indebtedness.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding New Preferred Shares will be entitled to receive, subject to the
second succeeding sentence, $1.00 principal amount of Exchange Notes for each
$1.00 of the aggregate liquidation preference of New Preferred Shares held by
them. The Exchange Notes will be issued in registered form, without coupons.
Exchange Notes issued in exchange for New Preferred Shares will be issued in
principal amounts of $1,000 and integral multiples thereof so that each holder
of New Preferred Shares will receive certificates representing the entire amount
of Exchange Notes to which such holder's New Preferred Shares entitle such
holder; provided that the Company may pay cash in lieu of issuing an Exchange
Note in a principal amount less than
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$1,000. The Company will send a written notice of exchange by mail to each
holder of record of New Preferred Shares not fewer than 30 days nor more than 60
days before the date fixed for such exchange. On and after the date of exchange,
dividends will cease to accrue on the outstanding New Preferred Shares and all
rights of the holders of New Preferred Shares (except the right to receive the
Exchange Notes, an amount in cash, to the extent applicable, equal to the
accumulated and unpaid dividends to the exchange date and, if the Company so
elects, cash in lieu of any Exchange Note that is in a principal amount less
than $1,000) will terminate. The person entitled to receive the Exchange Notes
issuable upon such exchange will be treated for all purposes as the registered
holder of such Exchange Notes. See "Description of Exchange Notes."
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of New Preferred Shares will be entitled to be paid, out of
the assets of the Company available for distribution to the shareholders, the
liquidation preference of $50 per New Preferred Share, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last Dividend
Payment Date to the date fixed for liquidation, dissolution or winding-up),
before any distribution is made on any Junior Shares, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the New Preferred Shares and all other Parity Shares are not paid in
full, the holders of the New Preferred Shares and the Parity Shares will share
equally and ratably in any distribution of assets of the Company in proportion
to the full liquidation preference, including, without duplication, all accrued
and unpaid dividends to which each is entitled. After payment of the full amount
of the liquidation preference and accumulated and unpaid dividends to which they
are entitled, the holders of New Preferred Shares will not be entitled to any
further participation in any distribution of assets of the Company. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more entities shall be deemed to be a liquidation, dissolution or winding-up
of the affairs of the Company.
The Certificate of Designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the New Preferred
Shares.
VOTING RIGHTS
The holders of New Preferred Shares, except as otherwise required under
applicable law or as set forth below, shall not be entitled or permitted to vote
on any matter required or permitted to be voted upon by the shareholders of the
Company.
The Certificate of Designations provides that if (i) dividends on the New
Preferred Shares are in arrears and unpaid (and, if after February 1, 2002, such
dividends are not paid in cash) for six or more quarterly dividend periods
(whether or not consecutive); (ii) the Company fails to redeem the New Preferred
Shares on February 1, 2009 or fails otherwise to discharge any redemption
obligation with respect to the New Preferred Shares; (iii) the Company fails to
make an Offer to Purchase if the provisions set forth under "--Change of
Control" below require such Offer of Purchase to be made, or fails to purchase
New Preferred Shares from holders who elect to have such shares purchased
pursuant to such an Offer to Purchase; (iv) a breach or violation of any of the
provisions described under the caption "--Certain Covenants" occurs and the
breach or violation continues for a period of 30 days or more after the Company
receives notice thereof specifying the default from the holders of at least 25%
of the New Preferred Shares then outstanding; or (v) the Company fails to pay at
the final stated maturity (giving effect to any extensions thereof) the
principal amount of any Debt of the Company or any Subsidiary of the Company, or
the final stated maturity of any such Debt is accelerated, if the aggregate
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principal amount of such Debt, together with the aggregate principal amount of
any other such Debt in default for failure to pay principal at the final stated
maturity (giving effect to any extensions thereof) or which has been
accelerated, aggregates $15 million or more at any time, in each case, after a
10-day period during which such default shall not have been cured or such
acceleration rescinded, then the number of directors constituting the Board of
Directors of the Company will be adjusted to permit the holders of a majority of
the then outstanding New Preferred Shares, voting together with any outstanding
Parity Shares separately as a single class, to elect the lesser of two directors
and that number of directors constituting 25% of the members of such Board of
Directors. Such voting rights will continue until such time as, in the case of a
dividend default, all accumulated dividends in arrears on the New Preferred
Shares are paid in full (and, in the case of dividends payable after February 1,
2002, paid in cash) and, in all other cases, the failure, breach or default
giving rise to such Voting Rights Triggering Event is remedied or waived by the
holders of at least a majority of the New Preferred Shares then outstanding, at
which time the term of any directors elected pursuant to the provisions of this
paragraph shall terminate. Each such event described in clauses (i) through (v)
above is referred to herein as a "Voting Rights Triggering Event." The voting
rights provided herein shall be the holders' exclusive remedy at law or in
equity.
In addition to the provisions described above under "Ranking," the
Certificate of Designations will also provide that the Company will not, without
the approval of the holders of two-thirds of the New Preferred Shares then
outstanding amend, alter or repeal any of the provisions of the Company's
Certificate of Incorporation (including the Certificate of Designations) or the
bylaws of the Company so as to affect adversely the powers, preferences or
rights of the holders of the New Preferred Shares or reduce the time for any
notice to which the holders of the New Preferred Shares may be entitled. Subject
to the provisions described above under "Ranking", the Certificate of
Designations provides that an amendment of the Company's Certificate of
Incorporation to authorize or create, or to increase the authorized amount, of
Junior Shares, Parity Shares or Senior Shares shall not be deemed to affect
adversely the powers, preferences or rights of the holders of the New Preferred
Shares.
Notwithstanding the foregoing, modifications and amendments of the terms of
Certificate of Designations described below under "--Change of Control" and
"--Certain Covenants" may be made by the Company with the consent of the holders
of a majority of the New Preferred Shares; provided, however, that following the
mailing of any Offer to Purchase and until the Expiration Date of that Offer to
Purchase no such modification or amendment may, without the consent of the
holder of each outstanding Preferred Share affected thereby, modify any Offer to
Purchase for the New Preferred Shares required under the "Change of Control"
covenant contained in the Certificate of Designations in a manner materially
adverse to the holders of outstanding New Preferred Shares. In addition, the
holders of a majority of the outstanding New Preferred Shares, on behalf of all
holders of New Preferred Shares, may waive compliance by the Company with the
covenants described below under "--Certain Covenants" and may waive any past
default of the provisions of the Certificate of Designations described below
under "--Change of Control" and "--Certain Covenants", except a default arising
from failure to purchase any New Preferred Shares tendered pursuant to an Offer
to Purchase.
CHANGE OF CONTROL
The Certificate of Designations will provide that within 30 days of the
occurrence of a Change of Control, the Company will be required to make an Offer
to Purchase all outstanding New Preferred Shares at a purchase price equal to
101% of the liquidation preference thereof, plus, without duplication, all
accumulated and unpaid dividends per share to the date of purchase (including an
amount in cash equal to a prorated dividend for the period from the Dividend
Payment Date immediately prior to the date of purchase (as defined below) to the
date of purchase) provided, that the Company will not repurchase or redeem any
New Preferred Shares pursuant to the foregoing provision prior to the Company's
repurchase of such Senior Notes as are required to be repurchased pursuant to
the Change of Control
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covenant in the Senior Indenture. A "Change of Control" will be deemed to have
occurred at such time as either (a) any Person or any Persons acting together
that would constitute a "group" (a "Group") for purposes of Section 13(d) of the
Securities Exchange Act of 1934, or any successor provision thereto (other than
Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an
underwriter engaged in a firm commitment underwriting on behalf of the Company),
shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act,
or any successor provision thereto) more than 50% of the aggregate voting power
of all classes of Voting Stock of the Company or (b) neither Mr. Craig O. McCaw
nor any person designated by him to the Company as acting on his behalf shall be
a director of the Company or (c) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by the
Board of Directors of the Company or whose nomination for election by the
shareholders of the Company was proposed by a vote of a majority of the
directors of the Company 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 of the Company then in office.
Within 30 days following the date on which the Company becomes aware that a
Change of Control has occurred, the Company must send the Offer to Purchase by
first class mail postage prepaid to each holder of New Preferred Shares. Such
Offer to Purchase shall state, among other things, its expiration date, which
must be no earlier than 30 days nor later than 60 days from the date such Offer
to Purchase is mailed, other than as may be required by law (the "Expiration
Date"). Holders electing to have any New Preferred Shares purchased pursuant to
an Offer to Purchase will be required to surrender such New Preferred Shares,
properly endorsed for transfer, together with such other customary documents as
the Company and the transfer agent may reasonably request, to the transfer agent
and registrar for the New Preferred Shares at the address specified in the Offer
to Purchase prior to the close of business on the Expiration Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent applicable in connection with the purchase of New
Preferred Shares pursuant to an Offer to Purchase.
This "Change of Control" covenant is not intended to afford holders of New
Preferred Shares protection in the event of certain highly leveraged
transactions, reorganizations, restructurings, mergers and other similar
transactions that might adversely affect the holders of New Preferred Shares but
would not constitute a Change of Control. The Company could, in the future,
enter into certain transactions, including certain recapitalizations of the
Company, that would not constitute a Change of Control, but would increase the
amount of indebtedness outstanding at such time.
The Company does not currently have adequate financial resources to effect a
repurchase of the New Preferred Shares upon a Change of Control and there can be
no assurance that the Company will have such resources in the future. In
addition, there may be restrictions contained in the Senior Indenture or other
instruments evidencing Indebtedness incurred by the Company or its Restricted
Subsidiaries which restrict or prohibit the ability of the Company to effect any
repurchase of New Preferred Shares required in connection with a Change of
Control.
None of the provisions in the Certificate of Designations relating to a
purchase of New Preferred Shares upon a Change of Control are waivable by the
Board of Directors of the Company. Without the consent of each holder of New
Preferred Shares affected thereby, after the mailing of the notice of an Offer
to Purchase, no amendment to the Certificate of Designations may, directly or
indirectly, affect the Company's obligation to purchase the outstanding New
Preferred Shares or amend, modify or change the obligation of the Company to
consummate an Offer to Purchase or waive any default in the performance thereof
or modify any of the provisions of the definitions with respect to any such
offer.
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CERTAIN COVENANTS
LIMITATION ON CONSOLIDATED DEBT. The Certificate of Designations will
provide that the Company may not, and may not permit any Restricted Subsidiary
of the Company to, Incur any Debt unless either (a) the ratio of (i) the
aggregate consolidated principal amount of Debt of the Company outstanding as of
the most recent available quarterly or annual balance sheet, after giving pro
forma effect to the Incurrence of such Debt and any other Debt Incurred since
such balance sheet date and the receipt and application of the proceeds thereof
to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters next preceding the Incurrence of such Debt for which
consolidated financial statements are available, determined on a pro forma basis
as if any such Debt had been Incurred and the proceeds thereof had been applied
at the beginning of such four fiscal quarters, would be less than 5.5 to 1 for
such four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1
for such periods ending thereafter, or (b) the Company's Consolidated Capital
Ratio as of the most recent available quarterly or annual balance sheet, after
giving pro forma effect to the Incurrence of such Debt and any other Debt
Incurred since such balance sheet date and the receipt and application of the
proceeds thereof, is less than 2.0 to 1.
Notwithstanding the foregoing limitation, the Company and any Restricted
Subsidiary may Incur the following: (i)Debt under any one or more Bank Credit
Agreements or Vendor Financing Facilities in an aggregate principal amount at
any one time not to exceed $125 million, and any renewal, extension, refinancing
or refunding thereof in an amount which, together with any principal amount
remaining outstanding or available under all Bank Credit Agreements and Vendor
Financing Facilities of the Company and its Restricted Subsidiaries, plus the
amount of any premium required to be paid in connection with such refinancing
pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount
of expenses incurred in connection with such refinancing, does not exceed the
aggregate principal amount outstanding or available under all such Bank Credit
Agreements and Vendor Financing Facilities of the Company and its Restricted
Subsidiaries immediately prior to such renewal, extension, refinancing or
refunding; (ii)Purchase Money Debt Incurred to finance the construction,
acquisition or improvement of Telecommunications Assets, provided that the net
proceeds of such Purchase Money Debt do not exceed 80% of the cost of
construction, acquisition or improvement price of the applicable
Telecommunications Assets; (iii)Debt owed by the Company to any Wholly-Owned
Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of
the Company to the Company or a Wholly-Owned Restricted Subsidiary of the
Company; provided, however, that upon either (x) the transfer or other
disposition by such Wholly-Owned Restricted Subsidiary or the Company of any
Debt so permitted to a Person other than the Company or another Wholly-Owned
Restricted Subsidiary of the Company or (y) the issuance (other than directors'
qualifying shares), sale, lease, transfer or other disposition of shares of
Capital Stock (including by consolidation or merger) of such Wholly-Owned
Restricted Subsidiary to a Person other than the Company or another such Wholly-
Owned Restricted Subsidiary, the provisions of this clause (iii) shall no longer
be applicable to such Debt and such Debt shall be deemed to have been Incurred
at the time of such transfer or other disposition; (iv)Debt Incurred to renew,
extend, refinance or refund (each, a "refinancing") Debt (a) referred to in
clause (vi) below or (b) Incurred pursuant to the preceding paragraph or clause
(ii) of this paragraph in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Debt so refinanced
plus the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt so refinanced or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the amount of expenses of the Company incurred in connection with such
refinancing; provided, however, that, the refinancing Debt by its terms, or by
the terms of any agreement or instrument pursuant to which such Debt is issued,
(x) does not provide for payments of principal of such Debt at the stated
maturity thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances,
90
but excluding any retirement required by virtue of acceleration of such Debt
upon any event of default thereunder), in each case prior to the time the same
are required by the terms of the Debt being refinanced and (y) does not permit
redemption or other retirement (including pursuant to a required offer to
purchase made by the Company) of such Debt at the option of the holder thereof
prior to the final stated maturity of the Debt being refinanced, other than a
redemption or other retirement at the option of the holder of such Debt
(including pursuant to an Offer to Purchase made by the Company) which is
conditioned upon a change substantially similar to those described under
"--Change of Control" or which is pursuant to provisions substantially similar
to those described under "Description of the Exchange
Notes--Covenants--Limitation on Asset Dispositions"; (v) Debt consisting of
Permitted Interest Rate and Currency Protection Agreements; (vi) Debt
outstanding at the Issue Date; (vii) Subordinated Debt invested by (a) a group
of employees of the Company, which includes the Chief Executive Officer of the
Company, who own, directly or indirectly, through an employee stock ownership
plan or arrangement, shares of the Company's Capital Stock or (b) any other
Person that controls the Company (i) on the Issue Date or (ii) after a Change of
Control, provided that the Company is not in default with respect to its
obligations described under "Change of Control" above; (viii) Debt consisting of
performance and other similar bonds and reimbursement obligations Incurred in
the ordinary course of business securing the performance of contractual,
franchise or license obligations of the Company or a Restricted Subsidiary, or
in respect of a letter of credit obtained to secure such performance; and (ix)
Debt not otherwise permitted to be Incurred pursuant to clauses (i) through
(viii) above, which, together with any other outstanding Debt Incurred pursuant
to this clause (ix), has an aggregate principal amount or, in the case of Debt
issued at a discount, an accreted amount (determined in accordance with
generally accepted accounting principles) at the time of Incurrence not in
excess of $10 million at any time outstanding.
For purposes of determining compliance with this "Limitation on Consolidated
Debt" covenant, in the event that an item of Debt meets the criteria of more
than one of the types of Debt the Company is permitted to incur pursuant to the
foregoing clauses (i) through (ix), the Company shall have the right, in its
sole discretion, to classify such item of Debt and shall only be required to
include the amount and type of such Debt under the clause permitting the Debt as
so classified. For purposes of determining any particular amount of Debt under
such covenant, Guarantees or Liens with respect to letters of credit supporting
Debt otherwise included in the determination of a particular amount shall not be
included.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Certificate of Designations
will provide that, without the affirmative vote of the holders of a majority of
the issued and outstanding New Preferred Shares, voting or consenting as a
separate class, the Company will not, in a single transaction or a series of
related transactions, consolidate with or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
assets to, another Person or adopt a plan of liquidation unless (i) either (1)
the Company is the surviving or continuing Person or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person that acquires by conveyance, transfer or lease the
properties and assets of the Company substantially as an entirety or in the case
of a plan of liquidation, the Person to which assets of the Company have been
transferred, shall be a corporation, limited liability company, partnership or
trust organized and existing under the laws of the United States or any State
thereof or the District of Columbia; (ii) the New Preferred Shares shall be
converted into or exchanged for and shall become shares of Capital Stock of such
successor, transferee or resulting Person, having in respect of such successor,
transferee or resulting Person the same powers, preferences and relative
participating, optional or other special rights and the qualifications,
limitations or restrictions thereon, that the New Preferred Shares had
immediately prior to such transaction; (iii) immediately after giving pro forma
effect to such transactions, no Voting Rights Triggering Event shall have
occurred or be continuing; and (iv) the Company has delivered to the transfer
agent for the New Preferred Shares prior to the consummation of the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer complies with the Certificate of
Designations and that all conditions precedent in the Certificate of
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Designations relating to such transaction have been satisfied. For purposes of
the foregoing, the transfer (by lease, assignment, sale or otherwise, in a
single transaction or series of related transactions) of all or substantially
all of the properties and assets of one or more Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties or assets of the
Company, will be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
REPORTS. The Certificate of Designations will provide that the Company will
provide to the holders of New Preferred Shares, within 15 days after it files
them with the Commission, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) which the Company
files with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
In the event that the Company is no longer required to furnish such reports to
its securityholders pursuant to the Exchange Act, the Company will cause its
consolidated financial statements, comparable to those that would have been
required to appear in annual or quarterly reports, to be delivered to the
holders of New Preferred Shares.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company will be the transfer agent and
registrar for the New Preferred Shares (the "Transfer Agent").
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes are to be issued under an Indenture (the "Exchange
Indenture"), between the Company and United States Trust Company of New York, as
trustee (the "Trustee"), which will be executed on or prior to the date of
original issuance of the Exchange Notes. The statements under this caption
relating to the Exchange Notes and the Exchange Indenture are summaries and do
not purport to be complete, and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Exchange Indenture,
including the definitions of certain terms therein. The Exchange Indenture is by
its terms subject to and governed by the Trust Indenture Act of 1939, as
amended. Unless otherwise indicated, references under this caption to sections,
"Section" or articles are references to the Exchange Indenture. Where reference
is made to particular provisions of the Exchange Indenture or to defined terms
not otherwise defined herein, such provisions or defined terms are incorporated
herein by reference. Copies of the Exchange Indenture are available at the
corporate trust office of the Trustee and may also be obtained from the Company
(see "Additional Information" below). For purposes of the description of the
Exchange Notes, the term "Company" refers to NEXTLINK Communications, Inc. and
does not include its subsidiaries except for purposes of financial data
determined on a consolidated basis.
GENERAL
The Exchange Notes will be unsecured obligations of the Company and will
mature on February 1, 2009. The Exchange Notes will bear interest at the rate of
14% per annum, payable semi-annually in cash (or, on or prior to February 1,
2002, in additional Exchange Notes, at the option of the Company) on February 1
and August 1 of each year to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding
January 15 or July 15, as the case may be. Interest on the Exchange Notes will
be computed on the basis of a 360-day year of twelve 30-day months.
(SectionSection 301, 307 and 310)
Principal of and premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be presented for registration of transfer
and exchange, at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan, The City of New York provided that at the option of
the Company, payment of interest on the Exchange Notes may be made by check
mailed to the address of the Person entitled thereto as it appears in the Note
Register. Until otherwise designated by the Company, such office or agency will
be the corporate trust office of the Trustee, as Paying Agent and Registrar.
(SectionSection 301, 305 and 1002)
The Exchange Notes will be issued in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple thereof (other than with
respect to additional Exchange Notes issued in lieu of cash interest in
accordance with the terms of the Exchange Indenture). (Section 302). No service
charge will be made for any registration of transfer or exchange of Exchange
Notes, but the Company may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Exchange Notes, and any other obligations of the Company in respect of the
Exchange Notes (including any obligation to repurchase Exchange Notes) will, to
the extent set forth in the Exchange Indenture, be subordinated in right of
payment to the prior payment in full of all Senior Debt. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution,
winding-up, reorganization, assignment for the benefit of creditors, marshalling
of assets or any bankruptcy, insolvency or similar proceedings of the Company,
the holders of all Senior Debt will first be entitled to receive payment in full
in cash of all amounts due or to become due thereon before the holders of the
Exchange Notes will be entitled to receive any payment in
93
respect of the principal of or premium, if any, or interest on the Exchange
Notes. No payments on account of principal, premium, if any, or interest, or any
other obligations (including any obligation to repurchase), in respect of the
Exchange Notes may be made if there shall have occurred and be continuing a
Senior Payment Default. Upon the occurrence of a Senior Nonmonetary Default and
receipt of written notice by the Company and the Trustee of the occurrence of
such Senior Nonmonetary Default from a holder of the Designated Senior Debt (or
a trustee, agent or other representative for such a holder) which is the subject
of such Senior Nonmonetary Default, no payments on account of principal,
premium, if any, or interest, or any other obligations (including any obligation
to repurchase), in respect of the Exchange Notes may be made for a period (the
"Payment Blockage Period") commencing on the date of the receipt of such notice
and ending the earlier of (i) the date on which such Senior Nonmonetary Default
shall have been cured or waived or ceased to exist or all Designated Senior Debt
the subject of such Senior Nonmonetary Default has been discharged and (ii) the
179th day after the date of the receipt of such notice; provided, however, that
no more than one Payment Blockage Period may be commenced during any 360-day
period and there shall be a period of at least 181 days during any such 360-day
period when no Payment Blockage Period is in effect; provided further, that no
Senior Nonmonetary Default which existed or was continuing on the date of the
commencement of a Payment Blockage Period may be made the basis of the
commencement of a subsequent Payment Blockage Period whether or not within a
period of 360 consecutive days, unless such Senior Nonmonetary Default shall
have been cured for a period of not less than 90 consecutive days. "Senior
Payment Default" is defined in the Exchange Indenture as any default in the
payment of any principal of or premium, if any, or interest on Senior Debt when
due, whether at the stated maturity of any such payment or by declaration of
acceleration, call for redemption or otherwise. "Senior Nonmonetary Default" is
defined in the Exchange Indenture as a default with respect to any Designated
Senior Debt, other than a Senior Payment Default, which with the giving of
notice or the passage of time, or both, shall give the holders of such
Designated Senior Debt (or a trustee or agent on behalf of the holders thereof)
the right to declare such Designated Senior Debt due and payable prior to the
date on which it would otherwise become due and payable.
Although the Exchange Indenture places limitations on the Company's ability
to incur additional Debt, see "Covenants--Limitation on Consolidated Debt," such
limitations do not prohibit Debt Incurred under Bank Credit Agreements or Vendor
Financing Facilities, or certain Purchase Money Debt, or refinancings thereof,
and any Debt incurred in accordance with such limitations may constitute Senior
Debt.
"Senior Debt" means the principal of (and premium, if any) and interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding) on, or other
amount of, (i) Debt for money borrowed of the Company created pursuant to Bank
Credit Agreements or Vendor Financing Facilities, (ii) Debt for money borrowed
of the Company, whether Incurred on or prior to the date of the Exchange
Indenture or thereafter Incurred, other than the Exchange Notes, (iii) Debt
evidenced by bonds, debentures, notes or other similar instruments, including
Debt Incurred in connection with the acquisition of property, assets or
businesses, (iv) matured and unmatured reimbursement or other obligations of the
Company with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of the Company, (v) obligations of the Company
under interest rate swaps, caps, collars and similar arrangements, (vi) Capital
Lease Obligations of the Company, (vii) guarantees by the Company of (x) Debt
for money borrowed and (y) Debt of a Restricted Subsidiary consisting of
performance and other similar bonds and reimbursement obligations Incurred in
the ordinary course of business securing the performance of contractual,
franchise or license obligations of such Restricted Subsidiary, or in respect of
a letter of credit obtained to secure such performance; and (viii) amendments,
renewals, extensions, modifications, refinancings and refundings of any such
Debt; provided, however, the following shall not constitute Senior Debt: (A) any
Debt owed to a Person when such Person is a Subsidiary of the Company, (B) any
Debt which by the terms of the instrument creating or evidencing the same is not
94
superior in right of payment to the Exchange Notes, (C) any Debt Incurred in
violation of the Indenture or (D) any Debt which is subordinated in right of
payment in any respect to any other Debt of the Company.
"Designated Senior Debt" means (i) Debt under the Senior Notes and (ii) any
Senior Debt of the Company (a) which at the time of determination exceeds $15
million in aggregate principal amount outstanding or available under a committed
facility, (b) which is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company and (c) as to which the
Trustee has received an Officers' Certificate of the Company specifying such
Senior Debt as "Designated Senior Debt."
The Company's principal operations are conducted through its Subsidiaries,
and the Company is therefore dependent upon the cash flow of its Subsidiaries to
meet its obligations. The Company's Subsidiaries will have no obligation to
guarantee or otherwise pay amounts due under the Exchange Notes. Therefore, the
Exchange Notes will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon any liquidation or reorganization of such Subsidiary (and the
consequent right of holders of the Exchange Notes to participate in those
assets) will be effectively subordinated to the claims of the Subsidiary's
creditors, except to the extent that the Company itself is recognized as a
creditor of the Subsidiary. Any recognized claims of the Company as a creditor
of the Subsidiary would be subordinate to any prior security interest held by
any other creditor of the Subsidiary and obligations of the Subsidiary that are
senior to those owing to the Company.
As of December 31, 1996, there was approximately $374.9 million of Senior
Debt outstanding and $29.2 million of obligations of the Company's subsidiaries.
PERMITTED AMENDMENTS RELATING TO OPTIONAL REDEMPTION
Following a Covenant Amendment, the Company may, at its election and without
the consent of any holder of Exchange Notes, amend the Exchange Indenture to add
provisions making the Exchange Notes redeemable at the option of the Company:
(i)at any time on or after February 1, 2002 and prior to maturity, in whole or
in part, upon not less than 30 nor more than 60 days' notice mailed to each
Holder of Exchange Notes to be redeemed at such Holder's address appearing in
the Note Register, in amounts of $1,000 or an integral multiple of $1,000, at
the following Redemption Prices (expressed as percentages of the principal
amount) plus accrued interest to but excluding the Redemption Date (subject to
the right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date), if redeemed during the 12-month period beginning February 1 of the years
indicated:
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- ------------
2002............................................................................ 107.00%
2003............................................................................ 105.25
2004............................................................................ 103.50
2005............................................................................ 101.75
2006 and thereafter............................................................. 100.00
(SectionSection 203, 1101, 1105 and 1107) (ii)prior to February 1, 2000, in
part, in an aggregate principal amount not to exceed $99.75 million out of the
net cash proceeds of one or more Qualifying Events (other than a Qualifying
Event that results in a Change of Control), provided, however, that Exchange
Notes in an aggregate principal amount equal to at least $185.25 million remain
outstanding after such redemption. Such redemption must occur on a Redemption
Date within 60 days after the receipt by the Company of the proceeds of such
Qualifying Event and upon not less than 30 nor more than 60 days' notice mailed
to each holder of Exchange Notes to be redeemed at such holder's address
appearing in the Note Register, in amounts of $1,000 or an integral multiple of
$1,000 at a redemption price of 114.0% of their
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principal amount plus accrued and unpaid interest to but excluding the
Redemption Date (subject to the right of holders of record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date).
If less than all the Exchange Notes are to be redeemed, the Trustee shall
select, on a pro rata basis, by lot or by such other method as the Trustee shall
deem fair and appropriate, the particular Exchange Notes to be redeemed or any
portion thereof that is an integral multiple of $1,000. (Section 1104)
MANDATORY REDEMPTION; SINKING FUND
Except as set forth under "Covenants--Limitation on Asset Sales" and
"Covenants--Change of Control" below, the Company is not required to purchase or
make mandatory redemption payments or sinking fund payments with respect to the
Exchange Notes.
COVENANTS
The Exchange Indenture will contain, among others, the following covenants,
which will only have effect beginning on the date (if any) of issuance of the
Exchange Notes:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, Incur any Debt unless either (a) the ratio of (i) the aggregate
consolidated principal amount of Debt of the Company outstanding as of the most
recent available quarterly or annual balance sheet, after giving pro forma
effect to the Incurrence of such Debt and any other Debt Incurred since such
balance sheet date and the receipt and application of the proceeds thereof to
(ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters next preceding the Incurrence of such Debt for which consolidated
financial statements are available, determined on a pro forma basis as if any
such Debt had been Incurred and the proceeds thereof had been applied at the
beginning of such four fiscal quarters, would be less than 5.5 to 1 for such
four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1 for
such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio
as of the most recent available quarterly or annual balance sheet, after giving
pro forma effect to the Incurrence of such Debt and any other Debt Incurred
since such balance sheet date and the receipt and application of the proceeds
thereof, is less than 2.0 to 1.
Notwithstanding the foregoing limitation, the Company and any Restricted
Subsidiary may Incur the following: (i)Debt under any one or more Bank Credit
Agreements or Vendor Financing Facilities in an aggregate principal amount at
any one time not to exceed $125 million, and any renewal, extension, refinancing
or refunding thereof in an amount which, together with any principal amount
remaining outstanding or available under all Bank Credit Agreements and Vendor
Financing Facilities of the Company and its Restricted Subsidiaries, plus the
amount of any premium required to be paid in connection with such refinancing
pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount
of expenses incurred in connection with such refinancing, does not exceed the
aggregate principal amount outstanding or available under all such Bank Credit
Agreements and Vendor Financing Facilities of the Company and its Restricted
Subsidiaries immediately prior to such renewal, extension, refinancing or
refunding; (ii)Purchase Money Debt Incurred to finance the construction,
acquisition or improvement of Telecommunications Assets, provided that the net
proceeds of such Purchase Money Debt do not exceed 80% of the cost of
construction, acquisition or improvement price of the applicable
Telecommunications Assets; (iii)Debt owed by the Company to any Wholly-Owned
Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of
the Company to the Company or a Wholly-Owned Restricted Subsidiary of the
Company; provided, however, that upon either (x) the transfer or other
disposition by such Wholly-Owned Restricted Subsidiary or the Company of any
Debt so permitted to a Person other than the Company or another Wholly-Owned
Restricted
96
Subsidiary of the Company or (y) the issuance (other than directors' qualifying
shares), sale, lease, transfer or other disposition of shares of Capital Stock
(including by consolidation or merger) of such Wholly-Owned Restricted
Subsidiary to a Person other than the Company or another such Wholly-Owned
Restricted Subsidiary, the provisions of this clause (iii) shall no longer be
applicable to such Debt and such Debt shall be deemed to have been Incurred at
the time of such transfer or other disposition; (iv)Debt Incurred to renew,
extend, refinance or refund (each, a "refinancing") (a) Debt referred to in
clause (vi) of this paragraph, (b) Debt Incurred pursuant to the preceding
paragraph or clause (ii) of this paragraph or (c) the Exchange Notes in an
aggregate principal amount not to exceed the aggregate principal amount of and
accrued interest on the Debt so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms of
the Debt so refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender offer
or privately negotiated repurchase, plus the amount of expenses of the Company
incurred in connection with such refinancing; provided, however, that Debt the
proceeds of which are used to refinance the Exchange Notes or Debt which is pari
passu to the Exchange Notes or Debt which is subordinate in right of payment to
the Exchange Notes shall only be permitted if (1) in the case of any refinancing
of the Exchange Notes or Debt which is pari passu to the Exchange Notes, the
refinancing Debt is made pari passu to the Exchange Notes or subordinated to the
Exchange Notes, and, in the case of any refinancing of Debt which is
subordinated to the Exchange Notes, the refinancing Debt constitutes
Subordinated Debt and (2) in either case, the refinancing Debt by its terms, or
by the terms of any agreement or instrument pursuant to which such Debt is
issued, (x) does not provide for payments of principal of such Debt at the
stated maturity thereof or by way of a sinking fund applicable thereto or by way
of any mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder), in each case
prior to the time the same are required by the terms of the Debt being
refinanced and (y) does not permit redemption or other retirement (including
pursuant to a required offer to purchase made by the Company) of such Debt at
the option of the holder thereof prior to the final stated maturity of the Debt
being refinanced, other than a redemption or other retirement at the option of
the holder of such Debt (including pursuant to an Offer to Purchase made by the
Company) which is conditioned upon a change substantially similar to those
described under "--Change of Control" or which is pursuant to provisions
substantially similar to those described under "--Limitation on Asset
Dispositions"; (v)Debt consisting of Permitted Interest Rate and Currency
Protection Agreements; (vi)Debt outstanding at the date of issuance of the
Exchange Notes; (vii)Debt outstanding under the Exchange Notes;
(viii)Subordinated Debt invested by (a) a group of employees of the Company,
which includes the Chief Executive Officer of the Company, who own, directly or
indirectly, through an employee stock ownership plan or arrangement, shares of
the Company's Capital Stock or (b) any other Person that controls the Company
(i) on the date of original issuance of the Exchange Notes or (ii) after a
Change of Control, provided that the Company is not in default with respect to
its obligations described under "Change of Control" below; (ix)Debt consisting
of performance and other similar bonds and reimbursement obligations Incurred in
the ordinary course of business securing the performance of contractual,
franchise or license obligations of the Company or a Restricted Subsidiary, or
in respect of a letter of credit obtained to secure such performance; and
(x)Debt not otherwise permitted to be Incurred pursuant to clauses (i) through
(ix) above, which, together with any other outstanding Debt Incurred pursuant to
this clause (x), has an aggregate principal amount or, in the case of Debt
issued at a discount, an accreted amount (determined in accordance with
generally accepted accounting principles) at the time of Incurrence not in
excess of $10 million at any time outstanding.
For purposes of determining compliance with this "Limitation on Consolidated
Debt" covenant, in the event that an item of Debt meets the criteria of more
than one of the types of Debt the Company is permitted to incur pursuant to the
foregoing clauses (i) through (x), the Company shall have the right, in
97
its sole discretion, to classify such item of Debt and shall only be required to
include the amount and type of such Debt under the clause permitting the Debt as
so classified. For purposes of determining any particular amount of Debt under
such covenant, Guarantees or Liens with respect to letters of credit supporting
Debt otherwise included in the determination of a particular amount shall not be
included. (Section1007)
LIMITATION ON SENIOR SUBORDINATED DEBT
The Company shall not Incur any Debt which by its terms is both (i)
subordinated in right of payment to any Senior Debt and (ii) senior in right of
payment to the Exchange Notes. (Section1008)
LIMITATION ON ISSUANCE OF GUARANTEES OF SUBORDINATED DEBT
The Company shall not permit any Restricted Subsidiary, directly or
indirectly, to assume, guarantee or in any other manner become liable with
respect to any Debt of the Company that is expressly by its terms subordinate or
junior in right of payment to any other Debt of the Company unless such
Restricted Subsidiary shall make effective provision for guaranteeing the
Exchange Notes (x) with respect to Debt that ranks pari passu with the Exchange
Notes, to the same extent as such Debt is to be guaranteed by such Restricted
Subsidiary or (y) with respect to Debt that is subordinate in right of payment
to the Exchange Notes, to a greater extent than such other Debt is to be
guaranteed by such Restricted Subsidiary. (Section1009)
LIMITATION ON LIENS SECURING SUBORDINATED DEBT
The Company shall not, and shall not permit any Restricted Subsidiary to,
Incur any Lien on or with respect to any property or assets of the Company or
any such Restricted Subsidiary now owned or hereafter acquired to secure Debt
which is pari passu with or subordinated in right of payment to the Exchange
Notes without making, or causing such Restricted Subsidiary to make, effective
provision for securing the Exchange Notes (and, if the Company shall so
determine, any other Debt of the Company which is not subordinate to the
Exchange Notes or of such Restricted Subsidiary) (x) equally and ratably with
such Debt as to such property or assets for so long as such Debt shall be so
secured or (y) in the event such Debt is Debt of the Company which is
subordinate in right of payment to the Exchange Notes, prior to such Debt as to
such property for so long as such Debt will be so secured. The foregoing
restrictions shall not apply to: (i) Liens in respect of Debt existing at the
date of original issuance of the Exchange Notes; (ii) Liens securing only the
Exchange Notes; (iii) Liens in favor of the Company or a Wholly-Owned Restricted
Subsidiary; or (iv) Liens to secure Debt incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, any Debt secured by Liens referred to in the foregoing clauses
(i) or (ii) so long as such Lien does not extend to any other property and the
principal amount of Debt so secured is not increased except as otherwise
permitted under Clause (iv) of the second paragraph of "Limitation on
Consolidated Debt." (Section1010)
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) may not, directly or indirectly, declare or pay any
dividend, or make any distribution, in respect of its Capital Stock or to the
holders thereof (in their capacity as such), excluding any dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire its
Capital Stock (other than Disqualified Stock); (ii) may not, and may not permit
any Restricted Subsidiary to, purchase, redeem, or otherwise retire or acquire
for value (a) any Capital Stock of the Company or any Related Person of the
Company; or (b) any options, warrants or rights to purchase or acquire shares of
Capital Stock of the Company or any Related Person of the Company or any
securities convertible or exchangeable into shares of Capital Stock of the
Company or any Related Person of the Company; (iii) may not make, or permit any
Restricted Subsidiary to make, any Investment in, or payment on a Guarantee of
any obligation of, any Person, other than the
98
Company or a Restricted Subsidiary of the Company, except for Permitted
Investments; and (iv) may not, and may not permit any Restricted Subsidiary to,
redeem, defease, repurchase, retire or otherwise acquire or retire for value,
prior to any scheduled maturity, repayment or sinking fund payment, Debt of the
Company which is subordinate in right of payment to the Exchange Notes (each of
clauses (i) through (iv) being a "Restricted Payment") if: (1) a Default or an
Event of Default shall have occurred and is continuing; or (2) upon giving
effect to such Restricted Payment, the Company could not Incur at least $1.00 of
additional Debt pursuant to the terms of the Exchange Indenture described in the
first paragraph of "--Limitation on Consolidated Debt" above; or (3) upon giving
effect to such Restricted Payment, the aggregate of all Restricted Payments from
the Issue Date exceeds the sum of: (a) 50% of cumulative Consolidated Net Income
(or, in the case Consolidated Net Income shall be negative, less 100% of such
deficit) since the end of the last full fiscal quarter prior to the Issue Date
through the last day of the last full fiscal quarter ending immediately
preceding the date of such Restricted Payment; plus (b) $5 million; plus (c)
100% of the net reduction in any Investment that when made was a Restricted
Payment resulting from payments of interest on Debt, dividends, repayments of
loans or advances, or other transfers of assets, in each case to the Company or
any Restricted Subsidiary of the Company (except to the extent that any such
payment is included in the calculation of Consolidated Net Income) or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries; provided
that the amount included in this clause (c) shall not exceed the amount of any
such Investment previously made by the Company and its Restricted Subsidiaries;
provided, further, that the Company or a Restricted Subsidiary of the Company
may make any Restricted Payment with the aggregate net proceeds received after
the Issue Date, including the fair value of property other than cash (determined
in good faith by the Board of Directors of the Company, as conclusively
evidenced by a board resolution filed with the Trustee), as capital
contributions to the Company or from the issuance (other than to a Restricted
Subsidiary) of Capital Stock (other than Disqualified Stock) of the Company and
warrants, rights or options on Capital Stock (other than Disqualified Stock) of
the Company and the principal amount of Debt of the Company that has been
converted into Capital Stock (other than Disqualified Stock and other than by a
Restricted Subsidiary) of the Company after the date of the Exchange Indenture.
Notwithstanding the foregoing, the Company may (i) pay any dividend on
Capital Stock of any class within 60 days after the declaration thereof if, on
the date when the dividend was declared, the Company could have paid such
dividend in accordance with the foregoing provisions; (ii) repurchase any shares
of its Common Equity or options to acquire its Common Equity from Persons who
were formerly officers or employees of the Company, provided that the aggregate
amount of all such repurchases made pursuant to this clause (ii) shall not
exceed $2 million, plus the aggregate cash proceeds received by the Company
since the Issue Date from issuances of its Common Equity or options to acquire
its Common Equity to members, officers, managers and employees of the Company or
any of its Subsidiaries; (iii) refinance, and permit its Restricted Subsidiaries
to refinance, any Debt otherwise permitted by clause (iv) of the second
paragraph under "--Limitation on Consolidated Debt" above; and (iv) retire or
repurchase, and permit its Restricted Subsidiaries to retire or repurchase, any
Capital Stock of the Company or of any Restricted Subsidiary of the Company in
exchange for, or out of the proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of the Company) of, Capital Stock (other than
Disqualified Stock) of the Company. If the Company makes a Restricted Payment
which, at the time of the making of such Restricted Payment, would in the good
faith determination of the Company be permitted under the Exchange Indenture,
such Restricted Payment shall be deemed to have been made in compliance with the
Exchange Indenture notwithstanding any subsequent adjustments made in good faith
to the Company financial statements affecting Consolidated Net Income for any
period. (Section1011)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or
99
restriction on the ability of any Restricted Subsidiary of the Company (i) to
pay dividends (in cash or otherwise) or make any other distributions in respect
of its Capital Stock owned by the Company or any other Restricted Subsidiary of
the Company or pay any Debt or other obligation owed to the Company or any other
Restricted Subsidiary; (ii) to make loans or advances to the Company or any
other Restricted Subsidiary; or (iii) to transfer any of its property or assets
to the Company or any other Restricted Subsidiary. Notwithstanding the
foregoing, the Company may, and may permit any Restricted Subsidiary to, suffer
to exist any such encumbrance or restriction (a) pursuant to any agreement in
effect on the date of original issuance of the Exchange Notes; (b) pursuant to
an agreement relating to any Acquired Debt, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person so acquired and its Subsidiaries; (c) pursuant to any one or
more Bank Credit Agreements or Vendor Financing Facilities (and renewals,
extensions, refinancings or refundings thereof) which is permitted to be
outstanding under clause (i) of the second paragraph of "Limitation on
Consolidated Debt", provided that such restriction is consistent with, and not
materially more restrictive (as conclusively determined in good faith by the
Chief Financial Officer of the Company), taken as a whole, than, comparable
provisions included in similar agreements or facilities extended to comparable
credits engaged in the Telecommunications Business; (d) pursuant to an agreement
effecting a renewal, refunding or extension of Debt Incurred pursuant to an
agreement referred to in clause (a) or (b) above or (e) below, provided,
however, that the provisions contained in such renewal, refunding or extension
agreement relating to such encumbrance or restriction are not materially more
restrictive (as conclusively determined in good faith by the Chief Financial
Officer of the Company), taken as a whole, than the provisions contained in the
agreement the subject thereof; (e) in the case of clause (iii) above,
restrictions contained in any security agreement (including a Capital Lease
Obligation) securing Debt of the Company or a Restricted Subsidiary otherwise
permitted under the Exchange Indenture, but only to the extent such restrictions
restrict the transfer of the property subject to such security agreement; (f) in
the case of clause (iii) above, customary nonassignment provisions entered into
in the ordinary course of business in leases and other agreements; (g) with
respect to a Restricted Subsidiary of the Company imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary,
provided that consummation of such transaction would not result in a Default or
an Event of Default, that such restriction terminates if such transaction is not
consummated and that such consummation or abandonment of such transaction occurs
within one year of the date such agreement was entered into; (h) pursuant to
applicable law or regulations; (i) pursuant to the Exchange Indenture and the
Exchange Notes; or (j) any restriction on the sale or other disposition of
assets or property securing Debt as a result of a Permitted Lien on such assets
or property. (Section 101)
LIMITATION ON ASSET DISPOSITIONS
The Company may not, and may not permit any Restricted Subsidiary to, make
any Asset Disposition in one or more related transactions occurring within any
12-month period unless: (i) the Company or the Restricted Subsidiary, as the
case may be, receives consideration for such disposition at least equal to the
fair market value for the assets sold or disposed of as determined by the Board
of Directors of the Company in good faith and evidenced by a board resolution
filed with the Trustee, which determination shall be conclusive; (ii) at least
75% of the consideration for such disposition consists of (1) cash or readily
marketable cash equivalents or the assumption of Debt of the Company (other than
Debt that is subordinated to the Exchange Notes) or of the Restricted Subsidiary
and release from all liability on the Debt assumed; (2) Telecommunications
Assets; or (3) shares of publicly traded Voting Stock of any Person engaged in
the Telecommunications Business in the United States; and (iii) all Net
Available Proceeds, less any amounts invested within 360 days of such
disposition in new Telecommunications Assets, are applied within 360 days of
such disposition (1) first, to the permanent repayment or reduction of Debt then
outstanding under any Bank Credit Agreement or Vendor Financing Facility, to the
extent such agreements would require such application or prohibit payments
pursuant to clause (2) following,
100
(2) second, to the extent of remaining Net Available Proceeds, to make an Offer
to Purchase outstanding Exchange Notes at 100% of their principal amount plus
accrued interest to the date of purchase and, to the extent required by the
terms thereof, any other Debt of the Company that is pari passu with the
Exchange Notes at a price no greater than 100% of the principal amount thereof
plus accrued interest to the date of purchase and (3) third, to the extent of
any remaining Net Available Proceeds following the completion of the Offer to
Purchase, to the repayment of other Debt of the Company or Debt of a Restricted
Subsidiary of the Company, to the extent permitted under the terms thereof. To
the extent any Net Available Proceeds remain after such uses, the Company and
its Restricted Subsidiaries may use such amounts for any purposes not prohibited
by the Exchange Indenture. (Section 1013) Notwithstanding the foregoing, these
provisions shall not apply to any Asset Disposition which constitutes a
transfer, conveyance, sale, lease or other disposition of all or substantially
all of the Company's properties or assets as described under "--Mergers,
Consolidations and Certain Sales of Assets".
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, issue, transfer, convey, sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary of the Company or securities
convertible or exchangeable into, or options, warrants, rights or any other
interest with respect to, Capital Stock of a Restricted Subsidiary of the
Company to any person other than the Company or a Wholly-Owned Restricted
Subsidiary of the Company except (i) in a transaction consisting of a sale of
Capital Stock of such Restricted Subsidiary owned by the Company or any
Restricted Subsidiary of the Company and that complies with the provisions
described under "--Limitation on Asset Dispositions" above to the extent such
provisions apply; (ii) if required, the issuance, transfer, conveyance, sale or
other disposition of directors' qualifying shares; (iii) in a transaction in
which, or in connection with which, the Company or a Restricted Subsidiary
acquires at the same time sufficient Capital Stock of such Restricted Subsidiary
to at least maintain the same percentage ownership interest it had prior to such
transaction; and (iv) Disqualified Stock issued in exchange for, or upon
conversion of, or the proceeds of the issuance of which are used to redeem,
refinance, replace or refund shares of Disqualified Stock of such Restricted
Subsidiary, provided that the amounts of the redemption obligations of such
Disqualified Stock shall not exceed the amounts of the redemption obligations
of, and such Disqualified Stock shall have redemption obligations no earlier
than those required by, the Disqualified Stock being exchanged, converted,
redeemed, refinanced, replaced or refunded. (Section 1014)
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, enter into any transaction (or series of related transactions) with
an Affiliate or Related Person of the Company (other than the Company or a
Wholly-Owned Restricted Subsidiary of the Company), including any Investment,
but excluding transactions pursuant to employee compensation arrangements
approved by the Board of Directors of the Company, either directly or
indirectly, unless such transaction is on terms no less favorable to the Company
or such Restricted Subsidiary than those that could be obtained in a comparable
arm's-length transaction with an entity that is not an Affiliate or Related
Person and is in the best interests of such Company or such Restricted
Subsidiary. For any transaction that involves in excess of $1 million but less
than or equal to $5 million, the Chief Executive Officer of the Company shall
determine that the transaction satisfies the above criteria and shall evidence
such a determination by a certificate filed with the Trustee. For any
transaction that involves in excess of $5 million, the Company shall also obtain
an opinion from a nationally recognized expert with experience in appraising the
terms and conditions, taken as a whole, of the type of transaction (or series of
related transactions) for which the opinion is required stating that such
transaction (or series of related transactions) is on terms and conditions,
taken as a whole, no less favorable to the Company or such Restricted Subsidiary
than those that could be obtained in a comparable arm's-length transaction with
an entity that is not an Affiliate or Related Person of the Company, which
opinion shall be filed with the Trustee. This covenant shall not apply to
Investments by an Affiliate or a Related Person of the Company in the Capital
Stock (other than Disqualified Stock) of the Company or any Restricted
Subsidiary of the Company. (Section 1015)
101
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, the Company will be
required to make an Offer to Purchase all Outstanding Exchange Notes at a
purchase price equal to 101% of their principal amount plus accrued and unpaid
interest to the date of purchase. A "Change of Control" will be deemed to have
occurred at such time as either (a) any Person or any Persons acting together
that would constitute a "group" (a "Group") for purposes of Section 13(d) of the
Securities Exchange Act of 1934, or any successor provision thereto (other than
Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an
underwriter engaged in a firm commitment underwriting on behalf of the Company),
shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act,
or any successor provision thereto) more than 50% of the aggregate voting power
of all classes of Voting Stock of the Company or (b) neither Mr. Craig O. McCaw
nor any person designated by him to the Company as acting on his behalf shall be
a director of the Company or (c) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by the
Board of Directors of the Company or whose nomination for election by the
shareholders of the Company was proposed by a vote of a majority of the
directors of the Company 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 of the Company then in office. (Section1016)
Except as described above with respect to a Change of Control, the Exchange
Indenture will not contain provisions that permit the Holders of the Exchange
Notes to require that the Company repurchase or redeem the Exchange Notes in the
event of a takeover, recapitalization or similar restructuring.
Restrictions in the Exchange Indenture described herein on the ability of
the Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on its or their property, to make Restricted Payments and to make
Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Exchange Notes, and there can be no assurance
that the Company or the acquiring party will have sufficient financial resources
to effect such redemption or repurchase. Such restrictions and the restrictions
on transactions with Affiliates may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Company or any of its
Subsidiaries by the management of the Company or other Persons. While such
restrictions cover a variety of arrangements which have traditionally been used
to effect highly leveraged transactions, the Exchange Indenture may not afford
the Holders of Exchange Notes protection in all circumstances from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction.
The Company does not currently have adequate financial resources to effect a
repurchase of the Exchange Notes upon a Change of Control and there can be no
assurance that the Company will have such resources in the future. The inability
of the Company to repurchase the Exchange Notes upon a Change of Control would
constitute an Event of Default.
In addition, there may be restrictions contained in instruments evidencing
Debt incurred by the Company or its Restricted Subsidiaries permitted under the
Senior Indenture and the Exchange Indenture which restrict or prohibit the
ability of the Company to effect any repurchase required under the Exchange
Indenture in connection with a Change of Control.
In the event that the Company makes an Offer to Purchase the Exchange Notes,
the Company intends to comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act.
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PROVISION OF FINANCIAL INFORMATION
The Company has agreed that, for so long as any Exchange Notes remain
outstanding, it will furnish to the holders of the Exchange Notes and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act. In addition, the Company will file with the Trustee within 15
days after it files them with the Commission copies of the annual and quarterly
reports and the information, documents, and other reports that the Company is
required to file with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act ("SEC Reports"). In the event the Company shall cease to be
required to file SEC Reports pursuant to the Exchange Act, the Company will
nevertheless continue to file such reports with the Commission (unless the
Commission will not accept such a filing) and the Trustee. The Company will
furnish copies of the SEC Reports to the holders of Exchange Notes at the time
the Company is required to file the same with the Trustee and will make such
information available to investors who request it in writing. (Section 1017)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into the Company (other than the
consolidation or merger of a Wholly-Owned Restricted Subsidiary organized under
the laws of a State of the United States into the Company), or (ii) directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries taken as a whole and provided that the creation of a
Lien on or in any of its assets shall not in and of itself constitute the
transfer, sale, lease or disposition of the assets subject to the Lien), unless:
(1) in a transaction in which the Company does not survive or in which the
Company sells, leases, or otherwise disposes of all or substantially all of its
assets to any other Person, the successor entity to the Company is organized
under the laws of the United States of America or any State thereof or the
District of Columbia and shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
of the Company's obligation under the Exchange Indenture; (2) immediately after
giving pro forma effect to such transaction as if such transaction had occurred
at the beginning of the last full fiscal quarter immediately prior to the
consummation of such transaction with the appropriate adjustments with respect
to the transaction being included in such pro forma calculation and treating any
Debt which becomes an obligation of the Company or a Subsidiary as a result of
such transaction as having been incurred by the Company or such Subsidiary at
the time of the transaction, no Default or Event of Default shall have occurred
and be continuing; (3) immediately after giving effect to such transaction, the
Consolidated Net Worth of the Company (or other successor entity to the Company)
is equal to or greater than that of the Company immediately prior to the
transaction; (4) the Company has delivered to the Trustee an Opinion of Counsel
to the effect that the holders of the Exchange Notes will not recognize gain or
loss for Federal income tax purposes as a result of such transaction; and (5)
certain other conditions are met. (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the immediately preceding paragraph in which the Company is not
the surviving Person and the surviving Person assumes all the obligations of the
Company under the Exchange Notes and the Exchange Indenture pursuant to a
supplemental indenture, such surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company, and the
Company will be discharged from its obligations under the Exchange Indenture and
the Exchange Notes; provided that solely for the purpose of calculating amounts
described in clause (3) under "Covenants--Limitation on Restricted Payments",
any such surviving Person shall only be deemed to have succeeded to and be
substituted for the Company with respect to the period subsequent to the
effective time of such transaction, and the Company (before giving effect to
such transaction) shall be deemed to be the "Company" for such purposes for all
prior periods. (Section 801)
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The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following will be Events of Default under the Exchange Indenture: (a)
failure to pay principal of (or premium, if any, on) any Exchange Note when due
(whether such payment is prohibited by the subordination provisions of the
Exchange Indenture); (b) failure to pay any interest on any Exchange Note when
due (whether such payment is prohibited by the subordination provisions of the
Exchange Indenture), and any such failure continued for 30 days as to any
interest payment date thereafter; (c) default in the payment of principal and
interest on Exchange Notes required to be purchased pursuant to an Offer to
Purchase as described under "Covenants--Change of Control" when due and payable;
(d) failure to perform or comply with the provisions described under "Mergers,
Consolidations and Certain Sales of Assets"; (e) failure to perform any other
covenant or agreement of the Company under the Exchange Indenture or the
Exchange Notes continued for 60 days after written notice to the Company by the
Trustee or holders of at least 25% in aggregate principal amount of Outstanding
Exchange Notes; (f) default under the terms of any instrument evidencing or
securing Debt of the Company or any Significant Subsidiary having an outstanding
principal amount of $10 million individually or in the aggregate which default
results in the acceleration of the payment of such Debt or constitutes the
failure to pay such Debt when due; (g) the rendering of a final judgment or
judgments (not subject to appeal) for the payment of money against the Company
or any Significant Subsidiary in an aggregate amount in excess of $15 million
which remains undischarged or unstayed for a period of 45 days after the date on
which the right to appeal all such judgments has expired; and (h) certain events
of bankruptcy, insolvency or reorganization affecting the Company or any
Significant Subsidiary. (Section 501) Subject to the provisions of the Exchange
Indenture relating to the duties of the Trustee in case an Event of Default (as
defined) shall occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under the Exchange Indenture at the
request or direction of any of the holders, unless such holders shall have
offered to the Trustee reasonable indemnity. (Section 603) Subject to such
provisions for the indemnification of the Trustee, the Holders of a majority in
aggregate principal amount of the Outstanding Exchange Notes will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. The Trustee may refuse, however, to follow any direction that the
Trustee, in its sole discretion, determines may be unduly prejudicial to the
rights of another holder or that may subject the Trustee to any liability or
expense if the Trustee determines, in its sole discretion, that it lacks
indemnification against such loss or expense. (Section 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above with respect to the Company) shall occur and be continuing, either the
Trustee or the holders of at least 25% in aggregate principal amount of the
Outstanding Exchange Notes may accelerate the maturity of all Exchange Notes;
provided, however, that after such acceleration, but before a judgment or decree
based on acceleration, the Holders of a majority in aggregate principal amount
of Outstanding Exchange Notes may, under certain circumstances, rescind and
annul such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Exchange
Indenture. If an Event of Default specified in Clause (h) above occurs with
respect to the Company, the Outstanding Exchange Notes will ipso facto become
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder. (Section 502) For information as to waiver of
defaults, see "Modification and Waiver".
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No holder of any Exchange Note will have any right to institute any
proceeding with respect to the Exchange Indenture or for any remedy thereunder,
unless such holder shall have previously given to the Trustee written notice of
a continuing Event of Default (as defined) and unless also the holders of at
least 25% in aggregate principal amount of the Outstanding Exchange Notes shall
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the Outstanding
Exchange Notes a direction inconsistent with such request and shall have failed
to institute such proceeding within 60 days. (Section 507) However, such
limitations do not apply to a suit instituted by a holder of an Exchange Note
for enforcement of payment of the principal of and premium, if any, or interest
on such Exchange Note on or after the respective due dates expressed in such
Exchange Note. (Section 508)
The Exchange Indenture provides that if a Default occurs and is continuing,
generally the Trustee must within 90 days after the occurrence of such Default,
give to the holders notice of such Default. The Trustee may withhold from
holders of the Exchange Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal of, premium, if any or interest) if it determines that withholding
notice is in their interest; provided however, that in the case of any default
of a character specified in Clause (e) above, no such notice to holders shall be
given until at least 30 days after the occurrence thereof. (Section 602)
The Company will be required to furnish to the Trustee quarterly a statement
as to the performance by the Company of certain of its obligations under the
Exchange Indenture and the Company is required upon becoming aware of any
Default or Event of Default to deliver to the Trustee a statement specifying
such Default or Event of Default. (Section 1019)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Exchange Indenture will cease to be of further effect as to all
outstanding Exchange Notes (except as to (i) rights of registration of transfer
and exchange and any right of the Company to effect an optional redemption, (ii)
substitution of apparently mutilated, defaced, destroyed, lost or stolen
Exchange Notes, (iii) rights of holders to receive payment of principal of and
premium, if any, and interest on the Exchange Notes, (iv) rights, obligations
and immunities of the Trustee under the Exchange Indenture and (v) rights of the
Holders of the Exchange Notes as beneficiaries of the Exchange Indenture with
respect to any property deposited with the Trustee payable to all or any of
them), if (x) the Company will have paid or caused to be paid the principal of
and premium, if any, and interest on the Exchange Notes as and when the same
will have become due and payable or (y) all outstanding Exchange Notes (except
lost, stolen or destroyed Exchange Notes which have been replaced or paid) have
been delivered to the Trustee for cancellation. (Section 401)
DEFEASANCE
The Exchange Indenture will provide that, at the option of the Company, (a)
if applicable, the Company will be discharged from any and all obligations in
respect of the Outstanding Exchange Notes or (b) if applicable, the Company may
omit to comply with certain restrictive covenants, that such omission shall not
be deemed to be an Event of Default under the Exchange Indenture and the
Exchange Notes and that the subordination provisions of the Exchange Indenture
will cease to apply, in either case (a) or (b) upon irrevocable deposit with the
Trustee, in trust, of money and/or U.S. government obligations which will
provide money in an amount sufficient in the opinion of a nationally recognized
firm of independent certified public accountants to pay the principal of and
premium, if any, and each installment of interest, if any, on the Outstanding
Exchange Notes on the Stated Maturity. With respect to clause (b), the
obligations under the Exchange Indenture other than with respect to such
covenants and the Events of Default other than the Events of Default relating to
such covenants above shall remain in full force and effect. Such trust may only
be established if, among other things (i) with respect to clause (a), the
Issuers have received from, or there has been published by, the Internal
105
Revenue Service a ruling or there has been a change in law after the Issue Date,
which in the Opinion of Counsel provides that holders of the Exchange Notes will
not recognize gain or loss for Federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such deposit, defeasance and discharge had not occurred; or, with
respect to clause (b), the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the holders of the Exchange Notes will not recognize
gain or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such deposit
and defeasance had not occurred; (ii) no Default or Event of Default shall have
occurred or be continuing; (iii) at the time of such deposit, no default in the
payment of all or a portion of principal of (or premium, if any) or interest on
or other obligations in respect of any Senior Debt shall have occurred and be
continuing and no other event of default with respect to any Senior Debt shall
have occurred and be continuing permitting after notice or the lapse of time, or
both, the acceleration thereof; (iv) the Company has delivered to the Trustee an
Opinion of Counsel to the effect that such deposit shall not cause the Trustee
or the trust so created to be subject to the Investment Company Act of 1940, as
amended; and (v) certain other customary conditions precedent are satisfied.
(Section 1201)
MODIFICATION AND WAIVER
Modifications and amendments of the Exchange Indenture may be made by the
Company and the Trustee with the consent of the holders of a majority in
aggregate principal amount of the Outstanding Exchange Notes; provided, however,
that no such modification or amendment may, without the consent of the holder of
each Outstanding Exchange Note affected thereby, (a) change the due date of the
principal of, or any installment of interest on, any Exchange Note, (b) reduce
the principal amount of, or the premium or interest on, any Exchange Note, (c)
change the place or currency of payment of principal of, or premium or interest
on, any Exchange Note, (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any Exchange Note, (e) reduce
the above-stated percentage of Outstanding Exchange Notes necessary to modify or
amend the Exchange Indenture, (f) reduce the percentage of aggregate principal
amount of Outstanding Exchange Notes necessary for waiver of compliance with
certain provisions of the Exchange Indenture or for waiver of certain defaults,
(g) modify any provisions of the Exchange Indenture relating to the modification
and amendment of the Exchange Indenture or the waiver of past defaults or
covenants, except as otherwise specified, (h) following the mailing of any Offer
to Purchase and until the Expiration Date of that Offer to Purchase, modify any
Offer to Purchase for the Exchange Notes required under the "Limitation on Asset
Dispositions" and the "Change of Control" covenants contained in the Exchange
Indenture in a manner materially adverse to the holders thereof or (i) modify
any of the subordination provisions of the Exchange Indenture in a manner
adverse to the holders of the Exchange Notes. (Section 902)
Notwithstanding the foregoing, without the consent of any holder of Exchange
Notes, the Company and the Trustee may amend or supplement the Exchange
Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Exchange Notes in addition to or in place of
certificated Exchange Notes, to provide for the assumption of the Company's
obligations to holders of Exchange Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to holders of Exchange Notes or that does not adversely affect the
legal rights under the Exchange Indenture of any such holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Exchange Indenture under the Trust Indenture Act. (Section 901)
The holders of a majority in aggregate principal amount of the Outstanding
Exchange Notes, on behalf of all holders of Exchange Notes, may waive compliance
by the Company with certain restrictive provisions of the Exchange Indenture.
(Section 1019) Subject to certain rights of the Trustee, as provided in the
106
Exchange Indenture, the holders of a majority in aggregate principal amount of
the Outstanding Exchange Notes, on behalf of all holders of Exchange Notes, may
waive any past default under the Exchange Indenture, except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Exchange Note tendered pursuant to an Offer to Purchase. (Section
513)
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
Exchange Notes or the Exchange Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder of Exchange
Notes by accepting an Exchange Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Exchange
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such waiver is against
public policy.
GOVERNING LAW
The Exchange Indenture and the Exchange Notes will be governed by the laws
of the State of New York.
THE TRUSTEE
The Exchange Indenture provides that, except during the continuance of an
Event of Default, the Trustee will perform only such duties as are specifically
set forth in the Exchange Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Exchange Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs. (Section 601)
The Exchange Indenture and provisions of the Trust Indenture Act
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claim as security or otherwise. The Trustee is permitted to engage in
other transactions with the Company or any Affiliate, provided, however, that if
it acquires any conflicting interest (as defined in the Exchange Indenture or in
the Trust Indenture Act), it must eliminate such conflict or resign.
(SectionSection 608 and 613)
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DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designations provisions and in the Exchange Indenture. Reference
is made to the Certificate of Designations and the Exchange Indenture for the
full definition of all such terms, as well as any other terms used herein for
which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such Person merges with or into or
consolidates with or becomes a Restricted Subsidiary of such specified Person
and (ii) Debt secured by a Lien encumbering any asset acquired by such specified
Person, which Debt was not Incurred in anticipation of, and was outstanding
prior to, such merger, consolidation or acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person to
such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such
Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of
Capital Stock or other ownership interests of a Restricted Subsidiary of such
Person, other than pursuant to a transaction in compliance with the covenant
described under "Description of Exchange Notes-- Mergers, Consolidations and
Certain Sales of Assets", (ii) substantially all of the assets of such Person or
any of its Restricted Subsidiaries representing a division or line of business
(other than as part of a Permitted Investment) or (iii) other assets or rights
of such Person or any of its Restricted Subsidiaries other than (A) in the
ordinary course of business or (B) that constitutes a Restricted Payment which
is permitted under the covenant "Description of Exchange Notes--Limitation on
Restricted Payments" above; provided that a transaction described in clauses
(i), (ii) and (iii) shall constitute an Asset Disposition only if the aggregate
consideration for such transfer, conveyance, sale, lease or other disposition is
equal to $5 million or more in any 12-month period.
"Bank Credit Agreement" means any one or more credit agreements (which may
include or consist of revolving credits) between the Company or any Restricted
Subsidiary of the Company and one or more banks or other financial institutions
providing financing for the business of the Company and its Restricted
Subsidiaries.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Debt arrangements 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 generally accepted accounting
principles (a "Capital Lease"). The stated maturity of such obligation shall be
the date of the last payment of rent or any other 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. The principal amount of such obligation shall be
the capitalized amount thereof that would appear on the face of a balance sheet
of such Person in accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
108
"Common Equity" of any Person means Capital Stock of such Person that is not
Disqualified Stock, and a "Sale of Common Equity" includes any sale effected by
private sale or public offering.
"Consolidated Capital Ratio" of any Person as of any date means the ratio of
(i) the aggregate consolidated principal amount of Debt of such Person then
outstanding to (ii) the aggregate consolidated Capital Stock (other than
Disqualified Stock) and paid-in capital (other than in respect of Disqualified
Stock) of such Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted Subsidiaries
for such period plus (iv) any non-cash expense related to the issuance to
employees of the Company or any Restricted Subsidiary of the Company of options
to purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v)
any charge related to any premium or penalty paid in connection with redeeming
or retiring any Debt prior to its stated maturity; provided, however, that there
shall be excluded therefrom the Consolidated Cash Flow Available for Fixed
Charges (if positive) of any Restricted Subsidiary of the Company (calculated
separately for such Restricted Subsidiary in the same manner as provided above
for the Company) that is subject to a restriction which prevents the payment of
dividends or the making of distributions to the Company or another Restricted
Subsidiary of the Company to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of the Company and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (excluding interest
income) of the Company and its Restricted Subsidiaries for such period
calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees with respect to interest rate swap
or similar agreements or foreign currency hedge, exchange or similar agreements;
(iv) Preferred Stock dividends of the Company and its Restricted Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not Disqualified
Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of
the Company and its Restricted Subsidiaries, whether or not declared or paid;
(vi) interest on Debt guaranteed by the Company and its Restricted Subsidiaries;
and (vii) the portion of any Capital Lease Obligation paid during such period
that is allocable to interest expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by the Company or a Restricted
Subsidiary of the Company in a pooling-of-interests transaction for any period
prior to the date of such transaction, (b) the net income (or loss) of any
Person that is not a Restricted Subsidiary of the Company except to the extent
of the amount of dividends or other distributions actually paid to the Company
or a Restricted Subsidiary of the Company by such Person during such period, (c)
gains or losses on Asset Dispositions by the Company or its Restricted
Subsidiaries, (d) all extraordinary gains and extraordinary losses, (e) the
cumulative effect of changes in accounting principles, (f) non-cash gains or
losses resulting from fluctuations in currency exchange rates, (g) any non-cash
gain or loss realized on the termination of any employee pension benefit plan
and (h) the tax effect of any of the items described in clauses (a) through (g)
above; provided, further, that for purposes of any determination pursuant to the
provisions described
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under "Description of the Exchange Notes--Covenants--Limitation on Restricted
Payments," there shall further be excluded therefrom the net income (but not net
loss) of any Restricted Subsidiary of the Company that is subject to a
restriction which prevents the payment of dividends or the making of
distributions to the Company or another Restricted Subsidiary of the Company to
the extent of such restriction.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Disqualified Stock of such Person; provided that, with respect to the Company,
adjustments following the date of the Exchange Indenture to the accounting books
and records of the Company in accordance with Accounting Principles Board
Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting
from the acquisition of control of the Company by another Person shall not be
given effect to.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Restricted Subsidiaries after
deducting therefrom all goodwill, trade names, trademarks, patents, unamortized
debt discount and expense and other like intangibles, which in each case under
generally accepted accounting principles would be included on such consolidated
balance sheet; provided that, with respect to the Company, adjustments following
the date of the Exchange Indenture to the accounting books and records of the
Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17
(or successor opinions thereto) or otherwise resulting from the acquisition of
control of the Company by another Person shall not be given effect to.
"Current Market Price" per Junior Share or any other security at any date
means (i) if the security is not registered under the Exchange Act, (a) the
value of the security, determined in good faith by the Board of Directors of the
Company, based on the most recently completed arm's-length transaction between
Company and a person other than an Affiliate of the Company and the closing of
which occurs on such date or shall have occurred within the six-month period
preceding such date, or (b) if no such transaction shall have occurred on such
date or within such six-month period, the value of the security as determined by
an independent financial expert (provided that, in the case of the calculation
of Current Market Price for determining the cash value of fractional shares, any
such determination within six months that is, in the good faith judgment of the
Board of Directors of the Company, a reasonable determination, may be utilized)
or (ii) (a) if the security is registered under the Exchange Act, the average of
the daily market prices of the security for the 20 consecutive trading days
immediately preceding such date, or (b) if the security has been registered
under the Exchange Act for less than 20 consecutive trading days before such
date, then the average of the closing sales prices for all of the trading days
before such date for which closing sales prices are available, in the case of
each of (ii) (a) and (ii) (b), as certified to the Warrant Agent by the
President, any Vice President or the Chief Financial Officer of the Company. The
market price for each such trading day shall be: (A) in the case of a security
listed or admitted to trading on any national securities exchange or quotation
system, the closing sales price, regular way, on such day, or if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
(B) in the case of a security not then listed or admitted to trading on any
national securities exchange or quotation system, the last reported sale price
on such day, or if no sale takes place on such day, the average of the closing
bid and asked prices on such day, as reported by a reputable quotation source
designated by the Company, (C) in the case of a security not then listed or
admitted to trading on any national securities exchange or quotation system and
as to which no such reported sale price or bid and asked prices are available,
the average of the reported high bid and low asked prices on such day, as
reported by a reputable quotation service, or a newspaper of general circulation
in the Borough of Manhattan, City and State of New York, customarily published
on each Business Day, designated by the Company, or, if there shall be no bid
and asked prices on such day, the
110
average of the high bid and low asked prices, as so reported, on the most recent
day (not more than 30 days prior to the date in question) for which prices have
been so reported and (D) if there are no bid and asked prices reported during
the 30 days prior to the date in question, the Current Market Price shall be
determined as if the securities were not registered under the Exchange Act.
"Debt" means (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) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including any such obligations Incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (iv)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (including securities repurchase agreements but
excluding trade accounts payable or accrued liabilities arising in the ordinary
course of business which are not overdue or which are being contested in good
faith), (v) every Capital Lease Obligation of such Person, (vi) all Receivables
Sales of such Person, together with any obligation of such Person to pay any
discount, interest, fees, indemnities, penalties, recourse, expenses or other
amounts in connection therewith, (vii) all obligations to redeem Disqualified
Stock issued by such Person, (viii) every obligation under Interest Rate and
Currency Protection Agreements of such Person and (ix) every obligation of the
type referred to in clauses (i) through (viii) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has Guaranteed. The "amount" or "principal amount" of Debt at any time of
determination as used herein represented by (a) any Debt issued at a price that
is less than the principal amount at maturity thereof, shall be the amount of
the liability in respect thereof determined in accordance with generally
accepted accounting principles, (b) any Receivables Sale, shall be the amount of
the unrecovered capital or principal investment of the purchaser (other than the
Company or a Wholly-Owned Restricted Subsidiary of the Company) thereof,
excluding amounts representative of yield or interest earned on such investment,
(c) any Disqualified Stock, shall be the maximum fixed redemption or repurchase
price in respect thereof, (d) any Capital Lease Obligation, shall be determined
in accordance with the definition thereof, or (e) any Permitted Interest Rate or
Currency Protection Agreement, shall be zero. In no event shall Debt include any
liability for taxes.
"Default" means an event that with the passing of time or the giving of
notice or both shall constitute an Event of Default.
"Disqualified Stock" of any Person means any Capital Stock of such Person
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, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final Stated Maturity of the Exchange
Notes or the mandatory redemption date of the Preferred Shares, as applicable;
provided, however, that any Preferred Stock which would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require the Company to repurchase or redeem such Preferred Stock upon the
occurrence of a Change of Control occurring prior to the final Stated Maturity
of the Exchange Notes or the mandatory redemption date of the Preferred Shares,
as applicable, shall not constitute Disqualified Stock if the change of control
provisions applicable to such Preferred Stock are no more favorable to the
holders of such Preferred Stock than the provisions applicable, in the case of
Exchange Notes, to the Exchange Notes contained in the covenant described under
"Description of the Exchange Notes--Covenants--Change of Control" or to the
Preferred Shares, in the case of Preferred Shares, contained in the covenant
described under "Description of Preferred Shares--Change of Control" and such
Preferred Stock specifically provides that the Company will not repurchase or
redeem any such stock pursuant to such provisions prior to the Company's
repurchase of such Exchange Notes or Preferred Shares, as applicable, as are
required to be repurchased pursuant to such covenant.
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"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-3" or higher, "A-" or higher or "A-" or
higher according to Moody's Investors Service, Inc., Standard & Poor's Ratings
Group or Duff & Phelps Credit Rating Co. (or such similar equivalent rating by
at least one "nationally recognized statistical rating organization" (as defined
in Rule 436 under the Securities Act)) respectively, at the time as of which any
investment or rollover therein is made.
"Event of Default" has the meaning set forth under "Description of the
Exchange Notes--Events of Default".
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act) and the rules and regulations thereunder.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States is pledged and which
have a remaining weighted average life to maturity of not more than 18 months
from the date of Investment therein.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing"
and "Guarantor" shall have meanings correlative to the foregoing); provided,
however, that the Guarantee by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business; and provided further, that the incurrence by a Restricted Subsidiary
of the Company of a lien on real or personal property of such Restricted
Subsidiary acquired, constructed or constituting improvements made after the
Issue Date to secure Purchase Money Debt which is Incurred for the construction,
acquisition and improvement of Telecommunications Assets and is otherwise
permitted under the Exchange Indenture, shall not be deemed to constitute a
Guarantee by such Restricted Subsidiary of any Purchase Money Debt of the
Company secured thereby; provided, however, that (a) the net proceeds of any
Debt secured by such a Lien does not exceed 100% of such purchase price or cost
of construction or improvement of the property subject to such Lien; (b) such
Lien attaches to such property prior to, at the time of or within 180 days after
the acquisition, completion of construction or commencement of operation of such
property; and (c) such Lien does not extend to or cover any property other than
the property (or identifiable portions thereof) acquired, constructed or
constituting improvements made with the proceeds of such Purchase Money Debt (it
being understood and agreed that all Debt owed to any single lender or group or
lenders or outstanding under any single credit facility shall be considered a
single Purchase Money Debt, whether drawn at one time or from time to time).
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Subsidiaries or the recording, as required pursuant
to generally accepted accounting principles or otherwise, of any such Debt or
other obligation on the balance sheet of such Person (and "Incurrence",
"Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided, however, that a change in generally accepted accounting
principles that results in an obligation of such Person that exists at such time
becoming Debt shall not be deemed an Incurrence of such Debt and that neither
the accrual of interest nor the accretion of original issue discount shall be
deemed an Incurrence of Debt; provided, further, however, that the
112
Company may elect to treat all or any portion of revolving credit debt of the
Company or a Subsidiary as being Incurred from and after any date beginning the
date the revolving credit commitment is extended to the Company or a Subsidiary,
by furnishing notice thereof to the Trustee or the Transfer Agent, as
applicable, and any borrowings or reborrowings by the Company or a Subsidiary
under such commitment up to the amount of such commitment designated by the
Company as Incurred shall not be deemed to be new Incurrences of Debt by the
Company or such Subsidiary.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person, but excluding any loan, advance or extension of credit to an
employee of the Company or any of its Restricted Subsidiaries in the ordinary
course of business, accounts receivables and other commercially reasonable
extensions of trade credit.
"Issue Date" means the date on which the Old Preferred Shares are first
issued and delivered.
"Joint Venture" means a corporation, partnership or other entity engaged in
one or more Telecommunications Businesses as to which the Company (directly or
through one or more Restricted Subsidiaries) exercises managerial control and in
which the Company owns (i) a 50% or greater interest, or (ii) a 40% or greater
interest, together with options or other contractual rights, exercisable not
more than seven years after the Company's initial Investment in such Joint
Venture, to increase its interest to not less than 50%.
"Junior Shares" means Capital Stock of the Company that does not rank, as to
the payment of dividends or other comparable distributions or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, prior to or on a parity with the
Preferred Shares.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Marketable Securities" means: (i) Government Securities; (ii) any time
deposit account, money market deposit and 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 "P-1" or higher according to Moody's Investors Service, Inc., "A-1" or
higher according to Standard & Poor's Ratings Group or "A-1" or higher according
to Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as defined in
Rule 436 under the Securities Act)); (iv) any banker's acceptances or money
market deposit accounts issued or offered by an Eligible Institution; (v)
repurchase obligations with a term of not more than 7 days for Government
Securities entered into with
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an Eligible Institution; and (vi) any fund investing exclusively in investments
of the types described in clauses (i) through (v) above.
"Net Available Proceeds" from any Asset Disposition by any Person means cash
or readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but excluding
any other consideration received in the form of assumption by the acquiror of
Debt or other obligations relating to such properties or assets) therefrom by
such Person, net of (i) all legal, title and recording tax expenses, commissions
and other fees and expenses Incurred and all federal, state, provincial, foreign
and local taxes (including taxes payable upon payment or other distribution of
funds from a foreign subsidiary to the Company or another subsidiary of the
Company) required to be accrued as a liability as a consequence of such Asset
Disposition, (ii) all payments made by such Person or its Restricted
Subsidiaries on any Debt which is secured by such assets in accordance with the
terms of any Lien upon or with respect to such assets or which must by the terms
of such Lien, or in order to obtain a necessary consent to such Asset
Disposition or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments made to minority
interest holders in Restricted Subsidiaries of such Person or joint ventures as
a result of such Asset Disposition, (iv) appropriate amounts to be provided by
such Person or any Restricted Subsidiary thereof, as the case may be, as a
reserve in accordance with generally accepted accounting principles against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such Asset Disposition,
including, without limitation, liabilities under any indemnification obligations
and severance and other employee termination costs associated with such Asset
Disposition, in each case as determined by the Board of Directors of the
Company, in reasonable good faith judgment and evidenced by a board resolution
filed with the Trustee; provided, however, that any reduction in such reserve
within twelve months following the consummation of such Asset Disposition will
be treated for all purposes of the Indenture and the Exchange Notes as a new
Asset Disposition at the time of such reduction with Net Available Proceeds
equal to the amount of such reduction, and (v) any consideration for an Asset
Disposition (which would otherwise constitute Net Available Proceeds) that is
required to be held in escrow pending determination of whether a purchase price
adjustment will be made, but amounts under this clause (v) shall become Net
Available Proceeds at such time and to the extent such amounts are released to
such Person.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each holder at his address appearing in
the records of the Company with respect to the Preferred Shares and the Note
Register with respect to the Exchange Notes, on the date of the Offer offering
to purchase up to the liquidation preference of Preferred Shares or the
principal amount of Exchange Notes, as applicable, specified in such Offer at
the purchase price specified in such Offer (as determined pursuant to the
Certificate of Designations or the Exchange Indenture, as the case may be).
Unless otherwise required by applicable law, the Offer shall specify an
expiration date (the "Expiration Date") of the Offer to Purchase which shall be,
subject to any contrary requirements of applicable law, not less than 30 days or
more than 60 days after the date of such Offer and a settlement date (the
"Purchase Date") for purchase of such security within five Business Days after
the Expiration Date. The Company shall notify the Transfer Agent or the Trustee,
as the case may be at least 15 business days (or such shorter period as is
acceptable to the Transfer Agent or the Trustee, as the case may be, prior to
the mailing of the Offer of the Company's obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Company or, at the Company's
request, by the Transfer Agent or the Trustee, as the case may be, in the name
and at the expense of the Company. The Offer shall contain information
concerning the business of the Company and its Subsidiaries which the Company in
good faith believes will enable such holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Transfer Agent or the Trustee, as the
case may be, pursuant to the Certificate of Designations or the Exchange
Indenture (which requirements may be satisfied by delivery of such
114
documents together with the Offer), (ii) a description of material developments
in the Company's business subsequent to the date of the latest of such financial
statements referred to in clause (i) (including a description of the events that
require the making of the Offer to Purchase), (iii) if applicable, appropriate
pro forma financial information concerning the Offer to Purchase and the events
that require the making of the Offer to Purchase and (iv) any other information
required by applicable law to be included therein). The Offer shall contain all
instructions and materials necessary to enable such holders to tender Preferred
Shares or Exchange Notes pursuant to the Offer to Purchase. The Offer shall also
state:
a. the Section of the Certificate of Designations or the Exchange
Indenture, if applicable, pursuant to which the Offer to Purchase is being
made;
b. the Expiration Date and the Purchase Date;
c. the aggregate liquidation preference of the Outstanding Preferred
Shares or principal amount of the Outstanding Exchange Notes, as applicable,
offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such has been determined
pursuant to the provision requiring the Offer to Purchase) (the "Purchase
Amount");
d. the purchase price to be paid by the Company for Preferred Shares or
Exchange Notes, as applicable, accepted for payment (as specified pursuant
to the Certificate of Designations or the Exchange Indenture) (the "Purchase
Price");
e. that the holder may tender all or any portion of the Preferred
Shares or Exchange Notes registered in the name of such holder, and that any
portion of an Exchange Note tendered must be tendered in an integral
multiple of $1,000 principal amount;
f. the place or places where Preferred Shares or Exchange Notes, as
applicable, are to be surrendered for tender pursuant to the Offer to
Purchase;
g. that dividends on any Preferred Share or interest on any Exchange
Note, as applicable, not tendered or tendered but not purchased by the
Company pursuant to the Offer to Purchase will continue to accrue;
h. that on the Purchase Date the Purchase Price will become due and
payable upon each Preferred Share or Exchange Note being accepted for
payment pursuant to the Offer to Purchase and that dividends or interest
thereon, as applicable, shall cease to accrue on and after the Purchase
Date;
i. that each holder electing to tender a Preferred Share or Exchange
Note pursuant to the Offer to Purchase will be required to surrender such
Preferred Share or Exchange Note at the place or places specified in the
Offer prior to the close of business on the Expiration Date (such Preferred
Share or Exchange Note being, if the Company or the Transfer Agent or the
Trustee, as applicable, so requires, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Transfer Agent or Trustee, as applicable, duly executed by, the holder
thereof or his attorney duly authorized in writing);
j. that holders will be entitled to withdraw all or any portion of
Preferred Shares or Exchange Notes, as applicable, tendered if the Company
(or its Paying Agent) receives, not later than the close of business on the
Expiration Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the holder, the number of Preferred Shares or the
principal amount of the Exchange Note the holder tendered, the certificate
number of the Preferred Share or Exchange Note the holder tendered and a
statement that such holder is withdrawing all or a portion of his tender;
115
k. that (a) if Preferred Shares or Exchange Notes in an aggregate
amount less than or equal to the Purchase Amount are duly tendered and not
withdrawn pursuant to the Offer to Purchase, the Company shall purchase all
such Preferred Shares or Exchange Notes and (b) in the case of Exchange
Notes, if Exchange Notes in an aggregate principal amount in excess of the
Purchase Amount are tendered and not withdrawn pursuant to the Offer to
Purchase, the Company shall purchase Exchange Notes having an aggregate
principal amount equal to the Purchase Amount on a PRO RATA basis (with such
adjustments as may be deemed appropriate so that only Exchange Notes in
denominations of $1,000 or integral multiples thereof shall be purchased);
and
l. that in the case of any holder whose Preferred Shares or Exchange
Notes are purchased only in part, the Company shall issue and the Transfer
Agent shall countersign and execute, and the Trustee shall authenticate and
deliver to the holder of such Preferred Shares or Exchange Notes without
service charge, a new Preferred Share or Preferred Shares or Exchange Note
or Exchange Notes, as applicable, of any authorized denomination, in the
case of Exchange Notes, as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of the
Exchange Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby and not for purposes of speculation.
"Permitted Investment" means (i) any Investment in a Joint Venture
(including the purchase or acquisition of any Capital Stock of a Joint Venture),
provided the aggregate amount of all outstanding Investments pursuant to this
clause (i) in Joint Ventures in which the Company owns, directly or indirectly,
a less than 50% interest shall not exceed $25 million, (ii) any Investment in
any Person as a result of which such Person becomes a Restricted Subsidiary or,
subject to the proviso to clause (i) of this definition, becomes a Joint Venture
of the Company, (iii) any Investment in Marketable Securities, (iv) Investments
in Permitted Interest Rate or Currency Protection Agreements, and (v)
Investments made as a result of the receipt of noncash consideration from an
Asset Disposition that was made pursuant to and in compliance with the covenant
described under "Description of the Exchange Notes-- Covenants--Limitation on
Asset Dispositions".
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization, government or agency or political subdivision thereof or any other
entity.
"Preferred Dividends" for any Person means for any period the quotient
determined by dividing the amount of dividends and distributions paid or accrued
(whether or not declared) on Preferred Stock of such Person during such period
calculated in accordance with generally accepted accounting principles, by 1
minus the maximum statutory income tax rate then applicable to the Company
(expressed as a decimal).
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
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"Public Equity Offering" means an underwritten public offering of common
stock, par value $.01 per share, of the Company pursuant to an effective
registration statement filed with the Commission in accordance with the
Securities Act.
"Purchase Money Debt" means (i) Acquired Debt Incurred in connection with
the acquisition of Telecommunications Assets and (ii) Debt of the Company or of
any Restricted Subsidiary of the Company (including, without limitation, Debt
represented by Capital Lease Obligations, Vendor Financing Facilities, 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 Restricted Subsidiary of the Company or any Joint Venture of any
Telecommunications Assets of the Company, any Restricted 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.
"Qualifying Event" means a Public Equity Offering or one or more Strategic
Equity Investments which in either case results in aggregate net proceeds to the
Company of not less than $75 million.
"Qualified Junior Shares" means Junior Shares that do not constitute
Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money in respect
of the sale of goods or services.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Related Person" of any Person means any other Person directly or indirectly
owning (a) 10% or more of the Outstanding Common Equity of such Person (or, in
the case of a Person that is not a corporation, 10% or more of the equity
interest in such Person) or (b) 10% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" of the Company means any Subsidiary, whether
existing on or after the date of original issuance of the Exchange Notes, unless
such Subsidiary is an Unrestricted Subsidiary.
"Significant 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.
"Strategic Equity Investment" means an investment in Qualified Junior Shares
made by a Strategic Investor in an aggregate amount of not less than $25
million.
"Strategic Investor" means a Person engaged in one or more
Telecommunications Businesses (which need not be such Person's primary business)
that has, or 80% or more of the Voting Stock of which is owned, directly or
indirectly, by a Person that has, an equity market capitalization or net worth,
at the time of its initial Investment in the Company, in excess of $2.0 billion.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Exchange Notes, or the Senior Notes if the Exchange Notes have not yet been
issued, to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Exchange Notes or Senior Notes, as applicable, exists;
(ii) in the event that any other default that with the passing of time or the
giving of notice, or both, would constitute an Event of Default exists with
respect to the Exchange Notes or Senior Notes, as applicable, upon notice by 25%
or more in principal amount of the Exchange Notes or Senior Notes, as
applicable, to the Trustee, the Trustee shall have the right to give notice to
the Company and
117
the holders of such Debt (or trustees or agents therefor) of a payment blockage,
and thereafter no payments of principal of (or premium, if any) or interest on
or otherwise due in respect of such Debt may be made for a period of 179 days
from the date of such notice or for the period until such default has been cured
or waived or ceased to exist and any acceleration of the Exchange Notes or
Senior Notes, as applicable, has been rescinded or annulled, whichever period is
shorter (which Debt may provide that (A) no new period of payment blockage may
be commenced by a payment blockage notice unless and until 360 days have elapsed
since the effectiveness of the immediately prior notice, (B) no nonpayment
default that existed or was continuing on the date of delivery of any payment
blockage notice to such holders (or such agents or trustees) shall be, or be
made, the basis for a subsequent payment blockage notice and (C) failure of the
Company to make payment on such Debt when due or within any applicable grace
period, whether or not on account of such payment blockage provisions, shall
constitute an event of default thereunder); and (iii) such Debt may not (x)
provide for payments of principal of such Debt at the stated maturity thereof or
by way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by the Company
(including any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each case
prior to the final Stated Maturity of the Exchange Notes or Senior Notes, as
applicable, or (y) permit redemption or other retirement (including pursuant to
an offer to purchase made by the Company) of such other Debt at the option of
the holder thereof prior to the final Stated Maturity of the Exchange Notes or
the Senior Notes, as applicable, other than a redemption or other retirement at
the option of the holder of such Debt (including pursuant to an offer to
purchase made by the Company) which is conditioned upon a change of control of
the Company pursuant to provisions substantially similar to those described
under "Description of the Exchange Notes--Covenants--Change of Control" (and
which shall provide that such Debt will not be repurchased pursuant to such
provisions prior to the Company's repurchase of the Exchange Notes or Senior
Notes, as applicable, required to be repurchased by the Company).
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding 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 Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"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 other devices for use in
a Telecommunication Business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
(i) or (ii) above and shall, in any event, include all businesses in which the
Company or any of its Subsidiaries are engaged on the Issue Date; provided that
the determination of what constitutes a Telecommunications Business shall be
made in good faith by the Board of Directors of the Company, which determination
shall be conclusive.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company designated
as such by the Board of Directors of the Company as set forth below where (a)
neither the Company nor any of its other Subsidiaries (other than another
Unrestricted Subsidiary) (i) provides credit support for, or Guarantee of, any
Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Debt) or (ii) is directly
or indirectly liable for any Debt of such Subsidiary or any Subsidiary of such
Subsidiary, and (b) no default with respect to any Debt of such Subsidiary or
any Subsidiary of such Subsidiary (including any right which the holders thereof
may have
118
to take enforcement action against such Subsidiary) would permit (upon notice,
lapse of time or both) any holder of any other Debt of the Company and its
Restricted Subsidiaries to declare a default on such other Debt or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of
Directors of the Company may designate any Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary, provided that either (x) the Subsidiary to be so designated has
total assets of $1,000 or less or (y) immediately after giving effect to such
designation, the Company could incur at least $1.00 of additional Debt pursuant
to the first paragraph under "Description of the Exchange
Notes--Covenants--Limitation on Consolidated Debt" or under "Description of the
Preferred Shares--Covenants--Limitation on Consolidated Debt" above, as
applicable, and provided, further and solely for purposes of the Exchange Notes
and the Exchange Indenture, that the Company could make a Restricted Payment in
an amount equal to the greater of the fair market value and the book value of
such Subsidiary pursuant to the covenant described under "Description of the
Exchange Notes--Covenants--Limitation on Restricted Payments" and such amount is
thereafter treated as a Restricted Payment for the purpose of calculating the
aggregate amount available for Restricted Payments thereunder. The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary, provided that, immediately after giving effect to such
designation, the Company could incur at least $1.00 of additional Debt pursuant
to the first paragraph under "Description of the Exchange
Notes--Covenants--Limitation on Consolidated Debt or under "Description of the
Preferred Shares--Covenants--Limitation on Consolidated Debt" above, as
applicable.
"Vendor Financing Facility" means any agreements between the Company or a
Restricted Subsidiary of the Company and one or more vendors or lessors of
equipment to the Company or any of its Restricted Subsidiaries (or any affiliate
of any such vendor or lessor) providing financing for the acquisition by the
Company or any such Restricted Subsidiary of equipment from any such vendor or
lessor.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly-Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person 99% or more of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly-Owned
Restricted Subsidiaries of such Person.
119
PLAN OF DISTRIBUTION
Based on no-action letters issued by the staff of the Commission (the
"Staff") to third parties, the Company believes the New Preferred Shares issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than a "Restricted Holder," being (i) a
broker-dealer who acquires such New Preferred Shares directly from the Company
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (ii) a person that is an Affiliate of the Company or (ii) a
broker-dealer who acquired Old Preferred Shares as a result of market-making or
other trading activities), without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Preferred Shares are acquired in the ordinary course of such holders' business
and such holders have no arrangements with any person to participate in the
distribution of such New Preferred Shares. To date, the Staff has taken the
position that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Old Preferred Shares to the Initial
Purchasers) with the prospectus contained in the Exchange Offer Registration
Statement of which this Prospectus is a part. Pursuant to the Preferred
Registration Rights Agreement, the Company has agreed to permit participating
broker-dealers and other persons, if any, subject to similar prospectus delivery
requirements to use this Prospectus in connection with the resale of such New
Preferred Shares. The Company has agreed that it will make this Prospectus, and
any amendment or supplement to this Prospectus, available to any broker-dealer
that requests such documents in the Letter of Transmittal.
Each holder of the Old Preferred Shares who wishes to exchange its Old
Preferred Shares for New Preferred Shares in the Exchange Offer will be required
to make certain representations to the Company as set forth in "The Exchange
Offer--Terms and Conditions of the Letter of Transmittal". In addition, each
holder who is a broker-dealer and who receives New Preferred Shares pursuant to
the Exchange Offer in exchange for Old Preferred Shares for its own account as a
result of market-making activities or other trading activities, will be required
to acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale by it of such New Preferred Shares.
The Company will not receive any proceeds from any sale of New Preferred
Shares by broker-dealers. New Preferred Shares 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 Preferred Shares 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 at 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 the purchasers of any such New
Preferred Shares. Any broker-dealer that resells New Preferred Shares 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 Preferred Shares may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of New Preferred Shares 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.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Preferred Shares (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Preferred Registration Rights Agreement.
120
LEGAL MATTERS
The validity of the New Preferred Shares will be passed upon for the Company
by Willkie Farr & Gallagher, New York, New York. As to matters of Washington
law, Willkie Farr & Gallagher will rely upon the opinion of Davis Wright
Tremaine LLP, Seattle, Washington.
EXPERTS
The audited consolidated financial statements of the Company, Sound Response
Corporation, Tel-West Central Services, Inc. and City Signal, Inc.,Tennessee
Operations, included in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The financial statements of Linkatel Pacific, L.P. as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 and the
cumulative period from July 21, 1993 (date of inception) to December 31, 1996
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
121
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Consolidated Statement of Operations for the Year Ended December 31,
1996............................................................................... F-3
Pro Forma Consolidated Statement of Operations for the Year Ended December 31,
1995............................................................................... F-4
Pro Forma Consolidated Balance Sheet at December 31, 1996............................ F-5
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................. F-6
Consolidated Balance Sheets at December 31, 1996 and 1995............................ F-7
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995
and From Inception (September 16, 1994) to December 31, 1994....................... F-8
Consolidated Statements of Changes in Members' Equity (Deficit) for the Years Ended
December 31, 1996 and 1995 and From Inception (September 16, 1994) to December 31,
1994............................................................................... F-9
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995
and From Inception (September 16, 1994) to December 31, 1994....................... F-10
Notes to Consolidated Financial Statements........................................... F-12
LINKATEL PACIFIC, L.P.
Independent Auditors' Report......................................................... F-24
Balance Sheets at December 31, 1996 and 1995......................................... F-25
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 and the
Cumulative Period From July 21, 1993 (Date of Inception) to December 31, 1996...... F-26
Statements of Partners' Capital for the Years Ended December 31, 1996, 1995 and 1994
and the Cumulative Period From July 21, 1993 (Date of Inception) to December 31,
1996............................................................................... F-27
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 and the
Cumulative Period From July 21, 1993 (Date of Inception) to December 31, 1996...... F-28
Notes to Financial Statements........................................................ F-29
SOUND RESPONSE CORPORATION
Report of Independent Public Accountants............................................. F-33
Balance Sheets at August 31, 1995, December 31, 1994 and December 31, 1993........... F-34
Statements of Operations For the Eight Months Ended August 31, 1995 and For the Years
Ended December 31, 1994 and 1993................................................... F-35
Statements of Changes in Shareholders' Equity For the Eight Months Ended August 31,
1995 and For the Years Ended December 31, 1994 and 1993............................ F-36
Statements of Cash Flows For the Eight Months Ended August 31, 1995 and For the Years
Ended December 31, 1994 and 1993................................................... F-37
Notes to Financial Statements........................................................ F-38
TEL-WEST CENTRAL SERVICES, INC.
Report of Independent Public Accountants............................................. F-42
Balance Sheets at March 31, 1995 and September 30, 1994 and 1993..................... F-43
Statements of Operations For the Six Months Ended March 31, 1995 and For the Years
Ended September 30, 1994 and 1993.................................................. F-44
Statements of Changes in Shareholders' Equity For the Six Months Ended March 31, 1995
and For the Years Ended September 30, 1994 and 1993................................ F-45
Statements of Cash Flows For the Six Months Ended March 31, 1995 and For the Years
Ended September 30, 1994 and 1993.................................................. F-46
Notes to Financial Statements........................................................ F-47
CITY SIGNAL, INC., TENNESSEE OPERATIONS
Report of Independent Public Accountants............................................. F-51
Summary of Revenue and Direct Operating Expenses For the Years Ended December 31,
1994 and 1993...................................................................... F-52
Notes to the Summary of Revenue and Direct Operating Expenses........................ F-53
- ------------------------
(1) See Notes 1 and 12 to the Audited Annual Consolidated Financial Statements.
F-1
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma statement of operations for the year ended
December 31, 1996 gives effect to the the acquisitions of the ITC Companies
("ITC"), a long distance reseller based in Salt Lake City, Utah, and Linkatel
Pacific, L.P. ("Linkatel"), a competitive access service provider based in Los
Angeles, California (collectively referred to as the "1996 Acquisitions") as if
those transactions had occurred on January 1, 1996. The ITC acquisition closed
in December 1996 and the Linkatel acquisition closed in February 1997. Both
acquisitions will be accounted for using the purchase method of accounting. The
unaudited pro forma statement of operations for the year ended December 31, 1995
gives effect to (i) the 1996 Acquisitions, (ii) the acquisition of Tel-West
Central Services, Inc., now known as NEXTLINK Washington, L.L.C. ("NEXTLINK
Washington"), which conducts NEXTLINK Communications, L.L.C.'s (the "Company")
operations in Spokane, Washington and Sound Response Corporation, now known as
NEXTLINK Interactive, L.L.C. ("NEXTLINK Interactive"), which conducts the
Company's interactive voice response platform operations (collectively referred
to as the "1995 Acquisitions") and (iii) a recapitalization of the Company and
four of the Company's operating subsidiaries, as a result of which each of these
subsidiaries was owned 99% by the Company and 1% by a corporation that is wholly
owned by Mr. Craig O. McCaw (the "Recapitalization") as if those transactions
had occurred on January 1, 1995.
The unaudited pro forma balance sheet gives effect to the Linkatel
acquisition and the conversion of the Company to a corporation as though such
transactions had occurred on December 31, 1996.
The pro forma financial statements have been prepared based on the
historical financial statements of the Company as well as the historical
financial statements of Linkatel, ITC, Tel-West Central Services, Inc. and Sound
Response Corporation and certain estimates and assumptions set forth in the
notes to the pro forma financial statements. This pro forma financial
information is neither necessarily indicative of results that would have
actually occurred had the transactions been consummated on the indicated dates
nor is it necessarily indicative of future operating results or financial
position.
F-2
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRO FORMA PRO FORMA
HISTORICAL LINKATEL ITC ADJUSTMENTS RESULTS
------------ --------- --------- ------------ -----------
Revenue.......................................... $ 25,686 $ 172 $ 11,372 $ (953)(1) $ 36,277
Costs and Expenses:
Operating...................................... 25,094 695 7,181 (570)(1) 32,400
Selling, general and administrative............ 31,353 1,031 3,094 (240)(1) 35,238
Deferred compensation.......................... 9,914 -- -- -- 9,914
Depreciation and amortization.................. 10,340 1,010 705 (155)(1) 14,966
3,066(2)
------------ --------- --------- ------------ -----------
Total costs and expenses................... 76,701 2,736 10,980 2,101 92,518
------------ --------- --------- ------------ -----------
Income/(loss) from operations.................... (51,015) (2,564) 392 (3,054) (56,241)
Interest income.................................. 10,446 -- -- (2,267)(3) 8,179
Interest expense................................. (30,876) (481) (182) 28(1) (31,030)
481(4)
------------ --------- --------- ------------ -----------
Income (loss) before minority interests.......... (71,445) (3,045) 210 (4,812) (79,092)
Minority interests in loss of consolidated
subsidiaries.................................... 344 -- -- -- 344
------------ --------- --------- ------------ -----------
Net income (loss)................................ $ (71,101) $ (3,045) $ 210 $ (4,812) $ (78,748)
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(1) Reflects elimination of revenues and expenses of ITC after acquisition that
are also included in the historical column.
(2) Reflects additional amortization of intangible assets resulting from
allocation of a portion of the purchase prices of ITC and Linkatel to
goodwill, customer base and other intangible assets.
(3) To reflect a reduction in interest income earned on investment of excess
cash due to assumed payment of cash portion of purchase prices as of January
1, 1996.
(4) To reflect a reduction in Linkatel's interest expense due to assumed
repayment of Linkatel's debt as of January 1, 1996.
F-3
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1996 1995 PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS ACQUISITIONS ADJUSTMENTS RESULTS (1)
------------ ------------ ------------ ------------ -----------
Revenue.................................... $ 7,552 $ 9,492 $ 12,773 $ (4,197)(2) $ 25,620
Costs and expenses:
Operating................................ 6,618 6,089 6,429 (2,629)(2) 16,507
Selling, general and administrative...... 9,563 3,471 4,592 (2,259)(2) 15,367
Deferred compensation.................... 375 -- -- -- 375
Depreciation and amortization............ 3,458 1,286 436 (495)(2) 8,663
912(3)
3,066(4)
------------ ------------ ------------ ------------ -----------
Total costs and expenses................... 20,014 10,846 11,457 (1,405) 40,912
------------ ------------ ------------ ------------ -----------
Income/(loss) from operations.............. (12,462) (1,354) 1,316 (2,792) (15,292)
Interest income............................ -- -- -- -- --
Interest expense........................... (499) (287) (45) 17(3) (814)
------------ ------------ ------------ ------------ -----------
Income (loss) before minority interests.... (12,961) (1,641) 1,271 (2,775) (16,106)
Minority interests in loss of consolidated
subsidiaries.............................. 230 - (13) (103)(5) 114
------------ ------------ ------------ ------------ -----------
Net income (loss).......................... $ (12,731) $ (1,641) $ 1,258 $ (2,878) $ (15,992)
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(1) The pro forma consolidated statement of operations data do not give effect
to the Company's acquisition of certain fixed assets that are now being used
by the Company in Ohio.
(2) Represents elimination of revenues and expenses of NEXTLINK Washington and
NEXTLINK Interactive after acquisition that are also included in the
historical column.
(3) Represents amortization of NEXTLINK Washington and NEXTLINK Interactive
intangible assets, primarily goodwill.
(4) Reflects additional amortization of intangible assets resulting from
allocation of a portion of the purchase prices of ITC and Linkatel to
goodwill, customer base and other intangible assets.
(5) Represents the effect of the Recapitalization as if this transaction had
occurred on January 1, 1995.
F-4
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRO FORMA PRO FORMA
HISTORICAL LINKATEL ADJUSTMENTS BALANCE
----------- --------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 76,807 $ 689 $ (30,130)(1) 41,811
(5,555)(2)
Marketable securities...................................... 47,713 -- -- 47,713
Accounts receivable, net................................... 7,008 22 -- 7,030
Other...................................................... 607 222 -- 829
Pledged securities......................................... 39,770 -- -- 39,770
----------- --------- ------------ -----------
Total current assets..................................... 171,905 933 (35,685) 137,153
Pledged securities........................................... 61,668 -- -- 61,668
Property and equipment, net.................................. 97,784 14,166 -- 111,950
Goodwill, net................................................ 24,110 -- 29,619(3) 53,729
Other intangible assets, net................................. 11,243 235 -- 11,478
Other long-term assets, net.................................. 23,973 292 (6,000)(1) 16,775
(1,490)(4)
----------- --------- ------------ -----------
Total assets............................................. $ 390,683 $ 15,626 $ (13,556) $ 392,753
----------- --------- ------------ -----------
----------- --------- ------------ -----------
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft............................................. $ -- $ -- $ -- $ --
Accounts payable........................................... 18,622 621 -- 19,243
Accrued expenses........................................... 4,112 1,312 -- 5,424
Accrued interest payable................................... 9,250 -- -- 9,250
Notes payable.............................................. -- 5,555 (5,555)(2) --
Current portion of capital lease obligations............... 1,194 -- -- 1,194
Payable to affiliate....................................... 1,500 1,490 (1,490)(4) 1,500
----------- --------- ------------ -----------
Total current liabilities................................ 34,678 8,978 (7,045) 36,611
Long-term liabilities:
Long-term debt............................................. 350,000 -- -- 350,000
Capital lease obligations.................................. 6,262 -- -- 6,262
Other...................................................... 13,139 137 -- 13,276
----------- --------- ------------ -----------
Total current liabilities................................ 404,079 9,115 (7,045) 406,149
Minority interests........................................... 308 -- -- 308
Equity units subject to redemption........................... 4,950 -- -- 4,950
Members' equity (deficit).................................... (18,654) 6,511 (6,511)(5) (18,654)
----------- --------- ------------ -----------
Total liabilities and members' equity (deficit).......... $ 390,683 $ 15,626 $ (18,654) $ 392,753
----------- --------- ------------ -----------
----------- --------- ------------ -----------
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(1) Represents payment of the cash portion of the purchase price in the Linkatel
transaction, including $6,000 that had been deposited in escrow pending
closing of the transaction.
(2) Represents repayment of Linkatel debt.
(3) Represents allocation to goodwill of the excess of the purchase price over
the net assets acquired in the Linkatel transaction. The goodwill will have
a 20 year life.
(4) Represents elimination of advances to Linkatel prior to the closing of the
transaction.
(5) Represents elimination of net assets acquired in Linkatel transaction.
F-5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of NEXTLINK Communications, L.L.C.:
We have audited the accompanying consolidated balance sheets of NEXTLINK
Communications, L.L.C. (a Washington limited liability company) and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in members' equity (deficit) and cash flows for the years
then ended and the period from inception (September 16, 1994) to December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of NEXTLINK Communications,
L.L.C. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended and the period
from inception (September 16, 1994) to December 31, 1994 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
February 10, 1997
F-6
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 76,807 $ 1,350
Marketable securities.................................................................. 47,713 --
Accounts receivable, net............................................................... 7,008 3,563
Other.................................................................................. 607 746
Pledged securities..................................................................... 39,770 --
----------- ---------
Total current assets............................................................... 171,905 5,659
Pledged securities....................................................................... 61,668 --
Property and equipment, net.............................................................. 97,784 29,664
Goodwill, net............................................................................ 24,110 12,137
Other intangible assets, net............................................................. 11,243 5,751
Other long-term assets, net.............................................................. 23,973 250
----------- ---------
Total assets....................................................................... $ 390,683 $ 53,461
----------- ---------
----------- ---------
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft......................................................................... $ -- $ 1,373
Accounts payable....................................................................... 18,622 4,315
Accrued expenses....................................................................... 4,112 1,266
Accrued interest payable............................................................... 9,250 --
Current portion of capital lease obligations........................................... 1,194 --
Payable to affiliates.................................................................. 1,500 4,937
----------- ---------
Total current liabilities.......................................................... 34,678 11,891
Long-term liabilities:
Long-term debt......................................................................... 350,000 --
Capital lease obligations.............................................................. 6,262 --
Other.................................................................................. 13,139 1,965
----------- ---------
Total liabilities.................................................................. 404,079 13,856
Commitments and contingencies
Minority interests....................................................................... 308 2,886
Equity units subject to redemption (900,000 units outstanding as of December 31, 1996)... 4,950 --
Members' equity (deficit) (63,793,820 and 49,798,659 units outstanding as of December 31,
1996 and 1995, respectively)........................................................... (18,654) 36,719
----------- ---------
Total liabilities and members' equity (deficit).................................... $ 390,683 $ 53,461
----------- ---------
----------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-7
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION
(SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- ---------- ---------
Revenue......................................................................... $ 25,686 $ 7,552 $ --
Costs and expenses:
Operating..................................................................... 25,094 6,618 106
Selling, general and administrative........................................... 31,353 9,563 232
Deferred compensation......................................................... 9,914 375 --
Depreciation.................................................................. 6,640 1,125 7
Amortization of intangible assets............................................. 3,700 2,333 7
---------- ---------- ---------
Total costs and expenses.................................................. 76,701 20,014 352
---------- ---------- ---------
Loss from operations............................................................ (51,015) (12,462) (352)
Interest income................................................................. 10,446 -- --
Interest expense................................................................ (30,876) (499) --
---------- ---------- ---------
Loss before minority interests.................................................. (71,445) (12,961) (352)
Minority interests in loss of consolidated subsidiaries......................... 344 230 3
---------- ---------- ---------
Net loss........................................................................ $ (71,101) $ (12,731) $ (349)
---------- ---------- ---------
---------- ---------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-8
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION
(SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
UNITS AMOUNT
------------- ----------
BALANCE, INCEPTION (SEPTEMBER 16, 1994)............................................... -- $ --
Contributed capital................................................................. 1,021,305 1,021
Net loss............................................................................ -- (349)
------------- ----------
BALANCE, DECEMBER 31, 1994............................................................ 1,021,305 672
Contributed capital................................................................. 44,365,413 44,366
Issuance of units for NEXTLINK Interactive acquisition.............................. 4,411,941 4,412
Net loss............................................................................ -- (12,731)
------------- ----------
BALANCE, DECEMBER 31, 1995............................................................ 49,798,659 36,719
Contributed capital................................................................. 9,502,021 9,502
Issuance of units for NEXTLINK Ohio acquisition..................................... 651,933 652
Impact of recapitalization and merger of affiliates................................. 3,841,207 5,574
Net loss............................................................................ -- (71,101)
------------- ----------
BALANCE, DECEMBER 31, 1996............................................................ 63,793,820 $ (18,654)
------------- ----------
------------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-9
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION
(SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- ---------- ---------
OPERATING ACTIVITIES:
Net loss........................................................................ $ (71,101) $ (12,731) $ (349)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred compensation expense............................................... 9,914 375 --
Equity in loss of affiliates................................................ 1,100 -- --
Depreciation and amortization............................................... 10,340 3,458 14
Minority interest in loss of consolidated subsidiaries...................... (344) (230) (3)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable......................................................... (1,659) (2,529) --
Other current assets........................................................ (42) (638) --
Other long-term assets...................................................... (1,430) (500) (79)
Accounts payable............................................................ 993 2,163 --
Accrued expenses............................................................ 2,416 1,452 21
Accrued interest payable.................................................... 9,250 -- --
---------- ---------- ---------
Total adjustments....................................................... 30,538 3,551 (47)
---------- ---------- ---------
Net cash used in operating activities........................................... (40,563) (9,180) (396)
INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (51,920) (17,778) (140)
Net assets acquired in business and asset acquisitions...................... (15,169) (17,639) (460)
Cash placed into escrow for business acquisition............................ (6,000) -- --
Investments in unconsolidated affiliates.................................... (4,953) -- --
Purchase of pledged securities.............................................. (117,688) -- --
Maturity of pledged securities.............................................. 16,431 -- --
Purchase of marketable securities,net....................................... (47,713) -- --
---------- ---------- ---------
Net cash used in investing activities........................................... (227,012) (35,417) (600)
FINANCING ACTIVITIES:
Proceeds from issuance of senior notes...................................... 350,000 -- --
Capital contributions....................................................... 9,935 37,091 1,021
Proceeds from payable to affiliates......................................... 28,766 7,458 --
Repayment of payables to affiliates......................................... (33,703) -- --
Bank overdraft.............................................................. (1,373) 1,373 --
Costs incurred in connection with financing................................. (9,822) -- --
Repayment of capital lease obligations...................................... (771) -- --
---------- ---------- ---------
Net cash provided by financing activities....................................... 343,032 45,922 1,021
---------- ---------- ---------
Net increase in cash and cash equivalents....................................... 75,457 1,325 25
Cash and cash equivalents, beginning of period.................................. 1,350 25 --
---------- ---------- ---------
Cash and cash equivalents, end of period........................................ $ 76,807 $ 1,350 $ 25
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amount capitalized........................... $ 20,912 $ 16 $ --
---------- ---------- ---------
---------- ---------- ---------
F-10
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION
(SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL CASH FLOW DISCLOSURES:
(DOLLARS IN THOUSANDS)
Noncash investing and financing activities:
During 1996 and 1995, the Company completed various acquisitions of
businesses and assets (see Note 3). In connection with these acquisitions, the
Company issued equity units and assumed liabilities as follows:
1996 1995
--------- ---------
Fair value of tangible assets acquired..................................................... $ 12,579 $ 11,500
Liabilities assumed........................................................................ (8,228) (3,554)
Fair value of intangible assets acquired................................................... 16,420 19,335
--------- ---------
$ 20,771 $ 27,281
--------- ---------
--------- ---------
Cash paid for assets....................................................................... $ 15,169 $ 17,022
Deferred purchase consideration............................................................ -- 3,000
Equity units issued:
Company units issued (1)................................................................. 5,602 4,412
Subsidiary units and options issued...................................................... -- 2,847
--------- ---------
$ 20,771 $ 27,281
--------- ---------
--------- ---------
- ------------------------
(1) Company units issued in 1996 includes 900,000 Class A Units valued at $4,950
which are subject to redemption (see Note 3).
During 1996, the Company acquired $1,377 in property and equipment under
capital lease obligations, exclusive of property and equipment under capital
lease obligations which were acquired in acquisitions.
In January 1996, the Company recognized additional members' equity and
goodwill of $5,574 and $2,907, respectively, and a reduction in minority
interests of $2,667 relating to a recapitalization and merger of companies
holding minority equity interests in certain subsidiaries of the Company, which
exchanged these interests for Class A units of the Company.
In December 1995, the Company issued 7,273,918 Class A Units to an affiliate
in satisfaction of a payable of $7,274.
The accompanying notes are an integral part of these consolidated statements.
F-11
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION:
The consolidated financial statements include the accounts of NEXTLINK
Communications, L.L.C., a Washington limited liability company, and its
majority-owned subsidiaries (the Company). The Company, through predecessor
entities, was formed on September 16, 1994 and, through its subsidiaries,
provides competitive local telecommunications services in selected markets in
the United States. The Company is a majority-owned subsidiary of Eagle River
Investments, L.L.C. (Eagle River).
Prior to January 31, 1997, the Company was organized and operated under a
limited liability company agreement. The agreement provided, among other things,
for specific allocation of net profits and losses to each member, allocations
and distributions to members, and a preferred return to members on their
respective contributions invested in the Company, as well as a return of their
respective investments in the Company. On January 31, 1997, NEXTLINK
Communications, L.L.C. merged with and into NEXTLINK Communications, Inc., a
Washington corporation (the Incorporation). See Note 12 for further discussion.
Unless otherwise indicated all information presented herein is presented for
periods prior to the Incorporation, and therefore relate to the time that the
Company was a limited liability company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include 100% of the assets,
liabilities and results of operations of subsidiaries in which the Company has a
controlling interest of greater than 50%. The ownership interests of the other
members or partners are reflected as minority interests. The Company's
investments in entities in which it has voting interests of at least 20% but not
more than 50% are accounted for using the equity method and investments in
entities in which it has voting interests of not more than 20% are accounted for
using the cost method. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue on telecommunications and enhanced
communications services in the period that service is provided.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the time of purchase.
MARKETABLE SECURITIES
Marketable securities consist of U.S. government securities and commercial
paper with original maturities beyond three months, but less than 12 months.
Marketable securities are stated at cost, adjusted for discount accretion and
premium amortization. The securities in the Company's portfolio are classified
as "held to maturity," as management has the intent and ability to hold those
securities to maturity. The fair value of the Company's marketable securities
approximates the carrying value.
F-12
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PLEDGED SECURITIES
In connection with the sale of Senior Notes (see Note 6), a portion of the
net proceeds were utilized to purchase a portfolio consisting of U.S. government
securities, which mature at dates sufficient to provide for payment in full of
interest on the Senior Notes through April 15, 1999. The pledged securities are
stated at cost, adjusted for premium amortization and accrued interest. The fair
value of the pledged securities approximates the carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Direct costs of construction are
capitalized, including $853,000 of interest costs related to construction during
1996. There were no interest costs capitalized prior to 1996. Depreciation is
computed using the straight-line method over estimated useful lives beginning in
the month an asset is put into service.
Estimated useful lives of property and equipment are as follows:
Telecommunications switching and other equipment... 5-10 years
Fiber optic network................................ 15-20 years
Office equipment, furniture and other.............. 3-5 years
Leasehold improvements............................. the lesser of the
estimated useful lives
or
the terms of the
leases
INTANGIBLE ASSETS
Intangible assets primarily represent costs allocated in acquisitions to
customer bases and contracts, software and related intellectual property and
goodwill. Intangible assets are amortized using the straight-line method over
the estimated useful lives of the assets as follows:
Customer contracts.................................... term of the
contracts
Customer bases........................................ 5 years
Software and related intellectual property............ 5 years
Goodwill.............................................. 15-20 years
LONG-LIVED ASSETS
The Company periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
F-13
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company has been organized and operated under a limited liability
company agreement structured in a manner that is intended to result in the
classification of the Company as a partnership for federal income tax purposes.
Accordingly, no provision for income taxes has been made. See Note 12 for
discussion regarding the effect of the Incorporation.
CONCENTRATION OF CREDIT RISK
The Company is exposed to concentration of credit risk principally from
accounts receivable. The Company had one customer whose revenue represented
approximately 23% of the Company's 1996 revenue and three customers whose
revenue each represented approximately 12-14% of the Company's 1995 revenue.
ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION
The preparation of 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
the disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts in order to
conform to the current presentation.
3. ACQUISITIONS:
In December 1996, the Company acquired ITC, a switched-based long-distance
reseller based in Salt Lake City, Utah. ITC has approximately 9,000
long-distance customers in Utah, Colorado, Arizona, New Mexico and Idaho.
Consideration for the acquisition of ITC consisted of a cash payment of $4.0
million, of which $2.6 million was placed into escrow to be paid during 1998,
plus the issuance of 900,000 Class A Units of the Company. The Company has
granted the seller an option requiring the Company to repurchase the units at
$11.50 per unit beginning three years from the date of the closing of the
acquisition in the event that the Company has not completed a public offering of
its equity securities prior to that time. The Company has valued the units,
including the put option, at $4,950,000, or $5.50 per unit.
In January 1996, the Company acquired certain assets of FoneNet, Inc. and
U.S. Network, Inc. through NEXTLINK Ohio, L.L.C. NEXTLINK Ohio, L.L.C. is
currently constructing fiber optic telecommunications systems for the Ohio
region. Consideration for the purchase consisted of a cash payment of $9.6
million, the issuance of 651,933 Class A Units of the Company, valued at
$651,933, plus the assumption of capital lease obligations of $6.1 million.
F-14
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. ACQUISITIONS: (CONTINUED)
In September 1995, the Company acquired certain assets of Sound Response
Corporation and immediately contributed the assets to NEXTLINK Interactive,
L.L.C. NEXTLINK Interactive, L.L.C. provides interactive voice response and
debit card services. The total cost of the acquisition was approximately $12.2
million. Included in the cost of the acquisition are 4,411,941 Class A Units of
the Company valued at $4,411,941 and $3.0 million of deferred purchase
consideration payable to BWP, Inc. (formerly known as Sound Response
Corporation) of which $1.5 million was paid during 1996 and $1.5 is payable
during 1997.
In May 1995, the Company acquired certain assets of City Signal, Inc. and
Teledial America, Inc. relating to the Magic Number service, through NEXTLINK
Solutions, L.L.C. These assets are used by NEXTLINK Solutions, L.L.C. to offer a
virtual communications center for mobile professionals and workgroups. The total
cost of the acquisition was approximately $617,000.
In April 1995, the Company acquired the telecommunications business of
Tel-West Central Services, Inc., a local exchange service reseller in Spokane,
Washington, through acquisition of the ownership units of NEXTLINK Washington,
L.L.C. The total cost of the acquisition was approximately $1.2 million.
In January 1995, the Company acquired certain assets of City Signal, Inc.
(which is also known as U.S. Signal) through NEXTLINK Tennessee, L.L.C,
primarily consisting of an existing fiber optic telecommunications network in
Memphis and another network then under development in Nashville. NEXTLINK
Tennessee, L.L.C. is expanding the networks and is currently providing switched
local and long-distance telecommunications services in these markets. The total
cost of the acquisition was approximately $17.5 million. Included in the cost of
the acquisition were 2,847,444 Class A Units and related options of NEXTLINK
Tennessee, L.L.C. valued at $2,847,444.
In September 1994, the Company acquired certain assets of Penns Light
Communications, Inc. through NEXTLINK Pennsylvania, L.P. The total cost of the
acquisition was approximately $460,000.
The above described acquisitions have been accounted for as purchases and,
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair values at the date of the acquisition, and the results of
operations have been included in the accompanying consolidated financial
statements since the dates of acquisition. The total purchase price in excess of
the fair market value of the net assets acquired was recorded as goodwill. See
Note 10 for a discussion of valuation of Class A Units.
The following unaudited pro forma information presents the results of the
Company as if the above described acquisitions plus the Linkatel acquisition
(see Note 12) had occurred as of the beginning of 1995. These results include
certain adjustments consistent with the Company's accounting policies. These
results are not necessarily indicative of the results that actually would have
been attained if the acquisitions had been in effect at the beginning of 1995 or
which may be attained in the future.
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(UNAUDITED, IN
THOUSANDS)
Revenue.............................................................. $ 36,105 $ 25,620
Net loss............................................................. $ (67,616) $ (15,992)
F-15
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. PROPERTY AND EQUIPMENT:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Telecommunications networks................................................................ $ 66,762 $ 15,358
Office equipment, leasehold improvements, furniture and other.............................. 18,097 3,710
--------- ---------
84,859 19,068
Less accumulated depreciation.............................................................. (8,369) (1,125)
--------- ---------
76,490 17,943
Network construction in progress........................................................... 21,294 11,721
--------- ---------
$ 97,784 $ 29,664
--------- ---------
--------- ---------
5. OTHER LONG-TERM ASSETS:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Financing costs............................................................................... $ 9,822 $ --
Cash held in escrow for acquisitions.......................................................... 8,682 --
Equity investments............................................................................ 3,853 --
Advances to business to be acquired........................................................... 1,490 --
Other noncurrent assets....................................................................... 854 250
--------- ---------
24,701 250
Less accumulated amortization................................................................. (728) --
--------- ---------
$ 23,973 $ 250
--------- ---------
--------- ---------
The Company's equity investments include (i) a 40% investment in
Telecommunications of Nevada, L.L.C., which operates a fiber optic
telecommunications network serving the Las Vegas market and (ii) a $3.2 million
investment in convertible preferred stock of Intermind Corporation, representing
a 13.6% voting interest. Intermind markets an interactive communications tool
for the World Wide Web and intranet applications.
6. LONG-TERM DEBT:
On April 25, 1996, the Company completed the issuance and sale of $350.0
million in principal amount of 12.5% Senior Notes due April 15, 2006. The
Company used $117.7 million of the gross proceeds to purchase U.S. government
securities, representing funds sufficient to provide for payment in full of
interest on the Senior Notes through April 15, 1999 and used an additional $32.2
million to repay the advances and accrued interest from Eagle River. In
addition, the Company incurred costs of $9.8 million in connection with the
financing (including underwriter discounts and commissions). Interest payments
on the Senior Notes are due semi-annually. As of December 31, 1996, the fair
value of long-term debt approximated carrying value.
F-16
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. LONG-TERM DEBT: (CONTINUED)
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2001 at the following prices
(expressed in percentages of the principal amount thereof at stated maturity) if
redeemed during the 12-month period beginning April 15 of the years indicated
below, in each case together with interest accrued to the redemption date:
YEAR PERCENTAGE
- ------------------------------------------------------------------------------------- -----------
2001................................................................................. 106.250%
2002................................................................................. 104.167%
2003................................................................................. 102.083%
2004 and thereafter.................................................................. 100.000%
The indenture pursuant to which the Senior Notes are issued contains certain
covenants that, among other things, limits the ability of the Company and its
subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay
dividends or make other distributions, repurchase equity interests or
subordinated indebtedness, engage in sale and leaseback transactions, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company and its subsidiaries, and enter into certain mergers and
consolidations.
In the event of a change in control of the Company as defined in the
indenture, holders of the Senior Notes will have the right to require the
Company to purchase their Senior Notes, in whole or in part, at a price equal to
101% of the stated principal amount thereof, plus accrued and unpaid interest,
if any, thereon to the date of purchase. The Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
7. RELATED PARTY TRANSACTIONS:
During 1995, Eagle River loaned the Company $7.3 million at an interest rate
of prime plus 2%. On December 1, 1995, the note payable and accrued interest
were converted to equity.
Included in payable to affiliates is $1.5 million payable to a Company
member in conjunction with the Sound Response Corporation acquisition. The
amount is due September 1, 1997.
The Company incurred expenses provided by an affiliate and minority member
for administrative services as a result of a temporary agreement related to
certain acquisitions. The Company recorded expenses in connection with fees to
this affiliate of approximately $1.5 million in 1995.
8. COMMITMENTS AND CONTINGENCIES:
Capitalized leases consist of leases of telecommunications equipment and
fiber optic networks. The Company is also leasing premises under various
operating leases which, in addition to rental payments, require payments for
insurance, maintenance, property taxes and other executory costs related to the
leases. The lease agreements have various expiration dates and renewal options
through 2015.
F-17
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum payments required under the capital leases and operating
leases and agreements that have an initial or remaining noncancelable lease term
in excess of one year at December 31, 1996 are summarized below:
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ---------------------------------------------------------------------- --------- -----------
(IN THOUSANDS)
1997 $ 2,322 $ 2,562
1998 2,310 2,568
1999 2,213 2,537
2000 1,921 2,338
2001 285 1,971
Thereafter............................................................ 1,376 8,051
---------
Total minimum lease payments.......................................... 10,427
Amounts representing interest......................................... (2,971)
---------
Present value of future minimum lease payments........................ 7,456
Less amounts due in one year.......................................... (1,194)
---------
$ 6,262
---------
---------
Total rent expense amounted to $2,248,000, $579,000 and $18,000 in 1996,
1995 and 1994, respectively.
The Company is obligated under a supply agreement with a telecommunications
equipment vendor to purchase a certain dollar volume of equipment over the next
four years in order to obtain special pricing. If the Company is unable to meet
the required purchase commitment, the Company will be obligated to pay
additional amounts for previous purchases.
9. EMPLOYEE BENEFIT PLAN:
The Company offers a 401(k) Plan to eligible employees as part of a 401(k)
Plan administered by an affiliate and Company member. All employees who have
worked at least 1,000 hours and have attained the age of 21 are eligible to
participate in the plan. Company contributions to the plan totaled $357,000 and
$50,000 in 1996 and 1995, respectively.
10. MEMBERS' EQUITY:
MEMBERSHIP UNITS
The Company's limited liability company agreement provides for both Class A
and Class B membership interests in the Company. Class A Unit holders are
entitled to a preferred return on their investment in the Company plus a return
of their capital upon the dissolution of the Company. Class B Units are granted
in connection with the Company's Amended and Restated Equity Option Plan (EOP).
Although Class B Units, when exercised, will constitute an ownership interest in
the Company, the interest is limited to the appreciation in the value of the
Company, that is the distributable profits interest,
F-18
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. MEMBERS' EQUITY: (CONTINUED)
if any, of the Company. On January 31, 1997, the Company merged with and into
NEXTLINK Communications, Inc. (see Note 12).
The valuation of membership units is determined by the EOP Administrative
Committee. The value of Class A Units as of December 31, 1995 and 1996 was
determined to be approximately $1.45 and $4.36, respectively, and the
appreciation interest per unit for Class B Units was approximately $0.44 and
$3.50 as of the same dates.
RECAPITALIZATION
Effective January 1, 1996, the Company merged four of its five operating
subsidiaries with newly formed entities owned by the Company (the
Recapitalization). As a result of these mergers, the entities and individuals
holding minority interests in the subsidiaries exchanged these interests for
3,841,207 Class A Units of the Company (representing an approximate 5.9%
ownership interest in the Company) which were valued at approximately $5.6
million. NEXTLINK Washington, L.L.C. did not participate in the merger. The
transaction has been accounted for as a purchase of minority interests.
Accordingly, the $2.9 million excess of the purchase price over the book value
of the interests acquired was recorded as goodwill.
In addition to the exchange of equity interests, the Company exchanged
options to acquire equity interests in the subsidiaries for options to acquire
Class B Units in the Company. In connection with this transaction, the Company
issued 1,953,656 options with exercise prices of $0.01 and four-year vesting
schedules. These options had substantially the same economic values and vesting
schedules as the subsidiary options which were exchanged. These options are
included in the summary of information regarding the EOP that follows.
EQUITY OPTION PLANS
The Company and certain of its subsidiaries provided for grants of equity
option interests (EO Interests) during 1994 and 1995. The various option grants,
including those granted pursuant to the Recapitalization, are considered
compensatory and are accounted for similar to stock appreciation rights. The
Company recognizes compensation expense over the vesting period based on the
excess of the fair value of the Class B Units, as determined by the
Administrative Committee, over the exercise price of the option and such expense
is periodically adjusted for changes in the fair value of the Class B units.
Effective January 1, 1996, the various option plans mentioned above were
replaced by the EOP. The EOP provides for the grant of EO Interests in the
Company. Options generally expire 15 years from the date of grant and vest 25%
at the end of each of the next four years. Previously granted options continue
to vest under their previous schedule which, in most cases, vested 20% at
employment and 20% at the end of each subsequent year.
F-19
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. MEMBERS' EQUITY: (CONTINUED)
Information regarding the Company's EOP is summarized below:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF UNITS PRICES
----------- --------------
Balance, inception (September 16, 1994).........................
Granted....................................................... 898,996 $ 0.01
-----------
Balance, December 31, 1994...................................... 898,996 $ 0.01
Granted....................................................... 1,135,176 $ 0.01
Granted pursuant to the Recapitalization...................... 1,953,656 $ 0.01
Canceled...................................................... (375,000) $ 0.01
-----------
Balance, December 31, 1995...................................... 3,612,828 $ 0.01
Granted....................................................... 1,031,002 $ 0.85
Canceled...................................................... (101,608) $ 0.01
-----------
Balance, December 31, 1996...................................... 4,542,222 $ 0.20
----------- --------------
----------- --------------
Of the options outstanding at December 31, 1996, there were 4,383,722 with
exercise prices ranging from $0.01 to $0.44 and 158,500 with an exercise price
of $3.50.
As of December 31, 1996, 1995 and 1994, there were 1,551,782, 805,864 and
59,149 options vested, respectively. For the same periods, the weighted average
exercise for these vested options were $0.02, $0.01 and $0.01, respectively. The
Company recorded $9,914,000 and $375,000 of deferred compensation expense
related to the EOP during 1996 and 1995, respectively. Such deferred
compensation is included in other long-term liabilities.
On January 31, 1997, in conjunction with the Incorporation, the Company
established a new stock option plan. All options previously outstanding will be
regranted under the new plan with terms and conditions substantially the same as
under the previous plan except that option holders will no longer have the
option to require the Company to repurchase units for cash upon exercise of such
units, nor will the Company have the option to repurchase exercised units for
cash.
11. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED):
The financial information presented below reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair presentation of the results for the interim
periods.
F-20
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED): (CONTINUED)
Summarized quarterly financial data for 1996 and 1995 is as follows
(unaudited, in thousands):
1996
---------------------------------------------
1ST 2ND 3RD 4TH
--------- ---------- ---------- ----------
Revenue...................................... $ 5,370 $ 6,671 $ 6,919 $ 6,726
Cost and expenses............................ 12,041 15,415 23,050 26,195
--------- ---------- ---------- ----------
Loss from operations......................... (6,671) (8,744) (16,131) (19,469)
Other income (expense), net.................. (445) (4,973) (7,371) (7,297)
--------- ---------- ---------- ----------
Net loss..................................... $ (7,116) $ (13,717) $ (23,502) $ (26,766)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
1995
---------------------------------------------
1ST 2ND 3RD 4TH
--------- ---------- ---------- ----------
Revenue...................................... $ 399 $ 1,000 $ 2,825 $ 3,328
Cost and expenses............................ 2,003 3,289 5,271 9,451
--------- ---------- ---------- ----------
Loss from operations......................... (1,604) (2,289) (2,446) (6,123)
Other income, net............................ 43 36 (95) (253)
--------- ---------- ---------- ----------
Net loss..................................... $ (1,561) $ (2,253) $ (2,541) $ (6,376)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
12. SUBSEQUENT EVENTS:
INCORPORATION
On January 31, 1997, the Company was merged into NEXTLINK Communications,
Inc. (Communi-
cations), a Washington corporation in a tax-free transaction. In the merger, the
Company's Class A membership interests were converted into shares of Class B
common stock of Communications, and options to purchase Class B membership
interests were converted into options to purchase shares of Class A common stock
of Communications. Communications Class A common stock and Class B common stock
will be identical in dividend and liquidation rights, and will vote together as
a single class on all matters, except as otherwise required by applicable law,
with the Class A shareholders entitled to cast one vote per share, and the Class
B shareholders entitled to cast 10 votes per share. In calculating the number of
shares of Communications common stock that each of the Company's Class A members
received in the merger, the Company applied a formula that reflected each
members' revalued capital account balance as of January 31, 1997. Class B
membership options were converted on a one to one basis. After the
incorporation, Communications had 100,000,000 and 83,123,084 shares of Class B
common stock authorized and outstanding, respectively and 250,000,000 and 0
shares of Class A common stock authorized and outstanding, respectively with
options to purchase 4,668,912 shares of Class A common stock outstanding.
Communications also has 25,000,000 shares of Preferred Shares authorized,
5,700,000 are outstanding. See below under "Financing." The amount of Class B
common stock outstanding excludes 3,571,364 shares of Class B common stock
issuable upon exercise of an option granted to Mr. James F. Voelker, the
Company's President.
F-21
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. SUBSEQUENT EVENTS: (CONTINUED)
The conversion of the Company to a taxable corporation will result in the
Company recording fully reserved net deferred tax assets. Major items giving
rise to deferred tax assets include deferred compensation and certain operating
expenses capitalized for tax purposes. Management believes that, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realization of the net deferred tax assets.
Accordingly, a valuation allowance will be provided for the net deferred tax
assets of the Company.
FINANCING
On January 31, 1997, the Company completed the sale of 5.7 million units
consisting of (i) 14% senior exchangeable redeemable preferred shares (Preferred
Shares), liquidation preference $50 per share, and (ii) contingent warrants to
acquire in the aggregate 5% of each class of outstanding junior shares (as
defined) of the Company on a fully diluted basis as of February 1, 1998, which
resulted in gross proceeds to the Company of $285 million and proceeds net of
underwriting discounts, advisory fees and expenses of $274 million. Dividends on
the Preferred Shares will accrue from January 31, 1997 and will be payable
quarterly commencing on May 1, 1997 at an annual rate of 14% of the liquidation
preference thereof. Dividends may be paid, at the Company's option, on any
dividend payment date occurring on or prior to February 1, 2002 either in cash
or by issuing additional Preferred Shares with an aggregate liquidation
preference equal to the amount of such dividends. The Company is required to
redeem all of the Preferred Shares outstanding on February 1, 2009 at a
redemption price equal to 100% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of redemption.
Subject to certain conditions, the Preferred Shares are exchangeable in
whole, but not in part, at the option of the Company, on any dividend payment
date, for the 14% senior subordinated notes (Senior Subordinated Notes) due
February 1, 2009 of the Company. All terms and conditions of the Senior
Subordinated Notes would be substantially the same as those of the Preferred
Shares.
The contingent warrants are only exercisable on any business day after
February 1, 1998 if a Qualifying Event has not occurred on or prior to February
1, 1998. A Qualifying Event means a public equity offering (as defined) or one
or more strategic equity investments (as defined) which in either case results
in aggregate net proceeds to the Company of not less than $75 million.
In the event of a change in control of the Company, the Company will be
required to offer to purchase all of the then outstanding Preferred Shares at a
price equal to 101% of the liquidation preference thereof, plus accumulated and
unpaid dividends to the date of redemption.
ACQUISITION
On February 4, 1997, the Company completed the acquisition of substantially
all of the assets of Linkatel Pacific, L.P. (Linkatel), a Los Angeles-based
competitive access telecommunications provider. At the time of acquisition,
Linkatel operated an 80 mile fiber optic telecommunications network covering
several markets in the Orange and Los Angeles county areas. The acquired assets
consist primarily of fiber optic network equipment and rights-of-way. The
Company plans to expand the network and add switching facilities in order to
provide local dial tone services during 1997. The total purchase price of $42.5
million consisted of a cash payment of $36.1 million, the repayment of debt of
$5.6 million and the assumption of net liabilities of $0.8 million.
F-22
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. SUBSEQUENT EVENTS: (CONTINUED)
The assets acquired and consideration given were as follows (in thousands):
Fair value of tangible assets and liabilities acquired............ $ 12,003
Fair value of intangible assets acquired.......................... 29,682
---------
$ 41,685
---------
---------
Cash paid for assets, including repayment of debt................. $ 41,685
---------
---------
F-23
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Partners of Linkatel Pacific, L.P.:
We have audited the accompanying balance sheets of Linkatel Pacific, L.P.
(the Partnership), a California limited partnership and a development stage
entity, as of December 31, 1996 and 1995, and the related statements of
operations, partners' capital and cash flows for the years ended December 31,
1996, 1995 and 1994 and the cumulative period from July 21, 1993 (date of
inception) to December 31, 1996. These financial statements are the
responsibility of the Partnership. Our responsibility is to express an opinion
on these 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, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1996 and
1995, and the results of its operations and its cash flows for the years ended
December 31, 1996, 1995 and 1994 and the cumulative period from July 21, 1993
(date of inception) to December 31, 1996 in conformity with generally accepted
accounting principles.
On February 4, 1997, substantially all of the Partnership's assets were
acquired by and liabilities assumed by an unrelated third party (Note 7),
including obligations under the long-term loan agreement.
[LOGO]
January 24, 1997, except for Note 7,
as to which the date is
February 4, 1997
[LOGO]
F-24
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
--------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $500 (1996 and 1995) (Note 4)...... $ 689 $ 3,771
Accounts receivable........................................................................ 22 14
Other current assets....................................................................... 222 99
--------- ---------
Total current assets................................................................... 933 3,884
NETWORK PLANT AND EQUIPMENT (Notes 4 and 5):
Plant...................................................................................... 9,104 6,908
Telecommunications equipment............................................................... 2,339 2,061
Other equipment............................................................................ 318 299
Network-in-progress........................................................................ 3,964 2,867
--------- ---------
Total network plant and equipment...................................................... 15,725 12,135
Less accumulated depreciation and amortization............................................. (1,559) (732)
--------- ---------
Network plant and equipment, net....................................................... 14,166 11,403
OTHER ASSETS:
Organization costs, net (Note 5)........................................................... 179 293
Unamortized debt issue costs, net.......................................................... 211 266
Licenses, net.............................................................................. 56 85
Other...................................................................................... 81 89
--------- ---------
Total other assets..................................................................... 527 733
--------- ---------
$ 15,626 $ 16,020
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note 5).......................................... $ 1,933 $ 1,322
Note payable to NTFC (Note 4).............................................................. 5,555 5,260
--------- ---------
Total current liabilities.............................................................. 7,488 6,582
DEFERRED CREDITS AND OTHER LIABILITIES..................................................... 137 141
ADVANCE FROM NEXTLINK (Note 4)............................................................. 1,490
COMMITMENTS AND CONTINGENCIES (Note 6).....................................................
PARTNERS' CAPITAL (Note 5)................................................................. 6,511 9,297
--------- ---------
$ 15,626 $ 16,020
--------- ---------
--------- ---------
See independent auditors' report and notes to financial statements.
F-25
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
CUMULATIVE
PERIOD
FROM JULY 21,
1993 (DATE OF
INCEPTION) TO
DECEMBER 31,
1996 1995 1994 1996
--------- --------- --------- --------------
(IN THOUSANDS)
REVENUES--Telecommunications services........................... $ 165 $ 62 $ 3 $ 230
COSTS AND EXPENSES (Notes 5 and 6):
Engineering..................................................... 688 409 43 1,176
Sales and marketing............................................. 175 211 215 601
General and administrative...................................... 856 672 813 2,637
Depreciation and amortization................................... 1,010 781 287 2,078
--------- --------- --------- -------
Total costs and expenses.................................... 2,729 2,073 1,358 6,492
--------- --------- --------- -------
OPERATING LOSS.................................................. (2,564) (2,011) (1,355) (6,262)
INTEREST (EXPENSE) INCOME, net.................................. (481) (99) 93 (481)
--------- --------- --------- -------
NET LOSS........................................................ $ (3,045) $ (2,110) $ (1,262) $ (6,743)
--------- --------- --------- -------
--------- --------- --------- -------
See independent auditors' report and notes to financial statements.
F-26
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
LINKATEL COLONY/LINKATEL FIBRCOM
COMMUNICATIONS, INC. NETWORKS, INC. INCORPORATED
(GENERAL AND LIMITED (GENERAL AND LIMITED (GENERAL AND LIMITED
PARTNER) PARTNER) PARTNER)
-------------------------- ------------------------ ------------------------
PARTNERSHIP PARTNERSHIP PARTNERSHIP
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT
------------- ----------- ------------- --------- ------------- ---------
(IN THOUSANDS)
BALANCE, July 21, 1993 (date of
inception)........................ -- $ -- -- $ -- -- $ --
PARTNERS' CAPITAL CONTRIBUTIONS:
Cash (Note 1)....................... 5 5 1 1 1 1
Property, organization costs,
research and development, and
expense reimbursement (Note 1).... 1,500 238 500 435 500 435
NOTE RECEIVABLE (Note 5)............ (159)
NET LOSS............................ (196) (65) (65)
------ ----------- ------ --------- ------ ---------
BALANCE, December 31, 1993.......... 1,505 (112) 501 371 501 371
PARTNERS' CAPITAL CONTRIBUTIONS:
Cash (Note 1)....................... 3,505 3,505 3,505 3,505
Notes payable converted to capital
(Note 1).......................... 500 500 500 500
INTEREST ON NOTE RECEIVABLE (Note
5)................................ (11)
NET LOSS............................ (202) (530) (530)
------ ----------- ------ --------- ------ ---------
BALANCE, December 31, 1994.......... 1,505 (325) 4,506 3,846 4,506 3,846
PARTNERS' CAPITAL CONTRIBUTIONS--
Cash................................ -- -- 2,025 2,025 2,025 2,025
INTEREST ON NOTE RECEIVABLE (Note
5)................................ (10)
NET LOSS............................ (240) (935) (935)
------ ----------- ------ --------- ------ ---------
BALANCE, December 31, 1995.......... 1,505 (575) 6,531 4,936 6,531 4,936
PARTNERS' CAPITAL CONTRIBUTIONS--
Cash................................ 135 135 135 135
INTEREST ON NOTE RECEIVABLE (Note
5)................................ (11)
NET LOSS............................ (313) (1,366) (1,366)
------ ----------- ------ --------- ------ ---------
BALANCE, December 31, 1996.......... 1,505 $ (899) 6,666 $ 3,705 6,666 $ 3,705
------ ----------- ------ --------- ------ ---------
------ ----------- ------ --------- ------ ---------
TOTAL
---------------------
PARTNERSHIP
UNITS AMOUNT
---------- ---------
BALANCE, July 21, 1993 (date of
inception)........................ -- $ --
PARTNERS' CAPITAL CONTRIBUTIONS:
Cash (Note 1)....................... 7 7
Property, organization costs,
research and development, and
expense reimbursement (Note 1).... 2,500 1,108
NOTE RECEIVABLE (Note 5)............ (159)
NET LOSS............................ (326)
---------- ---------
BALANCE, December 31, 1993.......... 2,507 630
PARTNERS' CAPITAL CONTRIBUTIONS:
Cash (Note 1)....................... 7,010 7,010
Notes payable converted to capital
(Note 1).......................... 1,000 1,000
INTEREST ON NOTE RECEIVABLE (Note
5)................................ (11)
NET LOSS............................ (1,262)
---------- ---------
BALANCE, December 31, 1994.......... 10,517 7,367
PARTNERS' CAPITAL CONTRIBUTIONS--
Cash................................ 4,050 4,050
INTEREST ON NOTE RECEIVABLE (Note
5)................................ (10)
NET LOSS............................ (2,110)
---------- ---------
BALANCE, December 31, 1995.......... 14,567 9,297
PARTNERS' CAPITAL CONTRIBUTIONS--
Cash................................ 270 270
INTEREST ON NOTE RECEIVABLE (Note
5)................................ (11)
NET LOSS............................ (3,045)
---------- ---------
BALANCE, December 31, 1996.......... 14,837 $ 6,511
---------- ---------
---------- ---------
See independent auditors' report and notes to financial statements.
F-27
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
CUMULATIVE
PERIOD
FROM JULY 21,
1993 (DATE OF
INCEPTION) TO
DECEMBER 31,
1996 1995 1994 1996
--------- --------- --------- --------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (3,045) $ (2,110) $ (1,262) $ (6,743)
Depreciation and amortization.................................................. 1,010 781 287 2,078
Write-off of organization costs................................................ 20 20
Loss on disposal of fixed assets............................................... 5 5
Interest accrued on note receivable due from partner........................... (11) (10) (11) (32)
Interest accrued on note payable to NTFC....................................... 295 260 555
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (8) (10) 7 (22)
Other assets................................................................. (113) 23 (156) (248)
Accounts payable and accrued liabilities and other liabilities............... 607 (693) 1,681 2,059
--------- --------- --------- --------------
Net cash (used in) provided by operating activities........................ (1,240) (1,759) 546 (2,328)
CASH FLOWS FROM INVESTING ACTIVITIES:
Network plant and equipment expenditures....................................... (3,602) (5,351) (6,121) (15,194)
Licenses....................................................................... (24)
Organization costs............................................................. (165)
--------- --------- --------- --------------
Net cash used in investing activities...................................... (3,602) (5,351) (6,121) (15,383)
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' capital contributions................................................ 270 4,050 7,010 11,337
Proceeds from advance from NextLink............................................ 1,490 1,490
Proceeds from notes payable to NTFC............................................ 5,000 5,000
Proceeds from notes payable to partners........................................ 1,000
Debt issue costs............................................................... (352) (427)
--------- --------- --------- --------------
Net cash provided by financing activities.................................. 1,760 9,050 6,658 18,400
--------- --------- --------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................... $ (3,082) $ 1,940 $ 1,083 $ 689
CASH AND CASH EQUIVALENTS--
Beginning of period.......................................................... 3,771 1,831 748 0
--------- --------- --------- --------------
CASH AND CASH EQUIVALENTS--
End of period................................................................ $ 689 $ 3,771 $ 1,831 $ 689
--------- --------- --------- --------------
--------- --------- --------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Interest paid................ $ 226 $ 66 $ 53 $ 345
--------- --------- --------- --------------
--------- --------- --------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
During the years ended December 31, 1996 and 1995, accrued interest of $295 and
$260, respectively, was added to the principal balance of the note payable to
NTFC.
Partners' noncash capital contributions:
Network-in-progress.......................................................... $ 543
Organization costs........................................................... 323
Note receivable.............................................................. 159
Licenses..................................................................... 50
Debt issue costs............................................................. 33
Notes payable converted to partners' capital................................. $ 1,000 1,000
See independent auditors' report and notes to financial statements.
F-28
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
1. ORGANIZATION
Linkatel Pacific, L.P. (Linkatel) is a California limited partnership.
Linkatel was formed on July 21, 1993 with LINKATEL Communications, Inc. (LCI), a
California corporation, as both a general partner and a limited partner, and
Colony/Linkatel Networks, Inc. (CLN), a California corporation, and FIBRCOM
Incorporated (FIBRCOM), a Delaware corporation, as limited partners. On March 3,
1994, a California Public Utility Commission order was issued which authorized
CLN and FIBRCOM to become general partners. Therefore, on April 11, 1994, an
amendment to Certificate of Limited Partnership was executed and filed with the
State of California adding CLN and FIBRCOM, both limited partners, as general
partners. During 1994, each of the partners contributed $5,000 for its general
partner interest.
The partnership agreement requires CLN and FIBRCOM to make cash capital
contributions collectively totaling $16,000,000. Simultaneous with the closing
of the loan agreement described in Note 4, CLN and FIBRCOM each funded capital
contributions consisting of $3,500,000 cash and conversion of notes payable of
$500,000 to partners' capital in satisfaction of a portion of the partners'
capital requirement. The remaining $8,000,000 capital commitment is to be
contributed based on Linkatel's financial needs and in accordance with certain
terms of the loan agreement. Effective with the sale of the Partnership's assets
(Note 7), such capital commitment is no longer required.
Partnership units were issued to the partners in accordance with the
partnership agreement in exchange for cash, as well as for the agreed-upon value
of property, organization costs, licenses, research and development, and expense
reimbursement. Property, organization and license costs contributed were
recorded by Linkatel at transferors' cost. Linkatel did not record any amounts
for research and development costs incurred by LCI or for LCI expense
reimbursement by CLN and FIBRCOM. Accumulated losses for the period from July
21, 1993 to December 31, 1996 were allocated based on the PRO RATA share of
outstanding partnership units during the period.
2. BASIS OF PRESENTATION
Linkatel was formed to build, own and operate a fiber-optic
telecommunications alternative access network in the Los Angeles basin.
Linkatel, which is a development stage entity, has devoted substantially all of
its present efforts to establishing this business including obtaining adequate
financing, obtaining regulatory approval, building the alternative access
network, assessing market demand and obtaining customers. Linkatel will remain
in the development stage until the network is built and sufficient customer
demand is established.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS--Linkatel considers all highly-liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
NETWORK PLANT AND EQUIPMENT--Additions are recorded at cost which generally
includes materials, applicable labor, overhead and interest. Depreciation is
computed generally using the straight-line
F-29
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
method over estimated useful lives ranging up to 20 years. Expenditures for
maintenance and repairs are expensed as incurred.
LICENSES--Licenses are recorded at cost and are amortized over five years.
ORGANIZATION COSTS--Organization costs are recorded at cost and are
amortized over five years.
DEBT ISSUE COSTS--Debt issue costs are capitalized and are amortized over
the term of the loan agreement, which is seven years.
REVENUES--Telecommunications fees are recorded as revenue in the period the
service is provided.
INCOME TAXES--Linkatel is not a taxable entity for federal and state income
tax purposes. Accordingly, no provision is made for income taxes in the
accompanying financial statements since Linkatel's operations are reportable by
its partners on their income tax returns.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
4. LOAN AGREEMENT
Linkatel entered into a loan agreement, dated February 17, 1994, with a
third-party finance company. The agreement provides that Linkatel may borrow
principal not to exceed an aggregate of $25,000,000, plus up to $1,700,000 in
capitalized interest. Loan proceeds are to be used solely for the purchase of
equipment and services for Linkatel's fiber-optic transmission and communication
system. Interest is to be accrued and added to principal during the first 12
months following the first borrowing date of each note (the Capitalized Interest
Period) at the 90-day commercial paper rate plus 4.75% (10.21% at December 31,
1996). Monthly interest-only payments commence the month following the
Capitalized Interest Period and will continue for 12 months, after which
principal will be repaid in accordance with a 60-month amortization schedule.
Standby fees are payable as consideration for the loan commitment. The fees are
payable quarterly based on 0.35% per annum of the average portion which remains
unborrowed during each calendar quarter. The loan agreement requires Linkatel to
maintain a compensating balance of cash, cash equivalents or marketable
securities of at least $500,000. Borrowings under the loan agreement are
collateralized by the assets and revenues of Linkatel.
A post-closing, post-initial funding condition included a requirement to
obtain a second carrier agreement with a carrier from a specific listing of
interexchange carriers. That second carrier agreement was executed on January
23, 1995. At December 31, 1994, there were certain events and conditions which
constituted events of default under the loan agreement which if not cured by
Linkatel or waived by
F-30
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
4. LOAN AGREEMENT (CONTINUED)
the lender could have prevented initial funding and terminated the loan
agreement. In 1995 Linkatel obtained waivers by the lender of certain of the
requirements of these provisions for the year ended December 31, 1994. Based on
these events, initial funding under the loan agreement in the amount of
$5,000,000 occurred in July 1995. During 1995, the lender agreed to waive
payment of a portion of the standby fees until such time as the lender makes the
remaining loan commitment available to Linkatel. At December 31, 1996, Linkatel
is in default of various covenants under the loan agreement. Such events of
default have not been cured by Linkatel or waived by the lender, including
certain events of default existing at December 31, 1995 and 1994. All borrowings
outstanding ($5,604,000, including accrued interest, at December 31, 1996) are
considered current liabilities since the lender has the right to demand full and
immediate payment.
On September 30, 1996, Linkatel entered into an asset purchase agreement
with an unrelated third-party (Nextlink Communications, LLC) (Nextlink) for the
sale of Linkatel's assets (Note 7). In consideration of Linkatel granting
limited operational and management authority to Nextlink during the interim
period between the signing of the asset purchase agreement until the closing
date (the Interim Period), Nextlink agreed to advance funds to Linkatel up to a
maximum aggregate amount of $2,440,000 for the purpose of providing the
necessary cash flow to cover the operating expenses and capital expenditures of
Linkatel during the Interim Period. Advances of $1,490,000 at December 31, 1996
are unsecured and shall be liabilities of Linkatel assumed by Nextlink at the
closing date (Note 7).
5. RELATED PARTY TRANSACTIONS
During 1995 and 1994, KBLCOM Incorporated (KBLCOM), the parent company of
FIBRCOM; The Providence Journal, the parent company of CLN; and LCI received
fees for services provided to Linkatel. The statements of operations include
$128,000 and $253,000 for financial and human resources services provided by
KBLCOM in 1995 and 1994, respectively, and $6,000 and $78,000 for management
services provided by LCI in 1995 and 1994, respectively. During 1995, Linkatel
incurred $7,000 of expenses related to management services provided by The
Providence Journal. At December 31, 1996 and 1995, network plant and equipment
includes $96,000 and $96,000, respectively, of technical services provided by
The Providence Journal and $217,000 and $217,000, respectively, of consulting
services provided by LCI. At December 31, 1996 and 1995, network plant and
equipment and organization costs include $113,000 and $113,000, respectively, of
consulting services provided by TACAN Corporation, an affiliate of LCI.
Linkatel holds a promissory note from LCI dated December 29, 1992 in the
amount of $150,000 plus accrued interest. The interest rate on the note is 6%
per annum, and unpaid interest is to be added to the principal on an annual
basis. The outstanding loan amount and accrued interest have been deducted from
LCI's partner's capital account. Distributions of earnings payable to LCI as
well as distributions from certain other projects of which LCI is a partner are
to be payable to Linkatel as payments on the note until the note is paid in
full. Payments are to be allocated first to unpaid interest and then to
principal. If the
F-31
LINKATEL PACIFIC, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE CUMULATIVE PERIOD FROM JULY 21, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1996
5. RELATED PARTY TRANSACTIONS (CONTINUED)
distributions to LCI from Linkatel or the ventures specified in the agreement
are insufficient to fully repay the promissory note by December 31, 2017, the
remaining unpaid balance of principal and unpaid accrued interest are to be
waived.
Accounts payable and accrued liabilities at December 31, 1996 and 1995
include $52,000 and $52,000, respectively, due to KBLCOM.
6. COMMITMENTS
Linkatel has entered into renewable commitments for the rental of poles and
conduit which are based on the actual number of poles and conduit used by the
operation. Such commitments resulted in $333,000, $124,000 and $14,000 of rent
expense in 1996, 1995 and 1994, respectively.
Linkatel has noncancelable operating leases involving certain real property.
Future minimum lease payments under those noncancelable operating leases are as
follows: (In thousands)
(IN THOUSANDS)
1997.......................................................................... $ 253
1998.......................................................................... 254
1999.......................................................................... 153
2000.......................................................................... 5
-----
Total payments required....................................................... $ 665
-----
-----
Rent expense under these leases in 1996, 1995 and 1994 was approximately
$229,000, $213,000 and $92,000, respectively.
As of February 17, 1994, effective date of the loan agreement (described in
Note 4), Linkatel committed to purchase certain transmission and cable products
and associated services totaling $18,777,000. The commitment may be modified
with appropriate written requests and approvals. The remaining commitment as of
December 31, 1996 is $13,005,000 (Note 7).
7. SUBSEQUENT EVENT
On February 4, 1997, substantially all of the Partnership's assets were
acquired by and liabilities assumed by Nextlink for a total purchase price of
$42,500,000 less the amount of certain assets and liabilities (as defined).
Effective with the sale of the Partnership's assets and assumption of
liabilities by Nextlink, the Partnership's purchase commitment under the loan
agreement had been canceled.
F-32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Sound Response Corporation:
We have audited the accompanying balance sheets of Sound Response
Corporation (an Oregon corporation) as of August 31, 1995, and December 31, 1994
and 1993, and the related statements of operations, changes in shareholders'
equity and cash flows for the eight months ended August 31, 1995, and for the
years ended December 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Sound Response Corporation
as of August 31, 1995, and December 31, 1994 and 1993, and the results of its
operations and its cash flows for the eight months ended August 31, 1995, and
for the years ended December 31, 1994 and 1993 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
March 22, 1996
F-33
SOUND RESPONSE CORPORATION
BALANCE SHEETS
DECEMBER 31,
AUGUST 31, --------------------------
1995 1994 1993
------------- ------------- -----------
ASSETS
CURRENT ASSETS:
Cash................................................................. $ 688,963 $ 113,842 $ 34,221
Accounts receivable, net of allowance for uncollectible accounts of
$40,000, $0 and $0, respectively................................... 2,377,956 651,378 379,155
Receivable from shareholder.......................................... -- 30,615 --
Other current assets................................................. 12,935 7,334 2,612
------------- ------------- -----------
Total current assets............................................. 3,079,854 803,169 415,988
PROPERTY AND EQUIPMENT, net (Note 2)................................... 1,368,361 421,578 256,533
OTHER ASSETS, net...................................................... -- 900 1,500
------------- ------------- -----------
Total assets..................................................... $ 4,448,215 $ 1,225,647 $ 674,021
------------- ------------- -----------
------------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft....................................................... $ -- $ -- $ 36,074
Accounts payable..................................................... 1,891,300 330,646 170,003
Payroll accruals..................................................... -- 106,188 --
Telecom accruals..................................................... -- 42,561 --
Current portion of long-term liabilities............................. 29,123 10,632 26,193
Deferred revenue..................................................... -- -- 175,000
------------- ------------- -----------
Total current liabilities........................................ 1,920,423 490,027 407,270
LONG-TERM LIABILITIES:
Notes payable........................................................ 53,385 44,963 56,158
Loans from shareholders.............................................. -- 156,295 154,419
------------- ------------- -----------
Total long-term liabilities...................................... 53,385 201,258 210,577
------------- ------------- -----------
Total liabilities................................................ 1,973,808 691,285 617,847
------------- ------------- -----------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 21,000,000 shares authorized:
Class A Common Stock, 4,000,000 issued and outstanding at August
31, 1995 and 2,000,000 issued and outstanding at December 31,
1994 and 1993.................................................... -- -- --
Class B Common Stock, 262,500, 185,000 and 110,000 issued and
outstanding at August 31, 1995, December 31, 1994 and 1993,
respectively..................................................... -- -- --
Paid-in capital...................................................... 240,500 240,500 98,000
Retained earnings (deficit).......................................... 2,233,907 293,862 (41,826)
------------- ------------- -----------
Total shareholders' equity....................................... 2,474,407 534,362 56,174
------------- ------------- -----------
Total liabilities and shareholders' equity....................... $ 4,448,215 $ 1,225,647 $ 674,021
------------- ------------- -----------
------------- ------------- -----------
The accompanying notes are an integral part of these balance sheets.
F-34
SOUND RESPONSE CORPORATION
STATEMENTS OF OPERATIONS
EIGHT
MONTHS YEARS ENDED
ENDED DECEMBER 31,
AUGUST 31, ----------------------------
1995 1994 1993
------------- ------------- -------------
REVENUE............................................................. $ 8,285,795 $ 3,232,907 $ 1,888,805
------------- ------------- -------------
COST AND EXPENSES:
Operating....................................................... 2,565,889 885,781 606,690
Selling, general and administrative............................. 3,330,860 1,889,106 1,094,155
Depreciation and amortization................................... 151,328 102,012 70,410
------------- ------------- -------------
6,048,077 2,876,899 1,771,255
------------- ------------- -------------
INCOME FROM OPERATIONS.............................................. 2,237,718 356,008 117,550
INTEREST EXPENSE.................................................... 16,848 20,320 17,563
------------- ------------- -------------
NET INCOME.......................................................... $ 2,220,870 $ 335,688 $ 99,987
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-35
SOUND RESPONSE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SHARES OUTSTANDING
-----------------------------------
RETAINED TOTAL
CLASS A VOTING CLASS B NONVOTING PAID-IN EARNINGS SHAREHOLDERS'
COMMON STOCK COMMON STOCK CAPITAL (DEFICIT) EQUITY
--------------- ------------------ ---------- ------------ --------------
BALANCE, JANUARY 1,
1993.................................. 20,000 -- $ 10,000 $ (101,813) $ (91,813)
Common stock split on 100:1 basis... 2,000,000 -- -- -- --
Cancellation of original Class A
stock............................. (20,000) -- -- -- --
Dividends declared at $0.02 per
share............................. -- -- -- (40,000) (40,000)
Issuance of nonvoting stock......... -- 110,000 88,000 -- 88,000
Net income.......................... -- -- -- 99,987 99,987
--------------- ---------- ---------- ------------ --------------
BALANCE, DECEMBER 31,
1993.................................. 2,000,000 110,000 98,000 (41,826) 56,174
Issuance of nonvoting stock......... -- 75,000 142,500 -- 142,500
Net income.......................... -- -- -- 335,688 335,688
--------------- ---------- ---------- ------------ --------------
BALANCE, DECEMBER 31,
1994.................................. 2,000,000 185,000 240,500 293,862 534,362
Dividends declared at $0.07 per
share............................. -- -- -- (152,950) (152,950)
Common stock split on 2:1 basis..... 2,000,000 185,000 -- -- --
Cancellation of nonvoting stock..... -- (107,500) -- -- --
Dividends declared at $0.03 per
share............................. -- -- -- (127,875) (127,875)
Net income.......................... -- -- -- 2,220,870 2,220,870
--------------- ---------- ---------- ------------ --------------
BALANCE, AUGUST 31,
1995.................................. 4,000,000 262,500 $ 240,500 $ 2,233,907 $ 2,474,407
--------------- ---------- ---------- ------------ --------------
--------------- ---------- ---------- ------------ --------------
The accompanying notes are an integral part of these financial statements.
F-36
SOUND RESPONSE CORPORATION
STATEMENTS OF CASH FLOWS
EIGHT
MONTHS YEARS ENDED
ENDED DECEMBER 31,
AUGUST 31, --------------------------
1995 1994 1993
------------- ------------ ------------
OPERATING ACTIVITIES:
Net income......................................................... $ 2,220,870 $ 335,688 $ 99,987
------------- ------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities--
Noncash compensation............................................. 30,615 142,500 106,000
Depreciation and amortization.................................... 151,328 102,012 70,410
Changes in assets and liabilities:
Accounts receivable............................................ (1,726,578) (272,223) (310,666)
Other current assets........................................... (5,601) (35,337) (2,612)
Bank overdraft................................................. -- (36,074) 36,074
Accounts payable............................................... 1,560,655 160,642 124,852
Accrued expenses............................................... (148,749) 130,750 (62,264)
Deferred revenue............................................... -- (175,000) 175,000
------------- ------------ ------------
(138,330) 17,270 136,794
------------- ------------ ------------
Net cash provided by operations.............................. 2,082,540 352,958 236,781
------------- ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment................................. (1,042,019) (266,457) (125,231)
------------- ------------ ------------
FINANCING ACTIVITIES:
Dividends paid..................................................... (280,825) -- (40,000)
Proceeds from lines of credit...................................... 1,360,000 -- --
Payments on notes payable.......................................... (28,280) (6,880) (3,306)
Payments on loans from shareholders................................ (156,295) -- (43,086)
Payments on lines of credit........................................ (1,360,000) -- --
------------- ------------ ------------
Net cash used in financing activities........................ (465,400) (6,880) (86,392)
------------- ------------ ------------
NET INCREASE IN CASH................................................... 575,121 79,621 25,158
CASH, beginning of year................................................ 113,842 34,221 9,063
------------- ------------ ------------
CASH, end of year...................................................... $ 688,963 $ 113,842 $ 34,221
------------- ------------ ------------
------------- ------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest:............................................ $ 16,848 $ 18,444 $ 17,563
------------- ------------ ------------
------------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-37
SOUND RESPONSE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Sound Response Corporation,
an Oregon S corporation. The Company was formed August 12, 1991, and is
principally engaged in the ownership and operation of enhanced or intelligent
communications services.
REVENUE RECOGNITION
The Company recognizes revenue in the period that service is provided. Bad
debt expense of $40,000, $28,739 and $2,952 are included in selling, general and
administrative expenses for the periods ended August 31, 1995, December 31, 1994
and 1993, respectively. The Company determined that no allowance for
uncollectible accounts was required at December 31, 1994 and 1993.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Provisions for depreciation are
computed using the straight-line method over estimated useful lives, which range
from five to seven years, beginning in the month an asset is put into service.
Leasehold improvements are amortized using the straight-line method over the
term of the lease.
INCOME TAXES
The Company has been organized and operated under a subchapter S tax status
structured in a manner that is intended to result in the classification of the
Company as a partnership for federal income tax purposes. Accordingly, no
provision for income taxes has been made.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentrations of
credit risk with respect to accounts receivable are limited due to the
dispersion of the Company's customer base among different industries and
remedies provided by terms of contracts and statutes.
Certain of the Company's customers provide a significant portion of the
Company's revenues. Customers providing more than 10% of the Company's revenues
during the periods ending August 31, 1995, December 31, 1994 and 1993 are as
follows:
EIGHT
MONTHS YEAR ENDED
ENDED DECEMBER 31,
AUGUST 31, ------------------------
1995 1994 1993
--------------- ----- -----
Number of customers......................................... 2 2 3
Percentage of revenues...................................... 97% 42% 71%
F-38
SOUND RESPONSE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
DECEMBER 31,
------------------------
AUGUST 31,
1995 1994 1993
------------- ----------- -----------
Network equipment.............................................. $ 1,519,199 $ 605,415 $ 348,272
Furniture...................................................... 124,450 35,934 26,620
Software....................................................... 59,363 -- --
Leasehold improvements......................................... 35,548 -- 16,664
------------- ----------- -----------
1,738,560 641,349 391,556
Less--accumulated depreciation................................. 370,199 219,771 135,023
------------- ----------- -----------
$ 1,368,361 $ 421,578 $ 256,533
------------- ----------- -----------
------------- ----------- -----------
3. LONG TERM DEBT:
A summary of the Company's outstanding long-term debt is as follows:
DECEMBER 31,
------------------------
AUGUST 31,
1995 1994 1993
----------- ----------- -----------
Notes payable to shareholders; interest at 9%; interest payments
due monthly; principal due 180 days following demand........... $ -- $ 156,295 $ 154,419
Note payable to shareholder; interest at 8%; principal and
interest due March 30, 1994.................................... -- -- 18,000
Note payable for equipment; interest at 26.36%; graduated
principal plus interest payments due monthly until maturity on
August 1, 1998................................................. 33,748 55,595 64,351
Note payable for equipment; interest at 15.8%; graduated
principal plus interest payments due monthly until maturity on
April 1, 1998.................................................. 48,760 -- --
----------- ----------- -----------
82,508 211,890 236,770
Less--current maturities......................................... (29,123) (10,632) (26,193)
----------- ----------- -----------
$ 53,385 $ 201,258 $ 210,577
----------- ----------- -----------
----------- ----------- -----------
F-39
SOUND RESPONSE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1995
3. LONG TERM DEBT: (CONTINUED)
During 1995, the Company entered into several operating line-of-credit
agreements with interest rates ranging from 9.5% to 10.5%. All agreements were
cancelled as of August 31, 1995.
The Company's future minimum payments under its long-term debt agreements
are as follows:
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
Remainder of 1995...................................................................................... $ 7,569
1996................................................................................................... 31,158
1997................................................................................................... 36,397
1998................................................................................................... 7,384
---------
$ 82,508
---------
---------
4. COMMITMENTS AND CONTINGENCIES:
The Company is leasing premises under various operating leases which, in
addition to rental payments, require payments for insurance, maintenance,
property taxes and other executory costs related to the leases. The lease
agreements have various expiration dates and renewal options through 2001.
Future minimum payments required under operating leases and agreements that
have an initial or remaining noncancellable lease term in excess of one year at
August 31, 1995 are summarized below:
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
Remainder of 1995.................................................................................. $ 66,403
1996............................................................................................... 285,744
1997............................................................................................... 285,744
1998............................................................................................... 285,744
1999............................................................................................... 282,576
Thereafter......................................................................................... 394,216
-------------
$ 1,600,427
-------------
-------------
Total rent expense amounted to approximately $115,000 for the eight months
ended August 31, 1995 and $78,000 and $51,000 for the years ended December 31,
1994 and 1993, respectively.
5. EMPLOYEE STOCK AWARD PLAN:
During 1993, the Company established the Key Employee Stock Award Plan (the
Plan). During the eight months ended August 31, 1995 and the years ended
December 31, 1994 and 1993, 2,500, 75,000 and 110,000 shares were awarded,
respectively. Compensation expense was recorded upon award of the shares.
Compensation expense of $0, $142,500 and $88,000 was recognized in the eight
months ended August 31, 1995 and the years ended December 31, 1994 and 1993,
respectively. The Plan was terminated as of August 31, 1995.
F-40
SOUND RESPONSE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1995
6. SUBSEQUENT EVENT:
In September 1995, NEXTLINK Communications, L.L.C. (NEXTLINK) acquired
certain assets of the Company and immediately contributed the assets to NEXTLINK
Interactive, L.L.C. NEXTLINK Interactive, L.L.C. provides interactive nationwide
voice response and debit card services. The total cost of the acquisition was
approximately $12,193,000. Included in the cost of the acquisition are 4,411,941
units of NEXTLINK valued at $4,411,941 and $3,000,000 of deferred purchase
consideration payable to BWP, Inc. (formerly known as Sound Response
Corporation). In addition, NEXTLINK made a distribution of $905,000 to BWP,
Inc., in 1996 to satisfy certain liabilities in connection with the acquisition.
F-41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Tel-West Central Services, Inc.:
We have audited the accompanying balance sheets of Tel-West Central
Services, Inc. (a Washington corporation) as of March 31, 1995, and September
30, 1994 and 1993, and the related statements of operations, changes in
shareholders' equity and cash flows for the six months ended March 31, 1995, and
for the years ended September 30, 1994 and 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Tel-West Central Services,
Inc. as of March 31, 1995, and September 30, 1994 and 1993, and the results of
its operations and its cash flows for the six months ended March 31, 1995, and
for the years ended September 30, 1994 and 1993 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
May 9, 1996
F-42
TEL-WEST CENTRAL SERVICES, INC.
BALANCE SHEETS
SEPTEMBER 30,
MARCH 31, ------------------------
1995 1994 1993
----------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash..................................................................... $ 2,624 $ 3,826 $ 3,294
Accounts receivable, net of allowance for doubtful accounts of $0, $5,000
and $0, respectively................................................... 163,743 53,005 32,865
Receivables from related parties......................................... 58,604 59,734 62,278
----------- ----------- -----------
224,971 116,565 98,437
PROPERTY AND EQUIPMENT, net................................................ 306,042 250,038 67,588
----------- ----------- -----------
Total assets......................................................... $ 531,013 $ 366,603 $ 166,025
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................... $ 170,492 $ 83,723 $ 15,765
Payroll accruals......................................................... 7,627 17,612 93
Accrued taxes payable.................................................... 13,739 2,653 4,462
Line of credit........................................................... 9,177 9,177 --
Current portion of notes payable--affiliates............................. 112,183 25,041 --
Current portion of notes payable--others................................. 14,524 14,109 18,663
----------- ----------- -----------
327,742 152,315 38,983
LONG-TERM LIABILITIES:
Notes payable--affiliates................................................ 205,414 219,497 --
Notes payable--others.................................................... 14,917 21,736 51,443
----------- ----------- -----------
220,331 241,233 51,443
----------- ----------- -----------
Total liabilities.................................................... 548,073 393,548 90,426
----------- ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par value, and paid-in capital; 50,000 shares
authorized, issued and outstanding..................................... 63,298 63,298 63,298
Retained earnings (deficit).............................................. (80,358) (90,243) 12,301
----------- ----------- -----------
Total shareholders' equity........................................... (17,060) (26,945) 75,599
----------- ----------- -----------
Total liabilities and shareholders' equity........................... $ 531,013 $ 366,603 $ 166,025
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these balance sheets.
F-43
TEL-WEST CENTRAL SERVICES, INC.
STATEMENTS OF OPERATIONS
SIX
MONTHS YEAR ENDED
ENDED SEPTEMBER 30,
MARCH 31, -------------------------
1995 1994 1993
----------- ------------ -----------
REVENUE................................................................... $ 472,083 $ 523,625 $ 216,183
----------- ------------ -----------
COST AND EXPENSES:
Operating............................................................. 361,479 421,391 147,001
Selling, general and administrative................................... 61,143 168,187 24,921
Depreciation.......................................................... 20,991 22,393 25,627
----------- ------------ -----------
443,613 611,971 197,549
----------- ------------ -----------
INCOME (LOSS) FROM OPERATIONS............................................. 28,470 (88,346) 18,634
INTEREST EXPENSE.......................................................... 18,585 14,198 4,083
----------- ------------ -----------
INCOME (LOSS) BEFORE TAXES................................................ 9,885 (102,544) 14,551
PROVISION FOR INCOME TAXES................................................ -- -- 2,250
----------- ------------ -----------
NET INCOME (LOSS)......................................................... $ 9,885 $ (102,544) $ 12,301
----------- ------------ -----------
----------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
F-44
TEL-WEST CENTRAL SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK
-------------------------- RETAINED TOTAL
SHARES PAID-IN EARNINGS SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL (DEFICIT) EQUITY
------------- ----------- --------- ------------ --------------
BALANCE, October 1, 1992....................... 50,000 $ -- $ 63,298 $ -- $ 63,298
Net income................................. -- -- -- 12,301 12,301
------------- ----- --------- ------------ --------------
BALANCE, September 30, 1993.................... 50,000 -- 63,298 12,301 75,599
Net income................................. -- -- -- (102,544) (102,544)
------------- ----- --------- ------------ --------------
BALANCE, September 30, 1994.................... 50,000 -- 63,298 (90,243) (26,945)
Net income................................. -- -- -- 9,885 9,885
------------- ----- --------- ------------ --------------
BALANCE, March 31, 1995........................ 50,000 $ -- $ 63,298 $ (80,358) $ (17,060)
------------- ----- --------- ------------ --------------
------------- ----- --------- ------------ --------------
The accompanying notes are an integral part of these financial statements.
F-45
TEL-WEST CENTRAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED
ENDED SEPTEMBER 30,
MARCH 31, ------------------------
1995 1994 1993
------------ ------------ ----------
OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 9,885 $ (102,544) $ 12,301
------------ ------------ ----------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization........................................ 20,991 22,393 25,627
Gain on asset sale................................................... -- (965) --
Changes in assets and liabilities:
Accounts receivable................................................ (110,738) (20,140) (16,233)
Accounts payable................................................... 86,768 67,959 413
Accrued expenses................................................... 1,101 15,709 4,555
------------ ------------ ----------
(1,878) 84,956 14,362
------------ ------------ ----------
Net cash provided by (used in) operating activities.............. 8,007 (17,588) 26,663
------------ ------------ ----------
INVESTING ACTIVITIES:
Purchase of property and equipment..................................... (76,994) (228,878) (6,588)
------------ ------------ ----------
FINANCING ACTIVITIES:
Proceeds from notes payable-affiliates................................. 84,800 252,790 --
Proceeds from notes payable-other...................................... -- -- 55,425
Payments on notes payable-affiliates................................... (11,741) (8,252) --
Payments on notes payable-other........................................ (6,404) (13,223) (26,907)
Proceeds from line of credit........................................... -- 9,177 --
Decrease (increase) in receivables from related parties................ 1,130 6,506 (46,255)
------------ ------------ ----------
Net cash provided by (used in) financing activities.............. 67,785 246,998 (17,737)
------------ ------------ ----------
Net (decrease) increase in cash.......................................... (1,202) 532 2,338
CASH, beginning of year.................................................. 3,826 3,294 956
------------ ------------ ----------
CASH, end of year........................................................ $ 2,624 $ 3,826 $ 3,294
------------ ------------ ----------
------------ ------------ ----------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest................................................. $ 18,585 $ 14,198 $ 4,083
Cash paid for taxes.................................................... -- 2,250 --
The accompanying notes are an integral part of these financial statements.
F-46
TEL-WEST CENTRAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Tel-West Central Services,
Inc., (the Company) a Washington corporation. The Company was formed September
8, 1992, and is principally engaged in the ownership and operation of
fiber-optic telecommunications services.
REVENUE RECOGNITION
The Company recognizes revenues in the period that service is provided.
Provisions for bad debts of $0, $5,000 and $0 are included in selling, general
and administrative expenses for the periods ended March 31, 1995, September 30,
1994 and September 30, 1993, respectively. The Company determined an allowance
for doubtful accounts was not required at March 31, 1995 and September 30, 1994
and 1993.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Provisions for depreciation are
computed using the straight-line method over estimated useful lives (from five
to seven years) beginning in the month an asset is put into service.
INCOME TAXES
The Company accounts for deferred taxes using the asset and liability
method.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentrations of
credit risk with respect to accounts receivable are limited due to the
dispersion of the Company's customer base among different industries and
remedies provided by terms of contracts and statutes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-47
TEL-WEST CENTRAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
2. PROPERTY AND EQUIPMENT:
SEPTEMBER 30,
MARCH 31, ------------------------
1995 1994 1993
----------- ----------- -----------
Switch equipment........................................................... $ 351,124 $ 190,088 $ 97,034
Furniture and fixtures..................................................... 16,844 16,392 2,448
Vehicles................................................................... -- -- 28,995
----------- ----------- -----------
367,968 206,480 128,477
Less--accumulated depreciation............................................. (99,313) (78,322) (60,889)
----------- ----------- -----------
268,655 128,158 67,588
Work in process............................................................ 37,387 121,880 --
----------- ----------- -----------
$ 306,042 $ 250,038 $ 67,588
----------- ----------- -----------
----------- ----------- -----------
3. LONG TERM DEBT:
A summary of the Company's outstanding long-term debt is as follows:
SEPTEMBER 30,
MARCH 31, ------------------------
1995 1994 1993
----------- ----------- -----------
Notes payable to affiliates:
Note payable to affiliate; interest at 11.5%; graduated principal plus
interest payments due monthly until maturity on February 20, 2001...... $ 131,013 $ 138,538 $ --
Note payable to affiliate; interest at 11.5%; graduated principal plus
interest payments due monthly until maturity on October 20, 2001....... 101,784 106,000 --
Note payable to affiliate; interest at 12%; interest-only payments due
bi-weekly until maturity on December 21, 1994.......................... 55,000 -- --
Notes payable to officers; non-interest bearing; due upon sale of assets
of the Company (April 1, 1995)......................................... 29,800 -- --
----------- ----------- -----------
317,597 244,538 --
Less current maturities.................................................. 112,183 25,041 --
----------- ----------- -----------
$ 205,414 $ 219,497 $ --
----------- ----------- -----------
----------- ----------- -----------
Notes payable to others:
Note payable to commercial bank; interest at prime plus 2.5%; graduated
principal plus interest payments due monthly until maturity on February
10, 1997............................................................... $ 29,441 $ 35,845 $ 48,075
Note payable to credit union; interest at 6.5%; graduated principal plus
interest payments due monthly until maturity on January 27, 1997....... -- -- 22,031
----------- ----------- -----------
29,441 35,845 70,106
Less current maturities.................................................. 14,524 14,109 18,663
----------- ----------- -----------
$ 14,917 $ 21,736 $ 51,443
----------- ----------- -----------
----------- ----------- -----------
F-48
TEL-WEST CENTRAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
3. LONG TERM DEBT: (CONTINUED)
The Company's future minimum payments under its long-term debt agreements
are as follows:
YEAR ENDING MARCH 31,
- ---------------------------------------------------------------------------------
1996......................................................................... $ 126,707
1997......................................................................... 45,621
1998......................................................................... 34,426
1999......................................................................... 38,602
2000......................................................................... 43,282
Thereafter................................................................... 58,400
-----------
$ 347,038
-----------
-----------
4. LINE OF CREDIT:
The Company had an operating line of credit with a commercial bank. As of
March 31, 1995, the credit line was $10,000 and the unused borrowing capacity
was $823. The line of credit bore interest at the bank's prime plus 2.5%. The
interest rate was 11.0% and 9.75% as of March 31, 1995 and September 30, 1994,
respectively. There were no borrowings under the credit line as of September 30,
1993. The line of credit was collateralized by the assets of the Company and
matured on May 1, 1995.
5. RELATED PARTY TRANSACTIONS:
The Company purchased certain telecommunications equipment from and sold
equipment to a company which is affiliated with the Company's president and
principal shareholder. Purchases in the amount of $372, $14,315 and $7,785 were
made from this affiliated company during the six months ended March 31, 1995 and
the years ended September 30, 1994 and 1993, respectively. Sales to this
affiliated company were $3,437, $39,486 and $10,622 during the six months ended
March 31, 1995 and the years ended September 30, 1994 and 1993, respectively.
6. COMMITMENTS AND CONTINGENCIES:
The Company leased premises under an operating lease which, in addition to
rental payments, required payments for insurance, maintenance, property taxes
and other executory costs related to the lease. The lease agreement expires on
December 31, 1998.
Future minimum payments required under the operating lease are summarized
below:
YEAR ENDING MARCH 31,
- -----------------------------------------------------------------------------------
1996........................................................................... $ 9,060
1997........................................................................... 9,060
1998........................................................................... 9,060
1999........................................................................... 6,795
---------
$ 33,975
---------
---------
Total rent expense amounted to approximately $4,900, $5,800 and $0 for the
six months ended March 31, 1995, and for the years ended September 30, 1994 and
1993, respectively.
F-49
TEL-WEST CENTRAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995
7. INCOME TAXES:
Significant components of deferred income tax assets are as follows:
SEPTEMBER 30,
MARCH 31, --------------------
1995 1994 1993
----------- --------- ---------
Deferred tax assets:
Net operating loss carryforwards.............................................. $ 13,900 $ 15,400 $ --
Valuation allowance........................................................... (13,900) (15,400) --
----------- --------- ---
$ -- $ -- $ --
----------- --------- ---
----------- --------- ---
For tax purposes, the Company had available at March 31, 1995, net operating
loss carryforwards for regular tax purposes of approximately $93,000 which will
expire in 2009. The change in valuation allowance was a decrease of $1,500 in
the six months ended March 31, 1995 and an increase of $15,400 in the year ended
September 30, 1994.
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realization of
the net deferred tax asset. Such factors include recurring operating losses
resulting primarily from the development of the Company's network and expected
increased competition. Accordingly, a valuation allowance has been provided for
the deferred tax assets of the Company.
The difference between the statutory tax rate for small businesses of
approximately 15% and the tax provision recorded by the Company is due to the
Company's full valuation allowance against its deferred tax assets.
8. SUBSEQUENT EVENT:
In April 1995, NEXTLINK Washington, L.L.C. acquired certain assets and
liabilities of the Company. NEXTLINK Washington, L.L.C. operates a local
exchange service business in Spokane, Washington, and is constructing
fiber-optic telecommunications networks in this region. The total cost of the
acquisition was approximately $1,151,000.
F-50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NEXTLINK Communications, L.L.C.:
We have audited the accompanying summary of revenue and direct operating
expenses of City Signal, Inc., Tennessee Operations (the Division) for the years
ended December 31, 1994 and 1993. This summary is the responsibility of the
Division's management. Our responsibility is to express an opinion on this
summary 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 summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the summary. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall summary presentation. We believe that our audits provide
a reasonable basis for our opinion.
The summary was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
registration statement on Form S-4 of NEXTLINK Communications, L.L.C.) as
described in Note 1 and is not intended to be a complete presentation of the
Division's results of operations.
In our opinion, the summary referred to above presents fairly, in all
material respects, the revenue and direct operating expenses of the Division for
the years ended December 31, 1994 and 1993, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
June 28, 1996
F-51
CITY SIGNAL, INC., TENNESSEE OPERATIONS
SUMMARY OF REVENUE AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993
------------- --------------
Revenue............................................................................ $ 1,676,408 $ 148,163
Direct operating expenses:
Costs of revenue................................................................. 676,551 101,807
Selling, general and administrative expenses..................................... 890,473 824,664
Depreciation..................................................................... 667,288 377,723
------------- --------------
Total direct operating expenses................................................ 2,234,312 1,304,194
------------- --------------
Excess of direct operating expenses over revenue................................... $ (557,904) $ (1,156,031)
------------- --------------
------------- --------------
The accompanying notes are an integral part of this summary.
F-52
CITY SIGNAL, INC., TENNESSEE OPERATIONS
NOTES TO THE SUMMARY OF REVENUE AND DIRECT OPERATING EXPENSES
DECEMBER 31, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
The accompanying summary of revenue and direct operating expenses for City
Signal, Inc., Tennessee Operations (the Division) was prepared for the purpose
of complying with the rules and regulations of the Securities and Exchange
Commission and is not intended to be a complete presentation of the Division's
results of operation.
In January 1995, NEXTLINK Communications, L.L.C. acquired certain assets
(herein referred to as the Tennessee Operations) of City Signal, Inc. (which is
also known as U.S. Signal) through NEXTLINK Tennessee, L.L.C. NEXTLINK
Tennessee, L.L.C. provides fiberoptic telecommunications networks and is
currently providing services as well as constructing fiberoptic
telecommunications systems for the Memphis and Nashville, Tennessee,
metropolitan markets.
NEXTLINK Communications, L.L.C., a Washington limited liability company (the
Company), through predecessor entities, was formed on September 16, 1994 and is
principally engaged in the ownership and operation of telecommunications
services and enhanced or intelligent communications services. The Company is a
majority-owned subsidiary of Eagle River Investments, L.L.C.
City Signal, Inc. began operating in Tennessee in the fourth quarter of
1993. Their operations consisted of providing telecommunication access services
in competition with the incumbent local exchange carrier.
REVENUE RECOGNITION
The Division's revenue consists principally of telecommunications access
charges billed to customers and sales of telecommunications equipment and
related installation services. The Division recognized revenue on
telecommunications access charges in the period that service was provided. Sales
of telecommunications equipment and related installation services are recorded
when the goods and services are delivered.
PROPERTY AND EQUIPMENT
Provisions for depreciation are computed using the straight-line method over
estimated useful lives (from five to 15 years) beginning in the year an asset is
placed into service. Leasehold improvements are amortized using the
straight-line method over the terms of the leases.
INCOME TAXES
As discussed above, the accompanying summary shows only the revenue and
direct operating expenses of the Division. Accordingly, no provision for income
taxes is reflected therein.
ESTIMATES USED IN THIS PRESENTATION
The preparation of this summary in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-53
CITY SIGNAL, INC., TENNESSEE OPERATIONS
NOTES TO THE SUMMARY OF REVENUE AND DIRECT OPERATING EXPENSES (CONTINUED)
DECEMBER 31, 1994 AND 1993
2. BASIS OF PRESENTATION:
The summary of revenue includes the Division's revenues from services
provided to customers beginning with the commencement of service in the fourth
quarter of 1993. Costs of revenue consist primarily of network transmission
charges and the costs of telecommunications equipment sold, related installation
costs and ongoing node site location and right of way rental expenses. Selling,
general and administrative expenses consist of those costs directly attributable
to and incurred by the Division. City Signal, Inc., during 1994 and 1993,
provided certain support activities of a general and administrative nature for
its various operations, including the Division. No allocation of expenses
incurred by City Signal, Inc., has been reflected in this summary.
3. COMMITMENTS AND CONTINGENCIES:
The Division leased certain node site locations and office premises under
various operating leases which, in addition to rental payments, require payments
for insurance, maintenance, property taxes and other executory costs related to
the leases. These agreements had various expiration dates and renewal options
through 2015.
The node site location and right of way rental expenses are recorded as
costs of revenue and amounted to approximately $382,000 in 1994 and were
immaterial in 1993. The office premises rent expenses are recorded as selling,
general and administrative expenses and amounted to approximately $90,000 and
$26,600 in 1994 and 1993, respectively.
F-54
ANNEX A TO THE PROSPECTUS
GLOSSARY
CAP (COMPETITIVE ACCESS PROVIDER)--A company that provides its customers
with an alternative to the ILEC for local private line and special access
telecommunications services.
CENTRAL OFFICES--The switching centers or central switching facilities of
the LECs.
CO-CARRIER STATUS--A regulatory scheme under which the ILEC is required to
integrate new, competing providers of local exchange service, such as the
Company, into the systems of traffic exchange, inter-carrier compensation, and
other inter-carrier relationships that already exist among ILECs in most
jurisdictions.
COLLOCATION--The ability of a CLEC such as the Company to connect its
network to the ILECs central offices. Physical collocation occurs when a CLEC
places its network connection equipment inside the ILEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the ILEC permits a CLEC to connect its network to the ILEC's central offices on
comparable terms, even though the CLEC's network connection equipment is not
physically located inside the central offices.
DEDICATED--Telecommunications lines dedicated or reserved for use by
particular customers and charged on a flat, usually monthly basis.
DIGITAL--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DS-0, DS-1, DS-3--The standard circuit capacity classifications. Each of
these transmission services can be provided using the same type of fiber optic
cable, but offer different bandwidth (that is, capacity), depending upon the
individual needs of the end-user. A DS-0 is a dedicated circuit that is
considered to meet the requirements of usual business communications, with
transmission capacity of up to 64 kilobits of bandwidth per second (that is, a
voice grade equivalent circuit). This service offers a basic low capacity
dedicated digital line for connecting telephones, fax machines, personal
computers and other telecommunications equipment. A DS-1 is a high speed digital
circuit typically linking high volume customer locations to long distance
carriers or other customer locations. Typically utilized for voice transmissions
as well as the interconnection of LANs, DS-1 service accommodates transmission
speeds of up to 1.544 megabits per second, which is the equivalent of 24 voice
grade equivalent circuits. DS-3 service provides a very high capacity digital
circuit with transmission capacity of 45 megabits per second, which is
equivalent to 28 DS-1 circuits or 672 voice grade equivalent circuits. This is a
digital service used by long distance carriers for central office connections
and by some large commercial users to link multiple sites.
ETHERNET--A local area network technology used for connecting computers,
printers, workstations, terminals, etc., within the same building. Ethernet
operates over twisted wire or coaxial cable at speeds up to 100 megabits per
second. Ethernet is the most popular LAN technology.
FCC--The United States Federal Communications Commission.
FDDI (FIBER DISTRIBUTED DATA INTERFACE)--Based on fiber optics, FDDI is a
100 megabit per second local area network technology used to connect computers,
printers, and workstations at very high speeds. FDDI is also used as backbone
technology to interconnect other LANs.
A-1
FIBER MILE--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
INTERCONNECTION DECISIONS--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other large ILECs to provide
interconnection in ILEC 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.
KILOBIT--One thousand bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "kilobits per second." One
kilobit is approximately sufficient to encode a standard telegram.
LANS (LOCAL AREA NETWORKS)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
LOCAL EXCHANGE--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LEC (LOCAL EXCHANGE CARRIER)--A company providing local telephone services.
LINE--an electrical path between a LEC central office and a subscriber.
LONG DISTANCE CARRIERS (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.
MEGABIT--One million bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "megabits per second." One
megabit is approximately sufficient to encode a 3 inch by 5 inch photograph.
NUMBER PORTABILITY--The ability of an end-user to change local exchange
carriers while retaining the same telephone number.
POPS (POINTS OF PRESENCE)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUC (PUBLIC UTILITY COMMISSION)--A state regulatory body, established in
most states, which regulates utilities, including telephone companies providing
intrastate services.
PRIVATE LINE--A dedicated telecommunications connection between end-user
locations.
PUBLIC SWITCHED NETWORK--That portion of a ILEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the ILEC's
central offices.
RECIPROCAL COMPENSATION--The compensation paid to and from a new competitive
local exchange carrier and the ILEC for termination of a local call on each
other's networks.
ROUTE MILE--The number of miles of the telecommunications path in which the
Company-owned or leased fiber optic cables are installed.
SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a ILEC or a CAP, which lines or
circuits run to or from the long distance carrier POPs. Examples of special
access services are telecommunications lines running between POPs of a single
long distance carrier, from one long distance carrier POP to the POP of another
long distance carrier or from an end-user to a long distance carrier POP.
A-2
SWITCH--A device that 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.
SWITCHED ACCESS SERVICES--Transmission of switched calls through the local
switched network for the purpose of originating or terminating toll calls. Long
distance companies pay switched access charges to the ILECs for each switched
call originated or terminated on the ILEC's network.
SWITCHED ACCESS TRANSPORT SERVICES--Transportation of switched traffic along
dedicated lines between the ILEC central offices and long distance carrier POPs.
SWITCHED TRAFFIC--Telecommunications traffic along the public switched
network that is charged on a per-minute or other range sensitive basis. This
traffic is generally switched at the ILEC's central offices.
TOKEN RING--A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs typically
operate at either 4 megabits per second or 16 megabits per second.
A-3
NEXTLINK COMMUNICATIONS, INC.
All tendered Old Preferred Shares, executed Letters of Transmittal, and
other related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent
for the Exchange Offer is
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
2 Broadway
New York, New York 10004
Attention: Reorganization Department
Phone: (212)509-4000 x535
Fax: (212)509-5150
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 23B.08.510 of the Revised Code of Washington authorizes Washington
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. The Company's Articles of Incorporation and By-laws require
indemnification of the Company's officers and directors to the fullest extent
permitted by Washington law. The Company also maintains directors' and officers'
liability insurance.
The Company's By-laws and Articles of Incorporation provide that the Company
shall, to the full extent permitted by the Washington Business Corporation Act
(the "Washington Business Act") of the State of Washington, as amended from time
to time, indemnify all directors and officers of the Company. In addition, the
Company's Articles of Incorporation contains a provision eliminating the
personal liability of directors to the Company or its shareholders for monetary
damages arising out of a breach of fiduciary duty. Under Washington law, this
provision eliminates the liability of a director for breach of fiduciary duty
but does not eliminate the personal liability of any director for (i) acts of
omissions of a director that involve intentional misconduct or a knowing
violation of law, (ii) conduct in violation of Section 23B.08.310 of the Revised
Code of Washington (which section relates to unlawful distributions) or (iii)
any transaction from which a director personally received a benefit in money,
property or services to which the director was not legally entitled.
The Company intends to enter into separate indemnification agreements with
each of its directors and executive officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
*1 --Purchase Agreement, dated as of January 21, 1997, by and among the Company and the
Initial Purchasers.
*3.1 --Articles of Incorporation of the Company.
*3.2 --By-laws of the Company
*4.1 --Form of Exchange Note Indenture, by and among the Company and United States Trust
Company of New York, as trustee, relating to the Exchange Notes, including form of
Exchange Notes.
*4.3 --Certificate of Designations of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 14% Senior Exchangeable
Redeemable Preferred Shares and Qualifications, Limitations and Restrictions
thereof.
*4.4 --Form of stock certificate of 14% Senior Exchangeable Redeemable Preferred Shares.
5.1 --Opinion of Willkie Farr & Gallagher.
5.2 --Opinion of Davis Wright Tremaine, LLP.
*10.1 --Stock Option Plan of the Company.
*10.2 --Management Agreement, dated as of April 30, 1996, by and between NEXTLINK
Management Services, L.L.C. and Telecommunications of Nevada, L.L.C. (incorporated
by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of NEXTLINK
Communications, L.L.C. (the predecessor of the Company) file no. 333-4603)
II-1
*10.3 --Warrant Agreement, dated as of January 31, 1997, by and between the Company and
Continental Stock Trust & Transfer Company, as warrant agent.
*10.4 --Registration Rights Agreement dated as of January 15, 1997, between the Company
and the signatories listed therein.
*10.5 --Preferred Exchange and Registration Rights Agreement, dated as of January 31,
1997, by and among the Company and the Initial Purchasers.
*12 --Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
*21 --Subsidiaries of the Registrant.
23.1 --Consent of Arthur Andersen LLP.
23.2 --Consent of Deloitte & Touche LLP.
23.3 --Consent of Willkie Farr & Gallagher (included in their opinion filed as Exhibit
5.1).
23.4 --Consent of Davis Wright Tremaine, LLP (included in their opinion filed as Exhibit
5.2).
*24 --Powers of Attorney (included on signature pages).
25 --Statement on Form T-1 of Eligibility of Trustee.
99.1 --Form of Letter of Transmittal.
*99.2 --Form of Notice of Guaranteed Delivery.
*99.3 --Form of Letter to Clients.
*99.4 --Form of Letter to Nominees.
- ------------------------
* Previously filed.
(b) Financial Statement Schedules:
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes 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 provisions, described under Item 20 above, 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 option of their 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
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this 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.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act the Registrant has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Bellevue, State of
Washington, on April 21, 1997.
NEXTLINK COMMUNICATIONS, INC.
By: /s/ JAMES F. VOELKER
-----------------------------------------
James F. Voelker
Title: PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
* Chief Executive Officer and
- ------------------------------ Director April 21, 1997
Craig O. McCaw
Vice President, Chief
* Financial Officer
- ------------------------------ (Principal Financial April 21, 1997
Kathleen H. Iskra Officer and Principal
Accounting Officer)
/s/ JAMES F. VOELKER President (Principal
- ------------------------------ Executive Officer) and April 21, 1997
James F. Voelker Director
* Director
- ------------------------------ April 21, 1997
Dennis Weibling
* Director
- ------------------------------ April 21, 1997
Scot Jarvis
* Director
- ------------------------------ April 21, 1997
C. James Judson
* Director
- ------------------------------ April 21, 1997
William A. Hoglund
/s/ R. BRUCE EASTER
- ------------------------------
R. Bruce Easter April 21, 1997
Attorney-in-fact
II-3