AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996
REGISTRATION NO. 333-4603
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT
NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
----------------
NEXTLINK COMMUNICATIONS, L.L.C.
NEXTLINK CAPITAL, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTER)
WASHINGTON 4813 91-1678465
WASHINGTON 4813 91-1716062
(PRIMARY STANDARD INDUSTRIALCLASSIFICATION CODE NUMBER)
(I.R.S.
(STATE OR OTHER EMPLOYERIDENTIFICATION
JURISDICTION OF 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
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
----------------
R. BRUCE EASTER JR., ESQ. 155 108TH AVENUE N.E., 8TH FLOORBELLEVUE, 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 & GALLAGHERONE CITICORP CENTER153 EAST 53RD
STREETNEW 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. [_]
----------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NEXTLINK COMMUNICATIONS, L.L.C.
NEXTLINK CAPITAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-4 ITEM NUMBER LOCATION IN PROSPECTUS
-------------------- ----------------------
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 Earn-
ings to Fixed Charges and
Other Information............. Summary; Business Selected Consolidated Fi-
nancial and Operating Data; Risk Factors
4. Terms of the Transaction...... Summary; Risk Factors; The Exchange Offer;
Description of the Notes; Plan of Distri-
bution
5. Pro Forma Financial Informa-
tion.......................... Summary; Selected Consolidated Financial
and Operating Data
6. Material Contracts with the
Company Being Acquired........ Not Applicable
7. Additional Information
Required for Reoccurring by
Persons and Parties Deemed to
be Underwriters............... Not Applicable
8. Interests of Named Experts and
Counsel....................... Not Applicable
9. Disclosure of Commission Posi-
tion 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 Summary; Risk Factors; Use of Proceeds;
S-2 Registrants............... Business; Capitalization; Selected Consol-
idated Financial and Operating Data; Man-
agement's Discussion and Analysis of Fi-
nancial Condiition and results of Opera-
tions
15. Information with Respect to S-
3 Companies................... Not Applicable
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, Con-
sents or Authorizations are to
be Solicited.................. Not Applicable
19. Information if Proxies, Con-
sents or Authorizations are
not to be Solicited or in an
Exchange Offer................ Summary; Management; Certain Relationships
and Related Transactions; Security Owner-
ship of Certain Beneficial Owners and Man-
agement
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 26, 1996
PROSPECTUS
NEXTLINK COMMUNICATIONS, L.L.C.
NEXTLINK CAPITAL INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF 12 1/2% SENIOR NOTES DUE APRIL
15, 2006 FOR EACH $1,000 IN PRINCIPAL AMOUNT OF OUTSTANDING 12 1/2% SENIOR
NOTES DUE APRIL 15, 2006 THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NEXTLINK Communications, L.L.C., a Washington limited liability company (the
"Company" or "NEXTLINK"), and NEXTLINK Capital, Inc., a Washington corporation
and a wholly owned subsidiary of the Company ("Capital" and, together with the
Company, the "Issuers"), hereby offer to exchange (the "Exchange Offer")
$350,000,000 in aggregate principal amount of their 12 1/2% Senior Notes Due
April 15, 2006 (the "Exchange Notes") for $350,000,000 in aggregate principal
amount of their outstanding 12 1/2% Senior Notes Due April 15, 2006 that were
issued and sold in a transaction exempt from registration under the Securities
Act of 1933, as amended (the "Senior Notes" and, together with the Exchange
Notes, the "Notes"). There will be no cash proceeds to the Issuers from the
Exchange Offer.
The terms of the Exchange Notes are the same in all respects (including
principal amount, interest rate, maturity and ranking) as the terms of the
Senior Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes have been registered under the Securities Act
and therefore will not be subject to certain restrictions on transfer
applicable to the Senior Notes and will not be entitled to registration rights.
The Exchange Notes will be issued under the indenture governing the Senior
Notes. The Exchange Notes will be, and the Senior Notes are, senior obligations
of the Issuers, will rank pari passu in right of payment with all existing and
future senior obligations of the Issuers and will rank senior in right of
payment to any future subordinated obligations of the Issuers. Holders of
secured obligations of the Issuers will, however, have claims that are prior to
the claims of the holders of the Notes with respect to the assets securing such
secured obligations. The Notes will be effectively subordinated to all existing
and future indebtedness of the Issuers' subsidiaries. As of March 31, 1996,
after giving pro forma effect to the issuance of the Senior Notes and the
application of the net proceeds from that issuance, (i) the total amount of
outstanding consolidated liabilities of the Issuers, including trade payables,
would have been approximately $379.1 million, $7.1 million of which would have
been secured obligations and (ii) the total amount of outstanding liabilities
of the Issuers' subsidiaries, including trade payables, that are effectively
senior to the Notes would have been $25.2 million, $7.1 million of which would
have been secured obligations. As of March 31, 1996, however, there is no
material indebtedness to which the notes are senior. For a complete description
of the terms of the Exchange Notes, see "Description of the Notes".
The Exchange Notes will bear interest from and including their respective dates
of issuance. Holders whose Senior Notes are accepted for exchange will receive
accrued interest thereon to, but not
(Cover continued on following page.)
SEE "RISK FACTORS" ON P. 13 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 , 1996.
including, the date of issuance of the Exchange Notes, such interest to be
payable with the first interest payment on the Exchange Notes, but will not
receive any payment in respect of interest on the Senior Notes accrued after
the issuance of the Exchange Notes.
The Senior Notes were originally issued and sold on April 25, 1996 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of,
and Rule 144A and Regulation S under, the Securities Act (the "Offering").
Accordingly, the Senior Notes may not be reoffered, resold or otherwise
pledged, hypothecated or transferred in the United States unless so registered
or unless an applicable exemption from the registration requirements of the
Securities Act is available. Based upon their view of interpretations provided
to third parties by the Staff of the Securities and Exchange Commission (the
"Commission"), the Issuers believe that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Senior Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder
which is (i) an "affiliate" of the Issuers within the meaning of Rule 405
under the Securities Act (an "Affiliate"), (ii) a broker-dealer who acquired
Senior Notes directly from the Issuers or (iii) a broker-dealer who acquired
Senior Notes 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 Exchange Notes 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 Exchange Notes. Each broker-
dealer who receives Exchange Notes pursuant to the Exchange Offer in exchange
for Senior Notes 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 Exchange Notes. The
Letter of Transmittal that is filed as an exhibit to the Registration
Statement of which this Prospectus is a part (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. Broker-dealers who acquired Senior Notes as a
result of market making or other trading activities may use this Prospectus,
as supplemented or amended, in connection with resales of the Exchange Notes.
The Issuers have agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period ending
on the earlier of the 90th day after the Exchange Offer has been completed or
such time as broker-dealers no longer own any Registrable Securities (as
defined in the Registration Rights Agreement, defined below). 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.
The Senior Notes and the Exchange Notes constitute new issues of securities
with no established public trading market. The Senior Notes, however, have
traded on the National Association of Securities Dealers, Inc.'s PORTAL
Market. Any Senior Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Senior Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered, and tendered but
unaccepted, Senior Notes could be adversely affected. Following consummation
of the Exchange Offer, the holders of Senior Notes will continue to be subject
to the existing restrictions on transfer thereof and the Issuers will have no
further obligation to such holders to provide for the registration under the
Securities Act of the Senior Notes except under certain limited circumstances.
See "Description of the Notes--Registration Covenant; Exchange Offer". No
assurance can be given as to the liquidity of the trading market for either
the Senior Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered or accepted for exchange. The Exchange
Offer will expire at 5:00 p.m., New York City time, on , 1996, unless
extended (the "Expiration Date"). The date of acceptance for exchange of the
Senior Notes (the "Exchange Date") will be the first business day following
the
Expiration Date, upon surrender of the Senior Notes. Senior Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable.
AVAILABLE INFORMATION
The Issuers have 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 Exchange Notes
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.
Upon consummation of the Exchange Offer, the Issuers will become subject to
the periodic reporting and other informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Periodic reports, proxy statements
and other information filed by the Issuers 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. Copies of such material can be obtained from the Company
upon request. The Commission maintains a Web site that contains reports, proxy
and information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This
Web site can be accessed at http://www.sec.gov.
The Issuers are required by the terms of the indenture dated as of April 25,
1996 by and among the Issuers and United States Trust Company of New York, as
trustee (the "Trustee"), under which the Senior Notes were issued, and under
which the Exchange Notes are to be issued (the "Indenture"), to furnish the
Trustee with annual reports containing consolidated financial statements
audited by their 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 ISSUERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES 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 ISSUERS 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.
TABLE OF CONTENTS
PAGE
----
SUMMARY.................................................................. 1
RISK FACTORS............................................................. 13
Consequences of Exchange and Failure to Exchange....................... 13
Negative Cash Flow and Operating Losses; Limited History of Opera-
tions................................................................. 13
Significant Future Capital Requirements; Substantial Indebtedness...... 14
Holding Company Structure; Effective Subordination of the Notes........ 14
Risk Associated with Implementation of Growth Strategy................. 15
Need to Obtain and Maintain Permits and Rights-of-Way.................. 15
Competition............................................................ 16
Regulation............................................................. 16
Dependence on Large Customers.......................................... 17
Rapid Technological Changes............................................ 17
Dependence on Key Personnel............................................ 17
Variability of Quarterly Operating Results............................. 17
Control by Mr. Craig O. McCaw; Potential Conflicts of Interests........ 17
Absence of a Public Market for the Notes; Possible Volatility of Note
Price................................................................. 18
USE OF PROCEEDS.......................................................... 18
THE EXCHANGE OFFER....................................................... 19
Purpose of the Exchange Offer.......................................... 19
Terms of the Exchange.................................................. 19
Expiration Date; Extensions; Termination; Amendments................... 20
How to Tender.......................................................... 20
Terms and Conditions of the Letter of Transmittal...................... 22
Withdrawal Rights...................................................... 23
Acceptance of Senior Notes for Exchange; Delivery of Exchange Notes.... 23
Conditions to the Exchange Offer....................................... 23
Exchange Agent......................................................... 24
Solicitation of Tenders; Expenses...................................... 24
Appraisal Rights....................................................... 25
Federal Income Tax Consequences........................................ 25
Other.................................................................. 25
CAPITALIZATION........................................................... 25
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA....................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 29
BUSINESS................................................................. 35
MANAGEMENT............................................................... 51
Summary Compensation Table............................................. 55
Option Grants in Last Fiscal Year...................................... 56
Employment Agreement................................................... 57
Equity Option Plan..................................................... 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 59
i
DESCRIPTION OF THE NOTES................................................... 61
General.................................................................. 61
Ranking.................................................................. 62
Form, Denomination, Book-Entry Procedures and Transfer................... 62
Optional Redemption...................................................... 65
Mandatory Redemption; Sinking Fund....................................... 65
Security................................................................. 65
Registration Covenant; Exchange Offer.................................... 66
Covenants................................................................ 68
Mergers, Consolidations and Certain Sales of Assets...................... 77
Certain Definitions...................................................... 78
Events of Default........................................................ 89
Satisfaction and Discharge of the Indenture.............................. 90
Defeasance............................................................... 91
Modification and Waiver.................................................. 91
No Personal Liability of Members, Managers, Officers, Employees and
Stockholders............................................................ 92
Governing Law............................................................ 92
The Trustee.............................................................. 92
PLAN OF DISTRIBUTION....................................................... 92
LEGAL MATTERS.............................................................. 93
EXPERTS.................................................................... 94
GLOSSARY................................................................... A-1
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
ii
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, references to "NEXTLINK" or the "Company" are to NEXTLINK
Communications, L.L.C., a Washington limited liability company and its
consolidated subsidiaries. As used in this Prospectus, "Offering" refers to the
offering of the Senior Notes, which closed on April 25, 1996. 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.
NEXTLINK was founded in 1994 by Mr. Craig O. McCaw, its Chief Executive
Officer and principal equity owner, to be a premier provider of local
facilities-based telecommunications services, focused on serving commercial
customers. NEXTLINK's goal is to become the principal competitor to the
incumbent local exchange carrier ("ILEC") for commercial customers in each of
the metropolitan areas served by the Company. The Company intends to achieve
this goal by initially targeting small and medium sized businesses and by
offering a single source for local, long distance and enhanced communications
services.
Since the Company's inception, Mr. McCaw has invested approximately $55
million of equity capital to fund the development of NEXTLINK's business. The
Company currently has operations in 10 metropolitan areas, and provides
commercial customers with dedicated transmission services in seven of these
areas. To date, the Company has installed approximately 500 route miles of high
capacity fiber-optic cable in its networks. In addition, in April 1996, the
Company became a 40% member in a joint venture that currently provides
competitive access services in Las Vegas, Nevada, over a 200 mile fiber-optic
network. NEXTLINK also offers enhanced voice communications services, including
a series of interactive voice response ("IVR") products and a virtual
communications center for mobile professionals and workgroups. By July 1996,
the Company intends to begin providing switched local, long distance and
enhanced communications services to end-users in six of its markets, and to
provide those services in its five remaining markets by early 1997. In
addition, the Company expects to expand to other metropolitan areas by
"clustering" future growth in areas close to those it currently serves, as well
as by entering attractive markets in other regions.
To date, NEXTLINK has built and acquired networks in mid-sized markets. The
Company designs and builds its networks to encompass the principal downtown and
suburban concentrations of businesses 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 has developed a uniform
technology platform that it is implementing in each of its networks that is
based on the Northern Telecom Limited ("Nortel") DMS-500 local and long
distance switching system.
The Company currently markets a number of enhanced communications services,
which utilize either an IVR platform or a virtual communications center. The
IVR platform supports a variety of customer service, marketing and database
applications for clients such as NIKE, Inc., PepsiCo, Inc. and The GAP, Inc.,
as well as businesses in the areas where the Company has networks. The virtual
communications center provides mobile professionals and workgroups with a
variety of ubiquitous communications services including enhanced call
forwarding, voice messaging, paging, facsimile and teleconferencing, through a
personal telephone number. The Company believes that its enhanced
communications services will accelerate the addition of commercial customers in
the areas served by its networks.
MARKET OPPORTUNITY
Industry sources estimate that in 1994, total revenues from local and long
distance telecommunications services were approximately $164 billion, of which
approximately $97 billion was represented by local exchange services and
approximately $67 billion was represented by long distance services. Although
the market for the provision of long distance service has been open to
competition since 1984, the market for local exchange services has until
recently been virtually closed to competition. The Company believes that the
recently enacted Telecommunications Act of 1996 (the "Telecom Act") will result
in a fundamental change in the competitive structure of the local exchange
market, greatly accelerating changes that have been under way for several years
as a result of FCC policy initiatives and ongoing deregulatory trends at the
state level. The Company believes that these developments will result in
significant opportunities for new entrants offering local exchange services.
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 account for less than 10% of the total local exchange market.
CAPs were restricted from providing the other, more frequently used services
such as basic dial tone and switched services, which account for approximately
90% of local exchange revenues. As a result of the Telecom Act and continuing
deregulatory trends at the state level, the Company has, or will soon have, the
right to offer the full range of local and long distance services in any U.S.
market it elects to enter.
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
provisions eliminating legal barriers to competition. Under the Telecom Act,
the FCC and state regulators are required to ensure that ILECs implement:
. Interconnection--provides competitors with the right to connect to the
ILEC's networks at any technically feasible point as well as obtain
access to its rights-of-way, thereby enabling the Company to provide
seamless local exchange service;
. Unbundling of the Local Loop--allows competitors to access components of
the ILEC's network selectively, thereby potentially reducing capital and
operating costs, and permitting the Company to choose between expanding
its own network or utilizing a portion of the ILEC's network to serve a
particular area;
. Reciprocal Compensation--establishes a framework for determining pricing
to be charged by competing local exchange carriers for the use of one
another's networks; and
. Number Portability--allows ILEC customers to become customers of NEXTLINK
without changing their current telephone numbers, thereby removing a
significant source of resistance for customers to change local service
providers.
In addition, the Telecom Act provides that ILECs that are subsidiaries of
Regional Bell Operating Companies cannot combine long distance services with
the local services they offer until they have demonstrated that (i) they face
facilities-based local exchange competition in their markets and (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.
The Company believes it will have an opportunity to gain significant market
share by combining local and long distance services in a single offering to its
customers before the ILEC is permitted to do so.
2
BUSINESS STRATEGY
The Company has built a locally oriented, customer-focused organization
dedicated to providing a broad range of products and services at competitive
prices, with the objective of becoming a major participant in the
telecommunications services business. The key components of the Company's
strategy to achieve this objective are the following:
High Capacity Networks with Broad Market Coverage. NEXTLINK approaches
network design with a long-term view, and focuses on three key elements.
First, the Company designs and builds its networks to provide extensive
coverage of principal business concentrations in its metropolitan areas,
featuring direct physical connection with a high percentage of the
businesses in these markets. This broad coverage will 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 very high volumes of voice, data,
video and Internet traffic as well as other high bandwidth services. This
should prevent significant "overbuild" costs and provide added network
flexibility. It also positions the Company as a backbone provider for
wireless and long distance carriers. Third, the Company is implementing a
uniform technology platform based on Nortel DMS-500 switches and ancillary
transmission technologies enabling the Company to quickly deploy features
and functions in all of its networks and expand switching capacity in a
cost effective manner.
Focus on Small and Medium Sized Businesses. The Company will initially
focus its marketing efforts on small and medium sized businesses in the
metropolitan areas that it serves. The Company's market research indicates
that these customers would prefer a single source and single bill for all
of their telecommunications services. In addition, the Company believes
that the gross margins on services provided to small and medium sized
businesses are generally higher than for larger businesses, where the ILEC
is more competitive. The Company expects to attract small and medium sized
business customers by offering: (i) bundled local and 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) customer service and support provided on a
local level.
Rapid Market Entry. The Company intends to be early to market providing
competitive local services in all of its markets. The Company is installing
four Nortel DMS-500 switches which will serve six markets where the Company
plans to provide local and long distance services by July 1996, and intends
to install Nortel DMS-500 switches and provide these services in its other
markets by early 1997. To complement its efforts to attract local exchange
customers, the Company plans to gain visibility and develop customer
relationships through the marketing of its enhanced communications
services.
Market Expansion. The Company currently operates or is constructing
networks in 11 metropolitan areas in six states. These areas, in the
aggregate, have approximately 1.5 million addressable business lines, which
represent the current market potential for the Company. By the end of 1997,
the Company's goal is to increase the number of areas it serves in order to
expand its market potential to approximately 2.3 million addressable
business lines. NEXTLINK believes that there are substantial advantages to
operating its networks in clusters, including economies of scale in
management, marketing, sales and network operations. Clustering networks
will also enable 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. The Company may also expand into new geographic areas as
opportunities arise either through building new networks or acquiring
existing networks.
3
Enhanced Communications Services Offering. NEXTLINK offers customers
value-added services beyond the transmission of telephone traffic. Its IVR
services provide an interface between NEXTLINK's clients and their
customers for a variety of applications. NEXTLINK's virtual communications
center allows mobile professionals and workgroups access to a suite of
commonly used communications services from any telephone in the public
switched network. Since these services are not dependent on the Company's
local facilities, the Company can offer these services in a market and
thereby establish a customer base in advance of the Company constructing
network facilities in that market. The Company plans to focus the marketing
of its enhanced communications services in all of its facilities-based
markets, as well as in areas of planned network expansion. This will
increase the Company's visibility, develop customer relationships and
assist the Company in attracting local exchange customers when it operates
networks in these markets.
Direct Sales Force and Customer Care. NEXTLINK is building a highly
motivated and experienced direct sales force and customer service
organization. The Company recruits salespeople with experience in selling
competitive telecommunications services in the markets where they will be
based. Salespeople are incentivized through a commission structure with a
target of 50% 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 will be responsible for solving problems and
responding to customer inquiries. Management believes that the quality of
its growing sales force and customer care organization will provide a
competitive advantage in competing with the ILEC in the local exchange
market.
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
experience in leading companies in competitive segments of the
telecommunications industry. In addition, each of the presidents of the
Company's operating subsidiaries has had extensive experience in building and
leading telecommunications companies. 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. In addition,
the Company has hired a number of mid-level and senior managers, including Mr.
Voelker, who were previously associated with U.S. Signal, one of the first
companies to compete directly with an ILEC for the provision of local exchange
services, and also from the highly competitive long distance industry. Mid-
level and senior managers are incentivized through a compensation structure
that provides for a target of 40% of a manager's compensation to be payable
upon both the individual manager and the Company achieving certain identified
performance goals.
4
THE EXCHANGE OFFER
Issuers..................... NEXTLINK Communications, L.L.C. and NEXTLINK
Capital, Inc. ("Capital"). The Notes (as defined
herein) are the joint and several obligations of
the Issuers. In serving as co-issuer, Capital is
acting as an agent of NEXTLINK. Capital has
nominal assets, does not conduct any operations
and will not provide additional security for the
Notes. The principal offices of the Issuers are
located at 155 108th Avenue, N.E., 8th Floor,
Bellevue, Washington 98004, and their telephone
number at that address is (206) 519-8900.
The Exchange Offer.......... The Issuers are offering to exchange up to
$350,000,000 aggregate principal amount of 12
1/2% Senior Notes Due April 15, 2006 (the
"Exchange Notes") for up to $350,000,000
aggregate principal amount of their outstanding
12 1/2% Senior Notes Due April 15, 2006 that were
issued and sold on April 25, 1996 in a
transaction (the "Offering") exempt from
registration under the Securities Act (the
"Senior Notes" and, collectively with the
Exchange Notes, the "Notes"). The terms of the
Exchange Notes are substantially identical in all
respects (including principal amount, interest
rate, maturity and ranking) to the terms of the
Senior Notes for which they may be exchanged
pursuant to the Exchange Offer, except that the
Exchange Notes 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 "--Terms and Conditions of
the Letter of Transmittal") and will not be
entitled to registration rights.
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Senior Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any
holder which is (i) an Affiliate of the Issuers,
(ii) a broker-dealer who acquired Senior Notes
directly from the Issuers or (iii) broker-dealers
who acquired Senior Notes 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 Exchange Notes 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 Exchange Notes.
Minimum Condition........... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Senior
Notes being tendered for exchange.
5
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1996 unless extended
(the "Expiration Date").
Exchange Date............... The first date of acceptance for exchange for the
Senior Notes will be the first business day
following the Expiration Date.
Conditions to the Exchange
Offer....................... The obligation of the Issuers to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer--Conditions to the
Exchange Offer". The Issuers reserve 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 Senior Notes 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.
Procedures for Tendering
Senior Notes............... See "The Exchange Offer--How to Tender".
Federal Income Tax
Consequences............... The exchange of Senior Notes for Exchange Notes
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 Senior
Notes....................... As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Senior Notes pursuant to the terms of
this Exchange Offer, the Issuers will have
fulfilled a covenant contained in the terms of
the Exchange and Registration Rights Agreement
(the "Registration Rights Agreement") dated as of
April 25, 1996 among the Company, Capital, and
Goldman, Sachs & Co., Bear Stearns & Co. Inc.,
Salomon Brothers Inc and Toronto Dominion
Securities (USA) Inc. (collectively, the
"Purchasers") and, accordingly, the holders of
the Senior Notes will have no further
registration or other rights under the
Registration Rights Agreement, except that under
certain limited circumstances, the Issuers 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 the Notes--
Registration Covenant; Exchange Offer". Holders
of the Senior Notes who do not tender their
Senior Notes in the
6
Exchange Offer will continue to hold such Senior
Notes and will be entitled to all the rights and
limitations applicable thereto under the
Indenture. All untendered, and tendered but
unaccepted, Senior Notes will continue to be
subject to the restrictions on transfer provided
for in the Senior Notes and the Indenture. To the
extent that Senior Notes are tendered and
accepted in the Exchange Offer, the trading
market, if any, for the Senior Notes could be
adversely affected. See "Risk Factors--
Consequences of Failure to Exchange".
TERMS OF THE NOTES
The Exchange Offer applies to $350,000,000 aggregate principal amount of the
Senior Notes. The form and terms of the Exchange Notes are the same as the form
and terms of the Senior Notes except that the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The Exchange Notes will evidence the same
debt as the Senior Notes and will be entitled to the benefits of the Indenture.
See "Description of the Notes".
Notes Offered............... $350,000,000 principal amount of 12 1/2% Senior
Notes due April 15, 2006.
Maturity.................... April 15, 2006.
Interest.................... The Notes accrue interest at the rate of 12 1/2%
per annum from April 25, 1996, payable semi-
annually in arrears on October 15 and April 15,
commencing October 15, 1996.
Ranking.....................
The Senior Notes are, and the Exchange Notes will
be, senior obligations of the Issuers, will rank
pari passu in right of payment with all existing
and future senior obligations of the Issuers and
will rank senior in right of payment to any
future subordinated obligations of the Issuers.
Holders of secured obligations of the Issuers
will, however, have claims that are prior to the
claims of the holders of the Notes with respect
to the assets securing such obligations. The
Notes are effectively subordinated to all
indebtedness and other liabilities and
commitments (including trade payables) of the
Issuers' subsidiaries. As of March 31, 1996, on a
pro forma basis (giving effect to the Offering
and the application of the net proceeds thereof),
(i) the total amount of outstanding consolidated
liabilities of the Issuers, including trade
payables, would have been approximately $379.1
million, $7.1 million of which would have been
secured obligations and (ii) the total amount of
outstanding liabilities of the Issuers'
subsidiaries, including trade payables, that are
effectively senior to the Notes would have been
$25.2 million, $7.1 million of which would have
been secured obligations. As of March 31, 1996,
however, there is no material indebtedness to
which the Notes are senior. See "Covenants"
below.
7
Security.................... At the closing of the Offering, 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"), to pledge as security for
payment of interest on the Notes through April
15, 1999 and, under certain circumstances, as
security for repayment of the principal of the
Notes. Proceeds from the Pledged Securities may
be used by the Company to make interest payments
on the Notes through April 15, 1999. The Pledged
Securities are being held by the Trustee under
the Pledge Agreement (as defined herein) pending
disbursement. See "Description of the Notes--
Security."
Optional Redemption......... The Notes are redeemable 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 herein 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 Indenture), up to a
maximum of 33 1/3% of the aggregate principal
amount of the Notes originally issued will, at
the option of the Company, be redeemable 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 Notes in an aggregate principal
amount equal to at least $175.0 million remain
outstanding after such redemption.
Change of Control........... In the event of a Change of Control, holders of
the Notes have the right to require the Company
to purchase their 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
Company does not currently have adequate
financial resources to effect a repurchase of the
Notes upon a Change of Control and there can be
no assurance that the Company will have these
resources in the future. The inability of the
Company to repurchase the Notes upon a Change of
Control would constitute an Event of Default.
Covenants................... The indenture pursuant to which the Notes have
been issued (the "Indenture") 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
8
of the Company and its subsidiaries, and enter
into certain mergers and consolidations. The
Indenture contains provisions that allow for the
modification and amendment of the covenants
contained in the Indenture by a vote of holders
owning a majority of the Outstanding Notes (as
defined in the 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 Outstanding Notes, on
behalf of all holders of Notes, may waive
compliance by the Issuers with certain
restrictive provisions of the Indenture. See
"Description of the Notes--Modification and
Waiver".
For additional information regarding the Notes, see "Description of the
Notes".
RISK FACTORS
Holders and prospective purchasers of Senior Notes should carefully consider
the matters set forth under the caption "Risk Factors". See "Risk Factors".
9
SUMMARY FINANCIAL AND OPERATING INFORMATION
($ IN THOUSANDS)
The selected 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 year ended December 31, 1995 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, 1994 and 1995, for the period from
inception (September 16, 1994) to December 31, 1994, and for the year ended
December 31, 1995, have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data presented below as of and for the
three-month periods ended March 31, 1995 and 1996, have been derived from
unaudited consolidated financial statements of the Company. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations for these periods.
Operating results for the three months ended March 31, 1995 and 1996 are not
necessarily indicative of the results that may be expected for the full year.
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 the Prospectus.
PERIOD FROM
INCEPTION
(SEPTEMBER 16, THREE MONTHS ENDED
1994) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996
-------------- ------------ --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue...................... $ -- $ 7,552 $ 399 $ 5,370
Costs and expenses:
Operating.................. 106 6,618 638 4,696
Selling, general and admin-
istrative................. 232 9,938 753 5,514
Depreciation and amortiza-
tion...................... 14 3,458 612 1,829
----- -------- --------- ---------
Loss from operations......... (352) (12,462) (1,604) (6,669)
Interest expense............. -- 499 -- 496
----- -------- --------- ---------
Loss before minority inter-
est......................... (352) (12,961) (1,604) (7,165)
Minority interest............ 3 230 43 49
----- -------- --------- ---------
Net loss..................... $(349) $(12,731) $(1,561) $(7,116)
===== ======== ========= =========
OTHER DATA:
EBITDA(1).................... $(338) $ (9,004) $ (992) $(4,840)
Summary Cash Flow Informa-
tion:
Net cash used in operating
activities................ (406) (9,420) (672) (5,967)
Net cash used in investing
activities................ (600) (35,417) (12,183) (17,389)
Net cash provided by fi-
nancing activities........ 1,031 46,162 12,883 37,256
Capital expenditures,
including acquisitions of
businesses (net of cash
acquired)(2)................ 600 49,230 18,284 24,144
Ratio of earnings to combined
fixed charges(3)............ -- -- -- --
10
AS OF AS OF
DECEMBER 31, MARCH 31,
---------------- ------------------------
PRO FORMA
1994 1995 1996 AS ADJUSTED(4)
------ -------- -------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 25 $ 1,350 $ 15,250 $237,075
Working capital.................... 14 (6,233) (29,725) 192,101
Total assets....................... 690 53,461 104,314 454,314
Long-term debt and capital lease
obligations, less current por-
tion.............................. -- 1,589 7,010 357,010
Members' equity:
Contributed capital and units is-
sued............................ 1,021 49,799 65,527 65,527
Accumulated deficit.............. (349) (13,080) (20,196) (20,196)
------ -------- -------- --------
Total members' equity.............. 672 36,719 45,331 45,331
AS OF MARCH 31, 1996(5)
-----------------------
OPERATING DATA (UNAUDITED):
Metropolitan areas in operation......................... 7
Metropolitan areas under development.................... 3
Route miles(6).......................................... 496
Fiber miles(7).......................................... 39,681
Buildings connected..................................... 206
Switches(8)............................................. 6
Employees............................................... 255
- --------
(1) EBITDA consists of earnings (loss) before interest expense, minority
interests, depreciation and amortization. EBITDA is commonly used in the
telecommunications industry 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".
(2) Total capital expenditures and acquisitions were funded as follows:
PERIOD FROM THREE MONTHS
INCEPTION (SEPTEMBER ENDED
16, 1994) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------
1994 1995 1995 1996
-------------------- ------------ ------- -------
Cash expended............. $600 $35,417 $12,183 $17,389
Debt issued and assumed... -- 6,554 3,254 6,103
Equity issued............. -- 7,259 2,847 652
---- ------- ------- -------
Total.................... $600 $49,230 $18,284 $24,144
==== ======= ======= =======
(3) For the period from inception (September 16, 1994) to December 31, 1994,
for the year ended December 31, 1995, and for the three months ended March
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, $1,604 and $7,165, respectively.
(4) As adjusted to give effect to the Offering of the Notes as if the Offering
had occurred on March 31, 1996. Working Capital excludes the portion of
Pledged Securities maturing in one year to satisfy current year interest
payments. See "Use of Proceeds".
11
(5) Excludes operations of NEXTLINK Nevada in which the Company became a 40%
member in April 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisitions and Network
Development."
(6) Route miles refers to the number of miles of the telecommunications path in
which the Company-owned or leased fiber-optic cables are installed.
(7) 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.
(8) Represents four Nortel DMS-500 switches that have been delivered and are
currently being installed and tested by the Company as well as two Siemens
EWSD switches which were included as part of the Company's acquisition of
its Ohio operations.
12
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Senior Notes for the Exchange Notes offered hereby, holders of
Senior Notes 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 Senior Notes as well as the Exchange
Notes:
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Senior Notes who do not exchange their Senior Notes for Exchange
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Senior Notes as set forth in the legend
thereon as a consequence of the issuance of the Senior Notes 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 Senior Notes 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 Issuers
do not intend to register the Senior Notes under the Securities Act. In
addition, any holder of Senior Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes 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 Senior Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for
the Senior Notes could be adversely affected. See "The Exchange Offer" and
"Description of the Notes--Registration Covenant; Exchange Offer".
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 losses before
interest, minority interest, depreciation and amortization of $0.3 million for
the period from September 16, 1994 through December 31, 1994, $9.0 million for
the year ended December 31, 1995 and $4.8 million for the three months ended
March 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 the Notes.
The Company was formed in September 1994. A significant portion of the
Company's revenue for the year ended December 31, 1995 was derived from the
operations of the Company's interactive voice response 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 and
an investment in the Notes. Although the Company generates revenues from its
current operations, the Company will not commence operations as a single
source provider of local, long distance and enhanced communications services,
which it intends to make the principal focus of its business, until July 1996.
Given the Company's limited operating history, there is no assurance that it
will be able to compete successfully in the telecommunications business and to
generate sufficient cash flow to service the Notes.
13
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 current business plan for 1996 and 1997 (including the funding of
operating losses) will approximate $250 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 additional 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 additional 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 the Notes. 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 and the introduction of
other new service offerings. The debt service requirements of any additional
indebtedness could make it more difficult for the Company to make principal
and interest payments on the Notes.
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.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE NOTES
The Company is a holding company which derives substantially all of its
revenues from its subsidiaries. The Company intends to lend or contribute
substantially all of the net proceeds from the sale of the Notes to certain of
its subsidiaries.
The Notes are not secured by any of the assets of the Company or Capital
(other than the Pledged Securities). The Indenture permits certain
indebtedness of the Company to be secured, including, among other things,
purchase money indebtedness, which the Indenture will permit the Company to
incur in unlimited amounts, and indebtedness up to $125 million under secured
credit facilities. Holders of any secured indebtedness of the Company or
Capital will have claims that are prior to the claims of the holders of the
Notes with respect to the assets securing such other indebtedness. In
addition, the Notes will be effectively subordinated to indebtedness and other
liabilities and commitments (including trade payables) of the Company's
subsidiaries. See "Description of the Notes--Covenants--Limitation on
Consolidated Debt" and "--Limitation on Debt and Preferred Stock of Restricted
Subsidiaries".
The Company's subsidiaries were formed as limited liability companies and a
limited partnership, each of which is treated as a partnership for federal,
state and local income tax purposes. The Company will be dependent upon
payments from its subsidiaries to generate the funds necessary to meet its
obligations, including the payment of principal of, and interest on, the
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
14
Company's subsidiaries are party to certain capital lease obligations and the
Company may borrow funds at the subsidiary level in the future.
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. As a result, there can be no
assurance that the Company will be able to expand successfully its existing
networks or acquire or develop new networks in a timely manner in accordance
with its strategic objectives. The Company's growth strategy also involves the
following risks:
Switch Installation. An essential element of the Company's current strategy
is the provision of dial tone service. To provide dial tone service, the
Company is installing and currently testing four Nortel DMS-500 switches.
There can be no assurance, however, that the installation of the required
switches will be completed on time or that, during the testing of these
switches, the Company will not experience technological problems that cannot
be resolved. The failure of the Company to have its switches 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 is currently negotiating agreements
for the interconnection of its networks with the network of the ILEC in each
metropolitan area in which NEXTLINK either has or is constructing a network.
There can be no assurance that the Company will successfully negotiate these
agreements for interconnection with the ILEC. The failure to negotiate the
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.
Products and Services. The Company expects to continue to enhance its
systems in order to offer its customers switched, local dial tone, Centrex 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. See "Use of Proceeds". 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 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 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
15
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--Network Architecture".
COMPETITION
In each of the cities served by the Company's networks, the services offered
by the Company compete principally with the services offered by the ILEC
serving that area. ILECs 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, the FCC recently proposed a rule that would
provide for increased ILEC pricing flexibility and deregulation either
automatically or after certain competitive levels are reached. If the ILECs
are allowed by regulators to lower their rates for access and private line
services, 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 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 CAPs, AT&T Corp.
("AT&T"), MCI Communications Corporation ("MCI"), Sprint Corporation
("Sprint"), GTE Corporation ("GTE") and other long distance companies, 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 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.
However, the FCC has determined that non-dominant carriers, such as the
Company and its subsidiaries, are required to file interstate tariffs on an
ongoing basis. The Telecom Act grants the FCC the authority to eliminate these
tariff obligations, although it has yet to do so. The Company's subsidiaries
that provide or will provide
16
intrastate services are also generally subject to certification and tariff
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".
DEPENDENCE ON LARGE CUSTOMERS
To date the Company has been dependent on certain large customers, the loss
of one or more of which could have a material adverse effect on the Company.
NEXTLINK's 10 largest customers accounted for approximately 66% of NEXTLINK's
1995 revenues. 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.
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. Three of
the presidents of the Company's operating subsidiaries have employment
agreements.
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 the sale of NEXTLINK's interactive voice response
enhanced communications service, 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, 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.
17
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE PRICE
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for the inclusion of the Exchange Notes in any
automated quotation system. Although the Company has been advised by the
Purchasers that, following completion of the Offering, the Purchasers intended
to make a market in the Notes, 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 Exchange Notes. If a market for the Exchange Notes were to
develop, the Exchange Notes could trade at prices that may be 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 non-investment grade debt has
been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the Exchange Notes. There can be no assurance
that, if a market for the Exchange Notes were to develop, such a market would
not be subject to similar disruptions.
USE OF PROCEEDS
There will be no proceeds to the Issuers from the Exchange Offer.
18
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Issuers with respect to the Registration Rights Agreement.
The Senior Notes were originally issued and sold on April 25, 1996 (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 and
Regulation S under, the Securities Act. In connection with the sale of the
Senior Notes, the Issuers agreed to file with the Commission a registration
statement relating to an exchange offer (the "Exchange Offer Registration
Statement") pursuant to which another series of senior notes of the Issuers
covered by such registration statement and containing the same terms as the
Senior Notes, except as set forth in this Prospectus, would be offered in
exchange for Senior Notes tendered at the option of the holders thereof.
TERMS OF THE EXCHANGE
The Issuers hereby offer to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal"), $1,000 in principal amount of Exchange Notes for each $1,000 in
principal amount of Senior Notes. The terms of the Exchange Notes are
identical in all respects to the terms of the Senior Notes for which they may
be exchanged pursuant to this Exchange Offer, except that (i) the Exchange
Notes will generally be freely transferable by holders thereof and (ii) the
holders of the Exchange Notes will not be entitled to registration rights
under the Registration Rights Agreement. See "Description of the Notes--
Registration Covenant; Exchange Offer". The Exchange Notes will evidence the
same debt as the Senior Notes and will be entitled to the benefits of the
Indenture. See "Description of the Notes".
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered or accepted for exchange.
Based on their view of interpretations set forth in no-action letters issued
to third parties by the Staff (the "Staff") of the Commission, the Issuers
believe that Exchange Notes issued pursuant to the Exchange Offer in exchange
for the Senior Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any holder which is (i) an
Affiliate of the Issuers, (ii) a broker-dealer who acquired Senior Notes
directly from the Issuers or (iii) a broker-dealer who acquired Senior Notes
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 Exchange Notes 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 Exchange Notes. Each broker-dealer who
receives Exchange Notes pursuant to the Exchange Offer in exchange for Senior
Notes 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 Exchange Notes. 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. Broker-dealers who acquired Senior Notes as
a result of market making or other trading activities may use this Prospectus,
as supplemented or amended, in connection with resales of the Exchange Notes.
The Issuers have agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period ending
on the earlier of the 90th day after the Exchange Offer has been completed or
such time as such broker-dealers no longer own any Registrable Securities (as
defined in the Registration Rights Agreement). 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.
19
Tendering holders of Senior Notes 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 Senior Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Senior Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance
of the Exchange Notes, such interest to be payable with the first interest
payment on the Exchange Notes, but will not receive any payment in respect of
interest on the Senior Notes accrued after the issuance of the Exchange Notes.
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 , 1996 unless the Issuers
in their 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 Issuers, expires. The
Issuers reserve 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 United
States Trust Company of New York (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 Senior Notes 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 Issuers expressly reserve the right to (i) terminate the
Exchange Offer and not accept for exchange any Senior Notes 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
Issuers and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Senior Notes. If any such termination or
amendment occurs, the Issuers will notify the Exchange Agent in writing and
will either issue a press release or give written notice to the holders of the
Senior Notes as promptly as practicable. Unless the Issuers terminate the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date,
the Issuers will exchange the Exchange Notes for the Senior Notes on the
Exchange Date.
If the Issuers waived any material condition to the Exchange Offer, or amend
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 Senior Notes 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 Issuers to record holders of Senior Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Senior Notes.
HOW TO TENDER
The tender to the Issuers of Senior Notes by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between
such holder and the Issuers in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
20
General Procedures. A holder of a Senior Note 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 Senior Notes 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 Senior Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Senior Notes 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 Senior Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Issuers 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 Exchange Notes and/or Senior Notes not exchanged are
to be delivered to an address other than that of the registered holder
appearing on the note register for the Senior Notes, the signature on the
Letter of Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Senior Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Senior Notes should contact such holder promptly and instruct such
holder to tender Senior Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Senior Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Senior Notes, either make appropriate arrangements to register
ownership of the Senior Notes 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 Senior Notes 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 Senior Notes by causing the Book-Entry Transfer
Facility to transfer such Senior Notes 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 Senior Notes
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 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 SENIOR NOTES 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 Senior Notes 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
21
Institution setting forth the name and address of the tendering holder, the
principal amount of the Senior Notes being tendered, the names in which the
Senior Notes are registered and, if possible, the certificate numbers of the
Senior Notes 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 Senior Notes, 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 Senior Notes 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 Issuers may, at their
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 Senior Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Senior Notes 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 Senior Notes
(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 Senior Notes will be
determined by the Issuers, whose determination will be final and binding. The
Issuers reserve 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 Issuers, be unlawful. The Issuers also reserve 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
Issuers, 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 Issuers'
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 Senior Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Senior Notes to the Issuers and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Senior Notes 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 Senior Notes and to
acquire Exchange Notes issuable upon the exchange of such tendered Senior
Notes, and that, when the same are accepted for exchange, the Issuers will
acquire good and unencumbered title to the tendered Senior Notes, 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 Issuers to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Senior Notes. The Transferor further agrees that acceptance of any
tendered Senior Notes by the Issuers and the issuance of Exchange Notes in
exchange therefor shall constitute performance in full by the Issuers of their
obligations under the Registration Rights Agreement and that the Issuers shall
have no further obligations or liabilities thereunder (except in certain
limited circumstances). All
22
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 Senior Notes and executing the Letter of Transmittal, the
Transferor certifies that it is not an Affiliate of the Issuers within the
meaning of Rule 405 under the Securities Act, that it is not a broker-dealer
that owns Senior Notes acquired directly from the Issuers or an Affiliate of
the Issuers, that it is acquiring the Exchange Notes 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
Exchange Notes.
WITHDRAWAL RIGHTS
Senior Notes 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 Senior Notes to be withdrawn, the certificate
numbers of Senior Notes to be withdrawn, the principal amount of Senior Notes
to be withdrawn, a statement that such holder is withdrawing his election to
have such Senior Notes exchanged, and the name of the registered holder of
such Senior Notes, 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
Issuers that the person withdrawing the tender has succeeded to the beneficial
ownership of the Senior Notes being withdrawn. The Exchange Agent will return
the properly withdrawn Senior Notes 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 Issuers, and such
determination will be final and binding on all parties.
ACCEPTANCE OF SENIOR NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Senior Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Issuers shall be deemed to have accepted
for exchange validly tendered Senior Notes when, as and if the Issuers have
given written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Senior
Notes for the purposes of receiving Exchange Notes from the Issuers and
causing the Senior Notes to be assigned, transferred and exchanged. Upon the
terms and subject to the conditions of the Exchange Offer, delivery of
Exchange Notes to be issued in exchange for accepted Senior Notes will be made
by the Exchange Agent promptly after acceptance of the tendered Senior Notes.
Senior Notes not accepted for exchange by the Issuers will be returned without
expense to the tendering holders (or in the case of Senior Notes 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 Senior Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) promptly following the Expiration Date or, if
the Issuers terminate 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 Issuers will not be required to issue Exchange
Notes in respect of any properly tendered
23
Senior Notes 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 their 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 Issuers to accept for exchange or
exchange some or all of the Senior Notes 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 Issuers
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 Issuers, might
result in the holders of Exchange Notes having obligations with respect to
resales and transfers of Exchange Notes 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
Issuers.
The foregoing conditions are for the sole benefit of the Issuers and may be
asserted by them with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Issuers) giving rise to such condition or may be waived by the Issuers in
whole or in part at any time or from time to time in their sole discretion.
The failure by the Issuers 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 Issuers have reserved the right, notwithstanding the
satisfaction of each of the foregoing conditions, to terminate or amend the
Exchange Offer.
Any determination by the Issuers concerning the fulfillment or non-
fulfillment of any conditions will be final and binding upon all parties.
In addition, the Issuers will not accept for exchange any Senior Notes
tendered and no Exchange Notes will be issued in exchange for any such Senior
Notes, 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 Indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act").
EXCHANGE AGENT
United States Trust Company of New York 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 Issuers have 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
Issuers will, however, pay the Exchange Agent reasonable
24
and customary fees for its services and will reimburse it for reasonable out-
of-pocket expenses in connection therewith. The Issuers 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 Issuers and are estimated at approximately
$398,000.
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
Issuers. 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 Issuers 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 Senior Notes 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 Issuers may, at their 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 Senior Notes 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 Issuers by one or more registered brokers or
dealers which are licensed under the laws of such jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF SENIOR NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
Based upon the opinion of Willkie Farr & Gallagher, counsel to the Issuers,
the material federal income tax consequence of participating in the Exchange
Offer is that the exchange for Exchange Notes by holders of Senior Notes will
not be a taxable exchange for federal income tax purposes, and such holders
will not recognize any taxable gain or loss or any interest income as a result
of such exchange. Such opinion assumes holders will rely on final Treasury
regulation Section 1.1001-3, which has an effective date of September 24, 1996
but may be relied on by taxpayers prior to such time.
OTHER
Participation in the Exchange Offer is voluntary, and holders should
carefully consider whether to accept the Exchange Offer and tender their
Senior Notes. Holders of the Senior Notes 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 Senior Notes pursuant to the terms of this Exchange Offer,
the Issuers will have fulfilled a covenant contained in the terms of the
Registration Rights Agreement. Holders of the Senior Notes 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 Indenture, except for any such
rights under the 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 the Notes--Registration Covenant; Exchange Offer".
All untendered Senior Notes will continue to be subject to the restriction on
transfer set forth in the Indenture. To the extent that Senior Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for
the Senior Notes could be adversely affected. See "Risk Factors--Consequences
of Failure to Exchange".
The Issuers may in the future seek to acquire untendered Senior Notes in the
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Issuers have no present plan to acquire any Senior
Notes which are not tendered in the Exchange Offer.
25
CAPITALIZATION
The following table sets forth at March 31, 1996, the actual capitalization
of the Company and the pro forma capitalization of the Company as adjusted to
reflect the issuance of the Notes. This table should be read in conjunction
with the Selected Consolidated Financial Data and the Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
AS OF
MARCH 31, 1996
---------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ---------------------
(UNAUDITED) (UNAUDITED)
($ IN THOUSANDS)
12 1/2% Senior Notes due April 15, 2006..... $ -- $350,000(1)
Other long-term debt and capital lease
obligations, less current portion ......... 7,010 7,010
-------- --------
Total long-term debt.................... 7,010 357,010
-------- --------
Minority interests(2)....................... 540 540
Members' equity:
Contributed capital and units issued...... 65,527 65,527
Accumulated deficit....................... (20,196) (20,196)
-------- --------
Total members' equity................... 45,331 45,331
-------- --------
Total capitalization........................ $ 52,881 $402,881
======== ========
- --------
(1) Of the net proceeds from the offering of the Notes, approximately $117.7
million was utilized to purchase Pledged Securities at the closing of the
Offering. See "Description of the Notes--Security".
(2) Minority interests represent a 1% cash investment in each of the Company's
subsidiaries in existence as of March 31, 1996 by a company that is wholly
owned by Mr. Craig O. McCaw.
26
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
($ IN THOUSANDS)
The selected 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 year ended December 31, 1995 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, 1994 and 1995, for the period from
inception (September 16, 1994) to December 31, 1994, and for the year ended
December 31, 1995, have been audited by Arthur Andersen LLP, independent
public accountants. The selected financial data presented below as of and for
the three-month periods ended March 31, 1995 and 1996, have been derived from
unaudited consolidated financial statements of the Company. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended March 31, 1995 and 1996
are not necessarily indicative of the results that may be expected for the
full year. The pro forma and 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 the
Prospectus.
PERIOD FROM
INCEPTION
(SEPTEMBER 16, THREE MONTHS ENDED
1994) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996
-------------- ------------ --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue...................... $ -- $ 7,552 $ 399 $ 5,370
Costs and expenses:
Operating.................. 106 6,618 638 4,696
Selling, general and
administrative............ 232 9,938 753 5,514
Depreciation and
amortization.............. 14 3,458 612 1,829
----- -------- --------- ---------
Loss from operations......... (352) (12,462) (1,604) (6,669)
Interest expense............. -- 499 -- 496
----- -------- --------- ---------
Loss before minority inter-
est......................... (352) (12,961) (1,604) (7,165)
Minority interest............ 3 230 43 49
----- -------- --------- ---------
Net loss..................... $(349) $(12,731) $ (1,561) $ (7,116)
===== ======== ========= =========
OTHER DATA:
EBITDA(1).................... $(338) $ (9,004) $ (992) $ (4,840)
Summary Cash Flow
Information:
Net cash used in operating
activities................ (406) (9,420) (672) (5,967)
Net cash used in investing
activities................ (600) (35,417) (12,183) (17,389)
Net cash provided by fi-
nancing activities........ 1,031 46,162 12,883 37,256
Capital expenditures,
including acquisitions of
businesses (net of cash
acquired)(2)................ 600 49,230 18,284 24,144
Ratio of earnings to combined
fixed charges(3)............ -- -- -- --
27
AS OF AS OF
DECEMBER 31, MARCH 31,
---------------- ------------------------
PRO FORMA
1994 1995 1996 AS ADJUSTED(4)
------ -------- -------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 25 $ 1,350 $ 15,250 $237,075
Working capital.................... 14 (6,233) (29,725) 192,101
Total assets....................... 690 53,461 104,314 454,314
Long-term debt and capital lease
obligations, less current
portion........................... -- 1,589 7,010 357,010
Members' equity:
Contributed capital and units
issued.......................... 1,021 49,799 65,527 65,527
Accumulated deficit.............. (349) (13,080) (20,196) (20,196)
------ -------- -------- --------
Total members' equity.......... 672 36,719 45,331 45,331
AS OF MARCH 31, 1996(5)
-----------------------
OPERATING DATA (UNAUDITED):
Metropolitan areas in operation......................... 7
Metropolitan areas under development.................... 3
Route miles(6).......................................... 496
Fiber miles(7).......................................... 39,681
Buildings connected..................................... 206
Switches(8)............................................. 6
Employees............................................... 255
- --------
(1) EBITDA consists of earnings (loss) before interest expense, minority
interests, depreciation and amortization. EBITDA is commonly used in the
telecommunications industry 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".
(2) Total capital expenditures and acquisitions were funded as follows:
PERIOD FROM THREE MONTHS
INCEPTION (SEPTEMBER ENDED
16, 1994) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------
1994 1995 1995 1996
-------------------- ------------ ------- -------
Cash expended............. $600 $35,417 $12,183 $17,389
Debt issued and assumed... -- 6,554 3,254 6,103
Equity issued............. -- 7,259 2,847 652
---- ------- ------- -------
Total.................... $600 $49,230 $18,284 $24,144
==== ======= ======= =======
(3) For the period from inception (September 16, 1994) to December 31, 1994,
for the year ended December 31, 1995, and for the three months ended March
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, $1,604 and $7,165, respectively.
(4) As adjusted to give effect to the Offering of the Notes as if the Offering
had occurred on March 31, 1996. Working Capital excludes the portion of
Pledged Securities maturing in one year to satisfy current year interest
payments. See "Use of Proceeds".
(5) Excludes operations of NEXTLINK Nevada in which the Company became a 40%
member in April 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisitions and Network
Development".
(6) Route miles refers to the number of miles of the telecommunications path
in which the Company-owned or leased fiber-optic cables are installed.
(7) 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.
(8) Represents four Nortel DMS-500 switches that have been delivered and are
currently being installed and tested by the Company as well as two Siemens
EWSD switches which were included as part of the Company's acquisition of
its Ohio operations.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's audited Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Prospectus.
OVERVIEW
Since its inception in 1994, the Company has executed a strategy of
constructing and acquiring fiber-optic networks, and acquiring related
telecommunications businesses. These activities have provided the Company with
the foundation to become a full service provider of local facilities-based
telecommunications services. Over this period, the Company has begun
construction of, or acquired and expanded, telecommunications networks in 10
metropolitan areas in five states. Currently, revenues are being generated
from the Company's networks in Tennessee (Memphis and Nashville); Pennsylvania
(Allentown, Harrisburg and Reading/Lancaster); Ohio (Columbus) and Washington
(Spokane), the most significant and mature of which is located in Memphis. In
addition, in April 1996, the Company became a 40% member in a joint venture
that currently provides competitive access services in Las Vegas, Nevada, over
a 200 mile fiber-optic network. The Company is also generating revenues from
the provision of enhanced communications services. The Company anticipates
that its networks in Ohio (Akron and Cleveland) and Utah (Salt Lake City),
will begin generating revenues during 1996.
The Company owns and operates subsidiaries that offer various components of
local facilities-based telecommunications services. For example, the Company's
Memphis network offers traditional competitive access services, including
dedicated private lines, long distance carrier access, high speed data
transmission, and video-conferencing. In Spokane, Washington, the Company
resells local exchange services. In addition, to augment its local facilities-
based services, the Company offers two types of enhanced communications
services: (i) interactive voice response services, which include interactive
call and information management, automated order entry and related services;
and (ii) a virtual communications center which offers a suite of products for
mobile professionals and workgroups.
By July 1996, the Company expects to commence the offering of local, long
distance and enhanced communications services in six of its markets, and to
provide those services in its five remaining markets by early 1997. The
Company also plans to acquire and build networks in new areas, expand its
current networks, and also explore the acquisition of other enhanced
communications services 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. While the
Company currently operates in metropolitan areas with a total of approximately
1.5 million addressable business lines, which the Company believes represent
its current market potential, the Company plans to expand its market potential
to approximately 2.3 million addressable business lines by the end of 1997.
The development and expansion of the Company's business and networks require
significant expenditures, a substantial portion of which are incurred before
the realization of revenues. 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.
However, the Company anticipates that most markets will not reach positive
EBITDA until approximately 24 to 30 months after the offering of switched
services commences. Thereafter, the Company believes that operating margins
should improve as the incremental cost of adding customers declines.
The Company is a Washington limited liability company, which is treated as a
partnership for federal and state income tax purposes. Accordingly, the
Company does not maintain a provision for income taxes in its Consolidated
Financial Statements.
29
ACQUISITIONS AND NETWORK DEVELOPMENT
Facilities-Based Services
Tennessee. In January 1995, the Company acquired from City Signal, Inc. an
extensive and fully operational network in Memphis, Tennessee and another
network then under development in Nashville, Tennessee for $17.5 million.
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. 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 network was completed in December 1995, and
the Company now provides services to customers in this area. As of December
31, 1995, the Company had invested an additional $8.9 million in expanding and
increasing the capacity of the Memphis and Nashville networks. The Company
plans to provide switched local and long distance services utilizing these
networks by the end of 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 151-mile backbone network connecting these three
areas and covering 21 counties was completed and fully tested in the first
quarter of 1996. The Company plans to provide switched local and long distance
service utilizing this network by the end of July 1996. The Company believes
that this network provides it with the foundation for significant regional
service offerings. As of December 31, 1995, $7.1 million had been invested by
the Company in the Pennsylvania network.
Washington. In April 1995, the Company acquired a local exchange service
reseller located in Spokane, Washington for $1.2 million. Currently serving
approximately 600 business customers with approximately 4,200 lines throughout
Spokane, the Company is constructing a fiber-optic ring in the downtown area
in order to provide facilities-based local telecommunications services
directly to these customers. The Company anticipates migrating its current
resale customers to the fiber-optic network upon its completion. Through
December 31, 1995, the Company has invested $462,000 in building and expanding
this system. The Company plans to provide switched local and long distance
services utilizing this network by the end of July 1996.
Ohio. In January 1996, the Company acquired existing fiber-optic networks
and switching facilities in Cleveland, Columbus and Akron, Ohio for $9.6
million in cash, the issuance of Company Class A Units of $652,000 and the
assumption of a capital lease obligation of $6.1 million for switches and
equipment. The Company's recently acquired networks in Ohio currently are
limited to the downtown cores, but the Company plans to significantly expand
the route and fiber miles of each of these networks during 1996. The Company
anticipates that it will begin offering switched local and long distance
services in each of these metropolitan areas during the first 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 will provide 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. Construction of the downtown fiber-optic ring is
scheduled to begin in the second quarter of 1996 with switched local and long
distance service starting during the first quarter of 1997.
Las Vegas. 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. 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 over 200 route miles throughout Las Vegas.
Through a newly formed subsidiary, NEXTLINK
30
Management Services, LLC, the company will provide strategic planning and
management of the business for a ten year period. In order to expand the
current competitive access business and begin offering local exchange service,
the Company committed to fund $8 million for future construction and
development of the network, including a Nortel DMS-500 switch over the next
three years. The investment in this joint venture will be accounted for under
the equity method and the initial carrying value of the investment is $1
million.
Enhanced Communications Services
During 1995, the Company completed two acquisitions that enable it to
provide enhanced communications services. These businesses allow the Company
to offer value added products in the metropolitan areas where the Company
either has networks in place or is constructing networks. Since the delivery
of these services does not require the construction of local facilities, these
services also provide substantial business opportunities outside of those
areas with significantly less capital expenditures than the facilities-based
businesses.
In June 1995, the Company acquired certain enhanced communications services
assets for $617,000 from City Signal, Inc. These assets are used by the
Company to offer a virtual communications center for mobile professionals and
workgroups. This center provides a suite of communications services to end-
users including Follow-me calling, voice mail, paging, Caller ID, and fax
services, which services can be described as creating a virtual office for the
mobile user. These services are made available through a personal telephone
number called a "Magic Number(TM)".
In September 1995, the Company acquired a fully operational interactive
voice response business for $12.2 million. The Company offers high volume
enhanced telecommunications services including interactive call and
information management, automated order entry and related services.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 vs. three months ended March 31, 1995.
Revenues increased to $5.4 million in the three months ended March 31, 1996,
compared to $399,000 in the first quarter of 1995. The increase was due to
expansion of the competitive access and dedicated line service business in
Tennessee and additional revenue generated from companies acquired in the
latter part of 1995. Of the first quarter 1996 revenues, $1.7 million were
derived from competitive access and dedicated line services, $500,000 from
local exchange resale services, and $3.2 million from enhanced services.
Expenses increased from $2.0 million in first quarter of 1995 to $12.0
million in 1996. This increase is due to the acquisitions described above and
expansion of the business. Operating expenses increased from $638,000 in the
first quarter 1995 to $4.7 million in the comparable period in 1996 due
primarily to the increase in salaries and benefits, consultant fees, and local
and long distance service costs.
Selling, general and administrative expenses ("SG&A") increased from
$753,000 in the three months ended March 31, 1995 to $5.5 million in the three
months ended March 31, 1996. SG&A increased substantially as a result of
acquisitions and development of the Company's business to commence local
exchange service in July 1996. Salaries and benefits, marketing, consulting
and legal fees, property taxes and facilities expenses increased in 1996
compared to the first quarter of 1995.
Depreciation increased from $130,000 in the three months ended March 31,
1995 to $1.1 million in comparable period in 1996 due to the added equipment
as a result of acquisitions and expansion of the networks. Amortization of
intangible assets increased from $482,000 in the first quarter of 1995 to
$752,000 in the first quarter of 1996 due to increase in intangible assets as
a result of acquisitions.
31
Net interest expense was $496,000 for the three months ended March 31, 1996
and related to advances from Eagle River and additional capital lease
obligations.
Period from Inception (September 16, 1994) to December 31, 1994 vs. 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.
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, expenses increased
from $352,000 in 1994 to $20.0 million in 1995. This increase is due to the
acquisitions described above and expansion of the business. Operating expenses
increased from $106,000 in 1994 to $6.6 million in 1995. Operating expenses
consist of costs directly related to providing facilities-based network and
enhanced communications services and includes salaries and benefits, right-of-
way fees and local and long distance service costs.
SG&A increased from $232,000 in 1994 to $9.9 million in 1995. SG&A includes
salaries and benefits, sales and marketing, consulting and legal fees,
property taxes, facilities expense and billing and systems development costs.
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.
Quarterly Information
The following table presents the unaudited operating results for the third
quarter of 1994 through the fourth quarter of 1995. The Company believes that
all necessary adjustments, consisting of only normal recurring adjustments,
have been included in the amounts stated below to present fairly the
32
quarterly results when read in conjunction with the Consolidated Financial
Statements and notes thereto. Results of operations for any particular quarter
are not necessarily indicative of results of operations for a full year or
predictive of future periods.
1994 1995
----------- ----------------------------------
3RD 4TH 1ST 2ND 3RD 4TH
---- ----- ------- ------- ------- -------
(IN THOUSANDS)
Revenue....................... $-- $ -- $ 399 $ 1,000 $ 2,825 $ 3,328
Loss from operations.......... (47) (305) (1,604) (2,290) (2,446) (6,122)
Other income (expense)........ 1 2 43 36 (95) (253)
Net loss...................... (46) (303) (1,561) (2,254) (2,541) (6,375)
EBITDA(1)..................... (46) (292) (992) (1,623) (1,672) (4,717)
- --------
(1) EBITDA consists of earnings (loss) before interest, minority interest,
depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA is not intended to represent
cash flow for the periods. See Consolidated Statement of Cash Flows.
Revenues have increased every quarter from the first quarter through the
fourth quarter of 1995, due to an increasing customer base that has resulted
from the acquisition and installation of new networks and enhanced
communications services. Additional increases in revenue resulted from the
September 1995 acquisition of the interactive voice response business.
The increased loss in the fourth quarter 1995 resulted primarily from costs
incurred in developing the local telecommunications networks. The increase
reflects primarily the costs of additional employees, increase in SG&A costs,
facilities expenses and development costs. The Company incurred costs related
to evaluating and establishing new markets; building systems engineering and
information technology functions; and developing marketing and sales programs.
In addition, depreciation and amortization increased due to the 1995
acquisitions and continued expansion of the Company's networks.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the acquisition of companies and assets, the purchase of additional
telecommunications equipment, and the design and development of the Company's
networks.
Since inception, the Company has funded approximately $55.0 million of its
expenditures through cash equity investments from two entities that are
controlled by Mr. Craig O. McCaw. In addition, the Company has issued $10.5
million of member units for the acquisition of certain assets as well as the
issuance of member units in a recapitalization of the Company and four of the
Company's operating subsidiaries, as a result of which each of these
subsidiaries is owned 99% by the Company and 1% by a corporation that is
wholly owned by Mr. McCaw (the "Recapitalization"), and assumed or incurred
approximately $12.7 million of debt obligations. Mr. McCaw, through Eagle
River, has made advances to the Company primarily to fund the Company's
capital expenditures (excluding acquisitions) and operating losses between
January 1996 and April 1996. These advances of approximately $32.2 million,
including accrued interest, will be repaid using a portion of the net proceeds
of the Offering.
On April 25, 1996, the Company executed a purchase agreement pursuant to
which investors committed to purchase the Senior Notes with interest due semi-
annually. The Company used $117.7 million of the 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 $32.2 million
to repay the advances and accrued interest from Eagle River.
33
The Company expects to use the remaining proceeds (approximately $190
million net of transaction costs) in connection with (i) further construction
and expansion of the Company's existing networks, including the installation
of additional switches and switch peripherals, (ii) design, construction and
development of networks in adjacent or new geographic areas, (iii) connection
of additional buildings and customers to the Company's networks, (iv) further
development of the Company's enhanced communications services and (v)
acquisitions and the development of acquired businesses.
The Company estimates that the cash requirements (including the funding of
operating losses) for the period from January 1996 through December 1997 will
be approximately $250 million. Beyond 1997, the Company's planned growth will
require substantial additional capital to fund capital expenditures, working
capital and any future operating losses. The Company will continue to evaluate
additional revenue opportunities in each of its metropolitan areas and, as and
when attractive additional opportunities develop, the Company plans to make
additional 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, sales of
additional debt securities, sales 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
consolidated cash flow in sufficient amounts to service the Notes. 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 contained
in the Indenture. 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.
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.
EFFECTS OF NEWLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". This statement requires that long-lived assets and
certain identifiable intangible assets be reviewed to determine whether the
carrying amount is recoverable based on estimated future cash flows expected
from the use of the assets and cash to be received upon disposal of the
assets. The Financial Accounting Standards Board has also recently issued
Statement No. 123 "Accounting for Stock-Based Compensation". This statement
affects the valuation and disclosure of stock-based transactions with
employees. The Company plans to use the pro forma disclosure alternative. The
Company does not anticipate any material effect on the financial position,
results of operations or cash flow of the Company upon adoption of these
standards in the first quarter of 1996.
EFFECT OF INFLATION
Inflation has not had a significant effect on the Company's operations over
the past two years.
34
BUSINESS
OVERVIEW
NEXTLINK was founded in 1994 by Mr. Craig O. McCaw, its Chief Executive
Officer and principal equity owner, to be a premier provider of local
facilities-based telecommunications services, focused on serving commercial
customers. NEXTLINK's goal is to become the principal competitor to the ILEC
for commercial customers in each of the metropolitan areas served by the
Company. The Company intends to achieve this goal by initially targeting small
and medium sized businesses and by offering a single source for local, long
distance and enhanced communications services.
Since the Company's inception, Mr. McCaw has invested approximately $55
million of equity capital to fund the development of NEXTLINK's business. The
Company currently has operations in 10 metropolitan areas, and provides
commercial customers with dedicated transmission services in seven of these
areas. To date, the Company has installed approximately 500 route miles of
high capacity fiber-optic cable in its networks. In addition, in April 1996,
the Company became a 40% member in a joint venture that currently provides
competitive access services in Las Vegas, Nevada, over a 200 mile fiber-optic
network. NEXTLINK also offers enhanced voice communications services,
including a series of interactive voice response ("IVR") products and a
virtual communications center for mobile professionals and workgroups. By July
1996, the Company intends to begin providing switched local, long distance and
enhanced communications services to end-users in six of its markets, and to
provide those services in its five remaining markets by early 1997. In
addition, the Company expects to expand to other metropolitan areas by
"clustering" future growth in areas close to those it currently serves, as
well as by entering attractive markets in other regions.
To date, NEXTLINK has built and acquired networks in mid-sized markets. The
Company designs and builds its networks to encompass the principal downtown
and suburban concentrations of businesses 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 has developed a uniform
technology platform that it is implementing in each of its networks that is
based on the Nortel DMS-500 local and long distance switching system.
The Company currently markets a number of enhanced communications services,
which utilize either an IVR platform or a virtual communications center. The
IVR platform supports a variety of customer service, marketing and database
applications for clients such as NIKE, Inc., PepsiCo, Inc. and The GAP, Inc.,
as well as businesses in the areas where the Company has networks. The virtual
communications center provides mobile professionals and workgroups with a
variety of ubiquitous communications services including enhanced call
forwarding, voice messaging, paging, facsimile and teleconferencing, through a
personal telephone number. The Company believes that its enhanced
communications services will accelerate the addition of commercial customers
in the areas served by its networks.
MARKET OPPORTUNITY
Industry sources estimate that in 1994, total revenues from local and long
distance telecommunications services were approximately $164 billion, of which
approximately $97 billion was represented by local exchange services and
approximately $67 billion was represented by long distance services. Although
the market for the provision of long distance service has been open to
competition since 1984, the market for local exchange services has until
recently been virtually closed to competition. The Company believes that the
recently enacted Telecom Act will result in a fundamental change in the
competitive structure of the local exchange market, greatly accelerating
changes that have been under way for several years as a result of FCC policy
initiatives and ongoing deregulatory trends at the state level. The Company
believes that these developments will result in significant opportunities for
new entrants offering local exchange services.
35
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
Modified Final Judgment (the "MFJ") in 1984. To foster competition in the long
distance market, the MFJ prohibited AT&T from acting as a single source
provider of telecommunications services.
The Company believes that a similarly critical event occurred this year 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.
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. Competitive access is a limited service that
allows customers with a high volume of long distance traffic to utilize a
CAP's network to bypass the ILEC (and the ILEC's relatively high access
charges) to connect to the customer's long distance carrier. Initially, CAPs
could only compete for high capacity, dedicated access services to customers
connected to the CAP's privately owned or leased network. The FCC's
Interconnection Decisions in 1992 and 1993 granted CAPs the right to
interconnect their private networks to the ILEC networks to provide collocated
special access and switched access transport services, which enabled CAPs to
access new customers and new markets without physically expanding their
networks.
The total market scope of CAPs, however, has remained limited. Even with
these FCC decisions, CAPs were limited to offering services that account for
approximately 15% of the total local exchange market. The portion of the total
telecommunications services market that these service providers were unable to
address (that is, local dial tone, associated switched services and intraLATA
toll) account for approximately 85% of the local exchange market.
As a result of the passage of the Telecom Act, competitors to the ILEC are
now permitted to offer all local telecommunications to their customers as well
as combine local and long distance services in a single product offering.
Pursuant to the Telecom Act, ILECs that are also subsidiaries of RBOCs are not
permitted to offer a combined local and long distance service product until
such time as the ILEC can demonstrate that a facilities-based provider, such
as NEXTLINK, is present in its market. Although it is uncertain when these
ILECs will be able to offer combined local and long distance services, the
Company believes that until they are able to do so, the Company will have a
competitive advantage to gain market share and to provide a combined service
package before the ILEC is permitted to do so.
The Company expects that continuing pro-competitive regulatory changes,
together with increasing customer demand, will create more opportunities for
competitors to the ILEC, such as NEXTLINK, to introduce additional services,
expand their networks and address a larger customer base. The Company believes
that these regulatory and competitive changes afford competitors to the ILEC
the potential to grow significantly over the next several years.
BUSINESS STRATEGY
The Company has built a locally oriented, customer-focused organization
dedicated to providing a broad range of products and services at competitive
prices, with the objective of becoming a major
36
participant in the telecommunications services business. The key components of
the Company's strategy to achieve this objective are the following:
High Capacity Networks with Broad Market Coverage. NEXTLINK approaches
network design with a long-term view, and focuses on three key elements.
First, the Company designs and builds its networks to provide extensive
coverage of principal business concentrations in its metropolitan areas,
featuring direct physical connection with a high percentage of the
businesses in these markets. This broad coverage will 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 very high volumes of voice, data,
video and Internet traffic as well as other high bandwidth services. This
should prevent significant "overbuild" costs and provide added network
flexibility. It also positions the Company as a backbone provider for
wireless and long distance carriers. Third, the Company is implementing a
uniform technology platform based on Nortel DMS-500 switches and ancillary
transmission technologies enabling the Company to quickly deploy features
and functions in all of its networks and expand switching capacity in a
cost effective manner.
Focus on Small and Medium Sized Businesses. The Company will initially
focus its marketing efforts on small and medium sized businesses in the
metropolitan areas that it serves. The Company's market research indicates
that these customers would prefer a single source and single bill for all
of their telecommunications services. In addition, the Company believes
that the gross margins on services provided to small and medium sized
businesses are generally higher than for larger businesses, where the ILEC
is more competitive. The Company expects to attract small and medium sized
business customers by offering: (i) bundled local and 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) customer service and support provided on a
local level.
Rapid Market Entry. The Company intends to be early to market providing
competitive local services in all of its markets. The Company is installing
four Nortel DMS-500 switches which will serve six markets where the Company
plans to provide local and long distance services by July 1996, and intends
to install Nortel DMS-500 switches and provide these services in its other
markets by early 1997. To complement its efforts to attract local exchange
customers, the Company plans to gain visibility and develop customer
relationships through the marketing of its enhanced communications
services.
Market Expansion. The Company currently operates or is constructing
networks in 10 metropolitan areas in five states. These areas, in the
aggregate, have approximately 1.5 million addressable business lines, which
represent the current market potential for the Company. By the end of 1997,
the Company's goal is to increase the number of areas it serves in order to
expand its market potential to approximately 2.3 million addressable
business lines. NEXTLINK believes that there are substantial advantages to
operating its networks in clusters, including economies of scale in
management, marketing, sales and network operations. Clustering networks
will also enable 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. The Company may also expand into new geographic areas as
opportunities arise either through building new networks or acquiring
existing networks.
Enhanced Communications Services Offering. NEXTLINK offers customers
value-added services beyond the transmission of telephone traffic. Its IVR
services provide an interface between NEXTLINK's clients and their
customers for a variety of applications. NEXTLINK's virtual communications
center allows mobile professionals and workgroups access to a suite of
commonly used communications services from any telephone in the public
switched network. Since these services are not dependent on the Company's
local facilities, the Company can offer
37
these services in a market and thereby establish a customer base in advance
of the Company constructing network facilities in that market. The Company
plans to focus the marketing of its enhanced communications services in all
of its facilities-based markets, as well as in areas of planned network
expansion. This will increase the Company's visibility, develop customer
relationships and assist the Company in attracting local exchange customers
when it operates networks in these markets.
Direct Sales Force and Customer Care. NEXTLINK is building a highly
motivated and experienced direct sales force and customer service
organization. The Company recruits salespeople with experience in selling
competitive telecommunications services in the markets where they will be
based. Salespeople are incentivized through a commission structure with a
target of 50% 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 will be responsible for solving problems and
responding to customer inquiries. Management believes that the quality of
its growing sales force and customer care organization will provide a
competitive advantage in competing with the ILEC in the local exchange
market.
NETWORK DEVELOPMENT
The Company has executed a strategy of (i) acquiring fully or partially
constructed fiber-optic networks, (ii) designing and constructing high
capacity fiber-optic networks with broad coverage, and (iii) acquiring related
enhanced communications services. The Company is constantly evaluating
metropolitan areas as locations for expansion of the Company's current
networks and the development of additional networks.
The decision to build or acquire 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 area;
. availability of rights-of-way;
. actual and potential competitors;
. potential for the Company to cluster additional networks in the region;
and
. demand for traditional CAP services such as special access and switched
access transport services.
If a particular metropolitan area 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 corporate
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 corporate 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.
38
The Company anticipates continuing the expansion of its networks into new
metropolitan areas utilizing the market development analysis described above.
For example, in April 1996 the Company completed negotiation of the formation
of a joint venture through which a subsidiary of the Company will manage and
operate a network in Las Vegas, Nevada. The Company will contribute an
aggregate of $8.0 million to the joint venture over three years. 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.
NETWORK ARCHITECTURE
Design
The Company's decision to build or acquire fiber-optic networks is based on
the Company's belief that, in the long term, facilities-based full service
telecommunications companies that have networks directly connected to their
customers will have the ability to respond quickly to customer needs for
capacity and services, and to develop a knowledgeable cooperative relationship
with the customer in providing new services and other telecommunications
solutions in the rapidly evolving telecommunications arena and should result
in higher long-term operating margins.
The Company believes that the future telecommunications market will be an
interconnected network of networks. No single network will continue to
dominate the marketplace, with the majority of customers originating and
terminating calls on a single network. 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 or 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, 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:
. 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.
39
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 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 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
deployment of the network backbone. After installing the network backbone,
extensions to additional buildings and expansions to other areas of a
metropolitan area 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.
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 can be
reconfigured for routing to its ultimate destination.
Uniform Technology Platform
In building its extensive networks, the Company is implementing a consistent
technology platform based on the Nortel DMS-500 switch. 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 offer consistent products and services and cost-effectively implement new
services. In addition, the scalability and capacity of these switches will
allow the Company to switch calls from more than one metropolitan area, 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 Tellabs, Inc. ("Tellabs") digital access and
cross connect systems ("DACS"). DACS provide the ability to aggregate and
disaggregate capacity along the fiber-optic network. Using the
40
DACS, the capacity of 24 DS-0s can be aggregated to form a DS-1 and, again
through the DACS, 28 DS-1s can be aggregated to form a DS-3.
The Company is in the process of establishing 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 production switches. This test site,
which will be referred to as NEXTLAB, will operate separate and apart from the
Company's operational switches. NEXTLAB will be used by the Company to test
new software, and services and service configurations prior to their release
on the Company's networks. Over time, NEXTLAB is expected to evolve into a
service and product development center which will provide the Company with an
opportunity to design new services prior to implementation.
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 or is currently negotiating to establish
all of these arrangements for Pennsylvania, Tennessee, and Washington by the
end of July 1996. These key elements include:
Interconnection. In Pennsylvania, Tennessee and Washington the Company is
in ongoing negotiations with respect to both the technical aspects and
underlying business relationships with the ILEC in each metropolitan area
where the Company intends to operate. The Company expects to have
interconnection arrangements in place in each location by July 1996.
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 will allow customers to retain their
telephone numbers when changing local exchange service carriers. In
addition, the Company has been allocated blocks of 10,000 telephone numbers
for each of its Memphis, Nashville and Spokane 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, 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. In Pennsylvania, NEXTLINK has applied
for an NXX number block, which should be assigned once the Company receives
local exchange carrier authority.
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. SS7 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 currently is negotiating
an agreement with a routing and transmission services vendor, which will
provide the Company with nationwide coverage for SS7 signaling, and expects
to complete that agreement prior to July 1996.
TELECOMMUNICATIONS SERVICES
Local and Long Distance Services
By July 1996, the Company expects to commence the offering of local and long
distance services in six metropolitan areas and to provide these services in
five additional areas by early 1997. The Company intends to initially focus
its sales efforts on small and medium sized businesses. The Company
anticipates that pricing, which will be determined and implemented by the
Company's operating subsidiary in each local market, will generally be 10% to
15% lower than the pricing for
41
comparable local services from the ILEC. The Company's initial product
offering to these customers will include:
. 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 (via the resale of a facilities-based long distance
carrier's services);
. Voice messaging with personalized greetings, send, transfer, reply and
remote retrieval capabilities;
. Directory listings and assistance; and
. Centrex (expected Fall 1996).
Data services that are currently offered by the Company, and will continue
to be offered after July 1996, include Ethernet, TOKEN rings, and Fiber
Distributed Data Interface (FDDI). In addition, the Company will offer
dedicated access and CAP services in each of its markets, focusing on long
distance carriers and the private line needs of high volume customers.
The Company's special access and private line telecommunications 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.
Traditional competitive access services are provided at a variety of
standardized transmission speeds over dedicated circuits. The standard circuit
capacity classifications include DS-0, DS-1 and DS-3 service. 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
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 Local Area Networks ("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.
In addition to these local exchange and CAP services, the Company's
subsidiary in Washington is a fully certified provider of local exchange
services and currently serves over 600 customers in Spokane, Washington, with
approximately 4,200 lines in service, through the resale of the services of
the ILEC. As this subsidiary constructs its own fiber-optic network in the
area, the Company expects to migrate these customers to the local exchange
service provided directly by the Company and to continue to provide long
distance services on a resale basis.
Enhanced Communications Services
NEXTLINK's interactive voice response 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
simultaneously to leave a profile of the caller behind, for use by
42
either NEXTLINK or its clients. Currently, NEXTLINK provides four types of
interactive voice response 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, 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, which offers a suite of personal communications
services. These services are made available through a specialized personal
telephone number marketed as a "Magic Number(TM)". The key services provided
by this center are the following:
. Follow-Me--which instructs the communications center to forward any calls
to a Magic 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--captures the telephone number of anyone who calls the
subscriber, which is also displayed on the subscriber's pager;
. Fax Messaging--stores the incoming fax and delivers it to the nearest fax
machine when the subscriber calls in to retrieve it; and
. Teleconferencing--handles all teleconferencing needs through a
teleconferencing operator.
The Company anticipates that it will continue to explore other enhanced
communications services opportunities and may acquire additional service
providers in the future that support its overall business and marketing
strategies.
SALES AND CUSTOMER CARE
Overview
The Company will utilize a two-pronged sales strategy in each of its
markets. First, initial sales efforts for local and long distance services
will be focused on small and medium sized businesses. The Company's market
research indicates that these customers would prefer a single source and
single bill for their telecommunications services. The Company intends to
attract these customers through a direct sales effort offering combined local
and long distance services at a 10% to 15% discount from the ILEC. This will
provide the Company's customers a level of convenience that has been generally
unavailable since the break-up of AT&T. Second, the Company is marketing its
enhanced communications services via 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
43
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 service organization. The Company recruits salespeople with
experience in selling competitive telecommunications services in the
metropolitan areas where they will be based. Salespeople are incentivized
through a commission structure with a target of 50% of a salesperson's
commission to be based upon 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. This yields a
more efficient and cost effective operational environment.
The Company anticipates that its enhanced communications services will
continue to be sold across the country by the 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 facilities-based
markets. The Company believes that this two-pronged approach to each market
will provide revenue incremental to facilities-based operations.
Customer Care
The Company intends to augment its direct sales approach with superior
customer care and support through locally based, customer care
representatives. Each customer will have a single point of contact for
customer care who will be responsible for solving problems and responding to
customer inquiries. The Company will seek to provide a customer care group
that will have the ability and resources to respond to and resolve customer
problems as they arise. The Company believes that these representatives will
be most effective if they are based in the community in which the Company is
offering services.
REGULATORY OVERVIEW
Overview
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide interstate or international communications. The
state regulatory commissions retain jurisdiction over the same facilities and
services to the extent they are used to originate or terminate intrastate
communications. Local governments sometimes impose franchise or licensing
requirements on 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 to the ILECs in the local market.
44
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 beliefs as to the anticipated effect of the new requirements, if
properly implemented.
ISSUE DEFINITION ANTICIPATED EFFECT
----- ---------- ------------------
Interconnection Efficient network Allows competitive
interconnection to transfer telecommunications provider
calls back and forth between to service and terminate
ILECs and competitive calls to customers not
networks (including 911, 0+, directly connected to its
directory assistance, etc.) networks
Local Loop Allows competitors to Reduces the capital and
Unbundling selectively gain access at operating costs of a
cost-based rates to ILEC competitive
wires from central offices telecommunications provider
to customer premises to serve customers not
directly connected to its
networks
Reciprocal Mandates reciprocal Improves the competitive
Compensation compensation for local telecommunications
traffic exchange between provider's margins for local
ILECs and competitors service
Number Portability Allows customers to change Allows customers to switch
local carriers without to competitive
changing numbers; true telecommunications
portability allows incoming provider's local service
calls to be routed directly without changing phone
to a competitor. Interim numbers
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 Allows competitive
Numbers telephone numbers to telecommunications providers
competitive to provide telephone numbers
telecommunications to new customers on the same
provider's customers 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 Regulation
The FCC has adopted a "forbearance" policy for non-dominant carriers, such
as the Company and its subsidiaries, under which no prior approval is needed
for network construction or acquisition, and only minimal tariff and reporting
requirements are in effect. The Telecom Act now gives the FCC
45
the authorization to eliminate tariff and reporting requirements as well. As a
result of the Interconnection Decisions, the Company is able to offer
interstate collocated special access and collocated switched access transport
services to virtually every business, government and institutional end-user in
the cities in which the Company provides services without being directly
connected to such customers. The Interconnection Decisions enabled CAPs to
compete for transport of switched long distance calls between ILEC central
offices and long distance companies' POPs. At the same time the ILECs were
granted greater pricing flexibility for those services. Certain aspects of the
Interconnection Decisions were subsequently overturned as a result of court
appeals by the ILECs. In particular, the FCC was not allowed to insist that
the ILECs offer actual physical interconnection of CAP facilities in the ILEC
central offices. Instead, in February 1994, the FCC modified its decision to
permit either such physical interconnection or "virtual" interconnection in
which ILECs own, install, maintain and lease to CAPs the equipment to
interconnect the CAP networks with the ILEC facilities. The Telecom Act,
however, now requires that ILECs provide CAPs 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.
In July 1995, the FCC took two actions related to the assignment of
telephone numbers, first mandating that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the BOCs and a few other ILECs to a neutral entity and
second, proposing a regulatory structure under which a wide range of number
portability issues would be resolved.
In September 1995, the FCC issued a Notice of Proposed Rulemaking which
proposes rules that, among other things, would increase ILEC pricing
flexibility and deregulation either automatically or as competition increases.
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 CAPs, 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 competitors to the ILECs, CAPs and other new entrants.
While the Telecom Act will probably accelerate the introduction of rules
promoting local competition, it is still far from certain what form the rules
will take and how effective those rules will be. The FCC has significant
discretion in the manner in which the Telecom Act will be implemented. The
details of the rules adopted by the FCC implementing the Telecom Act
requirements, particularly those relating to number portability and reciprocal
compensation, 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
46
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.
Furthermore, the Telecom Act provides specific guidelines under which ILECs
that are subsidiaries of RBOCs may provide interLATA or long distance service
to customers in their regions. Specifically, these ILECs are generally not
permitted to enter the in-region, interLATA business in a particular state
until the FCC has determined that they have complied with a list of
requirements designed to encourage local competition.
Finally, in overseeing interconnection negotiations, the approach adopted by
particular state regulatory authorities may significantly affect the
effectiveness of the Telecom Act in promoting competition in local services.
In states that fail to facilitate local competition, it may prove difficult,
without preemptive action by the FCC, for the Company to obtain adequate
interconnection agreements.
State Regulation
A small percentage of the Company's current circuits may be classified as
intrastate and therefore subject to state regulation. However, the Company
expects that as its business and product lines expand, the Company will offer
more intrastate service. In all states where certification as a common carrier
is currently required, the Company's operating subsidiaries are certificated
or have applied for certification. State authorizations historically have
varied in the scope of the intrastate services permitted. However, under the
Telecom Act, states may no longer prohibit competitive supply of any
telecommunications service although states may require prior certification and
certain qualification thresholds as a precondition to gaining certification.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services which are classified as intrastate.
In some states, the Company's tariff can list a range of prices for particular
services, and in others, such prices can be set on an individual customer
basis. The Company is not subject to price cap or to rate of return regulation
in any state in which it currently provides services.
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 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 to the ILECs in the local market. The Telecom Act also
grants state regulators the authority to mediate or arbitrate disputes that
arise during interconnection negotiations. Finally, the Telecom Act requires
state approval of interconnection agreements.
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 impose fees will
not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels.
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.
47
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company was 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 city served by its networks, the Company faces, and expects to
continue to face, significant competition from the ILECs, which currently
dominate their local telecommunications markets.
The Company expects to compete 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.
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 other 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 introduction of such
competition will allow ILECs to provide long distance services. When ILECs are
permitted to provide such services, they will be in a position to offer single
source service. On March 4, 1996, AT&T announced that it had completed filings
to offer local telephone service in all 50 states and that it hoped to begin
negotiations with local phone companies by the middle of March on terms for
interconnection. In addition, on March 4, 1996, GTE announced that it had
begun offering long distance service to its
48
local phone service customers in Michigan and Minnesota and expects to offer
long distance service in all 28 states where it currently offers local service
by the end of 1996.
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. 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 services, there are
several competitors that provide interactive voice response services. Of
these, the most significant from a volume of call processing standpoint is
Call Interactive, located in Omaha, Nebraska. Call Interactive focuses on
large volume customers. Another competitor, Telemedia, which is owned by
Sprint, also offers significant call volume capacity. With respect to the
Company's virtual communications center, there are numerous competitors with
product offerings that include some or all of the services offered by the
Company's communications center.
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, Nortel for telecommunications switches, and
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 factors are established, purchase orders for the
appropriate fiber and selected equipment types are placed under the general
purchase agreements.
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 March 31, 1996, the Company employed approximately 255 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.
49
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 Magic Number 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 proceedings that are in the normal course of its business.
50
MANAGEMENT
In a manager managed limited liability company such as NEXTLINK, there is no
board of directors. Pursuant to the terms of the LLC Agreement, management of
the Company is vested in two Managing Members, Eagle River and a corporation
that is wholly owned by Mr. Craig O. McCaw. Eagle River owns approximately 88%
of the Company's Class A Units and, therefore, effectively exercises control
over the Company's affairs. The Managing Members have authorized the following
persons to hold the positions designated below and to assist in the
administration of the day-to-day operational matters of the Company:
NAME AGE POSITION
---- --- --------
Craig O. McCaw..................... 45 Chief Executive Officer
James F. Voelker................... 45 President
Kathleen H. Iskra.................. 39 Vice President, Chief Financial
Officer and Treasurer
R. Bruce Easter, Jr. .............. 38 Vice President, Secretary and General
Counsel
Charles P. Daniels................. 39 Vice President and Chief Marketing
Officer
Gordon Sileo....................... 49 Vice President and Chief Information
Officer
Phillip F. Thompson................ 49 Vice President--Engineering and
Operations
J. Scott Bonney.................... 39 Vice President--Regulatory Affairs
The following persons are officers of Eagle River and additionally serve as
advisory officers to NEXTLINK in the following capacities:
NAME AGE POSITION
---- --- --------
Dennis Weibling.............................. 44 Executive Vice President
Scot Jarvis.................................. 35 Executive Vice President(1)
C. James Judson.............................. 51 Executive Vice President
William A. Hoglund........................... 42 Executive Vice President
- --------
(1) Effective April 30, 1996, Mr. Jarvis resigned as an officer of Eagle
River, but continues to serve as an advisory officer of the Company.
The following persons are the presidents of the Company's operating
subsidiaries:
NAME AGE POSITION
---- --- --------
Greg Green........................... 32 President of NEXTLINK Washington,
L.L.C.
Don Hillenmeyer...................... 50 President of NEXTLINK Tennessee,
L.L.C.
Jan Loichle.......................... 48 President of NEXTLINK Solutions,
L.L.C.
Robert Kingery....................... 42 President of NEXTLINK Interactive,
L.L.C.
Gary Rawding......................... 44 President of NEXTLINK Pennsylvania,
L.P.
Dwayne Nielson....................... 41 President of NEXTLINK Utah, L.L.C.
All of the persons identified above serve at the discretion of the Managing
Members 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
51
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 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 overall vision and direction for the company.
Mr. Voelker has 17 years of experience in the telecommunications industry, in
a variety of executive positions. As the Vice President of Sales, Marketing
and Customer Service of Lexitel Corporation, a 1981 entrant into the long
distance market, Mr. Voelker directed growth from zero to $60 million in
revenues. As a co-founder of Digital Signal Inc. ("Digital Signal"), Mr.
Voelker served as Chief Operating Officer and Chief Executive Officer from
1985 through the company's sale to SP Telecom in 1990. Digital Signal supplied
capacity, engineering, provisioning, and operational support for their
customers. Mr. Voelker continued through 1991 as an executive vice president
and director of SP Telecom. In 1992, Mr. Voelker assumed the role of Vice
Chairman of City Signal Inc., a CAP, which constructed and operated networks
in six markets. Subsequently, Mr. Voelker added the title of Chief Executive
Officer as it merged with Teledial America (its sister company), to form U.S.
Signal, one of the first competitive local exchange companies in the country.
Mr. Voelker has also served as Vice Chairman of ALTS, the industry association
for competitive access providers. Mr. Voelker was also a director of Phoenix
Network, Inc., a publicly held long distance company.
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 & Co.
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 joined NEXTLINK as Vice President and Chief Marketing
Officer in 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 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
52
responsible for evaluating and implementing new technologies that either
reduced costs or generated new revenue.
Gordon Sileo joined NEXTLINK as the Chief Information Officer in 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.
Phillip F. Thompson has been Vice President, Engineering and Technical
Operations, of NEXTLINK since December 1994. Mr. Thompson is responsible for
designing, engineering, and implementing the NEXTLINK network platform. Prior
to joining NEXTLINK in December 1994, Mr. Thompson served as Vice President of
Operations and Engineering for STSJ Telephone Company responsible for system
design, bid and budget responsibility for various projects. Prior to this,
Mr. Thompson held the position of Vice President of Product Development and
Vice President, MIS, at SP Telecom. Prior to SP Telecom, Mr. Thompson held the
position of Vice President of Operations, Engineering and MIS at Digital
Signal, Inc. from 1986 to 1990.
J. Scott Bonney has been Vice President of Regulatory and External Affairs
for NEXTLINK since November 1994. He is responsible for implementing
NEXTLINK's regulatory and industry affairs initiatives. Prior to joining
NEXTLINK, from November 1992 to November 1994, Mr. Bonney was Vice President
of Regulatory and External Affairs for Ameritech in Illinois, where he was
responsible for implementing Ameritech's competitive network unbundling plan.
Prior to joining Ameritech, from 1988 through November 1992, Mr. Bonney served
as Director of Regulatory Affairs for Teleport Communications Group one of the
original competitors for local phone service.
The following individuals act in an advisory capacity for the Company.
Dennis Weibling has been Executive Vice President of NEXTLINK since
September 1994 and President of Eagle River, Inc., a manager of Eagle River
since October 1993. Prior to joining Eagle River, Inc., Mr. Weibling was a
shareholder at Clark, Nuber & Co., P.S., a public accounting firm in Bellevue,
Washington, where he was responsible for corporate and individual tax
planning, specializing in estate planning, personal tax planning, financial
projections, retirement plans and deferred compensation arrangements. Mr.
Weibling also serves on the Executive Committee of Teledesic Corporation.
Prior to joining Clark, Nuber & Co. in July 1981, Mr. Weibling was with the
accounting firm Arthur Andersen & Co. in Columbus, Ohio.
Scot Jarvis has been Executive Vice President of NEXTLINK since September
1994 and Vice President of Eagle River, Inc. from October 1994 through April
1996 and 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 since
1988. 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: 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.
C. James Judson has been Executive Vice President of NEXTLINK since February
1995 and Vice President and General Counsel of Eagle River, Inc. since January
1995. Prior to joining Eagle River,
53
Inc., from January 1, 1975 through January 1995, Mr. Judson was a partner in
the law firm of Davis Wright Tremaine where he focused his practice primarily
in the areas of corporation law and taxation.
William A. Hoglund has been Executive Vice President of NEXTLINK since
February 1996 and 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.
The following individuals are the senior management of the Company's
subsidiaries.
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 of the 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 Area
(RSA) 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.
Jan Loichle has been the President of NEXTLINK Solutions (the virtual
communications center) since 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.
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.
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.
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.
54
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal year ended December 31, 1995,
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, 1995
(the "Named Executive Officers").
ANNUAL COMPENSATION
--------------------
OTHER SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS(#)(1) COMPENSATION(2)
------------------ ----------- ---------- --------- ---------------- ------------- ---------------
Craig O. McCaw, Chief
Executive Officer...... 1995 -0- -0- -0- -0- -0-
James F. Voelker,
President.............. 1995 89,405 87,000 11,542(3) 1,000,000 -0-
Gary Rawding(4),
President of NEXTLINK
Pennsylvania........... 1995 110,000 50,000 -0- -0- 4,275
Robert Kingery(4),
President of NEXTLINK
Interactive............ 1995 65,589 88,082 -0- 98,347(5) -0-
R. Bruce Easter, Jr.
Vice President and
General Counsel........ 1995 93,666 50,000 -0- 125,000 2,499
- --------
(1)Represents Class B membership units subject to compensatory equity option
plan options granted during 1995.
(2)Represents contributions made by the Company on behalf of the executive
officer under the Company's 401(k) Plan.
(3)Of this amount, $11,238 was allocated to temporary housing expenses.
(4)Mr. Kingery and Mr. Rawding are both active in the management of the
Company.
(5) This represents the number of Company unit options to acquire Class B
units pursuant to the Recapitalization of the Company and its
subsidiaries. Prior to the Recapitalization, this executive held options
to acquire membership interests in one of the Company's subsidiaries.
55
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1)
------------------- ----------------------------------
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
NAME AND PRINCIPAL OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION 5% 10%
POSITION GRANTED(#) YEAR(%) ($/SH) DATE(2) ($) ($)
------------------ ---------- ------------------- ----------- ------------------- --------------
Craig O. McCaw, Chief
Executive Officer...... -0- -0- -0- N/A -0- -0-
James F. Voelker,
President.............. 1,000,000 31.0 .01 April 10, 2010 -0- -0-
Gary Rawding, President
of NEXTLINK
Pennsylvania........... -0- N/A N/A N/A -0- -0-
Robert Kingery,
President of NEXTLINK
Interactive............ 98,347 3.0 .01 September 1, 2010 -0- -0-
R. Bruce Easter, Jr.,
Vice President and
General Counsel........ 125,000 3.9 .01 January 9, 2010 -0- -0-
- --------
(1) The dollar amounts under the 5% and 10% columns are the result of
calculations required by the rules of the Commission and, therefore, are
not intended to forecast possible future appreciation, if any, of the
Company's Class B member units. The Class B option values are based upon
the increase in appreciation of the Company's Class A member units as
reflected in the following formula. The amounts shown reflect the
difference between (a) the appreciation of each Class A member unit at the
SEC's assumed annual rates of appreciation through the fifteenth
anniversary of the date of the grant based on an initial $1.00 per Class A
member unit valuation 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 utilizes the prime rate of
Bank of America Northwest d/b/a Seafirst Bank for this purpose. The bank's
average annual prime rate for 1995 was 8.75% and the Company has used this
rate in calculating the above returns under the SEC's assumed rates of
return.
The value of the Company's Class B units is determined in accordance with
the Company's 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 value of the Company, that is the
distributable profits interest, 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 these 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, 1995, including those issued in the Recapitalization. Based
upon this valuation process, the appreciation interest per unit for Class B
units was determined at year end 1995 to be $.4374, and the value of Class A
units was $1.45. A compensation expense was then booked accordingly for the
Class B units to reflect the difference between the appreciation interest
value and the exercise price at year end for the vested portion of the
options granted during 1995. Commencing July 1, 1995, the EOP was revised to
provide that the Administrative Committee could revalue the Company based on
such financial data as the Administrative Committee deemed appropriate.
(2) The options for Mr. Voelker, Mr. Kingery and Mr. Easter were one-fifth
vested at December 31, 1995 and vest in additional one-fifth increments on
each anniversary of the date of initial grant.
56
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
1995(#) 1995($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Craig O. McCaw ............. -0- -0- -0- -0-
James F. Voelker ........... 200,000 800,000 85,480 341,920
Gary Rawding................ 54,150 81,224 23,144 34,715
Robert Kingery ............. 19,669 78,678 8,407 33,627
R. Bruce Easter, Jr. ....... 25,000 100,000 10,685 42,740
- --------
(1) Reflects the difference between the exercise price and a valuation of
$0.4374 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, 1995.
EMPLOYMENT AGREEMENT
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.
EQUITY OPTION PLAN
The Company has adopted an Amended and Restated Equity Option Plan (the
"Option Plan"). Pursuant to the Option Plan, the Company may grant any
employee of the Company or its Affiliates (as defined in the Option Plan) the
right to acquire Class B membership interests ("Equity Interests") in the
Company (an "Option"). The Option Plan is administered by a committee
comprised of three members (the "Administrative Committee"). Two of the
members are appointed by Eagle River, the primary member of the Company, and
the third is the President of the Company. The Administrative Committee has
sole and unfettered discretionary authority to administer the Option Plan and
to alter, modify, change or terminate the Option Plan at any time.
An Option granted under the Option Plan must be evidenced by a written
agreement between the Company and the employee. Such agreement will set forth
the quantity of Equity Interests with respect to which the Option is granted,
the Option price, the date the Option is granted, and such other terms,
conditions, and restrictions as the Company deems advisable and which are not
inconsistent with the terms of the Option Plan. The holder of an Option (an
"Option Holder") does 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 will not have
voting or other management rights in the Company.
An Option may be exercised, in whole or in part, at any time after December
31, 1996 and within a 15-year period following the date the Option is granted,
subject to ratable vesting of the Option over four Years of Service (as
defined in the Option Plan) and provisions in the Option Plan relating to
early termination of the Option in the case of termination of employment. Any
portion of an Option that is not exercised by the end of the 15-year term
shall terminate unless extended by the Company.
57
The Company has 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 Option Plan) 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 Option Plan);
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From the inception of the Company through the end of 1995, the Company's
capital and operational funding was providing on an as needed basis, and such
funding was provided, in chief, by Eagle River. During this period, under the
Company's limited liability company agreement, one equity unit was issued for
each dollar in cash or assets contributed to the Company. 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 March 31, 1996, Eagle
River had contributed approximately $53.9 million to the Company and had
received approximately 53.9 million Class A units.
On September 15, 1994, the Company 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 payments on September 15.
On August 18, 1995, the Company lent $93,141 to James F. Voelker, the
Company's President, in connection with his relocation to Washington. This
loan bears interest at the prime rate and principal and interest are due the
earlier of December 31, 1996 or the sale of Mr. Voelker's former residence.
On September 1, 1995, the Company agreed to pay $3.0 million to BWP, Inc. in
connection with the acquisition of certain assets of Sound Response
Corporation. Payments of $1.5 million are due on September 1, 1996 and
September 1, 1997, respectively. In addition, the Company issued approximately
4.4 million Class A units 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 is
unsecured and bears interest at the prime rate plus 2%. The note plus accrued
interest was repaid with a portion of the net proceeds of the Offering. The
Company's principal equity owner, Mr. Craig O. McCaw, through Eagle River has
made advances to the Company primarily to fund the Company'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.
During 1995, Eagle River lent the Company $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 were issued to Eagle River.
During 1995, the Company incurred expenses for administrative services
provided by U.S. Signal, a minority member of the Company, pursuant to
temporary agreements related to the acquisitions of certain assets from City
Signal, Inc. The Company recorded expenses in connection with fees to this
affiliate of $1.5 million in 1995.
On April 15, 1996, a subsidiary of the Company lent to BWP, Inc., a member
of the Company, $121,342 to pay certain taxes incurred by the subsidiary prior
to its purchase by the Company from BWP, Inc. The loan is unsecured, matures
on October 15, 1996 and bears interest at the prime rate plus 1%.
58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company. The following table sets forth certain information as of May
21, 1996, with respect to the beneficial ownership of the Company's member
interests by (i) each person known by the Company to own beneficially 5% or
more of the outstanding member interests, (ii) the Company's Managing Members,
(iii) the Company's Chief Executive Officer and each of the Named Executive
Officers and (iv) all executive officers as a group.
Class A Member Units(1)
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF CLASS
BENEFICIAL OWNER OWNERSHIP (%)
------------------- -------------------- -------------------
Eagle River 53,938,354 84.06
Investments, L.L.C.
2300 Carillon Point
Kirkland, WA 98033
BWP, Inc. 4,411,941(2) 6.88
707 S.W. Washington,
8th Fl.
Portland, OR 97205
NEXTLINK, Inc. 820,388 1.28
155 108th Ave. N.E.,
Suite 810
Bellevue, WA 98004
Craig O. McCaw 54,327,235(3) 84.67
2300 Carillon Point
Kirkland, WA 98033
Dennis Weibling 53,938,354(4) 84.06
2300 Carillon Point
Kirkland, WA 98033
James F. Voelker 2,664,072 4.15
155 108th Avenue N.E.
8th Floor
Bellevue, WA 98004
All executive officers as a 57,491,307 89.60
group (16 persons)
Class B Member Units(5)
James F. Voelker 400,000 30.35
155 108th Avenue N.E.
8th Floor
Bellevue, WA 98004
Gary Rawding 54,150 4.11
2675 Morgantown Road
Suite 2100
Reading, PA 19607
Robert Kingery 19,669 1.49
707 Southwest
Washington, 8th Floor
Portland, OR 97205
(Footnotes appear on following page.)
59
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF CLASS
BENEFICIAL OWNER OWNERSHIP (%)
------------------- -------------------- -------------------
R. Bruce Easter, Jr. 50,000 3.79
155 108th Avenue N.E.
8th Floor
Bellevue, WA 98004
All executive officers 822,386 62.40
as a group (16 persons)
- --------
(1) These units are all Class A member units.
(2) Represents Class A member units held beneficially by Douglas Bean and
Robert F. Kingery, each of whom owns 50% of the total member units held by
BWP, Inc.
(3) Represents Class A member units held beneficially by Mr. McCaw as a result
of his ownership interests in Eagle River and NEXTLINK, Inc.
(4) 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.
(5) Represents fully-vested options, granted under the Company's Amended and
Restated Equity Option Plan (the "Option Plan"), to acquire Class B
membership interests in the Company.
* Less than 1%.
Eagle River. The following table sets forth certain information as of May
22, 1996, 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) Eagle River's Managing Members,
and (iii) Eagle River's Chief Executive Officer.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF CLASS
BENEFICIAL OWNER OWNERSHIP(1) (%)
------------------- -------------------- -------------------
Craig O. McCaw 105,000(2) 99.1
2300 Carillon Point
Kirkland, WA 98033
Dennis Weibling 944 *
2300 Carillon Point
Kirkland, WA 98033
- --------
(1) Represents Class A member units.
(2) Represents Class A member units held beneficially by Mr. McCaw as a result
of his ownership interests in Eagle River and Eagle River, Inc.
* Less than 1%.
60
DESCRIPTION OF THE NOTES
The Exchange Notes, like the Senior Notes, are to be issued under an
Indenture, dated as of April 25, 1996 (the "Indenture"), between the Company
and Capital, as joint and several obligors (collectively, the "Issuers"), and
United States Trust Company of New York, as trustee (the "Trustee"). The
statements under this caption relating to the Notes and the Indenture are
necessarily summaries of the material terms thereof and reference is made to
all the provisions of the Indenture, including the definitions of certain
terms therein for a more complete description of the Notes and the Indenture.
The 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, "(S)" or articles are references to the Indenture. Where
reference is made to particular provisions of the Indenture or to defined
terms not otherwise defined herein, such provisions or defined terms are
incorporated herein by reference. Copies of the Indenture and the Registration
Rights Agreement referred to below (see "--Registration Covenant; Exchange
Offer") 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 Notes, the term "Company" refers to
NEXTLINK Communications, L.L.C. and does not include its subsidiaries except
for purposes of financial data determined on a consolidated basis.
GENERAL
The Senior Notes are, and the Exchange Notes will be, senior obligations of
the Issuers, will be limited to $350.0 million aggregate principal amount and
will mature on April 15, 2006. In serving as a co-issuer of the Notes, Capital
is acting as an agent of the Company. NEXTLINK has received all of the net
proceeds of the Offering of the Senior Notes. Capital has nominal assets, does
not conduct any operations and will not provide additional security for the
Notes. The Notes bear interest at the rate per annum shown on the front cover
of this Prospectus, payable semi-annually on October 15 and April 15 of each
year, commencing October 15, 1996, to the Person in whose name the Note (or
any predecessor Note) is registered at the close of business on the preceding
September 15 or March 15, as the case may be. Interest on the Notes, other
than Special Interest, if any, is computed on the basis of a 360-day year of
twelve 30-day months. ((S)(S)301, 307 and 310)
The Issuers have agreed to file and cause to become effective a registration
statement of which this Prospectus is a part, relating to an exchange offer
for the Senior Notes, or, in lieu hereof, to file and cause to become
effective a resale shelf registration statement for the Senior Notes. If such
exchange offer or shelf registration statement is not filed or is not declared
effective, or if such exchange offer is not consummated, within the time
periods set forth herein, Special Interest (as defined below) will accrue and
be payable on the Senior Notes either temporarily or permanently. See "--
Registration Covenant; Exchange Offer" below.
Principal of and premium, if any, and interest (including Special Interest)
on the Notes will be payable, and the Notes may be presented for registration
of transfer and exchange, at the office or agency of the Issuers maintained
for that purpose in the Borough of Manhattan, The City of New York provided
that at the option of the Issuers, payment of interest (including Special
Interest) on the 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 Issuers, such office or agency will be the corporate trust
office of the Trustee, as Paying Agent and Registrar. ((S)(S)301, 305 and
1002)
The Notes are issuable only in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. ((S)302) No service
charge will be made for any registration of transfer or exchange of Notes, but
the Issuers may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. ((S)305)
61
RANKING
The Senior Notes are, and the Exchange Notes will be, senior obligations of
the Issuers, will rank pari passu in right of payment with all existing and
future senior obligations of the Issuers and will rank senior in right of
payment to all future subordinated obligations of the Issuers. Holders of
secured obligations of the Issuers, however, will have claims that are prior
to the claims of the holders of the Notes with respect to the assets securing
such other obligations.
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 other than Capital will
have no obligation to guarantee or otherwise pay amounts due under the Notes.
Therefore, the Senior Notes are, and 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
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 March 31, 1996, on a pro forma basis after giving effect to the
Offering, (i) the total amount of outstanding consolidated liabilities of the
Company and its Subsidiaries, including trade payables, would have been
approximately $379.1 million, $7.1 million of which would have been secured
obligations and (ii) the total amount of outstanding liabilities of the
Company's Subsidiaries, including trade payables, that are effectively senior
to the Notes would have been $25.2 million, of which $7.1 million represented
secured obligations.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 and intergral multiples thereof,
in the form of a permanent global certificate in fully registered form (the
"Global Note") and deposited with the Trustee as custodian for The Depository
Trust Company ("DTC"), in New York, New York, and registered in the name of
DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner
of an interest in the Global Note will be able to transfer that interest
except in accordance with DTC's applicable procedures, in addition to those
provided for under the Indenture.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Note may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes."
Depository Procedures. DTC has advised the Issuers that DTC is a limited-
purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers
(including the Purchasers), banks, trust companies, clearing corporations and
certain other organizations. Access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial
62
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
The Issuers expect that, pursuant to procedures established by DTC, (i) upon
issuance of the Global Note, DTC will credit the respective principal amount
of Exchange Notes of the individual beneficial interests represented by such
Global Note to the accounts of Participants and (ii) ownership of such
interests in the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the Participants) or by the Participants and the Indirect Participants
(with respect to other owners of beneficial interests in the Global Note).
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of
a person having beneficial interests in a Global Note to pledge such interests
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the Notes, see "--Exchange of Book-Entry Notes for
Certificated Notes".
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of (and premium, if any) and interest
on a Global Note registered in the name of DTC or its nominee will be payable
by the Trustee to DTC or its nominee in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Issuers and the
Trustee will treat the persons in whose names the Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, none of
the Issuers, the Trustee nor any agent of the Issuers or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Note, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Note, or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants.
DTC has advised the Issuers that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Note as shown on the records of DTC unless DTC has reason
to believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Trustee or the Issuers. None of the
Issuers or the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Notes, and the
Issuers and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
Notes for all purposes.
63
Interests in the Global Note will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. If a holder requires
physical delivery of a Certificated Note for any reason, including to sell
Exchange Notes to Persons in states which require physical delivery of such
Exchange Notes or to pledge such Exchange Notes, such holder must transfer its
interest in the Global Note in accordance with the normal procedures of DTC
and the procedures set forth in the Indenture.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between the Participants in DTC, on
the one hand, and Euroclear or CEDEL participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
CEDEL, as the case may be, by its respective depository; however, such cross-
market transactions will require delivery of instructions to Euroclear or
CEDEL, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or CEDEL, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the Global Note in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and CEDEL participants
may not deliver instructions directly to the depositories for Euroclear or
CEDEL.
DTC has advised the Issuers that it will take any action permitted to be
taken by a holder of Exchange Notes only at the direction of one or more
Participants to whose account with DTC interests in the Global Note are
credited and only in respect of such portion of the aggregate principal amount
of the Exchange Notes as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default (as defined
below) under the Notes, DTC reserves the right to exchange the Global Note for
Exchange Notes in certificated form, and to distribute such Exchange Notes to
its Participants.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Issuers
believe to be reliable, but the Issuers take no responsibility for the
accuracy thereof.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Notes among participants in DTC,
Euroclear and CEDEL, they are under no obligation to perform or to continue to
perform such procedures, and such procedures may be discontinued at any time.
None of the Issuers or the Trustee will have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes. A Global Note is
exchangeable for definitive Exchange Notes in registered certificated form if
(i) DTC (x) notifies the Issuers that it is unwilling or unable to continue as
Depository for the Global Note and the Issuers thereupon fail to appoint a
successor depository or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Issuers, at their option, notify the Trustee
in writing that they elect to cause the issuance of the Exchange Notes in
certificated form or (iii) there shall have occurred and be continuing a
Default or an Event of Default with respect to the Notes. In addition,
beneficial interests in a Global Note may be exchanged for certificated
Exchange Notes upon request but only upon at least 20 days prior written
notice given to the Trustee by or on behalf of DTC in accordance with its
customary procedures. In all cases, certificated Exchange Notes delivered in
exchange for any Global Note or
64
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures).
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of the Company, in
whole or in part, at any time on or after April 15, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
Holder of 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 (including Special 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 April 15 of the years indicated:
REDEMPTION
YEAR PRICE
---- ----------
2001.......................................................... 106.250%
2002.......................................................... 104.167%
2003.......................................................... 102.083%
2004 and thereafter........................................... 100.000%
((S)(S) 203, 1101, 1105 and 1107)
The Notes will be redeemable prior to April 15, 2001 only in the event that
on or before April 15, 1999 the Company receives net proceeds from the sale of
its Common Equity, in which case the Company may, at its option, use all or a
portion of any such net proceeds to redeem Notes in a principal amount of up
to an aggregate amount equal to 33 1/3% of the original principal amount of
the Notes, provided, however, that Notes in an aggregate principal amount
equal to at least $175 million remain outstanding after such redemption. Such
redemption must occur on a Redemption Date within 90 days of such sale and
upon not less than 30 nor more than 60 days' notice mailed to each Holder of
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 112.50% of their principal amount plus accrued and unpaid interest
(including Special Interest) to but excluding the Redemption Date (subject to
the right of Holders of record on the relevant Regular Record Date to receive
Special Interest due on an Interest Payment Date that is on or prior to the
Redemption Date).
If less than all the 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 Notes to be redeemed or any portion
thereof that is an integral multiple of $1,000. ((S) 1104)
MANDATORY REDEMPTION; SINKING FUND
Except as set forth under "Covenants--Limitation on Asset Sales" and
"Covenants--Change of Control" below, neither the Company nor Capital is
required to purchase or make mandatory redemption payments or sinking fund
payments with respect to the Notes.
SECURITY
The Indenture provides that upon the closing of the Offering, the Company
must purchase and pledge to the Trustee for the benefit of the holders of the
Notes the Pledged Securities in such amount as will be sufficient upon receipt
of scheduled interest and principal payments of such securities, in the
opinion of a nationally recognized firm of independent public accountants
selected by the Company, to provide for payment in full of the first six
scheduled interest payments (excluding Special Interest) due on the Notes. The
Company used approximately $117.7 million of the net proceeds of the Offering
to
65
acquire the Pledged Securities. The Pledged Securities have been pledged by
the Company to the Trustee for the benefit of the holders of Notes pursuant to
the Pledge Agreement and are held by the Trustee in the Pledge Account.
Pursuant to the Pledge Agreement, immediately prior to an interest payment
date on the Notes, the Company may either deposit with the Trustee from funds
otherwise available to the Company cash sufficient to pay the interest
scheduled to be paid on such date or the Company may direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due.
In the event that the Company exercises the former option, the Company may
thereafter direct the Trustee to release to the Company proceeds or Pledged
Securities from the Pledge Account in like amount. A failure by the Issuers to
pay interest on the Notes in a timely manner through April 15, 1999 will
constitute an immediate Event of Default under the Indenture, with no grace or
cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants selected by the Company, to
provide for payment in full of the first six scheduled interest payments
(excluding Special Interest) due on the Notes (or, in the event an interest
payment or payments have been made, an amount sufficient to provide for
payment in full of any interest payments remaining, up to and including the
sixth scheduled interest payment) the Trustee will be permitted to release to
the Company at the Company's request any such excess amount. The Notes are
secured by a first priority security interest in the Pledged Securities and in
the Pledge Account and, accordingly, the Pledged Securities and the Pledge
Account will also secure repayment of the principal amount of the Notes to the
extent of such security. At any time while the Pledge Agreement is in force
the Company may substitute Marketable Securities (as defined in the Indenture)
for the U.S. government securities originally pledged as collateral; provided,
however that the Marketable Securities so substituted must have a value
(measured at the date of substitution), in the opinion of a nationally
recognized firm of independent public accountants selected by the Company, at
least equal to 125% of the amount of any of the first six scheduled interest
payments on the Notes that are unpaid (or the pro rata portion of such
interest payments equal to the percentage of such interest payments to be
secured by such Marketable Securities) as of the date such Marketable
Securities are proposed to be substituted as security for the Company's
obligation under the Pledge Agreement.
Under the Pledge Agreement, assuming that the Issuers make the first six
scheduled interest payments on the Notes in a timely manner, all of the
Pledged Securities will have been released from the Pledge Account and
thereafter the Notes will be unsecured.
REGISTRATION COVENANT; EXCHANGE OFFER
The Issuers have entered into an Exchange and Registration Rights Agreement
(the "Registration Rights Agreement") pursuant to which the Issuers agree, for
the benefit of the Holders of the Senior Notes, (i) to file with the
Commission, within 30 days following the Closing, a registration statement
(the "Exchange Offer Registration Statement") under the Securities Act
relating to this Exchange Offer pursuant to which notes substantially
identical to the Senior Notes (except that such notes will not contain terms
with respect to the Special Interest payments described below or transfer
restrictions) (the "Exchange Notes") would be offered in exchange for the then
outstanding Senior Notes 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 Issuers have 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 Notes for all Senior Notes
validly tendered and not withdrawn before the expiration of the offer.
Under existing Commission interpretations, the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act, except that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange
Offer will
66
be subject to a prospectus delivery requirement with respect to resale of
those Exchange Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of any unsold allotment from the
original sale of the Notes) by delivery of the prospectus contained in the
Exchange Offer Registration Statement. Under the Registration Rights
Agreement, the Issuers are required to allow Participating Broker-Dealers and
other persons, if any, subject to similar prospectus delivery requirements to
use the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such Exchange Notes. The Exchange Offer
Registration Statement will be kept effective for a period ending on the
earlier of the 90th day after the Exchange Offer has been completed or such
time as such broker-dealers no longer own any Registrable Securities (as
defined in the Registration Rights Agreement). Each Holder of the Senior Notes
(other than certain specified Holders) who wishes to exchange such Senior
Notes for Exchange Notes in the Exchange Offer will be required to represent
that any Exchange Notes to be received by it will be acquired in the ordinary
course of its business, that at the time of the commencement of the Exchange
Offer it has no arrangement with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and that it
is not an Affiliate of the Issuers.
However, if on or before the date of consummation of the Exchange Offer the
existing Commission interpretations are changed such that the Exchange Notes
would not in general be freely transferable on such date, the Issuers will, in
lieu of effecting registration of Exchange Notes, use their reasonable best
efforts to cause a registration statement under the Securities Act relating to
a shelf registration of the Senior Notes for resale by Holders (the "Resale
Registration") to become effective and to remain effective for a period of up
to three years after the Closing. The Issuers will, in the event of the Resale
Registration, provide to the Holders of the Senior Notes copies of the
prospectus that is a part of the registration statement filed in connection
with the Resale Registration, notify such Holders when the Resale Registration
for the Senior Notes has become effective and take certain other actions as
are required to permit unrestricted resales of the Senior Notes. A Holder of
Senior Notes that sells such Senior Notes pursuant to the Resale Registration
generally would be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such a Holder (including
certain indemnification obligations).
Although the Issuers have filed the Exchange Offer Registration Statement,
there can be no assurance that such registration statement will become
effective. In the event that (i) the Exchange Offer Registration Statement
(or, if applicable, the Resale Registration) has not become effective within
120 days following the Closing, (ii) the Exchange Offer has not been
consummated within 30 business days after the effective date of the Exchange
Offer Registration Statement or (iii) any registration statement required by
the 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 (iii), a "Registration Default"), then interest will accrue (in
addition to the stated interest on the Senior Notes) at the rate of 0.25% per
annum on the principal amount of the Senior Notes, for the period from the
occurrence of the Registration Default until such time as no Registration
Default is in effect. Such additional interest (the "Special Interest") will
be payable in cash semiannually in arrears on each October 15 and April 15.
For each 90-day period that the Registration Default continues, the per annum
rate of such Special Interest will increase by an additional 0.25%, provided
that such rate shall in no event exceed 1.0% per annum in the aggregate.
Special Interest, if any, will be computed on the basis of a 365 or 366 day
year, as the case may be, and the number of days actually elapsed.
67
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
The Senior Notes and the Exchange Notes will be considered collectively to
be a single class for all purposes under the Note Indenture, including,
without limitation, waivers, amendments, redemptions and Offers to Purchase,
and for purposes of this Description of the Notes all references herein to
"Notes" shall be deemed to refer collectively to the Senior Notes and any
Exchange Notes, unless the context otherwise requires.
COVENANTS
The Indenture contains, among others, the following covenants:
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 Subsidiary of the Company or (y) the issuance (other than
directors' qualifying shares), sale, lease, transfer or other
68
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 outstanding at the date of the Indenture or Incurred
pursuant to the preceding paragraph or clause (ii) of this paragraph or the
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 Notes or Debt which is pari
passu to the Notes or debt which is subordinate in right of payment to the
Notes shall only be permitted if (A) in the case of any refinancing of the
Notes or Debt which is pari passu to the Notes, the refinancing Debt is
made pari passu to the Notes or subordinated to the Notes, and, in the case
of any refinancing of Debt which is subordinated to the Notes, the
refinancing Debt constitutes Subordinated Debt and (B) 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 an 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 under the Notes;
(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" below;
(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.
69
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. ((S) 1007)
Limitation on Debt and Preferred Stock of Restricted Subsidiaries
The Company may not permit any Restricted Subsidiary of the Company (other
than a Restricted Subsidiary that has fully and unconditionally Guaranteed the
Notes on an unsubordinated basis) to Incur or suffer to exist any Debt or
issue any Preferred Stock except:
(i) Debt or Preferred Stock outstanding on the date of the Indenture
after giving effect to the application of the proceeds of the Notes;
(ii) Debt Incurred or Preferred Stock issued to and held by the Company
or a Wholly-Owned Restricted Subsidiary of the Company (provided that such
Debt or Preferred Stock is at all times held by the Company or a Wholly-
Owned Restricted Subsidiary of the Company);
(iii) Debt Incurred or Preferred Stock issued by a Person prior to the
time (A) such Person became a Restricted Subsidiary of the Company, (B)
such Person merges into or consolidates with a Restricted Subsidiary of the
Company or (C) another Restricted Subsidiary of the Company merges into or
consolidates with such Person (in a transaction in which such Person
becomes a Restricted Subsidiary of the Company), which Debt or Preferred
Stock was not Incurred or issued in anticipation of such transaction and
was outstanding prior to such transaction;
(iv) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements;
(v) Debt or Preferred Stock of a Joint Venture;
(vi) Debt under 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
"Limitation on Consolidated Debt";
(vii) Debt consisting of Guarantees of the Notes;
(viii) Debt or Preferred Stock which is exchanged for, or the proceeds of
which are used to refinance, refund or redeem, any Debt or Preferred Stock
permitted to be outstanding pursuant to clauses (i) and (iii) hereof (or
any extension or renewal thereof) (for purposes hereof, a "refinancing"),
in an aggregate principal amount, in the case of Debt, or with an aggregate
liquidation preference, in the case of Preferred Stock, not to exceed the
aggregate principal amount of the Debt so refinanced or the aggregate
liquidation preference of the Preferred Stock so refinanced, plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt or Preferred Stock 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 and the Restricted Subsidiary incurred in connection therewith
and provided the Debt or Preferred Stock incurred or issued upon such
refinancing by its terms, or by the terms of any agreement or instrument
pursuant to which such Debt or Preferred Stock is Incurred or issued, (x)
does not provide for payments of principal or liquidation value at the
stated maturity of such Debt or Preferred Stock or by way of a sinking fund
applicable to such Debt or Preferred Stock or by way of any mandatory
redemption, defeasance, retirement or repurchase of such Debt or Preferred
Stock by the Company or any Restricted Subsidiary of 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
70
an event of default thereunder), in each case prior to the time the same
are required by the terms of the Debt or Preferred Stock being refinanced
and (y) does not permit redemption or other retirement (including pursuant
to an offer to purchase made by the Company or a Restricted Subsidiary of
the Company) of such Debt or Preferred Stock at the option of the holder
thereof prior to the stated maturity of the Debt or Preferred Stock being
refinanced, other than a redemption or other retirement at the option of
the holder of such Debt or Preferred Stock (including pursuant to an offer
to purchase made by the Company or a Restricted Subsidiary of the Company)
which is conditioned upon the change of control of the Company pursuant to
provisions substantially similar to those contained in the Indenture
described under "--Change of Control" or which is pursuant to provisions
substantially similar to those described under "--Limitation on Asset
Dispositions", and provided, further, that in the case of any exchange or
redemption of Preferred Stock of a Restricted Subsidiary of the Company,
such Preferred Stock may only be exchanged for or redeemed with Preferred
Stock of such Restricted Subsidiary; 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. ((S) 1008)
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 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 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 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 date of the Indenture 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 date of the Indenture 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
Investments in any Unrestricted Subsidiary 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 from such Unrestricted Subsidiary (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 Investments previously made by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary; provided, further, that the
Company or a Restricted Subsidiary of the Company may make any Restricted
Payment with the aggregate net proceeds
71
received after the date of the Indenture, including the fair value of property
other than cash (determined in good faith by the Managing Member, as
conclusively evidenced by a certificate of the Managing Member 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 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 date of the Indenture 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) the Company and its
Restricted Subsidiaries may refinance any Debt otherwise permitted by clause
(iv) of the second paragraph under "--Limitation on Consolidated Debt" above;
(iv) so long as no Event of Default shall have occurred and be continuing, and
so long as the Company is treated as a partnership for U.S. federal income tax
purposes, make distributions in respect of members' or partners' income tax
liability in an amount not to exceed the Tax Amount; and (v) the Company and
its Restricted Subsidiaries may 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 Indenture, such
Restricted Payment shall be deemed to have been made in compliance with the
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company financial statements affecting Consolidated Net Income for any period.
((S) 1009)
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 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 Issue Date; (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
"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
72
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 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)
any restriction 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 Indenture and the 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. ((S) 1010)
Limitation on Liens
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or hereafter acquired to secure any Debt without
making, or causing such Restricted Subsidiary to make, effective provision for
securing the Notes (x) equally and ratably with (or prior to) such Debt as to
such property for so long as such Debt will be so secured or (y) in the event
such Debt is Debt of the Company which is subordinate in right of payment to
the 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 existing on the
Issue Date and securing Debt outstanding on the Issue Date or securing the
Notes or Liens securing Debt Incurred pursuant to any Bank Credit Agreement or
Vendor Financing Facility (whether or not such Bank Credit Agreement or Vendor
Financing Facility was outstanding on the Issue Date); (ii) Liens securing
Debt in an amount which, together with the aggregate amount of Debt then
outstanding or available under the Bank Credit Agreement and the Vendor
Financing Facility (or under refinancings or amendments of such agreements),
does not exceed 1.5 times the Company's Consolidated Cash Flow Available for
Fixed Charges for the four full fiscal quarters preceding the Incurrence of
such Lien for which consolidated financial statements are available,
determined on a pro forma basis as if such Debt had been Incurred and the
proceeds thereof had been applied at the beginning of such four fiscal
quarters; (iii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary of the Company; (iv) Liens on real or personal property of the
Company or a Restricted Subsidiary of the Company 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 Indenture,
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 of 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); (v) Liens to secure
73
Acquired Debt, provided, however, that (a) such Lien attaches to the acquired
asset prior to the time of the acquisition of such asset and (b) such Lien
does not extend to or cover any other asset; (vi) Liens to secure Debt
Incurred to extend, renew, refinance or refund (or successive extensions,
renewals, refinancings or refundings), in whole or in part, Debt secured by
any Lien referred to in the foregoing clauses (i), (ii), (iv) and (v) 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 "--Limitation on Consolidated Debt"; (vii) Liens securing Debt not
otherwise permitted by the foregoing clauses (i) through (vi) in an amount not
to exceed 5% of the Company's Consolidated Tangible Assets determined as of
the most recent available quarterly or annual balance sheet; and (viii)
Permitted Liens. ((S) 1011)
Limitation on Sale and Leaseback Transactions
The Company may not, and may not permit any Restricted Subsidiary to, enter
into any Sale and Leaseback Transaction unless (i) the Company or such
Restricted Subsidiary would be entitled to Incur a Lien to secure Debt by
reason of the provisions described under "--Limitation on Liens" above, equal
in amount to the Attributable Value of the Sale and Leaseback Transaction
without equally and ratably securing the Notes; or (ii) the Sale and Leaseback
Transaction is treated as an Asset Disposition and all of the conditions of
the Indenture described under "--Limitation on Asset Dispositions" (including
the provisions concerning the application of Net Available Proceeds) are
satisfied with respect to such Sale and Leaseback Transaction, treating all of
the consideration received in such Sale and Leaseback Transaction in the same
manner as consideration received in respect of an Asset Disposition for
purposes of such covenant. ((S) 1012)
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
Managing Member in good faith and evidenced by a certificate of the Managing
Member 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 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, (2) second,
to the extent of remaining Net Available Proceeds, to make an Offer to
Purchase outstanding Notes at 100% of their principal amount plus accrued
interest (including Special 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 Notes at a price no greater than 100% of the principal
amount thereof plus accrued interest (including Special 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
Indenture. ((S)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".
74
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; (iv) constituting the issuance of Preferred Stock
permitted by the provisions described under "--Limitation on Debt and
Preferred Stock of Restricted Subsidiaries" above; and (v) 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. ((S) 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 Managing Member 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. ((S) 1015)
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 Notes at a purchase
price equal to 101% of their principal amount plus accrued and unpaid interest
(including Special 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
75
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 Eagle River nor
any Affiliate of Mr. Craig O. McCaw or Eagle River shall be a Managing Member
of the Company. ((S) 1016)
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
Restrictions in the 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 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 Indenture may not afford the
Holders of 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 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 Notes upon a Change of Control would constitute an
Event of Default.
In addition, there may be restrictions contained in instruments evidencing
Indebtedness incurred by the Company or its Restricted Subsidiaries permitted
under the Indenture which restrict or prohibit the ability of the Company to
effect any repurchase required under the Indenture in connection with a Change
of Control.
In the event that the Company makes an Offer to Purchase the 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.
Provision of Financial Information
The Company has agreed that, for so long as any Notes remain outstanding, it
will furnish to the holders of the 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,
prior to the effectiveness of the Exchange Offer Registration Statement, the
Company will file with the Trustee and furnish to the holders of the Notes the
quarterly and annual financial statements and related notes and an
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations in the format that would be required to be included in
the Company's periodic reports filed with the Commission if the Company were
required to file such reports with the Commission. The Company will furnish
such information to the Trustee and the holders of the Notes within 15 days
after the date on which the Company would have been required to file the same
with the Commission. Following the effectiveness of the Exchange Offer
Registration Statement (or earlier if the Company becomes obligated to file
reports with the Commission), the Company will file with the
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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
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. ((S) 1017)
Limitations on Conduct of Business of Capital
Capital will not hold any operating assets or other properties or conduct
any business other than to serve as an Issuer and co-obligor with respect to
the Notes and will not own any Capital Stock of any Person to the extent that
such ownership would cause such Person to be deemed a Subsidiary of Capital.
((S) 1018)
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 obligations under the
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) if,
as a result of any such transaction, property or assets of the Company would
become subject to a Lien prohibited by the provisions of the Indenture
described under "Covenants--Limitation on Liens" above, the Company or the
successor entity to the Company shall have secured the Notes as required by
said covenant; (5) the Issuers have delivered to the Trustee an Opinion of
Counsel to the effect that the holders of the Notes will not recognize gain or
loss for Federal income tax purposes as a result of such transaction; and (6)
certain other conditions are met. ((S) 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 Notes and the 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 Indenture and the Notes; provided
that solely for the purpose of calculating amounts described in clause (3)
under "Covenant--Limitations on Restricted Payments", any such
77
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
((S)801)
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.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. ((S)101)
"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 as permitted by the
provisions of the Indenture described above under the Caption "--Limitation on
Debt and Preferred Stock of Restricted Subsidiaries") or pursuant to a
transaction in compliance with the covenant described under "--Mergers,
Consolidations and Certain Sales of Assets" above, (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 "--
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.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount
of rent required to be paid by such Person under such lease during the initial
term thereof as determined in accordance with generally accepted accounting
principles,
78
discounted from the last date of such initial term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to
be paid under any such lease for any such period shall be the aggregate amount
of rent payable by the lessee with respect to such period after excluding
amounts required to be paid on account of insurance, taxes, assessments,
utility, operating and labor costs and similar charges. In the case of any
lease which is terminable by the lessee upon the payment of penalty, such net
amount shall also include the lesser of the amount of such penalty (in which
case no rent shall be considered as required to be paid under such lease
subsequent to the first date upon which it may be so terminated) or the rent
which would otherwise be required to be paid if such lease is not so
terminated. "Attributable Value" means, as to a Capital Lease Obligation, the
principal amount thereof.
"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.
"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.
79
"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 under "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 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 Indenture to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions
80
thereto) or otherwise resulting from the acquisition of control of the Company
by another Person shall not be given effect to.
"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 such Person, any
Restricted Subsidiary of such Person or the holder thereof, in whole or in
part, on or prior to the final Stated Maturity of the Notes; 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
Notes 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 to the Notes
contained in the covenant described under "Covenants--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 Notes as are required to be repurchased pursuant
to the covenant described under "Covenants--Change of Control".
"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.
81
"Event of Default" has the meaning set forth under "Events of Default"
below.
"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 one year 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 permitted under
clause (iv) of the second paragraph of the "Limitation on Liens" covenant
shall not be deemed to constitute a Guarantee by such Restricted Subsidiary of
any Purchase Money Debt of the Company secured thereby.
"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", "Incurable" 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 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, 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
82
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 Notes are first authenticated and
delivered under the Indenture.
"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%.
"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).
"Managing Member" means Eagle River, NEXTLINK, Inc. or their respective
successors as Managing Members under the Company's Limited Liability Company
Agreement.
"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 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
83
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 a Managing Member, in its reasonable good faith judgment
evidenced by a certificate of such Managing Member 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 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 Note Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). 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 Notes within five Business Days after the Expiration
Date. The Company shall notify the Trustee at least 15 Business Days (or such
shorter period as is acceptable to the Trustee) 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 Trustee 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 Trustee
pursuant to the Indenture (which requirements may be satisfied by delivery of
such 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 requiring the Issuers to make the Offer to Purchase), (iii) if
applicable, appropriate pro forma financial information concerning the Offer
to Purchase and the events requiring the Issuers to make 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 Notes pursuant to the Offer to Purchase. The
Offer shall also state:
a. the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
b. the Expiration Date and the Purchase Date;
c. the aggregate principal amount of the Outstanding Notes 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 Indenture provision requiring the Offer to Purchase) (the "Purchase
Amount");
d. the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant to
the Indenture) (the "Purchase Price");
e. that the holder may tender all or any portion of the Notes registered
in the name of such holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal amount;
f. the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
84
g. that interest (including Special Interest) on any Note 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 Note being accepted for payment pursuant to the Offer to
Purchase and that interest (including Special Interest) thereon shall cease
to accrue on and after the Purchase Date;
i. that each holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee 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 Notes
tendered if the Company (or their Paying Agent) receive, 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 principal
amount of the Note the holder tendered, the certificate number of the Note
the holder tendered and a statement that such holder is withdrawing all or
a portion of his tender;
k. that (a) if Notes in an aggregate principal 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 Notes and (b) if
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 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 Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
l. that in the case of any holder whose Note is purchased only in part,
the Company shall execute, and the Trustee shall authenticate and deliver
to the holder of such Note without service charge, a new Note or Notes, of
any authorized denomination as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the 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 "Covenants--Limitation on
Asset Dispositions" above.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a
85
reserve or other appropriate provision, if any, as shall be required in
conformity with generally accepted accounting principles shall have been made
therefor; (b) other Liens incidental to the conduct of the Company's and its
Restricted Subsidiaries' business or the ownership of its property and assets
not securing any Debt, and which do not in the aggregate materially detract
from the value of the Company's and its Restricted Subsidiaries' property or
assets when taken as a whole, or materially impair the use thereof in the
operation of its business; (c) Liens with respect to assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to the Company to secure Debt
owing to the Company; (d) pledges and deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of statutory obligations (including to secure government
contracts); (e) deposits made to secure the performance of tenders, bids,
leases, and other obligations of like nature incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money); (f)
zoning restrictions, servitudes, easements, rights-of-way, restrictions and
other similar charges or encumbrances incurred in the ordinary course of
business which, in the aggregate, do not materially detract from the value of
the property subject thereto or interfere with the ordinary conduct of the
business of the Company or its Restricted Subsidiaries; (g) Liens arising out
of judgments or awards against the Company or any Restricted Subsidiary with
respect to which the Company or such Restricted Subsidiary is prosecuting an
appeal or proceeding for review and the Company or such Restricted Subsidiary
is maintaining adequate reserves in accordance with generally accepted
accounting principles; (h) any interest or title of a lessor in the property
subject to any lease other than a Capital Lease; and (i) any statutory
warehousemen's, materialmen's or other similar Liens for sums not then due and
payable (or which, if due and payable, are being contested in good faith and
with respect to which adequate reserves are being maintained to the extent
required by generally accepted accounting principles).
"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.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the net proceeds from the Offering.
"Pledge Agreement" means the Collateral Pledge and Security Agreement, dated
as of the date of the Indenture, by and between the Trustee and the Company,
governing the disbursement of funds from the Pledge Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from the Offering, which shall initially consist
of Government Securities, to be deposited in the Pledge Account.
"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.
"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
86
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.
"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 the Indenture, unless such Subsidiary is an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any person
to whom funds have been or are to be advanced by such lender or investor on
the security of such property or asset. The stated maturity of such
arrangement shall be the date of the last payment of rent or any other amount
due under such arrangement prior to the first date on which such arrangement
may be terminated by the lessee without payment of a penalty.
"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.
"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 Notes 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 Notes 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 Notes, upon
notice by 25% or more in principal amount of the Notes to the Trustee, the
Trustee shall have the right to give notice to the Company and 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 Notes 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
87
(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 Notes 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
Notes, 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 "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 Notes
required to be repurchased by the Company pursuant to the provisions described
under "Covenants--Change of Control").
"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.
"Tax Amount" means for each fiscal year of any Person (a) the aggregate
amount of income or gain of such Person over the aggregate amount of loss,
deduction or expense of such Person multiplied by (b) the maximum marginal
federal and applicable state income tax rates.
"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 Managing Member
of the Company, which determination shall be conclusive.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company designated
as such by the Managing Member 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 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
88
maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Managing
Member 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 "Covenants--Limitation on Consolidated Debt" above and
provided, further, 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 "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 Managing Member 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
"Covenants--Limitation on Consolidated Debt" above.
"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.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due; (b) failure to
pay any interest (including Special Interest) on any Note when due, as to any
interest payment date falling on or prior to April 15, 1999, and any such
failure continued for 30 days as to any interest payment date thereafter; (c)
default in the payment of principal and interest (including Special Interest)
on 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 Issuers under the Indenture or the Notes
continued for 60 days after written notice to the Issuers by the Trustee or
Holders of at least 25% in aggregate principal amount of Outstanding 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 $10 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 Issuers or
any Significant Subsidiary. ((S)501) Subject to the provisions of the
Indenture
89
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 Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. ((S)603) Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the Outstanding 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. ((S)512)
If an Event of Default (other than an Event of Default described in Clause
(h) above with respect to the Issuers) shall occur and be continuing, either
the Trustee or the Holders of at least 25% in aggregate principal amount of
the Outstanding Notes may accelerate the maturity of all 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 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 Indenture.
If an Event of Default specified in Clause (h) above occurs with respect to
the Issuers, the Outstanding Notes will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder. ((S)502) For information as to waiver of defaults, see "Modification
and Waiver".
No Holder of any Note will have any right to institute any proceeding with
respect to the 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 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 Notes a
direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days. ((S)507) However, such limitations do not
apply to a suit instituted by a Holder of a Note for enforcement of payment of
the principal of and premium, if any, or interest (including Special Interest)
on such Note on or after the respective due dates expressed in such Note.
((S)508)
The 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 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 (including Special 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.
((S)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
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. ((S)1019)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding Notes
(except as to (i) rights of registration of transfer and exchange and the
Issuers' right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders
to receive payment of principal of and premium, if any, and interest
(including Special Interest) on the Notes, (iv)
90
rights, obligations and immunities of the Trustee under the Indenture and (v)
rights of the Holders of the Notes as beneficiaries of the Indenture with
respect to any property deposited with the Trustee payable to all or any of
them), if (x) the Issuers will have paid or caused to be paid the principal of
and premium, if any, and interest (including Special Interest) on the Notes as
and when the same will have become due and payable or (y) all outstanding
Notes (except lost, stolen or destroyed Notes which have been replaced or
paid) have been delivered to the Trustee for cancellation. ((S) 401)
DEFEASANCE
The Indenture provides that, at the option of the Issuers, (a) if
applicable, the Issuers will be discharged from any and all obligations in
respect of the Outstanding Notes or (b) if applicable, the Issuers may omit to
comply with certain restrictive covenants, and that such omission shall not be
deemed to be an Event of Default under the Indenture and the Notes, 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 Notes on the Stated
Maturity. With respect to clause (b), the obligations under the 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 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 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 Issuers have
delivered to the Trustee an Opinion of Counsel to the effect that the holders
of the 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) the
Issuers have 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 (iv) certain other
customary conditions precedent are satisfied. ((S) 1201)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Issuers and
the Trustee with the consent of the holders of a majority in aggregate
principal amount of the Outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
Outstanding Note affected thereby, (a) change the due date of the principal
of, or any installment of interest on, any Note, (b) reduce the principal
amount of, or the premium or interest on, any Note, (c) change the place or
currency of payment of principal of, or premium or interest on, any Note, (d)
impair the right to institute suit for the enforcement of any payment on or
with respect to any Note, (e) reduce the above-stated percentage of
Outstanding Notes necessary to modify or amend the Indenture, (f) reduce the
percentage of aggregate principal amount of Outstanding Notes necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, or (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 Notes required under the "Limitation on
Asset Dispositions" and the "Change of Control" covenants contained in the
Indenture in a manner materially adverse to the Holders thereof. ((S) 902)
91
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Issuers and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such holder, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to effect the
Exchange Offer. ((S)901)
The holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. ((S)1019) Subject to
certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the Outstanding Notes, on behalf of
all holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest (including Special
Interest) or a default arising from failure to purchase any Note tendered
pursuant to an Offer to Purchase. ((S)513)
NO PERSONAL LIABILITY OF MEMBERS, MANAGERS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No member, manager, director, officer, employee, incorporator or stockholder
of either Issuer, as such, shall have any liability for any obligations of
either Issuer under the Notes, the Indenture or the Registration Rights
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the 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 Indenture and the Notes will be governed by the laws of the State of New
York.
THE TRUSTEE
The Trustee's current address is 114 West 47th Street, New York, New York
10036.
The 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 Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it under the 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. ((S)601)
The 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 either Issuer, 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 Issuers or any Affiliate, provided, however, that if it
acquires any conflicting interest (as defined in the Indenture or in the Trust
Indenture Act), it must eliminate such conflict or resign. ((S)(S)608, 613)
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Issuers believe that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Senior Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any
92
holder which is (i) an Affiliate of the Issuers, (ii) a broker-dealer who
acquired Senior Notes directly from the Issuers or (iii) a broker-dealer who
acquired Senior Notes 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 Exchange Notes 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
Exchange Notes; provided that Participating Broker-Dealers receiving Exchange
Notes in the Exchange Offer will be subject to a prospectus delivery
requirement with respect to resales of such Exchange Notes. 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 Senior Notes
to the Purchasers) with the prospectus contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Issuers have 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 Exchange Notes. The Issuers
have 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 Senior Notes who wishes to exchange its Senior Notes for
Exchange Notes 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 Exchange Notes for its own account in exchange
for Senior Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that
it will deliver a prospectus in connection with any resale by it of such
Exchange Notes.
The Issuers will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or 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 Exchange Notes.
Any broker-dealer that resells Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Issuers have 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 Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in
the Registration Rights Agreement.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Issuers 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,
Seattle, Washington.
93
EXPERTS
The audited consolidated financial statements of the Company, Capital, Sound
Response Corporation and Tel-West Central Services, Inc. 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.
94
INDEX TO FINANCIAL STATEMENTS
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Consolidated Statement of Operations For the Year Ended
December 31, 1995...................................................... F-4
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1996 and December 31, 1995..... F-5
Consolidated Statements of Operations For the Three Months Ended March
31, 1996 and 1995...................................................... F-6
Consolidated Statements of Changes in Members' Equity For the Three
Months Ended March 31, 1996............................................ F-7
Consolidated Statements of Cash Flows For the Three Months Ended March
31, 1996 and 1995...................................................... F-8
Notes to Consolidated Financial Statements.............................. F-9
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-10
Consolidated Balance Sheets at December 31, 1995 and 1994............... F-11
Consolidated Statements of Operations For the Year Ended December 31,
1995 and From Inception (September 16, 1994) to December 31, 1994 ..... F-12
Consolidated Statements of Changes in Members' Equity For the Year Ended
December 31, 1995 and From Inception (September 16, 1994) to December
31, 1994............................................................... F-13
Consolidated Statements of Cash Flows For the Year Ended December 31,
1995 and From Inception (September 16, 1994) to December 31, 1994...... F-14
Supplemental Schedule of Noncash Financing and Investing Activities..... F-15
Notes to Consolidated Financial Statements.............................. F-16
NEXTLINK CAPITAL, INC.
Report of Independent Public Accountants................................ F-23
Balance Sheet at March 31, 1996......................................... F-24
Note to Balance Sheet................................................... F-25
SOUND RESPONSE CORPORATION
Report of Independent Public Accountants................................ F-26
Balance Sheets at August 31, 1995, December 31, 1994 and December 31,
1993................................................................... F-27
Statements of Operations For the Eight Months Ended August 31, 1995 and
For the Years Ended December 31, 1994 and 1993......................... F-28
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-29
Statements of Cash Flows For the Eight Months Ended August 31, 1995 and
For the Years Ended December 31, 1994 and 1993......................... F-30
Notes to Financial Statements........................................... F-31
F-1
TEL-WEST CENTRAL SERVICES, INC.
Report of Independent Public Accountants................................ F-34
Balance Sheets at March 31, 1995 and September 30, 1994 and 1993........ F-35
Statements of Operations For the Six Months Ended March 31, 1995 and For
the Years Ended September 30, 1994 and 1993............................ F-36
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-37
Statements of Cash Flows For the Six Months Ended March 31, 1995 and For
the Years Ended September 30, 1994 and 1993............................ F-38
Notes to Financial Statements........................................... F-39
CITY SIGNAL, INC., TENNESSEE OPERATIONS
Report of Independent Public Accountants................................ F-43
Summary of Revenue and Direct Operating Expenses For the Years Ended De-
cember 31, 1994 and 1993............................................... F-44
Notes to the Summary of Revenue and Direct Operating Expenses........... F-45
F-2
NEXTLINK COMMUNICATIONS, L.L.C.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma statement of operations gives effect to
(i) 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 and (ii) a recapitalization of the Company and
four of the Company's operating subsidiaries, as a result of which each of
these subsidiaries is 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 pro forma statement of
operations is based upon the audited historical financial statements of the
Company and estimates and assumptions set forth below and in the notes to the
pro forma financial information.
F-3
NETLINK COMMUNICATIONS, L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
($ IN THOUSANDS)
HISTORICAL
-------------------------------------- PRO FORMA
NEXTLINK WASHINGTON(1) INTERACTIVE(1) ADJUSTMENTS PRO FORMA(5)
-------- ------------- -------------- ----------- ------------
Revenue................. $ 7,552 $1,325 $11,448 $(4,197)(2) $ 16,128
-------- ------ ------- ------- --------
Cost and expenses:
Operating............. 6,618 1,401 5,028 (2,629)(2) 10,418
General and
administrative....... 9,938 671 3,921 (2,259)(2) 12,271
Depreciation and
amortization......... 3,458 18 418 (495)(2)
912 (3) 4,311
-------- ------ ------- ------- --------
20,014 2,090 9,367 (4,471) 27,000
Income (loss) from
operations............. (12,462) (765) 2,081 274 (10,872)
-------- ------ ------- ------- --------
Interest expense........ 499 21 24 (17)(2) 527
-------- ------ ------- ------- --------
Income (loss) before
minority interest...... (12,961) (786) 2,057 291 (11,399)
Minority interest:
Loss of consolidated
subsidiaries 230 8 (21) (103)(4) 114
-------- ------ ------- ------- --------
Net income (loss)....... $(12,731) $(778) $ 2,036 $ 188 $(11,285)
======== ====== ======= ======= ========
- --------
(1) Represents unaudited operating results for the year ended December 31,
1995.
(2) Represents elimination of revenues and expense of NEXTLINK Washington and
NEXTLINK Interactive after acquisition of these companies.
(3) Amortization of NEXTLINK Washington and NEXTLINK Interactive intangible
assets, primarily goodwill.
(4) Represents the effect of the Recapitalization as if this transaction had
occurred on January 1, 1995.
(5) The pro forma 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.
F-4
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 15,249,777 $ 1,349,557
Accounts receivable, net............................ 5,232,782 3,563,016
Other............................................... 851,217 745,747
------------ -----------
Total current assets.............................. 21,333,776 5,658,320
PROPERTY AND EQUIPMENT, net........................... 53,078,511 29,664,095
GOODWILL, net......................................... 23,227,987 12,137,205
CUSTOMER CONTRACTS, net............................... 1,891,923 2,363,528
OTHER ASSETS, net..................................... 4,781,538 3,637,480
------------ -----------
$104,313,735 $53,460,628
============ ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft...................................... $ -- $ 1,373,124
Accounts payable.................................... 14,174,543 4,314,490
Accrued expenses.................................... 2,510,350 1,266,383
Payable to affiliates............................... 34,373,597 4,937,332
------------ -----------
Total current liabilities......................... 51,058,490 11,891,329
LONG-TERM LIABILITIES:
Capital lease obligation............................ 5,324,677 --
Other............................................... 2,059,855 1,964,227
------------ -----------
Total liabilities................................. 58,443,022 13,855,556
MINORITY INTEREST..................................... 540,082 2,886,179
MEMBERS' EQUITY....................................... 45,330,631 36,718,893
------------ -----------
$104,313,735 $53,460,628
============ ===========
See accompanying notes to unaudited consolidated interim financial statements.
F-5
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1996 1995
------------ -----------
REVENUE........................................ $ 5,369,630 $399,135
------------ -----------
COST AND EXPENSES:
Operating.................................... 4,696,143 638,245
Selling, general and administrative.......... 5,513,498 753,273
Depreciation................................. 1,077,000 130,000
Amortization of intangible assets............ 752,495 482,008
------------ -----------
12,039,136 2,003,526
------------ -----------
LOSS FROM OPERATIONS........................... (6,669,506) (1,604,391)
INTEREST EXPENSE, net.......................... 495,820 --
------------ -----------
LOSS BEFORE MINORITY INTEREST.................. (7,165,326) (1,604,391)
MINORITY INTEREST IN LOSS OF CONSOLIDATED
SUBSIDIARIES.................................. 49,057 43,260
------------ -----------
NET LOSS....................................... $ (7,116,269) $(1,561,131)
============ ===========
See accompanying notes to unaudited consolidated interim financial statements.
F-6
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
UNITS AMOUNT
---------- -----------
BALANCE, DECEMBER 31, 1995.............................. 49,798,659 $36,718,893
Contributed capital................................... 9,502,021 9,502,021
Issuance of units for NEXTLINK Ohio acquisition....... 651,933 651,933
Impact of recapitalization and merger of affiliates... 3,841,207 5,574,053
Net loss.............................................. -- (7,116,269)
---------- -----------
BALANCE, MARCH 31, 1996................................. 63,793,820 $45,330,631
========== ===========
See accompanying notes to unaudited consolidated interim financial statements.
F-7
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ------------
OPERATING ACTIVITIES:
Net loss......................................... $ (7,116,269) $ (1,561,131)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by
(used in) operating activities:
Depreciation and amortization.................. 1,829,495 612,008
Minority interest in loss of consolidated sub-
sidiaries..................................... (49,057) (43,260)
Changes in operating assets and liabilities:
Accounts receivable, net..................... (1,669,767) (405,646)
Other current assets......................... (105,470) --
Other assets................................. (1,086,827) (1,118,385)
Accounts payable............................. 1,896,347 821,317
Accrued expenses............................. 334,049 1,022,659
Other noncurrent liabilities................. -- --
------------ ------------
1,148,770 888,693
------------ ------------
Net cash used in operating activities...... (5,967,499) (672,438)
------------ ------------
INVESTING ACTIVITIES:
Purchase or acquisition of:
NEXTLINK Ohio, L.L.C. ......................... (9,598,000) --
NEXTLINK Tennessee, L.L.C. .................... -- (11,389,777)
Property and equipment......................... (7,790,535) (793,188)
------------ ------------
Net cash used in investing activities...... (17,388,535) (12,182,965)
------------ ------------
FINANCING ACTIVITIES:
Capital contributions............................ 9,871,607 12,882,742
Proceeds from payable to affiliates.............. 28,531,265
Bank overdraft................................... (1,373,124)
Other noncurrent liabilities..................... 226,506 --
------------ ------------
Net cash provided by financing activities.. 37,256,254 12,882,742
------------ ------------
NET INCREASE IN CASH............................... 13,900,220 27,339
CASH, beginning of year............................ 1,349,557 25,229
------------ ------------
CASH, end of period................................ $ 15,249,777 $ 52,568
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for interest......... $ 256,011 $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
In the three months ended March 31, 1996, the Company recognized $2,907,428
of goodwill and additional members' equity relating to a recapitalization and
merger of companies holding minority equity interests in the subsidiaries, who
exchanged these interest for membership units of the Company.
In addition, the Company accrued $905,000 related to a tax settlement to
certain members in connection with the NEXTLINK Interactive acquisition. This
resulted in an increase in goodwill and reduced the cash received from the
acquisition.
See accompanying notes to unaudited consolidated interim financial statements.
F-8
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION:
The financial statements contained herein have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
unaudited condensed consolidated statements should be read in connection with
the audited consolidated financial statements and footnotes as of December 31,
1995.
2. NEW MARKETS
UTAH. In March 1996, the Company admitted a minority member to its
subsidiary conducting the Company's operations in Utah. This minority member
will provide access to its right-of-way, franchises and other valuable
services in exchange for a 10% interest in the subsidiary. The Company plans
to commence the construction of a downtown fiber-optic ring in Salt Lake City
in the second quarter of 1996.
LAS VEGAS. In April 1996, the Company became a 40% member in, and manager
of, a joint venture that will provide local telecommunication services in Las
Vegas. NEXTLINK Nevada which will be licensed by the Company to operate under
the NEXTLINK trade name.
The joint venture currently provides competitive access services over a
fiber-optic network covering over 200 route miles throughout Las Vegas.
Through a newly formed subsidiary, NEXTLINK Management Services, LLC, the
Company will provide strategic planning and management of the business for a
ten year period. In order to expand the current competitive access business
and begin offering local exchange service, the Company committed to fund $8
million for future construction and development of the network, including a
NorTel DMS-500 switch over the next three years. The investment in this joint
venture will be accounted for under the equity method and the initial carrying
value of the investment is $1 million.
3. FINANCING
On April 25, 1996, the Company executed a purchase agreement pursuant to
which investors committed to purchase $350 million of 12.5% of Senior Notes
due April 15, 2006 (the "Notes"), with interest due semi-annually. The Company
used $117.7 million of the proceeds to purchase U.S. government securities,
representing funds sufficient to provide for payment in full of interest on
the Notes through April 15, 1999 and $32.2 million to repay advances and
accrued interest from Eagle River. The Company will use the remaining proceeds
(net of transactions costs) to (i) expand existing networks, (ii) acquire new
networks or other complementary businesses, (iii) build networks in new
markets, and (iv) fund negative operating cash flow.
In May 1996 the Company formed an unrestricted subsidiary, capitalized with
$5.0 million in cash, which will be used for the purpose of making future
investments as are permitted for unrestricted subsidiaries under the Indenture
related to the Notes.
During the first quarter of 1996, the Company assumed capital lease
obligations of $6.1 million for switches and equipment in conjunction with
acquisition of assets in Ohio. The lease expires in November 2000.
During the first quarter of 1996, the Company has been principally funded by
its majority member through advances. These advances bear interest at prime
plus 2% and are due the earlier of July 1, 1996 or the date upon which the
Company receives the proceeds of a debt financing. On April 26, 1996, advances
and accrued interest totaling $32.2 million were repaid to Eagle River.
F-9
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, 1995 and 1994, and the related consolidated
statements of operations, changes in members' equity and cash flows for the
year ended December 31, 1995 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, 1995 and 1994, and the results of
their operations and their cash flows for the year ended December 31, 1995 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 23, 1996
F-10
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
----------- --------
ASSETS
CURRENT ASSETS:
Cash................................................... $ 1,349,557 $ 25,229
Accounts receivable.................................... 3,563,016 --
Other.................................................. 745,747 --
----------- --------
Total current assets................................. 5,658,320 25,229
PROPERTY AND EQUIPMENT, net.............................. 29,664,095 133,672
GOODWILL, net of accumulated amortization (1995,
$366,906)............................................... 12,137,205 --
CUSTOMER CONTRACTS, net of accumulated amortization
(1995, $1,736,472)...................................... 2,363,528 --
OTHER ASSETS............................................. 3,637,480 531,230
----------- --------
$53,460,628 $690,131
=========== ========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft......................................... $ 1,373,124 $ --
Accounts payable....................................... 4,314,490 --
Accrued expenses....................................... 1,266,383 11,171
Payable to affiliates.................................. 4,937,332 --
----------- --------
Total current liabilities............................ 11,891,329 11,171
OTHER NONCURRENT LIABILITIES............................. 1,964,227 --
----------- --------
Total liabilities.................................... 13,855,556 11,171
COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTEREST........................................ 2,886,179 6,432
MEMBERS' EQUITY.......................................... 36,718,893 672,528
----------- --------
$53,460,628 $690,131
=========== ========
The accompanying notes are an integral part of these balance sheets.
F-11
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
1995 1994
------------ ---------
REVENUE.............................................. $ 7,551,726 $ --
------------ ---------
COST AND EXPENSES:
Operating.......................................... 6,617,505 106,594
Selling, general and administrative................ 9,938,153 231,727
Depreciation....................................... 1,125,164 6,543
Amortization of intangible assets.................. 2,333,552 7,050
------------ ---------
20,014,374 351,914
------------ ---------
LOSS FROM OPERATIONS................................. (12,462,648) (351,914)
INTEREST EXPENSE..................................... 498,536 --
------------ ---------
LOSS BEFORE MINORITY INTEREST........................ (12,961,184) (351,914)
MINORITY INTEREST IN LOSS OF CONSOLIDATED
SUBSIDIARIES........................................ 230,195 3,137
------------ ---------
NET LOSS............................................. $(12,730,989) $(348,777)
============ =========
The accompanying notes are an integral part of these financial statements.
F-12
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
UNITS AMOUNT
---------- ------------
BALANCE, INCEPTION (SEPTEMBER 16, 1994): -- $ --
Contributed capital................................. 1,021,305 1,021,305
Net loss............................................ -- (348,777)
---------- ------------
BALANCE, DECEMBER 31, 1994............................ 1,021,305 672,528
Contributed capital................................. 44,365,413 44,365,413
Issuance of units for NEXTLINK Interactive
acquisition........................................ 4,411,941 4,411,941
Net loss............................................ -- (12,730,989)
---------- ------------
BALANCE, DECEMBER 31, 1995............................ 49,798,659 $ 36,718,893
========== ============
The accompanying notes are an integral part of these financial statements.
F-13
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994
1995 1994
------------ ---------
OPERATING ACTIVITIES:
Net loss............................................ $(12,730,989) $(348,777)
------------ ---------
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization .................... 3,458,716 13,593
Minority interest in loss of consolidated
subsidiaries..................................... (230,195) (3,137)
Changes in assets and liabilities, net of effects
from acquistions:
Accounts receivable............................. (2,528,854) --
Other current assets............................ (638,683) --
Other assets.................................... (500,646) (78,555)
Accounts payable................................ 2,162,999 --
Accrued expenses................................ 1,212,221 11,170
Other noncurrent liabilities.................... 375,000 --
------------ ---------
3,310,558 (56,929)
------------ ---------
Net cash used in operating activities......... (9,420,431) (405,706)
------------ ---------
INVESTING ACTIVITIES:
Purchase or acquisition of--
NEXTLINK Pennsylvania L.P......................... -- (459,726)
NEXTLINK Tennessee, L.L.C......................... (11,389,777) --
NEXTLINK Washington, L.L.C. (excluding cash
acquired)........................................ (952,628) --
NEXTLINK Solutions (excluding cash acquired)...... (617,130) --
NEXTLINK Interactive (excluding cash acquired).... (4,679,262) --
Property and equipment............................ (17,778,331) (140,214)
------------ ---------
Net cash used in investing activities......... (35,417,128) (599,940)
------------ ---------
FINANCING ACTIVITIES:
Capital contributions............................... 37,091,495 1,021,305
Proceeds from payable to affiliates................. 7,457,491 --
Bank overdraft...................................... 1,373,124 --
Other noncurrent liabilities........................ 239,777 9,570
------------ ---------
Net cash provided by financing activities..... 46,161,887 1,030,875
------------ ---------
NET INCREASE IN CASH.................................. 1,324,328 25,229
CASH, beginning of year............................... 25,229 --
------------ ---------
CASH, end of year..................................... $ 1,349,557 $ 25,229
============ =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for interest.............. $ 16,372 $ --
Conversion to equity of payables to affiliates...... 7,273,918 --
The accompanying notes are an integral part of these financial statements.
F-14
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
In 1995, the Company purchased certain assets of various companies through
the subsidiaries named below. In connection with these acquisitions, equity
units of the Company issued and liabilities assumed are as follows:
NEXTLINK NEXTLINK NEXTLINK
TENNESSEE, L.L.C. WASHINGTON, L.L.C. INTERACTIVE
----------------- ------------------ -----------
Fair value of tangible assets
acquired.................... $ 8,677,098 $ 565,898 $ 2,256,915
Fair value of intangible
assets acquired............. 8,813,882 585,327 9,936,121
----------- ---------- -----------
$17,490,980 $1,151,225 $12,193,036
=========== ========== ===========
Cash paid for assets......... $11,389,777 $ 952,628 $ 4,679,262
Deferred purchase
consideration............... -- -- 3,000,000
Equity units issued:
Company units issued....... -- -- 4,411,943
Subsidiary units and
options issued............ 2,847,444 -- --
Liabilities assumed.......... 3,253,759 198,597 101,831
----------- ---------- -----------
$17,490,980 $1,151,225 $12,193,036
=========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-15
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Principles of Consolidation
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 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.
The Company's consolidated financial statements include 100% of the assets,
liabilities and results of operations of subsidiaries (both limited liability
companies and a partnership) in which the Company has a controlling interest
of greater than 50%. The ownership interests of the other members or partners
is reflected as minority interests. All significant intercompany accounts and
transactions have been eliminated.
Limited Liability Company Agreement
The Company has been organized and operated under a limited liability
company agreement. The agreement provides, among other things, specific
allocation of net profits and losses to each member, allocations and
distributions to members, and a preferred return to members on their
respective cash contributions invested in the Company, as well as a return of
their respective investments in the Company. Each subsidiary company also has
an obligation to pay a preferred return on the cash contributions invested in
such subsidiary company by the Company or minority interest.
The Company's limited liability company agreement provides that the Company
shall remain in existence until December 31, 2025, unless it is earlier
dissolved in accordance with the terms of the agreement.
Revenue Recognition
The Company recognizes revenue on telecommunications and enhanced
communications services in the period that service is provided.
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation are
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...................................... 5-7 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 leases
Intangible Assets
Intangible assets primarily represent costs allocated in acquisition to
customer contracts, software and related intellectual property and goodwill.
Customer contracts are amortized using the straight-line method over the term
of the contracts. Intellectual property and goodwill are amortized over
estimated
F-16
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
useful lives of 5 and 15 to 20 years, respectively, using the straight-line
method. The Company periodically reviews the carrying value of its 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.
Significant Customers
The Company had three customers whose revenue each represented approximately
12-14% of the Company's 1995 revenue.
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.
Financial Instruments
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
geographic areas and remedies provided by terms of contracts and statutes.
Estimates Used in Financial Statement Presentation
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. Actual results could differ from those estimates.
2. ACQUISITIONS:
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.
NEXTLINK Tennessee, L.L.C. provides fiber-optic telecommunications networks
and is currently providing services as well as constructing fiber-optic
telecommunications systems for the Memphis and Nashville, Tennessee,
metropolitan markets. The total cost of the acquisition was approximately
$17,491,000. Included in the cost of the acquisition are 2,847,444 Class A
units and related options of NEXTLINK Tennessee, L.L.C. valued at $2,847,444
(see Note 8 for discussion of valuation of Class A units).
In April 1995, the Company acquired the telecommunications business of Tel-
West Central Services, Inc. through acquisition of the ownership units of
NEXTLINK Washington, L.L.C. NEXTLINK Washington, L.L.C. currently 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.
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. NEXTLINK Solutions, L.L.C. provides nationwide Magic Number
services, an enhanced communication service. The total cost of the acquisition
was approximately $617,000.
F-17
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
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 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 Class A units of the Company valued at $4,411,941 (see Note 8 for
discussion of valuation of Class A units), and $3,000,000 of deferred purchase
consideration payable to BWP, Inc. (formerly known as Sound Response
Corporation). In addition, the Company may make a distribution to BWP, Inc. in
1996 to satisfy certain liabilities in connection with the acquisition.
Management does not expect this to have a material impact on the Company's
financial position or results of operations.
In September 1994, the Company acquired certain assets of Penns Light
Communications, Inc. through NEXTLINK Pennsylvania, L.P. NEXTLINK
Pennsylvania, L.P., is currently constructing fiber-optic telecommunications
systems in Pennsylvania. The total cost of the acquisition was approximately
$460,000.
These 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 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.
The following unaudited pro forma information presents the results of the
Company as if the acquisitions 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.
YEAR ENDED
DECEMBER 31, 1995
-----------------
Revenue.................................................... $16,128,000
Net loss................................................... 11,285,000
3. PROPERTY AND EQUIPMENT:
1995 1994
----------- --------
Telecommunications networks........................... $15,357,466 $ --
Furniture, office equipment and other................. 3,710,360 64,231
----------- --------
19,067,826 64,231
Less accumulated depreciation......................... (1,125,164) (6,543)
----------- --------
17,942,662 57,688
Network construction in progress...................... 11,721,433 75,984
----------- --------
$29,664,095 $133,672
=========== ========
F-18
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
4. OTHER ASSETS:
1995 1994
---------- --------
Intellectual property.................................. $2,577,552 $ --
Organization costs..................................... 309,667 39,291
Noncompete agreements.................................. 108,227 --
Other noncurrent assets................................ 872,208 498,989
---------- --------
3,867,654 538,280
Less accumulated amortization.......................... (230,174) (7,050)
---------- --------
$3,637,480 $531,230
========== ========
5. RELATED PARTY TRANSACTIONS:
During 1995, a Company member loaned the Company approximately $7,200,000 at
an interest rate of prime plus 2%. On December 1, 1995, the note payable and
accrued interest were converted to equity.
Included in other current and noncurrent assets in 1995 are loans to two
officers of the Company in the amounts of $93,141 and $100,000, respectively.
The notes bear interest at prime and are due December 31, 1996 and September
15, 2004, respectively.
Included in payable to affiliates is $1,500,000 and in other noncurrent
liabilities is an additional $1,500,000 payable to a Company member in
conjunction with the NEXTLINK Interactive acquisition. The amounts are due
September 1, 1996 and September 1, 1997, respectively.
Included in payable to affiliates is a short-term note payable and accrued
interest of approximately $3,437,000 at an interest rate of prime plus 2%. The
note is due March 31, 1996.
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 $1,496,000 in 1995.
6. 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 2015.
Future minimum payments required under operating leases and agreements that
have an initial or remaining noncancellable lease term in excess of one year
at December 31, 1995 are summarized below:
YEAR ENDING DECEMBER 31,
------------------------
1996............................................................ $1,145,000
1997............................................................ 1,123,000
1998............................................................ 1,008,000
1999............................................................ 960,000
2000............................................................ 760,734
Thereafter...................................................... 3,279,063
Total rent expense amounted to approximately $579,000 and $18,000 in 1995
and 1994, respectively.
F-19
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
7. EMPLOYEE BENEFIT PLAN:
The Company offers a 401(k) Plan to eligible employees as part of a 401(k)
Plan which is 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
$50,000 in 1995.
8. MEMBERS' EQUITY:
MEMBERSHIP UNITS
The Company has issued both Class A and Class B membership units in the
Company. Class B membership 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, if any, of the Company.
The valuation of membership units is determined by the EOP Administrative
Committee. During 1994 and 1995, the EOP provided that the valuation would be
based on financial data dated as of the most recent tax year. Because of the
small amount of capital invested at December 31, 1994, the valuation of Class
A membership units was determined to be equal to the capital invested in the
Company, or $1.00 per unit. Thus, there was no fair market value ascribed to
the Class B 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.
For year-end 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 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, 1995, including
those issued in the Recapitalization (see Note 10). Based upon this valuation
process, the value of Class A units as of December 31, 1995 was determined to
be approximately $1.45 and the appreciation interest per unit for Class B
units was approximately $0.44.
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 as stock appreciation rights.
The Company recognizes compensation expense over the vesting period based on
the excess of the fair market value, as determined by the Administrative
Committee, over the exercise price of the option and such expense is
periodically adjusted for changes in the fair market value of the options.
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. All options 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-20
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
Information regarding the Company's EOP is summarized below:
NUMBER EXERCISE
OF UNITS PRICE
--------- --------
Balance, inception (September 16, 1994)................ --
Granted.............................................. 898,996 $0.01
---------
Balance, December 31, 1994............................. 898,996 $0.01
Granted.............................................. 1,271,004 $0.01
Granted pursuant to the Recapitalization (see Note
10)................................................. 1,953,656 $0.01
Canceled............................................. (375,000) $0.01
---------
Balance, December 31, 1995............................. 3,748,656 $0.01
=========
For the year ended December 31, 1995, the Company recorded $375,000 of
compensation expenses and deferred compensation related to the EOP. Such
deferred compensation is included in other long-term liabilities.
9. 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.
Summarized quarterly financial data for 1995 and 1994 is as follows:
1995
--------------------------------------------------
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
Revenue................. $ 399,135 $ 999,719 $ 2,824,742 $ 3,328,130
Cost and expenses....... 2,003,526 3,289,294 5,270,513 9,451,041
----------- ----------- ----------- -----------
Loss from operations.... (1,604,391) (2,289,575) (2,445,771) (6,122,911)
Other income (expense),
net.................... 43,260 36,275 (94,943) (252,933)
----------- ----------- ----------- -----------
Net loss................ $(1,561,131) $(2,253,300) $(2,540,714) $(6,375,844)
=========== =========== =========== ===========
1994
--------------------------------------------------
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
Revenue................. $ -- $ -- $ -- $ --
Cost and expenses....... -- -- 46,560 305,354
----------- ----------- ----------- -----------
Loss from operations.... -- -- (46,560) (305,354)
Other income, net....... -- -- 371 2,766
----------- ----------- ----------- -----------
Net loss................ $ -- $ -- $ (46,189) $ (302,588)
=========== =========== =========== ===========
10. SUBSEQUENT EVENTS:
Recapitalization
In the first quarter of 1996, the Company merged four of the five operating
subsidiaries with newly formed entities owned by the Company. As a result of
these mergers, the entities and individuals holding minority interests in the
subsidiaries exchanged these interests for 3,841,207 membership units of the
Company (representing an approximate 5.9% ownership interest in the Company)
which were valued at $5,574,053. NEXTLINK Washington, L.L.C. did not
participate in the merger. Under APB No. 16, the transaction has been
accounted for as a purchase. Accordingly, the $2,907,433 excess of the
purchase price over the book value of the interests acquired was recorded as
goodwill.
F-21
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
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 interests 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 in Note
8.
Acquisition
Effective January 1, 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. provides fiber-optic telecommunications networks and is currently
constructing fiber-optic telecommunications systems for the Ohio region. The
cash portion of the purchase price was funded by a capital contribution from
the majority member.
The assets acquired and consideration given were as follows:
Fair value of tangible assets acquired.......................... $ 8,837,707
Fair value of intangible assets acquired........................ 7,515,943
-----------
$16,353,650
===========
Cash paid for assets............................................ $ 9,598,000
Equity units issued............................................. 651,933
Liabilities assumed............................................. 6,103,717
-----------
$16,353,650
===========
The following unaudited pro forma balance sheet shows the Company's position
as though the mergers and the acquisition had occurred December 31, 1995.
ASSETS
Current assets.................................................. $ 5,658,000
Property and equipment.......................................... 38,401,000
Goodwill, net................................................... 22,560,000
Customer contracts, net......................................... 2,364,000
Other assets, net............................................... 3,740,000
-----------
$72,723,000
===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities............................................. $12,802,000
Other noncurrent liabilities.................................... 7,158,000
-----------
Total liabilities............................................. 19,960,000
Minority interest............................................... 316,000
Members' equity................................................. 52,447,000
-----------
$72,723,000
===========
The increase in other noncurrent liabilities is due to the assumption of
capital leases. These are due over five years at a rate of approximately
$1,700,000 per year.
Financing
From inception through the first several months of 1996, the Company has
been principally funded by its majority member. Further funding is intended to
be from short-term debt from the majority member. The Company anticipates the
short-term debt will be replaced by long-term financing arrangements.
F-22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NEXTLINK Capital, Inc.:
We have audited the accompanying balance sheet of NEXTLINK Capital, Inc. (a
Washington corporation) as of March 31, 1996. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of NEXTLINK Capital, Inc. as of
March 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Seattle, Washington,
March 31, 1996
F-23
NEXTLINK CAPITAL, INC.
BALANCE SHEET
MARCH 31, 1996
ASSETS
CASH IN BANK.......................................................... $ 100
=====
SHAREHOLDER'S EQUITY
COMMON STOCK, no par value,
1,000 shares authorized, issued and outstanding...................... $ --
Additional paid-in capital........................................... 100
-----
$ 100
=====
The accompanying note is an integral part of this balance sheet
F-24
NEXTLINK CAPITAL, INC.
NOTE TO BALANCE SHEET
MARCH 31, 1996
1. DESCRIPTION OF THE COMPANY
NEXTLINK Capital, Inc. (NEXTLINK Capital) is a Washington corporation and a
wholly owned subsidiary of NEXTLINK Communications, L.L.C. (NEXTLINK).
NEXTLINK Capital was initially funded with a $100 contribution from NEXTLINK
and has had no operations to date.
NEXTLINK Capital was formed in March 1996 to facilitate the issuance of
Senior Notes in conjunction with NEXTLINK. Management's intent is that
NEXTLINK Capital will issue Senior Notes and advance the proceeds to NEXTLINK.
NEXTLINK Capital's sole source of repayment for the notes will be from the
operations of NEXTLINK. Therefore, this balance sheet should be read in
conjunction with the consolidated financial statements of NEXTLINK.
F-25
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-26
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 un-
collectible 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' equi-
ty........................................ $4,448,215 $1,225,647 $674,021
========== ========== ========
The accompanying notes are an integral part of these balance sheets.
F-27
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-28
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 origi-
nal 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 non-
voting 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-29
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 activi-
ties............................... (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-30
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-31
SOUND RESPONSE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995
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; princi-
pal 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 Au-
gust 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
======== ======== ========
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
=======
F-32
SOUND RESPONSE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995
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.
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-33
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-34
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 doubt-
ful accounts of $0, $5,000 and $0, respective-
ly............................................. 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-35
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-36
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-37
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-38
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-39
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%; inter-
est-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 $--
======== ======== ====
F-40
TEL-WEST CENTRAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
SEPTEMBER 30,
MARCH 31, ---------------
1995 1994 1993
--------- ------- -------
Notes payable to others:
Note payable to commercial bank; interest at
prime plus 2.5%; graduated principal plus in-
terest 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
======= ======= =======
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.
F-41
TEL-WEST CENTRAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
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.
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-42
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-43
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-44
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-45
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-46
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 CAP such as the Company to connect its network
to the ILECs central offices. Physical collocation occurs when a CAP 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 CAP to connect its network to the ILEC's central offices on
comparable terms, even though the CAP'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).
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.
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 BOCs 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.
A-1
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.
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.
A-2
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, L.L.C.
NEXTLINK CAPITAL, INC.
All tendered Senior Notes, 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
UNITED STATES TRUST COMPANY OF NEW YORK
By Facsimile:
(212) 420-6152
Attention: Customer Service
Confirm by telephone:
(800) 548-6565
By Registered or Certified Mail:
United States Trust Company of New York
P.O. Box 844 Cooper Station
New York, New York 10276
By Hand:
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Corporate Trust Operations
By Overnight Courier:
United States Trust Company of New York
770 Broadway
New York, New York 10003
Attention: Corporate Trust Operations
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company, a Washington limited liability company, is empowered by the
Washington Limited Liability Company Act, through its limited liability
company agreement, to eliminate or limit the personal liability of a member or
manager to the limited liability company or its members for monetary damages
for conduct as a member or manager and to indemnify any member or manager from
and against any judgments, settlements, penalties, fines or expenses incurred
in a proceeding by reason of his, her or its capacity as a member or manager,
except in certain circumstances involving acts or omission not in good faith
or involving negligence or unlawful conduct.
Article 11 of the Company's Amended and Restated Limited Liability Company
Agreement provides as follows:
ARTICLE 11--LIMITATION OF MEMBERS LIABILITY; INDEMNIFICATION OF MEMBERS
11.1 LIMITATION OF LIABILITY. No Member or Manager, or their respective
officers, directors, agents, employees, members or managers, shall have
liability to the Company or its Members for monetary damages for conduct as
a Member or Manager, except for acts or omissions that involve a breach of
this Agreement, intentional misconduct, a knowing violation of law, conduct
violating RCW 25.15.235, or for any transaction from which such person has
personally received a benefit in money, property or services to which such
person was not legally entitled. If the Act is hereafter amended to
authorize Company action further limiting the personal liability of such
persons, then the liability of such persons shall be eliminated or limited
to the full extent permitted by the Act, as so amended. No repeal or
modification of the Act or this Section 11.1 shall adversely affect any
right or protection of any such person existing at the time of such repeal
or modification for or with respect to an act or omission of such person
occurring prior to such repeal or notification.
11.2 INDEMNIFICATION. The Company shall indemnify each Member and
Manager, and their respective officers, directors, agents, employees,
members or managers, from and against any judgments, settlements,
penalties, fines or expenses incurred in a proceeding to which such person
is a party because he, she or it is, or was, a Member, a Manager, or
officer, director, agent, employee, member or manager thereof; provided,
that such persons shall not be indemnified from or on account of acts or
omissions of such persons finally adjudicated to be a breach of this
Agreement, intentional misconduct or a knowing violation of law by such
persons, conduct of such persons adjudged to be in violation of RCW
25.15.235, or any transaction with respect to which it was finally adjudged
that such person received a benefit in money, property or services to which
such person was not legally entitled. The right to indemnification
conferred in this Section 11.2 shall be a contract right and shall include
the right to be paid by the Company the expenses incurred in defending any
such proceeding in advance of its final disposition; provided, that the
payment of such expenses in advance of the final disposition of a
proceeding shall be made only upon delivery to the Company of an
undertaking, by or on behalf of such indemnified person, to repay all
amounts so advanced if it shall ultimately be determined that such person
is not entitled to be indemnified under this Section 11.2 or otherwise.
The right to indemnification and payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in
this Section 11.2 shall not be exclusive of any other right any person
entitled to indemnification under this Agreement may have or hereafter
acquire under any statute, this Agreement, vote of Members or otherwise.
No repeal or modification of the Act or this Section 11.2 shall adversely
affect any right to indemnification existing at the time of such repeal or
modification for or with respect to
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indemnification related to an act or omission of such person occurring
prior to such repeal or modification.
Capital, a Washington corporation, is empowered by the Washington Business
Corporations Act ("WBCA"), through its articles of incorporation and bylaws,
to limit the liability of directors and to grant indemnity to directors,
officers, employees or agents for actions taken with respect to the
corporation in their respective capacities as directors, officers, employees
or agents. The WBCA provides that indemnification for such liabilities may be
provided to an officer, director, employee or agent based upon the
determination by a vote of the disinterested board of directors, a vote by a
special committee of the board of directors, by the determination of a special
legal counsel or by a vote of the shareholders that the director, officer,
employee or agent may properly be indemnified under the statute. Capital's
Articles of Incorporation provide for indemnification of the directors and
officers of such entities to the full extent permitted by WBCA.
Articles XI and XII of Capital's Articles of Incorporation provides as
follows:
ARTICLE XI. LIMITATION OF DIRECTORS' LIABILITY. A director shall have no
liability to the corporation or its shareholders for monetary damages for
conduct as a director, except for acts or omissions that involve
intentional misconduct by the director, or a knowing violation of law by
the director, or for conduct violating RCW 23B.08.310, or for any
transaction from which the director will personally receive a benefit in
money, property or services to which the director is not legally entitled,
if the Washington Business Corporation Act is hereafter amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director shall be
eliminated or limited to the full extent permitted by the Washington
Business Corporation Act, as so amended. Any repeal or modification of this
Article shall not adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or modification for or
with respect to an act or omission of such director occurring prior to such
repeal or modification.
ARTICLE XII. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 1. Right
to Indemnification. Each person who was, or is threatened to be made a
party to or is otherwise involved (including, without Stations as a
witness) in any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director or officer of the corporation or, while
a director or officer, he or she is or was serving at the request of the
corporation as a director, trustee, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis
of such proceeding is alleged action in an official capacity as a director,
trustee, officer, employee or agent or in any other capacity while serving
as a director, trustee, officer, employee or agent, shall be indemnified
and held harmless by the corporation, to the full extent permitted by
applicable law as then in effect, against all expense, liability and loss
(including attorney's fees, judgments, fines, ERISA excise taxes or
penalties and amounts to be paid in settlement) actually and reasonably
incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a
director, trustee, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided,
however, that except as provided in Section 2 of this Article with respect
to proceedings seeking to enforce rights to indemnification, the
corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person
only if such proceeding (or part thereof) was authorized by the board of
directors of the corporation. The right to indemnification conferred in
this Section 1 shall be a contract right and shall include the right to be
paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that the
payment of such expenses in advance of the final disposition of a
proceeding shall be made only upon delivery to the corporation of an
undertaking, by or on behalf of such
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director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to
be indemnified under this Section 1 or otherwise.
Section 2. Right of Claimant to Bring Suit. If a claim under Section 1 of
this Article is not paid in full by the corporation within sixty (60) days
after a written claim has been received by the corporation, except in the
case of a claim for expenses incurred in defending a proceeding in advance
of its final disposition, in which case the applicable period shall be
twenty (20) days, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, to
the extent successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. The claimant shall
be presumed to be entitled to indemnification under this Article upon
submission of a written claim (and, in an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition, where the required undertaking has been tendered to the
corporation), and thereafter the corporation shall have the burden of proof
to overcome the presumption that the claimant is not so entitled. Neither
the failure of the corporation (including its board of directors,
independent legal counsel or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstances nor an actual determination by the corporation (including its
board of directors, independent legal counsel or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses shall be a defense to the action or create a
presumption that the claimant is not so entitled.
Section 3. Nonexclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation, Bylaws, agreement,
vote of shareholders or disinterested directors or otherwise.
Section 4. Insurance, Contracts and Funding. The corporation may maintain
insurance, at its expense, to protect itself and any director, trustee,
officer, employee or agent of the corporation or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the corporation would have the power to
indemnify such person against such expense, liability or loss under the
Washington Business Corporation Act. The corporation may, without further
shareholder action, enter into contracts with any director or officer of
the corporation in furtherance of the provisions of this Article and may
create a trust fund, grant a security interest or use other means
(including, without Stations a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in
this Article.
Section 5. Indemnification of Employees and Agents of the
Corporation. The corporation may, by action of its board of directors from
time to time, provide indemnification and pay expenses in advance of the
final disposition of a proceeding to employees and agents of the
corporation with the same scope and effect as the provisions of this
Article with respect to the indemnification and advancement of expenses of
directors and officers of the corporation or pursuant to rights granted
pursuant to, or provided by, the Washington Business Corporation Act or
otherwise.
The Issuers maintain an insurance policy providing for indemnification of
their officers, directors and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under
certain stated conditions.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
1 --Purchase Agreement, dated as of April 25, 1996, by and among the
Company, Capital and the Purchasers.*
3.1 --Amended and Restated Certificate of Formation of the Company.*
3.2 --Amended and Restated Limited Liability Company Agreement of the
Company.*
3.3 --Articles of Incorporation of Capital.*
3.4 --By-laws of Capital.*
4.1 --Indenture, dated as of April 25, 1996, by and among the Company,
Capital, United States Trust Company of New York, as trustee, relating
to $350,000,000 principal amount of 12 1/2% Senior Notes due April 15,
2006, including form of Global Note.*
4.2 --Collateral Pledge and Agreement dated April 25, 1996, by and between
the Company and the Trustee.*
4.3 --Exchange and Registration Rights Agreement, dated as of April 25,
1996, by and among the Company, Capital and the Purchasers.*
5.1 --Opinion of Willkie Farr & Gallagher.
5.2 --Tax opinion of Willkie Farr & Gallagher.*
5.3 --Opinion of Davis Wright Tremaine.
10.1 --Amended and Restated Equity Option Plan of the Company.*
10.2 --Employment Agreement of Gary A. Rawding.*
12 --Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.*
21 --Subsidiaries of the Registrants.*
23.1 --Consent of Arthur Andersen LLP.
23.2 --Consents of Willkie Farr & Gallagher (included in their opinions filed
as Exhibit 5.1 and 5.2).
23.3 --Consent of Davis Wright Tremaine (included in their opinion filed as
Exhibit 5.3).
24 --Powers of Attorney (included on signature pages).
25 --Statement on Form T-1 of Eligibility of Trustee.*
27 --Financial Data Schedule.*
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.
**To be filed by amendment.
(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.
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ITEM 22. UNDERTAKINGS.
The Registrants will:
(1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Registrants
pursuant to the provisions, described under Item 20 above, or otherwise, the
Registrants have 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 Registrants of expenses incurred or paid by a director, officer
or controlling person of the Registrants 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
Registrants 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 registrants hereby undertake 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 registrants hereby undertake 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.
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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 JULY 23, 1996.
Nextlink Communications, L.L.C.
/s/ James F. Voelker
_____________________________________
By: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 (Principal July 23, 1996
- ------------------------------------- Executive Officer)
CRAIG O. MCCAW
/s/ Kathleen H. Iskra Vice President,
- ------------------------------------- Chief Financial July 23, 1996
KATHLEEN H. ISKRA Officer (Principal
Financial Officer
and Principal
Accounting Officer)
Eagle River Investments, L.L.C. Manager
July 23, 1996
*
By:__________________________________
Name: Craig O. McCaw
Title: Chief Executive Officer
Nextlink, Inc. Manager
July 23, 1996
*
By:__________________________________
Name: Craig O. McCaw
Title: Chief Executive Officer
* /s/ James F. Voelker
-----------------------------------
JAMES F. VOELKER
ATTORNEY-IN-FACT
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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 JULY 23, 1996.
Nextlink Capital, Inc.
/s/ James F. Voelker
_____________________________________
By:James F. Voelker
Title: Director, Chief Executive
Officer and 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
/s/ James F. Voelker Director, Chief
- ------------------------------------- Executive Officer July 23, 1996
JAMES F. VOELKER and President
(Principal
Executive Officer)
/s/ Kathleen H. Iskra Vice President and
- ------------------------------------- Treasurer July 23, 1996
KATHLEEN H. ISKRA (Principal
Accounting Officer
and Principal
Financial Officer)
Director, Vice
* President, General July 23, 1996
- ------------------------------------- Counsel and
R. BRUCE EASTER, JR. Secretary
*/s/ James F. Voelker
- -------------------------------------
JAMES F. VOELKER
ATTORNEY-IN-FACT
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