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PROSPECTUS
[ORIUS CAPITAL LOGO]
NATG HOLDINGS, LLC
ORIUS CAPITAL CORP.
EXCHANGE OFFER FOR
$150,000,000
12 3/4% SENIOR SUBORDINATED NOTES DUE 2010
UNCONDITIONALLY GUARANTEED ON A SENIOR SUBORDINATED BASIS BY
ORIUS CORP.
AND EACH OF NATG HOLDINGS, LLC'S SUBSIDIARIES
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WE ARE OFFERING TO EXCHANGE:
UP TO $150,000,000 OF OUR NEW 12 3/4% SENIOR SUBORDINATED NOTES DUE 2010, SERIES
B
FOR
A LIKE AMOUNT OF OUR OUTSTANDING 12 3/4% SENIOR SUBORDINATED NOTES.
MATERIAL TERMS OF EXCHANGE OFFER:
- - The terms of the notes to be issued in the exchange offer are substantially
identical to the outstanding notes, except that the transfer restrictions and
registration rights relating to the outstanding notes will not apply to the
exchange notes.
- - There is no existing public market for the outstanding notes or the exchange
notes. We do not intend to list the exchange notes on any securities exchange
or seek approval for quotation through any automated trading system.
- - Expires 5:00 p.m., New York City time, October 16, 2000, unless extended.
- - We believe that the exchange of notes will not be a taxable event for U.S.
federal income tax purposes.
- - Not subject to any material condition other than that the exchange offer not
violate applicable law or any applicable interpretation of the Staff of the
SEC.
- - We will not receive any proceeds from the exchange offer.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER BEFORE
PARTICIPATING IN THIS EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF
THIS PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE NOTES
TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS
DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SEPTEMBER 14, 2000
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TABLE OF CONTENTS
PAGE
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Prospectus Summary......................... 1
Risk Factors............................... 10
Forward-Looking Statements May Prove
Inaccurate............................... 20
LISN Acquisition........................... 21
Exchange Offer; Registration Rights........ 24
Use of Proceeds............................ 34
Capitalization............................. 34
Unaudited Pro Forma Financial Statements... 35
Supplemental Unaudited Pro Forma Financial
Data..................................... 40
Selected Historical Financial Data......... 45
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 46
Business................................... 56
PAGE
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Management................................. 69
Certain Relationships and Related Party
Transactions............................. 75
Principal Stockholders..................... 78
Description of Parent's Securities......... 79
Description of Senior Credit Facilities.... 81
Description of the Notes................... 84
Book Entry; Delivery and Form.............. 125
United States Federal Income Tax
Consequence.............................. 129
Plan of Distribution....................... 132
Legal Matters.............................. 133
Independent Accountants.................... 134
Available Information...................... 135
Index to Financial Statements.............. F-1
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As used in this prospectus, references to "we," "our" and "Orius" refer to
Orius Corp. and all of its subsidiaries. In those situations where it is
important to distinguish between Orius Corp. and its subsidiaries, we use the
term "Parent" to refer only to Orius Corp. We refer to NATG Holdings, LLC and
Orius Capital Corp. as the "Issuers."
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PROSPECTUS SUMMARY
This summary highlights the material information about our company and this
exchange offer. This summary does not contain all of the information that may be
important to you in deciding whether to participate in the exchange offer. We
encourage you to read this prospectus in its entirety.
SUMMARY OF THE EXCHANGE OFFER
The Initial Offering of
Outstanding Notes............. We sold the outstanding notes on February 4,
2000 to Deutsche Bank Securities Inc. and Banc
of America Securities LLC. We collectively
refer to these parties in this prospectus as
the "initial purchasers." The initial
purchasers subsequently resold the outstanding
notes to qualified institutional buyers under
Rule 144A under the Securities Act.
Registration Rights
Agreement..................... Simultaneously with the initial sale of the
outstanding notes, we entered into a
registration rights agreement for the exchange
offer. In the registration rights agreement, we
agreed, among other things, to use our
reasonable best efforts to file a registration
statement with the SEC within 120 days of
issuing the outstanding notes and to cause this
registration statement to be declared effective
by the SEC within 210 days of issuing the
outstanding notes. Because this registration
statement was not declared effective by the SEC
by September 6, 2000, which was the 210th day
following the issuance of the outstanding
notes, we have begun to incur additional
interest on the outstanding notes, as
liquidated damages, at a rate of 0.5% per
annum. The exchange offer is intended to
satisfy our obligations under the registration
rights agreement. After the exchange offer is
complete, you may no longer be entitled to any
exchange or registration rights with respect to
your outstanding notes.
The Exchange Offer............ We are offering to exchange the exchange notes,
which have been registered under the Securities
Act for your outstanding notes, which were
issued on February 4, 2000 in the initial
offering. In order to be exchanged, an
outstanding note must be properly tendered and
accepted. All outstanding notes that are
validly tendered and not validly withdrawn will
be exchanged. We will issue exchange notes
promptly after the expiration of the exchange
offer.
Resales....................... We believe that the exchange notes issued in
the exchange offer may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that:
- the exchange notes are being acquired in the
ordinary course of your business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
in the distribution of the exchange notes
issued to you in the exchange offer; and
- you are not an affiliate of ours.
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If any of these conditions are not satisfied
and you transfer any exchange notes issued to
you in the exchange offer without delivering a
prospectus meeting the requirements of the
Securities Act or without an exemption from
registration of your exchange notes from these
requirements, you may incur liability under the
Securities Act. We will not assume, nor will we
indemnify you against, these liabilities.
Each broker-dealer that is issued exchange
notes in the exchange offer for its own account
in exchange for outstanding notes that were
acquired by that broker-dealer as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resale of the exchange
notes. A broker-dealer may use this prospectus
for an offer to resell, resale or other
retransfer of the exchange notes issued to it
in the exchange offer.
Record Date................... We mailed this prospectus and the related
exchange offer documents to registered holders
of outstanding notes on September 14, 2000.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, October 16, 2000, unless we
decide to extend the expiration date. We will
keep the exchange offer open for not less than
20 business days, or longer if required by
applicable law, after the date on which notice
of the exchange offer is mailed to holders of
the outstanding notes.
Conditions to the Exchange
Offer......................... The exchange offer is not subject to any
material condition other than that the exchange
offer not violate applicable law or any
applicable interpretation of the Staff of the
SEC.
Procedures for Tendering
Outstanding Notes............. We issued the outstanding notes as global
securities. When the outstanding notes were
issued, we deposited the global notes
representing the outstanding notes with United
States Trust Company of New York, as book-entry
depositary. United States Trust Company issued
a certificateless depositary interest in each
global note we deposited with it, which
represents a 100% interest in the notes, to The
Depositary Trust Company, known as DTC.
Beneficial interests in the outstanding notes,
which are held by direct or indirect
participants in DTC through the certificateless
depositary interest, are shown on records
maintained in book-entry form by DTC.
You may tender your outstanding notes through
book-entry transfer in accordance with DTC's
Automated Tender Offer Program, known as ATOP.
To tender your outstanding notes by a means
other than book-entry transfer, a letter of
transmittal must be completed and signed
according to the instructions contained in the
letter. The letter of transmittal and any other
documents required by the letter of transmittal
must be delivered to the exchange agent by
mail, facsimile, hand delivery or overnight
carrier. In addition, you must deliver the
outstanding
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notes to the exchange agent or comply with the
procedures for guaranteed delivery. See "The
Exchange Offer -- Procedures for Tendering
Outstanding Notes" for more information.
Do not send letters of transmittal and
certificates representing outstanding notes to
us. Send these documents only to the exchange
agent. See "The Exchange Offer -- Exchange
Agent" for more information.
Special Procedures for
Beneficial Owners............. If you are the beneficial owner of book-entry
interests and your name does not appear on a
security position listing of DTC as the holder
of the book-entry interests or if you are a
beneficial owner of outstanding notes that are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender the book-entry interest
or outstanding notes in the exchange offer, you
should contact the person in whose name your
book-entry interests or outstanding notes are
registered promptly and instruct that person to
tender on your behalf.
Withdrawal Rights............. You may withdraw the tender of your outstanding
notes at any time prior to 5:00 p.m., New York
City time on October 16, 2000.
Federal Income Tax
Considerations................ Based upon advice of counsel, we believe that
the exchange of outstanding notes will not be a
taxable event for United States federal income
tax purposes. See "United States Federal Income
Tax Consequences" for a more detailed
discussion of the U.S. federal income tax
consequences of the exchange offer and the
ownership and disposition of the exchange
notes.
Use of Proceeds............... We will not receive any proceeds from the
issuance of exchange notes in the exchange
offer. We will pay all of our expenses incident
to the exchange offer.
Exchange Agent................ United States Trust Company of New York is
serving as the exchange agent in connection
with the exchange offer.
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SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes, except that the exchange notes will be registered
under the Securities Act. As a result, the exchange notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damage provisions contained in the outstanding notes. The exchange
notes represent the same debt as the outstanding notes. Both the outstanding
notes and the exchange notes are governed by the same indenture. We use the term
notes in this prospectus to collectively refer to the outstanding notes and the
exchange notes.
Issuers.................... The exchange notes will be joint and several
obligations of NATG and Orius Capital. Orius
Capital is a wholly owned subsidiary of NATG, which
in turn is a wholly owned subsidiary of Parent.
Orius Capital was formed in connection with the
offering of the outstanding notes. Orius Capital
has no assets, no liabilities other than the
outstanding notes and no operations, and is
prohibited from engaging in any business activities
other than in connection with the notes.
Securities Offered......... $150,000,000 in principal amount of 12 3/4% senior
subordinated notes due 2010, Series B.
Maturity................... February 1, 2010.
Interest Rate.............. 12 3/4% per year, calculated using a 360-day year.
Interest Payment Dates..... February 1 and August 1, commencing August 1, 2000.
Ranking.................... The exchange notes will be unsecured senior
subordinated obligations of the issuers and will
rank (1) junior to their existing and future senior
debt, (2) senior to all debt of the issuers that is
expressly subordinated to the exchange notes and
(3) equal to all other debt and other obligations
of the issuers. As of June 30, 2000, the issuers
had approximately $290.3 million of senior debt
(including equipment debt and leases of $4.7
million), in addition to approximately $43.0
million that they had available to borrow under the
senior credit facilities.
Guarantees................. The issuers' obligations under the exchange notes
and the related indenture will be jointly,
severally, fully and unconditionally guaranteed on
an unsecured senior subordinated basis by Parent
and by all of the issuers' existing and future
domestic subsidiaries. We collectively refer to
these subsidiaries in this prospectus as the
guarantors. See "Description of the
Notes -- Guarantees." As of June 30, 2000, the
guarantors had approximately $290.3 million of
senior debt to which their guarantees of the
outstanding notes were subordinated.
Optional Redemption........ Except as described in the next paragraph, the
issuers cannot redeem the exchange notes until
February 1, 2005. Thereafter, they may redeem some
or all of the notes at the redemption prices listed
in the "Description of the Notes" section under the
heading "Optional Redemption."
At any time before February 1, 2003, the issuers
can choose to redeem up to 35% of the notes issued
under the indenture with money raised in one or
more equity offerings, as long as:
- they pay 112.75% of the principal amount of the
notes, plus accrued interest;
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- they give notice of redemption within 60 days of
completing the equity offering; and
- at least 65% of the aggregate principal amount of
notes issued under the indenture remains
outstanding afterwards.
Change of Control Offer.... If a change of control occurs, the issuers must
offer to purchase exchange notes from holders at
101% of their principal amount, plus accrued
interest.
The issuers might not be able to pay you the
required price for exchange notes you present at
the time of a change of control, because:
- they might not have enough funds at that time; or
- the terms of their senior debt may prevent them
from paying that amount.
Asset Sale Proceeds........ If we engage in asset sales, we generally must
either (1) invest the net cash proceeds from the
sales in our business, (2) prepay senior debt
within a period of time or (3) make an offer to
purchase a principal amount of exchange notes equal
to the excess net cash proceeds from the asset
sale. The purchase price of the exchange notes out
of the asset sale proceeds will be 100% of their
principal amount, plus accrued interest.
Certain Covenants.......... The indenture under which the outstanding notes
were issued will govern the exchange notes. This
indenture contains covenants limiting our ability
to, among other things:
- incur additional debt;
- pay dividends or distributions on our capital
stock or repurchase our capital stock;
- issue stock of subsidiaries;
- make certain investments;
- create liens on our assets to secure debt;
- enter into transactions with affiliates;
- merge or consolidate with another company; and
- transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions.
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ORIUS CORP.
Unless otherwise indicated, pro forma revenue data presented in this
prospectus for 1999 and for the six months ended June 30, 2000 give effect to
(1) our acquisition of LISN Holdings, Inc. and its subsidiaries in December
1999, and (2) the nine other acquisitions we have completed in 1999 and 2000.
We believe that we are one of the largest independent providers of
comprehensive telecom infrastructure services in the U.S., with operations in 48
states. We offer a full spectrum of services, including:
- External Telecom Services -- installation, design, engineering and
maintenance of fiber optic, coaxial and copper cable networks for the
telecom industry, which consists of the telecommunications services
segment and the broadband services segment; and
- Internal Telecom Services -- engineering, furnishing and installation of
network equipment and related components and related maintenance
services, primarily in the central offices of telecommunications services
providers, which we refer to as "EF&I Services," and similar network
services for commercial, governmental and institutional entities, which
we refer to as "Network Services."
We believe that our ability to provide comprehensive, quality service on a
nationwide basis positions us as a leading, full-service provider of telecom
infrastructure services.
Our principal customers are providers of telecom services, including
telecommunications services and broadband services. Providers of
telecommunications services generally include the Regional Bell Operating
Companies and other incumbent local exchange carriers, competitive local
exchange carriers and long distance carriers. Our primary telecommunications
services customers include Ameritech, AT&T, DTI, GTE, MCI WorldCom, Verizon and
Williams Communications. Broadband services refer to the emerging initiative of
traditional cable companies to provide a comprehensive package of cable service,
telephone service, Internet access and other data and voice transmission
services. Our primary broadband services customers include Adelphia, AT&T
Broadband & Internet Services, Charter Communications, Clearsource, Comcast, Cox
Communications, Digital Access and Universal Access. In addition, we provide our
Network Services for commercial, governmental and institutional customers such
as Compaq, Dell, EDS and the World Bank.
COMPETITIVE STRENGTHS
We believe that we possess a number of competitive strengths that position
us as a leading provider of telecom infrastructure services and provide us with
the ability to meet the increased demand for these services and to take
advantage of the strong technology-driven growth occurring in the telecom
industry, including:
- Comprehensive service capabilities,
- Broad geographic coverage,
- Strong customer relationships,
- Reputation and commitment to quality,
- Decentralized operating strategy, and
- Experienced management.
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BUSINESS STRATEGY
Our objective is to enhance what we believe is our position as one of the
largest providers of comprehensive telecom infrastructure services in the U.S.
We seek to utilize our competitive strengths to take advantage of substantial
growth opportunities in the telecom industry that favor large companies like us
with significant capital resources. Key elements of our growth and operating
strategies include the following:
- Continuing to Grow Internally. We believe we can continue to achieve
internal growth by:
- Continuing to develop national service capabilities;
- Focusing on cross-selling opportunities;
- Maximizing performance of existing operations; and
- Expanding our service offerings.
- Selectively Pursuing Strategic Acquisitions.
- Attracting, Training and Retaining Highly Qualified Personnel.
LISN ACQUISITION
On December 15, 1999, Parent and LISN Holdings, Inc. entered into a series
of transactions that resulted in LISN becoming a wholly owned subsidiary of
NATG. In connection with the LISN acquisition, Parent was acquired by an
investor group consisting of LISN's former stockholders, including Willis Stein
& Partners and members of LISN's management, certain new co-investors and
members of Parent's and its subsidiaries' management. Willis Stein & Partners,
its co-investors and members of LISN's management invested cash in the aggregate
of $112.2 million in LISN and exchanged their LISN securities for similar
securities issued by Parent as part of the LISN acquisition. For a more detailed
description of the components of the LISN acquisition, see "LISN Acquisition."
RECENT DEVELOPMENTS
Since January of this year we have completed four acquisitions. In January
2000, we completed the acquisition of Irwin Utilities of Texas, Inc. and three
related entities. Irwin is a Dallas, Texas based provider of External Telecom
Services to telecom services providers in a variety of states. Irwin's primary
customers include AT&T Broadband & Internet Services, Charter Communications and
Time Warner. In April 2000, we completed the acquisitions of Fenix
Communications, Inc. and Fenix Limited Partnership, which we collectively refer
to as "Fenix," and Midwest Splicing and Activation, Inc. Fenix and Midwest
provide External Telecom Services to broadband service providers in and around
the Great Lakes region of the U.S. and the Midwest region of the U.S.,
respectively. Fenix's primary customer is Charter Communications and Midwest's
primary customers include Media One and Paragon Cable. In May 2000, we completed
the acquisition of Hattech, Inc. Based in Chantilly, Virginia, Hattech provides
a wide range of network integration services to telecommunications service
providers and internet service providers. Hattech's primary customer is AT&T.
The aggregate purchase price for these acquisitions was approximately $74.2
million, consisting of approximately $60.7 million of cash, $12.2 million of
Parent's securities and the assumption of $1.3 million of debt. We funded $42.0
million of the cash purchase price with borrowings under our senior credit
facilities. These four companies had aggregate revenue and EBITDA for the year
ended December 31, 1999 of $78.8 million and $15.8 million, respectively. Our
revenue and cash flow provided by operations were $167.0 million and $13.8
million, respectively, for the year ended December 31, 1999.
In July 1999, we entered into a non-binding letter of intent to acquire a
northeastern EF&I service provider for approximately $20.0 million. Completion
of this acquisition is conditioned upon satisfactory
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completion of due diligence and negotiation of a definitive agreement. If we
complete this acquisition, we would expect the closing to occur in the fourth
quarter.
EQUITY INVESTOR
Willis Stein & Partners is a leading private equity investment firm based
in Chicago, Illinois that specializes in negotiated investments in the telecom,
business services, media and publishing, manufacturing, financial services and
health care industries. Willis Stein & Partners, through its limited partnership
funds, had approximately $1.2 billion of assets under management as of December
31, 1999. Other investments sponsored by Willis Stein & Partners in the telecom
and media sectors include The Petersen Companies, Protocol Holdings, College
Television Network, Interlink Communication Partners and LISN Holdings, Inc.
Unless otherwise noted, references in this offering memorandum to Willis Stein &
Partners refer to Willis Stein & Partners II, L.P., Willis Stein & Partners
Dutch, L.P. and their respective management companies.
RISK FACTORS
For a discussion of some of the factors that you should consider before
participating in this exchange offer, see "Risk Factors."
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Parent is a Florida corporation, NATG is a Delaware limited liability
company and Orius Capital is a Delaware corporation. Our principal executive
offices are located at 1401 Forum Way, Suite 400, West Palm Beach, Florida
33401. Our telephone number is (561) 687-8300.
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SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below is summary unaudited pro forma financial data for Orius.
The summary unaudited pro forma financial data has been derived by the
application of pro forma adjustments to the historical consolidated financial
statements of LISN, Orius and each of the companies acquired by us since March
1998 (collectively, the "Acquired Companies"). The summary unaudited pro forma
financial data presented below is intended to give you a better understanding of
what the results of operations of all of our businesses might have looked like
had they been combined as of the beginning of the periods presented. Our
combined financial position at June 30, 2000 is reflected in our historical
balance sheet included elsewhere in this prospectus. You should read the summary
unaudited pro forma financial data in conjunction with the information contained
in "Unaudited Pro Forma Financial Statements," "Selected Historical Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Supplemental Unaudited Pro Forma Financial Data" and the
financial statements and the related notes appearing elsewhere in this
prospectus.
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
2000 1999
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(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $369,501 $587,179
Expenses:
Direct costs............................................ 263,334 419,123
General and administrative.............................. 41,846 63,444
Depreciation and amortization........................... 14,522 26,795
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Total expenses............................................ 319,702 509,362
Income from operations.................................... 49,799 77,817
Other Expense:
Interest expense, net................................... 32,574 64,772
Other expense........................................... (105) 142
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Income before income tax provision and extraordinary
charge.................................................. 17,330 12,903
Provision for income taxes................................ 10,659 10,989
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Net income before extraordinary charge.................... $ 6,671 $ 1,914
======== ========
OTHER DATA:
Ratio of earnings to fixed charges........................ 1.49 1.18
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RISK FACTORS
You should carefully consider the following factors and the other
information in this prospectus before you decide whether to participate in the
exchange offer.
RISKS ASSOCIATED WITH THE EXCHANGE OFFER
BECAUSE THERE IS NO PUBLIC MARKET FOR THE NOTES, YOU MAY NOT BE ABLE TO RESELL
YOUR NOTES.
The exchange notes will be registered under the Securities Act, but will
constitute a new issue of securities with no established trading market.
Therefore, you may not be able to sell your notes. Even if a trading market were
to develop, the market could be illiquid. If the trading market for the notes is
illiquid, you may not be able to sell your notes or may not be able to sell them
at a desirable price.
If a trading market were to develop, the exchange notes might trade at
higher or lower prices than their principal amount or purchase price, depending
on many factors, including prevailing interest rates, the market for similar
debentures and our financial performance.
We do not intend to list the notes on any trading exchange or to do
anything to facilitate the develop of a trading market for the notes. We
understand that the initial purchasers presently intend to make a market in the
notes. However, they are not obligated to do so, and any market-making activity
with respect to the notes may be discontinued at any time without notice. In
addition, any market-making activity will be subject to the limits imposed by
the Securities Act and the Securities Exchange Act, and may be limited during
the exchange offer or the pendency of an applicable shelf registration
statement.
In addition, any outstanding note holder 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. For a description of
these requirements, see "Exchange Offer; Registration Rights."
YOUR OUTSTANDING NOTES WILL NOT BE ACCEPTED FOR EXCHANGE IF YOU FAIL TO FOLLOW
THE EXCHANGE OFFER PROCEDURES AND, AS A RESULT, YOUR NOTES WILL CONTINUE TO BE
SUBJECT TO EXISTING TRANSFER RESTRICTIONS AND YOU MAY NOT BE ABLE TO SELL YOUR
OUTSTANDING NOTES.
We will not accept your notes for exchange if you do not follow the
exchange offer procedures. We will issue exchange notes as part of this exchange
offer only after a timely receipt of your outstanding notes, a properly
completed and duly executed letter of transmittal and all other required
documents. Therefore, if you want to tender your outstanding notes, please allow
sufficient time to ensure timely delivery. If we do not receive your notes,
letter of transmittal and other required documents by the expiration date of the
exchange offer, we will not accept your notes for exchange. We are under no duty
to give notification of defects or irregularities with respect to the tenders of
outstanding notes for exchange. If there are defects or irregularities with
respect to your tender of notes, we will not accept your notes for exchange.
IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES, YOUR OUTSTANDING NOTES WILL
CONTINUE TO BE SUBJECT TO THE EXISTING TRANSFER RESTRICTIONS AND YOU MAY NOT BE
ABLE TO SELL YOUR OUTSTANDING NOTES.
We did not register the outstanding notes, nor do we intend to do so
following the exchange offer. Outstanding notes that are not tendered will
therefore continue to be subject to the existing transfer restrictions and may
be transferred only in limited circumstances under the securities laws. If you
do not exchange your outstanding notes, you will lose your right to have your
outstanding notes registered under the federal securities laws. As a result, if
you hold outstanding notes after the exchange offer, you may not be able to sell
your outstanding notes.
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RISKS RELATING TO THE NOTES
BECAUSE WE HAVE SUBSTANTIAL DEBT, WE MAY HAVE DIFFICULTY IN MAKING PAYMENTS ON
THE NOTES.
We have indebtedness that is substantial in relation to our shareholders'
equity. Because we have substantial debt, we may have difficulty in making
payments on the notes. As of June 30, 2000, we had $591.0 million in aggregate
principal amount of consolidated indebtedness outstanding, $290.3 million of
which was senior to the notes, and a shareholders' deficit of $215.6 million.
Our substantial indebtedness could have important consequences for you,
including:
- we may have difficulty making payments on the notes;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired;
- a substantial portion of our cash flow from operations must be dedicated
to the payment of principal and interest on our debt, reducing the funds
available to us for other purposes, including expansion through
acquisitions and expansion of our service offerings;
- certain of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of a rise in interest rates;
- substantially all of our assets have been pledged to secure our
obligations under our senior credit facilities and will be unavailable to
secure other debt, which will limit our ability to obtain additional debt
financing;
- we may be substantially more leveraged than some of our competitors,
which may place us at a competitive disadvantage; and
- our substantial indebtedness may hinder our ability to adjust rapidly to
changing market conditions and could make us more vulnerable in the event
of a downturn in general economic conditions or our business.
Our ability to make scheduled payments or to refinance our obligations
under our indebtedness will depend on our financial and operating performance,
which, in turn, is subject to prevailing economic conditions and to financial,
business and other factors beyond our control. Our operating performance, cash
flow and capital resources may not be sufficient for payment of our debt in the
future. If our cash flow and capital resources are not sufficient to fund our
debt service obligations, we could be forced to reduce or delay scheduled
expansion and capital expenditures, sell material assets or operations, obtain
additional capital or restructure our debt. In the event that we are required to
dispose of material assets or operations or restructure our debt to meet our
debt service and other obligations, we may not be able to do so on favorable
terms and may not be able to do so quickly enough to allow us to make payments
on the notes when due. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DESPITE SUBSTANTIAL LEVELS OF DEBT, WE MAY STILL BE ABLE TO INCUR EVEN MORE
DEBT, WHICH COULD FURTHER EXACERBATE THE RISK THAT WE MAY NOT BE ABLE TO MAKE
PAYMENTS ON THE NOTES.
We may be able to incur substantial debt in the future. The terms of the
indenture and the senior credit facilities permit the incurrence of additional
debt under some circumstances. In particular, as of July 5, 2000, we would have
been able to incur an additional $100.0 million of borrowings. We anticipate
that we will fund future acquisitions in part through the incurrence of
additional indebtedness. For example, if we consummated the acquisition
contemplated by the July 1999 non-binding letter of intent disclosed under
"Prospectus Summary -- Recent Developments," we expect that we would fund a
portion of the $20 million purchase price with borrowings under our senior
credit facility. If new debt is added to our existing debt, the related risks
that you face as a holder of the notes could intensify.
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BECAUSE THE NOTES AND THE GUARANTEES ARE SUBORDINATED TO SENIOR DEBT, IN THE
EVENT THE ISSUERS BECOME INSOLVENT, THE HOLDERS OF THE NOTES WILL NOT RECEIVE
ANY PAYMENT ON THE NOTES UNTIL ALL SENIOR DEBT IS PAID IN FULL.
Payment on the notes is subordinated in right of payment to all of our
senior indebtedness, including the senior credit facilities. By reason of the
subordination provisions of the indenture, in the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of the issuers,
holders of notes will not receive any payment on the notes until all senior
debt, including the senior credit facilities, is paid in full. As a result, in
the event of the liquidation or dissolution of the issuers, holders of the notes
may receive less, ratably, than holders of senior debt.
In addition, no payment will be able to be made in respect of the notes
during the continuance of payment defaults on our senior debt, and payments on
the notes may be prohibited for up to 180 consecutive days in the event of a
non-payment default on our senior debt. As of June 30, 2000, the aggregate
principal amount of our consolidated indebtedness to which the notes were
subordinated was approximately $290.3 million. The notes are unsecured, and are
effectively subordinated to all secured obligations to the extent of the value
of the assets securing the secured obligations. The guarantees are similarly
subordinated and, as of June 30, 2000, were subordinated to approximately $290.3
million of debt.
ORIUS CAPITAL HAS NO ASSETS FROM WHICH TO MAKE PAYMENTS ON THE NOTES AND
PARENT'S GUARANTEE PROVIDES LITTLE, IF ANY, ADDITIONAL CREDIT SUPPORT FOR THE
NOTES. YOU SHOULD NOT RELY ON EITHER ORIUS CAPITAL OR PARENT TO RECEIVE PAYMENTS
ON THE NOTES.
Orius Capital was formed in connection with the initial offering of the
outstanding notes and has no assets and no operations from which to make
payments on the notes and is prohibited from engaging in any business
activities, except in connection with the notes. In addition, Parent is a
holding company whose sole source of operating income and cash flow is derived
from NATG and whose only material asset is NATG's capital stock. Parent is
therefore dependent upon dividends and distributions of NATG's earnings to
perform its obligations under its guarantee. As a result, Parent's guarantee
provides little, if any, additional credit support for the notes. Furthermore,
the indenture does not impose any restrictions on the business or operations of
Parent or on, among other things, the amount of indebtedness that Parent may
incur.
NATG WILL NOT BE ABLE TO MAKE PAYMENTS ON THE NOTES UNLESS IT RECEIVES
SUFFICIENT DIVIDENDS AND LOANS FROM ITS SUBSIDIARIES.
NATG is a holding company. Its subsidiaries conduct substantially all of
its operations and own substantially all of its assets. NATG's cash flow and its
ability to meet its debt service obligations depend upon the cash flow of its
subsidiaries and the payment of funds by its subsidiaries in the form of loans
and dividends. NATG will not be able to make payments on the notes unless it
receives sufficient dividends and loans from its subsidiaries. NATG's
subsidiaries are not obligated to make funds available to NATG for payments on
the notes. In addition, the ability of its subsidiaries to make payments to it
will depend on their earnings, the terms of their debt, business and tax
considerations and legal restrictions.
IF WE BECAME INSOLVENT, THE LENDERS UNDER THE SENIOR CREDIT FACILITY WOULD HAVE
A CLAIM ON ALL OF OUR ASSETS BEFORE THE HOLDERS OF THE NOTES.
The notes are not secured by any of Parent's assets or any of its
subsidiaries' assets. Our obligations under our senior credit facilities are
secured by substantially all of Parent's assets and its subsidiaries' assets. If
an issuer became insolvent or was liquidated, or if payment under the senior
credit facilities was accelerated, the lenders under the senior credit
facilities will have a claim on all assets securing the senior credit facilities
before the holders of unsecured debt, including the notes.
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IF WE ARE UNABLE TO COMPLY WITH THE NUMEROUS COVENANTS UNDER THE SENIOR CREDIT
FACILITIES AND THE INDENTURE, ALL OF OUR INDEBTEDNESS COULD BE ACCELERATED AND
WE MIGHT NOT BE ABLE TO PAY THE NOTES IN FULL.
In the event that we fail to comply with the numerous covenants contained
in our senior credit facilities and the indenture, we would be in default under
our senior credit facilities and the maturity of substantially all of our
long-term indebtedness could be accelerated. If the indebtedness under the
senior credit facilities was accelerated, we may not be able to repay the
indebtedness under the notes in full.
The senior credit facilities require Parent to meet financial ratios and
tests, including:
- a minimum consolidated net worth test;
- a maximum consolidated total leverage test;
- a minimum interest coverage test; and
- a minimum consolidated fixed charge coverage test.
Our ability to comply with the covenants and other terms of our senior
credit facilities and the indenture and to satisfy our debt obligations will
depend on our future operating performance.
See "Description of Senior Credit Facilities" and "Description of the
Notes."
IF WE WERE REQUIRED TO WRITE OFF A SIGNIFICANT AMOUNT OF OUR GOODWILL OR TO
SIGNIFICANTLY REDUCE THE PERIOD OVER WHICH WE AMORTIZE GOODWILL, WE MIGHT NOT BE
ABLE TO COMPLY WITH THE NET WORTH COVENANT IN OUR SENIOR CREDIT FACILITY, WHICH
COULD CAUSE ALL OF OUR INDEBTEDNESS TO BE ACCELERATED, IN WHICH CASE WE MIGHT
NOT BE ABLE TO PAY THE NOTES IN FULL.
If we were required to write off a significant amount of our goodwill or to
significantly reduce the period over which we amortize goodwill, we might not be
able to comply with the net worth covenant in our senior credit facility, which
could cause all of our indebtedness to be accelerated. If all of our
indebtedness was accelerated, we might not be able to pay the notes in full.
We have a significant amount of goodwill. As of June 30, 2000, we had
unamortized goodwill of $418.7 million, which is currently being amortized over
a 25-year period. If we were to determine that this goodwill had become
impaired, meaning that the value of our business had declined, we would be
required to write-off a portion of this goodwill, which would reduce our
earnings and our net worth. If the write-off was significant, it could cause us
to violate our net worth covenant. We are required under our senior credit
facility to maintain net worth of at least $128.5 million. As of June 30, 2000,
we had net worth, as defined in our senior credit agreement, of $189.2 million.
Similarly, if we were required, due to a change in accounting policy or
otherwise, to significantly reduce the period over which we amortize our
goodwill, we might violate the net worth covenant. A reduction in the
amortization period would result in an increase in our amortization expense,
which in turn would reduce our earnings and net worth. See "Description of
Senior Credit Facilities."
THE GUARANTEES MAY BE UNENFORCEABLE DUE TO FRAUDULENT CONVEYANCE STATUTES, IN
WHICH CASE YOU WOULD NOT BE ABLE TO RELY UPON THE GUARANTORS' ASSETS TO RECEIVE
PAYMENT ON THE NOTES.
The obligations of the guarantors may be subject to challenge under state
or federal fraudulent transfer laws. If a guarantee were determined to be a
fraudulent conveyance, it could be unenforceable and you would not be able to
rely on the guarantee to secure payment of the notes. In general, under
fraudulent conveyance laws, a court can subordinate or avoid an obligation such
as a guarantee if it determines that the obligation was incurred with actual
intent to hinder, delay or defraud creditors or if the
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guarantor did not receive fair consideration or reasonably equivalent value for
the guarantee and the guarantor also:
- was insolvent or rendered insolvent as a result of the guarantee;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay at maturity.
Generally an entity is insolvent if:
- the sum of its debts, including contingent or unliquidated debts, is
greater than all of its property at a fair valuation; or
- the present fair salable value of its assets is less than the amount
required to pay its probable liability on existing debts as they become
due.
WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL OFFER, IN
WHICH CASE WE WOULD BE IN DEFAULT ON THE NOTES. A CHANGE OF CONTROL MAY ALSO
CAUSE ALL OF OUR SENIOR DEBT TO BE ACCELERATED, IN WHICH CASE WE MAY NOT BE ABLE
TO PAY THE NOTES IN FULL.
Upon the occurrence of specified change of control events, we are required
to offer to purchase each holder's notes at a price of 101% of their principal
amount plus accrued interest. We may not have sufficient financial resources to
purchase all of the notes that holders tender to us upon a change of control
offer. The occurrence of a change of control could also constitute an event of
default under the senior credit facilities and/or any of our future credit
agreements. Our bank lenders may also have the right to prohibit us from
repurchasing the notes, in which event we would be in default on the notes. See
"Description of the Notes -- Change of Control."
RISKS RELATING TO OUR BUSINESS
IF WE ARE UNABLE TO CONTINUE TO SUCCESSFULLY INTEGRATE THE COMPANIES WE HAVE
ACQUIRED AND TO MANAGE THE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY,
INCLUDING THE RISKS ASSOCIATED WITH INCURRING ADDITIONAL DEBT TO FUND
ACQUISITIONS, OUR PROFITABILITY WOULD BE REDUCED AND WE MAY NOT BE ABLE TO
GENERATE ENOUGH CASH FLOW TO MAKE PAYMENTS ON THE NOTES.
If we are unable to integrate or successfully manage the companies we have
acquired, including LISN, or the businesses that we may acquire in the future,
we may not realize anticipated cost savings and revenue growth, which may result
in reduced profitability or operating losses and prevent us from making payments
on the notes.
Acquisitions involve a number of special risks including:
- failure of the acquired businesses to achieve the results we expect;
- diversion of our management's attention from operational matters;
- our inability to retain key personnel of the acquired businesses;
- risks associated with unanticipated events or liabilities;
- risks associated with the incurrence of additional senior debt to fund
the acquisitions;
- the potential disruption of our business; and
- customer dissatisfaction or performance problems at the acquired
businesses.
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The realization of all or any of the risks described above could materially
and adversely affect the reputation of our company and reduce our revenues,
which could prevent us from making payments on the notes.
IF WE ARE UNABLE TO ATTRACT ACQUISITION CANDIDATES AND TO OBTAIN FINANCING FOR
FUTURE ACQUISITIONS, OUR BUSINESS MAY NOT BE SUCCESSFUL AND WE MAY NOT BE ABLE
TO MAKE PAYMENTS ON THE NOTES.
We may be unable to support our strategy of growth through acquisitions if
we cannot attract acquisition candidates and finance future acquisitions. We
expect to face competition for acquisition candidates, which may limit the
number of our acquisition opportunities and may lead to higher acquisition
prices. If we are unable to grow through acquisitions, our business may not be
successful and we may not be able to make payments on the notes.
We expect to use Parent's equity or debt securities for all or a portion of
the consideration for future acquisitions. If Parent's equity securities do not
maintain a sufficient value or potential acquisition candidates are unwilling to
accept Parent's equity or debt securities as part of the consideration for the
sale of their businesses, we may be required to utilize more of our cash
resources to pursue our acquisition program, whether through additional
borrowings under our senior credit facilities, cash on hand or otherwise. Using
cash for acquisitions limits our financial flexibility and makes us more likely
to seek additional capital through future debt or equity financings. When we
seek additional debt or equity financings, we may not be able to complete the
financing or may not be able to complete the financing on terms acceptable to
us.
We are required to obtain the consent of our senior lenders for
acquisitions that exceed minimum levels of cash consideration and the aggregate
amount we can borrow under the senior credit facilities to finance acquisitions
is limited. Our senior lenders may not permit us to complete future
acquisitions.
WE HAVE EXPERIENCED RAPID GROWTH IN THE PAST TWO YEARS, HAVING ACQUIRED 18
BUSINESSES, AND WE INTEND TO ACQUIRE ADDITIONAL BUSINESSES IN THE FUTURE. IF WE
ARE UNABLE TO MANAGE THIS GROWTH, OUR PROFITABILITY WILL BE REDUCED AND WE MAY
NOT BE ABLE TO MAKE PAYMENTS ON THE NOTES.
Our acquisition of 18 businesses in the past two years has placed, and is
expected to continue to place, a significant strain on our managerial,
operational and financial resources. As part of our growth strategy, we expect
to pursue additional acquisitions in the future. If we are unable to manage our
growth, our profitability will be reduced and we may not be able to make
payments on the notes. To manage any future growth, we must continue to
implement and improve our operational and financial systems, and must expand,
train and manage our expanded employee base. For example, we had 5,885 employees
at June 30, 2000, as compared to 2,670 employees at June 30, 1999. We may
encounter unexpected difficulties in managing the expansion of our operations,
and our systems, products and controls may be inadequate to support our expanded
operations. Any inability to manage growth effectively could reduce our
profitability and prevent us from making payments on the notes.
ALL OF OUR CUSTOMER CONTRACTS CAN BE CANCELED ON SHORT NOTICE. IF OUR CUSTOMER
CONTRACTS WERE CANCELED, OUR REVENUE WOULD DECREASE, WHICH COULD PREVENT US FROM
MAKING PAYMENTS ON THE NOTES.
All of our customer contracts are cancelable upon 90 days' notice or less
without penalty, except, in some cases, for the recovery of our actual committed
costs and profit on work performed up to the date of cancellation. Accordingly,
our future revenues may not approximate our historical performance. In addition,
because all of our customer contracts are cancelable, our backlog, which was
approximately $663 million as of June 30, 2000, is not necessarily indicative of
our future revenue. If any canceled contracts are not replaced with contracts
from other customers, or if we do not receive orders under our master service
agreements, our revenue would decrease and we could be unable to meet our fixed
expenses, including payments on the notes.
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IF WE WERE TO LOSE VERIZON AS A CUSTOMER, OUR REVENUE WOULD DECREASE
SUBSTANTIALLY, WHICH COULD PREVENT US FROM MAKING PAYMENTS ON THE NOTES.
Our revenue from Verizon represented approximately 25.2% of our pro forma
revenue for the six months ended June 30. In recent months, our revenue from
Verizon has increased in both absolute terms and as a percentage of our revenue
and this trend may continue for the foreseeable future. The loss of Verizon as a
customer or a significant decline in its demand for our services would
substantially reduce our revenue and could prevent us from making payments on
the notes. Many of our contracts with Verizon do not guarantee us a particular
amount of work, therefore, despite the long-term nature of some of these
contracts, they do not provide us with the security that a typical long-term
contract might.
OUR EXTERNAL TELECOM SERVICES BUSINESS IS SEASONAL, EXPOSING US TO REDUCED
REVENUE IN THE FIRST AND FOURTH QUARTERS OF EACH YEAR, WHICH MAY NEGATIVELY
IMPACT THE TRADING MARKET FOR YOUR NOTES.
Our revenue and net income in the first quarter and the fourth quarter have
in the past been, and may in the future be, reduced by adverse holiday season
shutdowns, weather conditions and the year-end budgetary spending patterns of
our customers. The quarterly variations in our revenues and income could
negatively impact the trading market for your notes, should a trading market
develop, in which case you may not be able to sell your notes or to sell them at
a desirable price.
For example, our pro forma revenue for each of the four quarters of 1999
and the first and second quarters of 2000 were:
PRO FORMA
REVENUE
QUARTER (IN MILLIONS)
------- -------------
1999
First quarter......................................... $111
Second quarter........................................ 140
Third quarter......................................... 166
Fourth quarter........................................ 170
2000
First quarter......................................... 171
Second quarter........................................ 199
As shown above, our revenues remained flat during the fourth quarter of 1999 and
the first quarter of 2000. Because our operating results may vary significantly
from quarter to quarter based on the factors described above, our operating
results may not meet the expectations of analysts and investors, and this could
negatively impact the trading market for your notes.
WE EXPECT OUR QUARTERLY RESULTS TO FLUCTUATE. IF WE FAIL TO MEET REVENUE AND
EARNINGS ESTIMATES, THE TRADING MARKET FOR YOUR NOTES WOULD BE ADVERSELY
EFFECTED.
Quarterly variations in our revenues and net income result from several
factors, including:
- the timing and magnitude of acquisitions;
- variations in the margins of projects performed during any particular
quarter;
- the timing and volume of work under new agreements;
- the spending patterns of customers;
- the termination of existing agreements;
- costs we incur to support growth internally or otherwise;
- the change in mix of our customers, contracts and business;
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- fluctuations in construction and design costs; and
- regional and general economic conditions.
Due to these factors, quarterly revenues, expenses and results of
operations could vary significantly in the future. Because our operating results
may vary significantly from quarter to quarter based upon the factors described
above, results may not meet the expectations of analysts and investors, which
could negatively impact the trading market for your notes.
AN INCREASE IN INTEREST RATES COULD REDUCE OUR PROFITABILITY AND PREVENT US FROM
MAKING PAYMENTS ON THE NOTES WHEN DUE.
A substantial portion of our existing indebtedness, including all of our
indebtedness under our senior credit facilities, bears interest at variable
rates. At June 30, 2000, we had variable rate debt of $285.8 million. We
currently hedge a portion of our exposure to fluctuations in interest rates. As
a result, we are vulnerable to interest rate fluctuations, and an increase in
interest rates could substantially increase our interest expense, which could in
turn reduce our profitability and could prevent us from making payments on the
notes when due.
A DECLINE IN THE WORK ASSIGNED TO US UNDER OUR MASTER SERVICE, TURNKEY AND OTHER
MAINTENANCE SERVICE AGREEMENTS WOULD REDUCE OUR REVENUE, WHICH COULD MAKE IT
DIFFICULT FOR US TO MAKE PAYMENTS ON THE NOTES.
A significant decline in work assigned to us under our master service,
turnkey and other maintenance service agreements could reduce our revenue and
make it difficult for us to make payments on the notes. Under our master service
agreements, our customers have no obligation to undertake any installation
projects or other work with us. In addition, our customers may use their own
regularly employed personnel instead of us, which would reduce our revenue.
Therefore, despite the long-term nature of these master service agreements, they
do not give us the security that typical long-term contracts may provide.
Similarly, under our other maintenance agreements, our customers do not
generally guarantee us a particular amount of work.
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES, OR IF A SHORTAGE OF
LABOR INCREASES OUR LABOR COSTS SUBSTANTIALLY, OUR PROFITABILITY WOULD BE
REDUCED AND WE MIGHT NOT BE ABLE TO MAKE PAYMENTS ON THE NOTES.
Our ability to provide high-quality services on a timely basis requires
that we employ an adequate number of skilled engineers, installation
technicians, equipment operators, linemen, foremen, cable and fiber splicers and
project managers. As projects are completed, we typically experience a high
turn-over rate among these employees. For the year ended December 31, 1999, we
experienced an employee turnover rate of 36% and, for the six month ended June
30, 2000, we experienced an employee turnover rate of 32%. Because we have been
able to recruit and train a sufficient number of employees, this turnover has
not had a material adverse effect on our business to date. However, if we are
unable to attract and retain a sufficient number of qualified employees in the
future, our profitability will be reduced and we might not be able to make
payments on the notes. We, like many of our competitors, are currently
experiencing shortages of qualified personnel. We may not be able to maintain
the skilled labor force necessary to operate efficiently and to support our
growth strategy. In addition, our labor expenses could increase as a result of a
shortage in the supply of skilled personnel. To the extent we cannot hire
employees on a full-time basis, we are often required to hire independent
contractors at rates higher than those we would pay to our own employees for
comparable work. As of June 30, 2000, we had approximately 1,800 subcontracted
workers. A substantial increase in our labor costs would also reduce our
profitability, which could prevent us from making payments on the notes.
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TECHNOLOGICAL AND REGULATORY CHANGES COULD REDUCE DEMAND FOR OUR SERVICES AND
REDUCE OUR REVENUE, WHICH COULD PREVENT US FROM MAKING PAYMENTS ON THE NOTES.
New technologies could reduce the need for installation, repair and
replacement of wireline services, which could reduce the demand for our
services, which would reduce our revenue and could prevent us from making
payments on the notes. The telecom industry is subject to rapid changes in
technology. Wireline systems used for the transmission of video, voice and data
are subject to potential displacement by various technologies, including
wireless technologies. We do not currently design, install or repair wireless
networks, although we intend to expand our service offerings to include these
services in the future. We may not be successful in developing or marketing our
services to wireless network operators. In addition, our customers may develop
new technologies that allow users to receive enhanced services without a
significant upgrade of their existing telecommunications networks. Additionally,
the telecom industry is subject to significant governmental regulation at the
federal, state and local levels. Regulatory changes in the telecom industry
could reduce the demand for our services. Due in part to changes in the
regulatory environment, the telecom industry has been characterized by a high
level of consolidation that may result in the loss of one or more customers.
BECAUSE SOME OF OUR COMPETITORS HAVE GREATER RESOURCES THAN WE DO AND BECAUSE
THERE ARE FEW BARRIERS TO ENTRY IN OUR INDUSTRY, WE MAY NOT BE ABLE TO MAINTAIN
AND ENHANCE OUR COMPETITIVE POSITION. IF WE ARE UNABLE TO DO SO, OUR BUSINESS
WILL NOT BE SUCCESSFUL AND WE WILL NOT BE ABLE TO MAKE PAYMENTS ON THE NOTES.
Our industry is highly competitive and is served by numerous small,
owner-operated companies, a few large national companies and several large
regional companies. There are relatively few barriers to entry in our industry
and we expect that competition will intensify in the future. As a result, any
organization that has adequate financial resources and access to technical
expertise may become one of our competitors. We therefore may not be able to
maintain or enhance our competitive position. If we are unable to do so, our
business will not be successful and we will not be able to make payments on the
notes.
Competition in the industry depends on a number of factors, including
price. Our competitors, particularly the smaller, owner-operated companies, may
have lower overhead cost structures and may, therefore, be able to provide their
services at lower rates than we can. Some of our competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than we do, including Dycom Industries, Inc., Mastec,
Inc., Quanta Services, Inc. and others. As a result, they may be able to develop
and expand their customer base more quickly, adapt more swiftly to new or
emerging technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily, and devote greater resources
to the marketing and sale of their products and services than we can. In
addition, our competitive position within our industry would suffer if we were
to lose our status as a "preferred" service provider to our significant
customers. We also face competition from the in-house service organizations of
our existing or prospective customers who often employ personnel that perform
some of the same types of services as we do. Our revenues would decrease if
these customers increased the amount of services performed by their in-house
organizations, which could prevent us from making payments on the notes.
OUR CONTROLLING STOCKHOLDERS MAY MAKE DECISIONS THAT COULD ADVERSELY AFFECT THE
HOLDERS OF THE NOTES, SUCH AS DECISIONS TO ISSUE ADDITIONAL DEBT OR TO DECLARE
DIVIDENDS.
Willis Stein & Partners owns capital stock representing approximately 42%
of the outstanding voting power of Parent. Willis Stein & Partners and all of
our other stockholders have entered into an investors agreement governing the
composition of Parent's board of directors. Willis Stein & Partners has the
right to designate a majority of the members of that board. As a result, Willis
Stein & Partners has the ability to appoint new management and approve any
action requiring the approval of Parent's stockholders and may make decisions
that could adversely affect the holders of the notes. For example, the directors
have the authority to make decisions affecting Parent's capital structure, and
Willis Stein may appoint directors
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that would vote to issue additional indebtedness or declare dividends. The
interests of Willis Stein & Partners may not be the same as those of the holders
of the notes.
BECAUSE OUR SENIOR MANAGEMENT TEAM HAS AN AVERAGE OF OVER 20 YEARS OF EXPERIENCE
IN OUR INDUSTRY AND SIGNIFICANT ACQUISITION EXPERIENCE, THEY WOULD BE DIFFICULT
TO REPLACE. THE DEPARTURE OF KEY PERSONNEL COULD DISRUPT OUR BUSINESS AND REDUCE
OUR PROFITABILITY, WHICH COULD PREVENT US FROM MAKING PAYMENTS ON THE NOTES WHEN
DUE.
We depend upon the continued services and experience of our senior
management team, including William J. Mercurio, our President and Chief
Executive Officer, and of the managers of businesses we acquire. Our executive
management and the senior management of our operating subsidiaries have an
average of over 20 years of experience in the telecom infrastructure services
industry. Our executive management team also has significant acquisition
experience. The loss of the services of any of our key employees, because they
would be difficult to replace, could disrupt our business plan and growth
strategy and reduce our profitability, which could prevent us from making
payments on the notes when due.
ENVIRONMENTAL AND SAFETY REQUIREMENTS COULD CAUSE US TO INCUR MATERIAL COSTS IN
THE FUTURE, WHICH COULD PREVENT US FROM MAKING PAYMENTS ON THE NOTES.
We are subject to the requirements of federal, state and local
environmental and occupational health and safety laws and regulations. It is
possible that these requirements may change in the future. These requirements
are complex, constantly changing and have tended to become more stringent over
time. It is possible that we have not been and will not be at all times in
complete compliance with all of these requirements and that we could incur
material costs or liabilities in the future as a result of our noncompliance,
which could prevent us from making payments on the notes.
IN MAKING A DECISION WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER, INVESTORS
SHOULD REALIZE THAT, DUE TO THE SIGNIFICANT NUMBER OF ACQUISITIONS THAT WE HAVE
COMPLETED OVER THE PAST TWO YEARS, OUR HISTORICAL FINANCIAL STATEMENTS ARE
GENERALLY NOT REFLECTIVE OF OUR ONGOING OPERATIONS.
Since March 1998, we have acquired 18 companies, including the acquisition
of LISN in December 1999. All of these acquisitions were accounted for using the
purchase method of accounting. As a result, our historical financial statements
do not include the results of operations of acquisitions prior to the date they
were acquired. Due to the significant number of acquisitions that we have
completed over the last two years, our historical financial statements are not
reflective of our ongoing operations. In addition, prior to their acquisition by
us, many of the acquired companies were operated with different strategic and
financial objectives. Some of the former owners of the businesses we acquired
sought to maximize cash flow and stockholder distributions, rather than reinvest
earnings in future growth. In addition, our acquired businesses operated under
varying tax structures, which influenced the historical level of owners'
compensation. As a result, the historical financial statements of these acquired
businesses are generally not representative of their operations following their
acquisition.
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
All statements other than statements of present or historical facts, and
our opinions and beliefs relating to these statements, included in this
prospectus, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or the negative thereof or
other variations of this terminology or similar terminology. All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the
cautionary statements. Although we believe that the expectations reflected in
our forward-looking statements are reasonable, we can give no assurance that
these expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations are disclosed
under "Risk Factors" and elsewhere in this prospectus, including, among others:
- our substantial debt and significant debt service obligations;
- changes in the laws and regulations governing the telecom industry;
- the competitive nature of the telecom infrastructure industry;
- changes in our relationships with our major customers;
- changes in technology that could reduce demand for our services;
- our ability to attract and retain qualified key employees; and
- our ability to successfully integrate acquired businesses, including
LISN.
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LISN ACQUISITION
On December 15, 1999, Parent and LISN entered into a series of transactions
that resulted in LISN becoming a wholly owned subsidiary of NATG. In connection
with the LISN acquisition, Parent was acquired by an investor group consisting
of LISN's former stockholders, including Willis Stein & Partners and members of
LISN's management, new co-investors and members of Parent's and its
subsidiaries' management. The principal components of the LISN acquisition
included:
- Additional Investment. Willis Stein & Partners, a group of co-investors
and members of LISN's management invested cash in the aggregate of $112.2
million in LISN immediately prior to the exchange described below.
- Exchange of LISN Securities. LISN's former stockholders, including Willis
Stein & Partners and members of LISN's management, exchanged all of their
outstanding junior subordinated notes, preferred stock and common stock
of LISN for a similar strip of securities issued by Parent.
- Borrowings. NATG borrowed: (1) approximately $275.0 million, excluding
$9.3 million under standby letters of credit described below, under the
new multi-tranche senior credit facilities providing for aggregate
borrowings of up to $375.0 million, consisting of a (i) $100.0 million
revolving credit facility to be used for permitted acquisitions and
working capital, with sublimits of $75.0 million for acquisition loans
and $50.0 million for working capital loans, (ii) $75.0 million tranche A
term loan, with a $50.0 million letter of credit subfacility and (iii)
$200.0 million tranche B term loan, and (2) $100.0 million under a senior
subordinated term loan.
- Redemption of Parent Securities. We redeemed all of Parent's outstanding
capital stock other than a portion of the capital stock owned by members
of Parent's or its subsidiaries' management and the securities issued to
LISN's former stockholders.
- Rollover of Parent Equity. Substantially all of Parent's management
stockholders rolled over approximately one-half the value of their equity
interests in Parent. As part of the rollover, Parent's stockholders
exchanged a portion of their existing common stock for newly issued
junior subordinated notes and preferred stock of Parent.
- Repayment of Existing Indebtedness. NATG repaid an aggregate of $179.8
million of indebtedness of its subsidiaries and $82.3 million of LISN's
indebtedness.
We refer to all of the foregoing transactions and payment of all of the
fees and expenses associated with these transactions collectively as the LISN
acquisition.
Following the LISN acquisition, the investor group led by Willis Stein &
Partners will own capital stock representing approximately 65% of Parent's
voting power and the management of Parent and its subsidiaries, including LISN,
will own capital stock representing approximately 35% of Parent's voting power.
The LISN acquisition resulted in each stockholder of Parent owning Parent
common stock, series C preferred stock and junior subordinated notes, with
values representing approximately 9%, 54% and 37%, respectively, of the fair
market value of the securities. For more information regarding the terms of
Parent's common stock, preferred stock and junior subordinated notes, see
"Description of Parent's Securities."
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The following table summarizes the sources and uses of funds in connection
with the LISN acquisition as of December 15, 1999:
SOURCES OF FUNDS AMOUNT
- ---------------- -------------
(IN MILLIONS)
Senior credit facilities........ $275.0
Senior subordinated term loan... 100.0
New investment.................. 112.2
Retained investment:
LISN stockholders............. 170.3
Parent stockholders........... 91.7
Cash on hand.................... 2.3
------
TOTAL SOURCES......... $751.5
======
USES OF FUNDS AMOUNT
- ------------- -------------
(IN MILLIONS)
Refinance existing $262.1
indebtedness..................
Exchange of LISN securities..... 170.3
Redemption of Parent 213.2
securities....................
Rollover of Parent equity....... 91.7
Fees and expenses............... 14.2
------
TOTAL USES............ $751.5
======
The new investment includes approximately $41.3 million in aggregate
principal amount of Parent's junior subordinated notes, $60.8 million in
aggregate liquidation preference of Parent's preferred stock and $10.1 million
of Parent's common stock, based on its estimated fair market value.
The retained investment by LISN includes approximately $62.7 million in
aggregate principal amount of Parent's junior subordinated notes, $92.3 million
in aggregate liquidation preference of Parent's preferred stock and $15.3
million of Parent's common stock, based on its estimated fair market value. The
retained investment by Parent's stockholders includes approximately $33.7
million in aggregate principal amount of Parent's junior subordinated notes,
$49.7 million in aggregate liquidation preference of Parent's preferred stock
and $8.3 million of Parent's common stock, based on its estimated fair market
value.
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The following diagram sets forth the corporate structure of Parent and its
subsidiaries following the LISN acquisition and the initial offering of the
outstanding notes:
[FLOW CHART]
Management's ownership of 35% includes 24.5% attributable to stockholders
of Orius prior to the LISN acquisition.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The issuers, the guarantors and the initial purchasers entered into a
registration rights agreement in connection with the original issuance of the
notes. The registration rights agreement provides that we will, take the
following actions at our expense, for the benefit of the holders of the notes.
- Within 120 days after the date on which the outstanding notes were
issued, we will file the exchange offer registration statement, of which this
prospectus is a part, relating to the exchange offer. The exchange notes will
have terms substantially identical in all material respects to the outstanding
notes except that the exchange notes will not contain transfer restrictions.
- We will cause the exchange offer registration statement to be declared
effective under the Securities Act within 210 days after the date on which the
outstanding notes were issued.
- We will keep the exchange offer open for at least 20 business days, or
longer if required by applicable law, after the date notice of the exchange
offer is mailed to the holders.
For each of the outstanding notes surrendered in the exchange offer, the
holder who surrendered the note will receive an exchange note having a principal
amount equal to that of the surrendered note. Interest on each exchange note
will accrue from the later of (1) the last interest payment date on which
interest was paid on the outstanding note surrendered. (2) if no interest has
been paid on the outstanding note, from the date on which the outstanding notes
were issued. If the note is surrendered for exchange on a date in a period that
includes the record date for an interest payment date to occur on or after the
date of the exchange will accrue from that interest payment date.
Under existing interpretations of the SEC contained in several no-action
letters to third parties, the exchange notes will be freely transferable by
holders of the notes, other than our affiliates, after the exchange offer
without further registration under the Securities Act. However, each holder that
wishes to exchange its outstanding notes for exchange notes will be required to
make the following representations.
- Any exchange notes to be received by the holder will be acquired in the
ordinary course of its business.
- At the time of the commencement of the exchange offer, the holder has no
arrangement or understanding with any person to participate in the distribution,
within the meaning of Securities Act, of the exchange notes in violation of the
Securities Act.
- The holder is not our affiliate as defined in Rule 405 promulgated under
Securities Act.
- If the holder is not a broker-dealer, it is not engaged in, and does not
intend to engage in, the distribution of exchange notes.
- If the holder is a broker-dealer that will receive exchange notes for its
own account in exchange for outstanding notes that were acquired as a result of
market-making or other trading activities, the holder will deliver a prospectus
in connection with any resale of the exchange notes. We refer to these broker-
dealers as participating broker-dealers.
- The holder is not acting on behalf of any person or entity that could not
truthfully make these representations.
We will agree to make available, during the period required by the
Securities Act, a prospectus meeting the requirements of the Securities Act for
use by participating broker-dealers and any other persons with similar
prospectus delivery requirements for use in connection with any resale of
exchange notes.
We will be required to file a shelf registration statement covering resales
of the outstanding notes if:
(1) because of any change in law or in currently prevailing interpretations
of the staff of the SEC, we are not permitted to effect an exchange offer,
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(2) the exchange offer is not consummated within 255 days of the date on
which the outstanding notes were issued,
(3) in some circumstances, the holders of unregistered exchange notes so
request, or
(4) in the case of any holder that participates in the exchange offer, the
holder does not receive exchange notes on the date of the exchange that may be
sold without restriction under state and federal securities laws.
In addition, we have agreed to use our best efforts to keep effective the
shelf registration statement until the earlier of two years after the date on
which the outstanding notes were issued or the time when all of the applicable
notes have been sold under the shelf registration statement.
We will, in the event that a shelf registration statement is filed, provide
to each holder copies of the prospectus that is a part of the shelf registration
statement, notify each holder when the shelf registration statement for the
outstanding notes has become effective and take other actions as are required to
permit unrestricted resales of the outstanding notes. A holder that sells
outstanding notes that were registered on the shelf registration statement,
- will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers,
- will be subject to applicable civil liability provisions under Securities
Act in connection with the sales, and
- will be bound by the provisions of the registration rights agreement that
are applicable to the holder, including indemnification rights and
obligations.
If we fail to comply with any of the above provisions or if the exchange
offer registration statement or the shelf registration statement fails to become
effective, then, as liquidated damages, additional interest will become payable
in respect of the outstanding notes as calculated below.
(1) If
(A) neither the exchange offer registration statement nor the shelf
registration statement is filed with the SEC on or prior to 120 days after
the date on which the outstanding notes were issued or
(B) notwithstanding that we have consummated or will consummate an
exchange offer, we are required to file a shelf registration statement and
the shelf registration statement is not filed on or prior to the date
required by the registration rights agreement,
then commencing on the day after the required filing date, additional
interest shall accrue on the principal amount of the notes. Additional interest
will accrue at a rate of 0.5% per annum for the first 90 days immediately
following the required filing date, and the additional interest rate will
increase by an additional 0.5% per annum at the beginning of each subsequent
90-day period.
(2) If
(A) neither the exchange offer registration statement nor a shelf
registration statement is declared effective by the 210th day after the
date on which the outstanding notes were issued or, with respect to any
shelf registration statement, the later of the 60th day after the date the
shelf registration was filed or the 210th day after the date on which
outstanding notes were issued, or
(B) notwithstanding that we have consummated or will consummate an
exchange offer, we are required to file a shelf registration statement and
the shelf registration statement is not declared effective by the SEC on or
prior to the relevant effectiveness date,
then, commencing on the day after either the required effectiveness date,
additional interest will accrue on the principal amount of the notes. Additional
interest will accrue at a rate of 0.5% per annum for the first 90 days
immediately following the required effectiveness date, and the additional
interest rate
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will increase by an additional 0.5% per annum at the beginning of each
subsequent 90-day period. Because this registration statement was not declared
effective by the SEC by September 6, 2000, which was the 210th day following the
issuance of the outstanding notes, we have begun to incur additional interest on
the outstanding notes, as liquidated damages, at a rate of 0.5% per annum.
(3) If
(A) the issuers have not exchanged exchange notes for all securities
validly tendered in the exchange offer on or prior to the 30th day after
the effective date of the exchange offer registration statement,
(B) if applicable, a shelf registration statement has been declared
effective and the shelf registration statement ceases to be effective at
any time during the effectiveness period, or
(C) we effect a suspension period in accordance with the terms of the
registration rights agreement,
then in each case, additional interest will accrue on the principal amount
of the notes. Additional interest will accrue at a rate of 0.50% per annum for
the first 90 days commencing on the
- 31st day after the effective date, in the case of (A) above,
- the day the shelf registration statement ceases to be effective in the
case of (B) above or
- the day the suspension period commences in the case of (C) above.
The additional interest rate will increase by an additional 0.50% per annum
at the beginning of each subsequent 90-day period.
The additional interest rate on the notes may not accrue under more than
one of clauses (1) through (3) above at any one time and at no time can the
aggregate amount of additional interest accruing exceed in the aggregate 1.5%
per annum. In addition, upon
- the filing of the exchange offer registration statement or a shelf
registration statement in the case of clause (1) above,
- the effectiveness of the exchange offer registration statement or a shelf
registration statement in the case of clause (2) above, or
- the exchange of the applicable exchange notes for all notes tendered, in
the case of clause (3)(A) above,
- the effectiveness of the applicable shelf registration statement which
had ceased to remain effective, in the case of clause (3)(B) above, or
- the termination of the suspension period, in the case of clause (3)(C)
above,
additional interest on the notes shall cease to accrue. Any amounts of
additional interest due as a result of the circumstances described in clause
(1), (2) or (3) above will be payable in cash on the same original interest
payment dates as the notes.
Following the consummation of the exchange offer, holders of the
outstanding notes who were eligible to participate in the exchange offer but who
did not tender their outstanding notes will not have any further registration
rights and the outstanding notes will continue to be subject to restrictions on
transfer. Accordingly, the liquidity of the market for the outstanding notes
could be adversely affected.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all outstanding notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the expiration date of the exchange offer. We will issue $1,000 principal amount
of exchange notes in exchange for each $1,000 principal amount of outstanding
notes accepted in the exchange offer. Holders may tender some or all of their
outstanding notes in the exchange offer. However, outstanding notes may be
tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes except that:
(1) the exchange notes bear a Series B designation and a different CUSIP
Number from the outstanding notes;
(2) the exchange notes have been registered under the Securities Act and
will not bear legends restricting their transfer; and
(3) the holders of the exchange notes will not be entitled to any rights
under the registration rights agreement, including the provisions providing for
an increase in the interest rate on the outstanding notes in certain
circumstances relating to the timing of the exchange offer, all of which rights
will terminate when the exchange offer is terminated.
The exchange notes will evidence the same debt as the outstanding notes and will
be entitled to the benefits of the indenture.
As of the date of this prospectus, $150,000,000 aggregate principal amount
of the outstanding notes were outstanding. We have fixed the close of business
on September 13, 2000 as the record date for the exchange offer for purposes of
determining the persons to whom this prospectus and the letter of transmittal
will be mailed initially.
Holders of outstanding notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware, or the indenture in
connection with the exchange offer. We intend to conduct the exchange offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the SEC.
We will be deemed to have accepted validly tendered outstanding notes when,
as and if we have given oral or written notice of our acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders for the
purpose of receiving the exchange notes from us.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of specified other events set forth in this
prospectus or otherwise, the certificates for any unaccepted outstanding notes
will be returned, without expense, to the tendering holder as promptly as
practicable after the expiration date of the exchange offer.
Holders who tender outstanding notes in the exchange offer 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
outstanding as part of the exchange offer. We will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
exchange offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" will mean 5:00 p.m., New York City time, on
October 16, 2000, unless we, in our sole discretion, extend the exchange offer,
in which case the term "expiration date" will mean the latest date and time to
which the exchange offer is extended.
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In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will mail to the registered holders
an announcement, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion,
(1) to delay accepting any outstanding notes, to extend the exchange offer
or to terminate the exchange offer if any of the conditions set forth below
under "-- Conditions" have not been satisfied, by giving oral or written notice
of any delay, extension or termination to the exchange agent or
(2) to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from their date of issuance. Holders
of outstanding notes that are accepted for exchange will receive, in cash,
accrued interest to, but not including, the date of issuance of the exchange
notes. Interest on the outstanding notes accepted for exchange will cease to
accrue upon issuance of the exchange notes.
Interest on the exchange notes is payable semi-annually on each February 1
and August 1, commencing on August 1, 2000.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must:
(1) complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal,
(2) have the signatures on the letter of transmittal guaranteed if required
by the letter of transmittal or transmit an agent's message in connection with a
book-entry transfer, and
(3) mail or otherwise deliver the letter of transmittal or the facsimile,
together with the outstanding notes and any other required documents, to the
exchange agent prior to 5:00 p.m., New York City time, on the expiration date.
To be tendered effectively, the outstanding notes, letter of transmittal or
an agent's message and other required documents must be completed and received
by the exchange agent at the address set forth below under "Exchange Agent"
prior to 5:00 p.m., New York City time, on the expiration date. Delivery of the
outstanding notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of the book-entry transfer must be
received by the exchange agent prior to the expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that the book-entry transfer facility
has received an express acknowledgment from the participant in the book-entry
transfer facility tendering the outstanding notes that the participant has
received and agrees:
- to participate in ATOP;
- to be bound by the terms of the letter of transmittal; and
- that we may enforce the agreement against the participant.
By executing the letter of transmittal, each holder will make to us the
representations set forth above in the third paragraph under the heading
"-- Purpose and Effect of the Exchange Offer."
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The tender by a holder and our acceptance of the tender will constitute
agreement between the holder and us in accordance with the terms and subject to
the conditions set forth in this prospectus and in the letter of transmittal or
agent's message.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
OR AGENT'S MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT
THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD
BE SENT TO US. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THEM.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the letter of transmittal.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member of the Medallion System unless the
outstanding notes are tendered:
(1) by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the letter of
transmittal or
(2) for the account of a member firm of the Medallion System.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by a member firm of the Medallion System.
If the letter of transmittal is signed by a person other than the
registered holder, the outstanding notes must be endorsed or accompanied by a
properly completed bond power, signed by the registered holder as the registered
holder's name appears on the outstanding notes with the signature on the bond
power guaranteed by a member firm of the Medallion System.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
offices of corporations or others acting in a fiduciary or representative
capacity, the person signing should so indicate when signing, and evidence
satisfactory to us of its authority to so act must be submitted with the letter
of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the
outstanding notes at DTC for the purpose of facilitating the exchange offer.
Subject to the establishment of the accounts, any financial institution that is
a participant in DTC's system may make book-entry delivery of outstanding notes
by causing DTC to transfer the outstanding notes into the exchange agent's
account with respect to the outstanding notes in accordance with DTC's
procedures for the transfer. Although delivery of the outstanding notes may be
effected through book-entry transfer into the exchange agent's account at DTC,
unless an agent's message is received by the exchange agent in compliance with
ATOP, an appropriate letter of transmittal properly completed and duly executed
with any required signature guarantee and all other required documents must in
each case be transmitted to and received or confirmed by the exchange agent at
its address set forth below on or prior to the expiration date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under the procedures. Delivery of documents to DTC does not
constitute delivery to the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered outstanding notes and withdrawal of tendered
outstanding notes will be determined by us in our sole discretion, which
determination will be final and binding. We reserve the absolute right to reject
any and
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all outstanding notes not properly tendered or any outstanding notes our
acceptance of which would, in the opinion of our counsel, be unlawful.
We also reserve the right in our sole discretion to waive any defects,
irregularities or conditions of tender as to particular outstanding notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of outstanding notes must be cured within the time we determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
outstanding notes, neither we, the exchange agent nor any other person will
incur any liability for failure to give the notification. Tenders of outstanding
notes will not be deemed to have been made until the defects or irregularities
have been cured or waived. Any outstanding notes received by the exchange agent
that are not properly tendered and as to which the defects or irregularities
have not been cured or waived will be returned by the exchange agent to the
tendering holders, as soon as practicable following the expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their outstanding notes and:
(1) whose outstanding notes are not immediately available,
(2) who cannot deliver their outstanding notes, the letter of transmittal
or any other required documents to the exchange agent or
(3) who cannot complete the procedures for book-entry transfer, prior to
the expiration date, may effect a tender if the following conditions are met:
(A) The tender is made through a member firm of the Medallion System.
(B) Prior to the expiration date, the exchange agent receives from a
member firm of the Medallion System a properly completed and duly executed
Notice of Guaranteed Delivery by facsimile transmission, mail or hand
delivery setting forth the name and address of the holder, the certificate
number(s) of the outstanding notes and the principal amount of outstanding
notes tendered. The Notice of Guaranteed Delivery must state that tender is
being made and must guarantee that, within three New York Stock Exchange
trading days after the expiration date, the letter of transmittal or
facsimile of the letter of transmittal, together with the certificate(s)
representing the outstanding notes or a confirmation of book-entry transfer
of the outstanding notes into the exchange agent's account at DTC, and any
other documents required by the letter of transmittal will be deposited by
the member firm of the Medallion System with the exchange agent.
(C) The properly completed and executed letter of transmittal or a
facsimile of the letter of transmittal, as well as the certificate(s)
representing all tendered outstanding notes in proper form for transfer or
a confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at DTC, and all other documents required by the
letter of transmittal are received by the exchange agent within three New
York Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their outstanding notes by complying with the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date.
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To withdraw a tender of outstanding notes, a telegram, telex, letter or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth in this prospectus prior to 5:00 p.m., New York
City time, on the expiration date of the exchange offer. Any notice of
withdrawal must:
(1) specify the name of the person having deposited the outstanding notes
to be withdrawn;
(2) identify the outstanding notes to be withdrawn, including the
certificate number(s) and principal amount of the outstanding notes, or, in the
case of outstanding notes transferred by book-entry transfer, the name and
number of the account at DTC to be credited;
(3) be signed by the holder in the same manner as the original signature
on the letter of transmittal by which the outstanding notes were tendered,
including any required signature guarantees, or be accompanied by documents of
transfer sufficient to enable the trustee to register the transfer of the
outstanding notes into the name of the person withdrawing the tender; and
(4) specify the name in which any outstanding notes are to be registered,
if different from that of the person depositing the outstanding notes to be
withdrawn.
All questions as to the validity, form and eligibility, including time of
receipt, of the notices will be determined by us and our determination will be
final and binding on all parties. Any outstanding notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer and
no exchange notes will be issued with respect to the withdrawn notes unless they
are validly retendered. Any outstanding notes which have been tendered but which
are not accepted for exchange will be returned to their holder without cost to
the holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn outstanding notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or issue exchange notes for, any outstanding
notes, and may terminate or amend the exchange offer as provided in this
prospectus before the acceptance of the outstanding notes, if:
(1) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange offer which,
in our sole judgment, might materially impair our ability to proceed with the
exchange offer or any material adverse development has occurred in any existing
action or proceeding with respect to us or any of our subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the Staff of
the SEC is proposed, adopted or enacted, which, in our sole judgment, might
materially impair our ability to proceed with the exchange offer or materially
impair the contemplated benefits of the exchange offer to us; or
(3) any governmental approval has not been obtained, which approval we, in
our sole discretion, deem necessary for the consummation of the exchange offer
as contemplated by this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may
(1) refuse to accept any outstanding notes and return all tendered
outstanding notes to the tendering holders,
(2) extend the exchange offer and retain all outstanding notes tendered
prior to the expiration of the exchange offer, subject, however, to the rights
of holders to withdraw the outstanding notes or
(3) waive the unsatisfied conditions with respect to the exchange offer and
accept all properly tendered outstanding notes which have not been withdrawn.
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EXCHANGE AGENT
United States Trust Company of New York has been appointed as exchange
agent for the exchange offer. Questions and requests for assistance, requests
for additional copies of this prospectus or of the letter of transmittal and
requests for Notice of Guaranteed Delivery should be directed to the exchange
agent addressed as follows:
By Registered or Certified Mail: Overnight Courier and By Hand Delivery After
4:30 p.m., New York City time, on the
expiration date:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 112, Bowling Green Station 30 Broad Street, 14th Floor
Attn: Corporate Trust Services Attn: Corporate Trust Services
New York, New York 10274-0112 New York, New York 10004-2304
By Hand Prior to 4:30 p.m., New York City Facsimile Transmission:
time: (212) 422-0183 or (646) 458-8104
30 Broad Street, B-Level For Information Telephone (call toll-free):
New York, New York 10004-2304 (800) 548-6565
Attn: Corporate Trust Window
New York, New York 10006
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail. However, additional solicitation may be made by
telegraph, telecopy, telephone or in person by our and our affiliates' officers
and regular employees.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses incurred in connection with these services.
We will pay the cash expenses to be incurred in connection with the
exchange offer. These expenses include fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
outstanding notes, which is face value, as reflected in our accounting records
on the date of exchange. Accordingly, we will not recognize any gain or loss for
accounting purposes as a result of the exchange offer. The expenses of the
exchange offer will be deferred and charged to expense over the term of the
exchange notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The outstanding notes that are not exchanged for exchange notes in the
exchange offer will remain restricted securities. Therefore, the outstanding
notes may be resold only:
(1) to us upon redemption of the notes or otherwise;
(2) so long as the outstanding notes are eligible for resale under Rule
144A, to a person inside the United States whom the seller reasonably believes
is a qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or in compliance with another
exemption from the
32
35
registration requirements of the Securities Act, which other exemption is based
upon an opinion of counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act; or
(4) if registered on an effective registration statement under the
Securities Act,
in each case in accordance with any applicable securities laws of any state
of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of exchange notes, based on interpretations by the
Staff of the SEC set forth in no-action letters issued to third parties, we
believe that a holder or other person who receives exchange notes, whether or
not the person is the holder will be allowed to resell the exchange notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the exchange notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act.
In order to resell the exchange notes without restriction, the holder of
exchange notes:
- must not be our affiliate within the meaning of Rule 405 under the
Securities Act
- must have received the exchange notes in exchange for outstanding notes
in the ordinary course of business and
- must not participate or intend to participate, or have any arrangement or
understanding with any person to participate, in the distribution of the
exchange notes.
However, if any holder acquires exchange notes in the exchange offer for
the purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the Staff of the SEC expressed
in the no-action letters or any similar interpretive letters, and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each broker-dealer that receives exchange notes
for its own account in exchange for outstanding notes, where the outstanding
notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the exchange notes.
33
36
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the exchange notes. In consideration for issuing the exchange notes
contemplated in this prospectus, we will receive outstanding notes in like
principal amount, the form and terms of which are the same as the form and terms
of the exchange notes, except as otherwise described in this prospectus.
The net proceeds from the issuance of the outstanding notes, after
deducting the underwriting discount and expenses, was $143.6 million. We used a
portion of these proceeds to repay $100.0 million in aggregate principal amount
outstanding under the senior subordinated term loan, plus accrued interest. We
used the remaining $43.6 to repay a portion of the tranche B term loan at 101%
of the principal amount repaid, plus accrued interest. As of December 31, 1999,
the interest rate on borrowings under the senior subordinated term loan was
12.4% and the interest rate on borrowings under the tranche B term loan was
9.4%. The borrowings under the senior subordinated term loan were due and
payable on December 15, 2007. The tranche B term loan is payable in quarterly
installments, with the final installment due December 15, 2006. The proceeds
from the senior subordinated term loan and the tranche B term loan were used to
finance a portion of the LISN acquisition. See "LISN Acquisition,"
"Capitalization" and "Description of Senior Credit Facilities."
CAPITALIZATION
The following table sets forth Orius' consolidated capitalization at June
30, 2000.
AT JUNE 30,
2000
--------------
(IN THOUSANDS)
(UNAUDITED)
Long-term debt, including current portion:
Senior credit facilities(1):
Revolving credit facility(2)(3)........................... $ 57,000
Tranche A term loan....................................... 72,000
Tranche B term loan....................................... 156,573
Equipment debt, leases and other............................ 4,683
---------
Total senior debt................................. 290,256
Senior subordinated term loan............................... --
Senior subordinated notes................................... 150,000
Junior subordinated notes................................... 150,710
---------
Total long-term debt.............................. 590,966
Participating, redeemable preferred stock................... 241,246
Stockholders' deficit....................................... (215,608)
---------
Total capitalization.............................. $ 616,604
---------
- ------------
(1) Does not include $60.0 million of additional borrowings under the tranche C
term loan of the senior credit facilities, which were incurred in July 2000
and which were used to repay borrowings under our revolving credit facility.
(2) Our revolving credit facility provides for up to $100.0 million of
borrowings to be used for permitted acquisitions and working capital
purposes, with sublimits of $75.0 million for acquisition loans and $50.0
million for working capital loans. See "Description of Senior Credit
Facilities."
34
37
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Set forth below are unaudited pro forma financial statements for Orius. The
unaudited pro forma financial statements have been prepared by the application
of pro forma adjustments to the historical financial statements of LISN, Orius
and each of the Acquired Companies. Orius acquired eight businesses in 1998, six
in 1999 and completed the acquisitions of Irwin, Fenix, Midwest Splicing and
Hattech in 2000. The unaudited pro forma financial statements have been prepared
to reflect LISN as the acquiring corporation for accounting purposes in the LISN
acquisition even though it became a subsidiary of Orius in that transaction.
LISN has been treated as the acquiring corporation for accounting purposes as a
result of LISN's former stockholders acquiring control of Parent in the LISN
acquisition.
The unaudited pro forma financial statements presented below are intended
to give you a better understanding of what the results of operations of all of
our businesses might have been had they been combined as of the beginning of the
periods presented. Our combined financial position at June 30, 2000 is reflected
in our historical balance sheet included elsewhere in this prospectus. We
prepared the unaudited pro forma statements of operations data by (1) combining
the historical results of LISN, Orius and each of the Acquired Companies as if
LISN had acquired Orius and each of the Acquired Companies at the beginning of
the period presented and (2) adjusting the combined historical results to
reflect:
(a) the application of purchase accounting to those acquisitions,
(b) the elimination of certain non-recurring expenses and adjustments
reflecting different depreciation and amortization policies and
(c) the financing transactions associated with those acquisitions.
The application of purchase accounting to the businesses acquired by Orius
resulted in certain fair value adjustments to property, plant and equipment and
these are reflected in the Supplemental Unaudited Pro Forma Financial Data. Upon
the LISN acquisition, no other fair value adjustment was necessary. The
amortization of goodwill as a result of the LISN acquisition is included as if
LISN had acquired Orius at the beginning of all periods presented.
LISN, Orius and the Acquired Companies may have performed differently if
they had been combined as of or on the dates presented. You should not rely on
these unaudited pro forma financial statements as being indicative of the
historical results that we would have had or the future results that we will
experience.
You should read these unaudited pro forma financial statements in
conjunction with the information contained in "Selected Historical Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Supplemental Unaudited Pro Forma Financial Data" and the
financial statements and the related notes appearing elsewhere in this
prospectus.
35
38
ORIUS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS)
ACQUIRED
ORIUS(1) COMPANIES(2) PRO FORMA
--------- ------------- ---------
Revenues............................................. $349,868 $19,633 $369,501
Expenses:
Direct costs....................................... 250,682 12,652 263,334
General and administrative......................... 37,029 4,817 41,846
Depreciation and amortization...................... 13,760 762 14,522
-------- ------- --------
Total expenses....................................... 301,471 18,231 319,702
Income from operations............................... 48,397 1,402 49,799
Other (Income) expenses:
Interest expense, net.............................. 30,904 1,670 32,574
Other (income) expenses............................ (96) (9) (105)
-------- ------- --------
Income before income tax provision................... 17,589 (259) 17,330
Provision for income taxes........................... 10,298 361 10,659
-------- ------- --------
Net income........................................... $ 7,291 $ (620) $ 6,671
======== ======= ========
- ------------
(1) Results for the six months ended June 30, 2000 represent the actual
historical consolidated results of Orius, including the results of Irwin,
Fenix, Midwest and Hattech from the date of acquisition forward.
(2) Represents the results of Irwin, Fenix, Midwest and Hattech in the related
period prior to the date of acquisition and related acquisition adjustments.
See "Supplemental Unaudited Pro Forma Financial Data" for further detail and
discussion.
36
39
ORIUS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
LISN
ACQUIRED ACQUISITION OFFERING
LISN(1) ORIUS(2) COMPANIES(3) ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- ------------ ----------- ----------- ---------
Revenues................... $167,018 $314,821 $105,340 $ -- $ -- $587,179
Expenses:
Direct costs............. 118,539 237,652 64,432 (1,500)(4) -- 419,123
General and
administrative........ 20,577 39,721 20,383 (5,175)(4) -- 63,444
(12,062)(5)
Depreciation and
amortization.......... 1,358 10,293 2,129 13,015(6) -- 26,795
-------- -------- -------- -------- ------- --------
Total expenses............. 140,474 287,666 86,944 (5,722) -- 509,362
Income from operations..... 26,544 27,155 18,396 5,722 -- 77,817
Other (Income) expense:
Interest expense, net.... 11,149 14,007 4,662 32,143(7) 2,811(9) 64,772
Other (income) expense... 362 (174) (46) -- -- 142
-------- -------- -------- -------- ------- --------
Income (loss) before income
tax provision............ 15,033 13,322 13,780 (26,421) (2,811) 12,903
Provision for income
taxes.................... 4,937 6,134 5,508 (5,684)(8) 94 10,989
-------- -------- -------- -------- ------- --------
Net income (loss) (10)..... $ 10,096 $ 7,188 $ 8,272 $(20,737) $(2,905) $ 1,914
======== ======== ======== ======== ======= ========
37
40
ORIUS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) Results for the year ended December 31, 1999 represent the combined
historical results for the period of LISN (which had no material operations
prior to 1998) and LISN, Inc. and Orius from December 15, 1999 through
December 31, 1999. LISN and ARION, Inc., which were companies under common
control, were combined in the May 1999 recapitalization.
(2) Results for the period ended December 14, 1999 represent the actual
historical consolidated results of Orius, including results for the Acquired
Companies from their date of acquisition.
(3) Represents the results of the Acquired Companies in the related period prior
to the date of acquisition and related acquisition adjustments. See
"Supplemental Unaudited Pro Forma Financial Data" for further detail and
discussion.
(4) Reflects the decrease resulting from differentials between the compensation
levels of the former owners of LISN and the terms of their employment
agreements entered into with Parent. After the acquisition of LISN, the
duties and responsibilities of the owners who remained employed with the
Company have not and will not change and additional costs have not and are
not expected to be incurred related to their efforts.
(5) Reflects the elimination of one-time expenses associated with the LISN
acquisition included in Orius' historical statement of operations. As the
acquired company for accounting purposes, Orius reflected these costs as
expenses in the period incurred. Included in this adjustment are
professional fees totaling $6,248 for advisors, lawyers and accountants, and
compensation expense of $5,814 associated with the accelerated vesting of
options under Parent's stock option plan at the time of the LISN
acquisition.
(6) The calculation of pro forma depreciation reflecting fixed asset basis
adjustments from the application of purchase accounting is included in Note
3 to the Supplemental Unaudited Pro Forma Financial Data for the Acquired
Companies. While these basis adjustments reflect the purchase accounting at
the time of Orius' acquisition of these businesses, given the nature of the
fixed assets and the proximity of the acquisitions, book value approximated
fair value at the time of the LISN Acquisition. Pro forma amortization of
goodwill generated from the LISN acquisition and the acquisition of the
Acquired Companies based on a 25-year goodwill life is calculated as
follows:
YEAR ENDED
DECEMBER 31,
1999
------------
Amortization of pro forma goodwill of $423,452 based on a 25
year life................................................. $16,938
-------
Elimination of historical goodwill amortization............. (3,923)
-------
Net increase in goodwill amortization....................... $13,015
=======
(7) The increase in pro forma interest expense as a result of the LISN
acquisition is as follows:
YEAR ENDED
DECEMBER 31,
1999
------------
Revolving credit facility(i)................................ $ --
Tranche A term loan(ii)..................................... 6,810
Tranche B term loan(iii).................................... 19,160
Senior subordinated term loan(iv)........................... 12,580
Junior subordinated notes(v)................................ 16,524
Commitment fee(vi).......................................... 500
Capital leases and equipment loans.......................... 261
Amortization of deferred financing costs(vii)............... 1,772
Acquisition related interest(viii).......................... 4,354
--------
Total pro forma interest expense............................ $ 61,961
Elimination of historical interest(ix)...................... (29,818)
--------
Net increase in interest expense............................ $ 32,143
========
- ------------
(i) On a pro forma basis as a result of the LISN acquisition, there was no
amount drawn on the revolving credit facility.
(ii) Represents interest on the $75.0 million tranche A term loan using an
assumed interest rate of 9.08%.
(iii) Represents interest on the $200.0 million tranche B term loan using an
assumed interest rate of 9.58%.
(iv) Represents interest on the $100.0 million senior subordinated term loan
using an assumed rate of 12.58%.
(v) Represents interest on the $137.7 million junior subordinated notes at an
interest rate of 12%.
(vi) Represents a 0.5% commitment fee on the unused portion of the revolving
credit facility.
(vii) Represents amortization of deferred financing costs of $10,631 over an
average life of six years.
(viii) Represents interest on the $42.0 million used to fund the Fenix and
Hattech acquisitions at an assumed interest rate of 9.08% and interest on
the junior subordinated notes issued in connection with the Irwin, Fenix,
Midwest Splicing and Hattech acquisitions.
(ix) Represents the elimination of historical interest expense paid or payable
by Orius in cash.
(8) Reflects the income tax rate that would have been in effect if the Acquired
Companies had been combined and subject to a federal statutory rate of 35%
and the applicable state statutory rate for each of the Acquired Companies
throughout the period presented.
38
41
ORIUS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS -- (CONTINUED)
(9) The increase in pro forma interest expense resulting from the offering of
the notes consists of the following:
YEAR ENDED
DECEMBER 31,
1999
------------
Revolving credit facility(i)................................ $ --
Tranche A term loan(ii)..................................... $ 6,810
Tranche B term loan(iii).................................... $ 14,983
Senior subordinated notes(iv)............................... $ 19,125
Junior subordinated notes(v)................................ 16,524
Commitment fee(vi).......................................... 500
Capital leases and equipment loans.......................... 261
Amortization of deferred financing costs(vii)............... 2,215
Acquisition related interest(viii).......................... $ 4,354
--------
Total pro forma interest expense............................ $ 64,772
Pro forma interest prior to the offering.................... $(61,961)
--------
Net increase in interest expense............................ $ 2,811
========
- ------------
(i) On a pro forma basis as a result of the offering of the notes, there was
no amount drawn on the revolving credit facility.
(ii) Represents interest on the $75.0 million tranche A term loan using an
assumed interest rate of 9.08%.
(iii) Represents interest on the remaining $156.4 million tranche B term loan
following the repayment of $43.6 million of the tranche B term loan with
the proceeds from the sale of the outstanding notes, using an assumed
interest rate of 9.58%.
(iv) Represents interest on the notes at an interest rate of 12.75%.
(v) Represents interest on the $137.7 million junior subordinated notes at an
interest rate of 12%.
(vi) Represents a 0.5% commitment fee on the unused portion of the revolving
credit facility.
(vii) Represents amortization of deferred financing costs of $13,290 over an
average life of six years.
(viii) Represents interest on the $42.0 million used to fund the Fenix and
Hattech acquisitions at an assumed interest rate of 9.08% and interest on
the junior subordinated notes issued in connection with the Irwin, Fenix,
Midwest and Hattech acquisitions.
(ix) Represents the elimination of pro forma interest expense prior to the
offering of the outstanding notes.
(10) EBITDA for the year ended December 31, 1999 was $104.6 million. EBITDA is
defined as net income before interest expense, income taxes, depreciation
and amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principals and should not be considered an
alternative to operating income or net income as a measure of operating
performance or to net cash provided by operating activities as a measure of
liquidity.
39
42
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below is supplemental unaudited pro forma financial data for the
Acquired Companies. The supplemental unaudited pro forma financial data has been
derived by the application of pro forma adjustments to the historical financial
statements of each of the Acquired Companies. Orius acquired eight businesses in
1998, six in 1999 and completed the acquisition of Irwin in January 2000, the
acquisitions of Fenix and Midwest Splicing in April 2000 and the acquisition of
Hattech in May 2000.
The supplemental unaudited pro forma financial data presented below is
intended to give you additional information as to how the amounts set forth in
the unaudited pro forma statement of income under the column "Acquired
Companies" in the Unaudited Pro Forma Financial Statements were calculated. We
obtained the pro forma statements of operations data by (1) combining the
historical results of each of the Acquired Companies from the beginning of the
period until their acquisition by Orius and (2) adjusting the combined
historical results to reflect (a) the application of purchase accounting to the
acquisitions, (b) the elimination of certain non-recurring expenses and
adjustments reflecting different depreciation and amortization policies and (c)
the financing transactions associated with the acquisitions. The Acquired
Companies may have performed differently if they had been combined as of or on
the dates presented. You should not rely on the supplemental unaudited pro forma
data as being indicative of the historical results that we would have had or the
future results that we will experience.
You should read this supplemental unaudited pro forma financial data in
conjunction with the information contained in "Unaudited Pro Forma Financial
Statements," "Selected Historical Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes appearing elsewhere in this prospectus.
40
43
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA(1)
SIX MONTHS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS)
IRWIN FENIX MIDWEST HATTECH ADJUSTMENTS PRO FORMA
----- ----- ------- ------- ----------- ---------
Revenues........................... $1,475 $3,849 $3,070 $11,289 $ -- $19,633
Expenses:
Direct costs..................... 1,092 2,447 1,903 7,423 (213)(2) 12,652
General and administrative....... 195 411 555 3,798 (142)(3) 4,817
Depreciation and amortization.... 58 87 76 152 389(4) 762
------ ------ ------ ------- ------- -------
Total expenses..................... 1,345 2,945 2,534 11,373 34 18,231
Income from operations............. 130 904 536 (134) (34) 1,402
Other (Income) Expense:
Interest expense, net............ 3 2 (9) 175 1,499(5) 1,670
Other (income) expense........... (9) -- -- -- -- (9)
------ ------ ------ ------- ------- -------
Income before income tax
provision........................ 136 902 545 (309) (1,533) (259)
Provision for income taxes......... 361 -- -- -- 361
------ ------ ------ ------- ------- -------
Income (loss)...................... $ (225) $ 902 $ 545 $ (309) $(1,533) $ (620)
====== ====== ====== ======= ======= =======
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NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) Results for the six months ended June 30, 2000 represent the results of the
Acquired Companies purchased in the related period prior to their date of
acquisition.
(2) The acquisition adjustments to direct costs reflect a one-time bonus paid by
Midwest Splicing in connection with the sale of the business.
(3) The acquisition adjustments to general and administrative expenses consist
of the following:
SIX MONTHS ENDED
JUNE 30, 2000
----------------
Owner's compensation(i)..................................... $(157)
Rent expense(ii)............................................ 15
-----
$(142)
=====
(i) Reflects the decrease resulting from differentials between the
compensation levels of former owners of the Acquired Companies and the
terms of their employment agreements with Orius. After the acquisition
of the Acquired Companies, the duties and responsibilities of the
owners who remained employed with Orius have not and will not change,
and additional costs have not and are not expected to be incurred
related to their efforts. Also reflects the elimination of compensation
expense associated with the distribution of excess cash balances to the
former owners of the Acquired Companies immediately prior to their
dates of acquisition.
(ii) Reflects the rent expense resulting from our current lease terms as
compared to lease terms entered into by former owners. In addition,
reflects the increase in rent expense and the corresponding decrease in
real estate tax expense resulting from our leasing rather than owning
certain related facilities which were not, and in the case of Irwin
will not be, purchased from the former owners of the Acquired
Companies.
(4) Depreciation has been derived utilizing the property, plant and equipment
values of each of the Acquired Companies at the time of their acquisition,
rather than utilizing values of property, plant and equipment actually held
by each of the Acquired Companies in the period presented. Reflects the
impact on depreciation resulting from (1) the application of Orius'
depreciation policy rather than those of the former owners of the Acquired
Companies and (2) any decrease in depreciation resulting from leasing rather
than owning certain related facilities.
The acquisition adjustments to depreciation and amortization expense consist
of the following:
SIX MONTHS ENDED
JUNE 30, 2000
----------------
Depreciation resulting from change in depreciable lives:
Pro forma depreciation using Orius depreciation
policies(i)............................................. 204
Less historical depreciation of acquired companies(ii).... (373)
----
(169)
Depreciation resulting from write up of fixed assets(iii)... 45
Amortization of goodwill(iv)................................ 513
----
389
====
(II)
(I) ELIMINATION OF
PRO FORMA HISTORICAL
ENTITY DEPRECIATION DEPRECIATION ADJUSTMENT
------ ------------ -------------- ----------
Irwin....................................................... 34 (58) (24)
Fenix....................................................... 57 (87) (30)
Midwest..................................................... 30 (76) (46)
Hattech..................................................... 83 (152) (69)
--- ---- ----
204 (373) (169)
(III)
PRO FORMA AMORTIZATION
BASED ON 5 YR AVERAGE
ENTITY PP&E WRITE UP LIFE OF WRITE UP
------ ------------- ----------------------
Fenix....................................................... 900 45
(IV)
PRO FORMA PRO FORMA
ENTITY GOODWILL ADJUSTMENT
------ --------- ----------
Irwin....................................................... 12,250 41
Fenix....................................................... 14,164 142
Midwest..................................................... 8,105 95
Hattech..................................................... 23,514 235
---
513
(5) Represents interest of $1,355 on amounts drawn on the revolving credit
facility to fund the Fenix and Hattech acquisitions using an assumed
interest rate of 9.08% and interest of $144 on the junior subordinated notes
issued in connection with the acquisitions of Irwin, Fenix, Midwest and
Hattech using an assumed interest rate of 12%.
42
45
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA(1)
YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
NETWORK
DAS-CO SCHATZ COPENHAGEN CABLING TEXEL IRWIN FENIX MIDWEST HATTECH
------ ------ ---------- ------- ----- ----- ----- ------- -------
Revenues..................... $3,660 $5,127 $3,877 $3,520 $10,363 $19,180 $15,426 $12,340 $31,847
Expenses:
Direct costs............... 1,910 3,847 2,783 2,851 7,462 13,096 6,172 6,285 20,026
General and
administrative........... 369 1,006 330 313 635 3,874 7,502 1,724 10,622
Depreciation and
amortization............. 121 317 160 48 72 628 245 274 275
------ ------ ------ ------ ------- ------- ------- ------- -------
Total expenses............... 2,400 5,170 3,273 3,212 8,169 17,598 13,919 8,283 30,923
Income from operations....... 1,260 (43) 604 308 2,194 1,582 1,507 4,057 924
Other (Income) Expense:
Interest expense, net...... (2) (4) (10) 31 (43) 34 75 41 186
Other (income) expense..... (1) -- -- 1 (18) (12) (6) (10)
------ ------ ------ ------ ------- ------- ------- ------- -------
Income before income tax
provision.................. 1,263 (39) 614 276 2,255 1,548 1,444 4,022 748
Provision for income taxes... 17 -- -- 172 61 (34) 100 185
------ ------ ------ ------ ------- ------- ------- ------- -------
Net income (loss)............ $1,246 $ (39) $ 614 $ 104 $ 2,194 $ 1,582 $ 1,344 $3,837 $ 748
====== ====== ====== ====== ======= ======= ======= ======= =======
ADJUSTMENTS PRO FORMA
----------- ---------
Revenues..................... $ -- $105,340
Expenses:
Direct costs............... -- 64,432
General and
administrative........... (5,992)(2) 20,383
Depreciation and
amortization............. (11)(3) 2,129
------- --------
Total expenses............... (6,003) 86,944
Income from operations....... 6,003 18,396
Other (Income) Expense:
Interest expense, net...... 4,354(4) 4,662
Other (income) expense..... -- (46)
------- --------
Income before income tax
provision.................. 1,649 13,780
Provision for income taxes... 5,007(5) 5,508
------- --------
Net income (loss)............ $(3,358) $ 8,272
======= ========
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46
NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) Results for the year ended December 31, 1999 represent the results of the
Acquired Companies purchased in the related period prior to their date of
acquisition.
(2) The acquisition adjustments to general and administrative expenses consist
of the following:
YEAR ENDED
DECEMBER 31,
1999
------------
Owner's compensation(i)..................................... $(6,174)
Rent expense(ii)............................................ 182
-------
$(5,992)
=======
(i) Reflects the decrease resulting from differentials between the
compensation levels of former owners of the Acquired Companies and the
terms of their employment agreements with Orius. After the acquisition
of the Acquired Companies, the duties and responsibilities of the
owners who remained employed with Orius have not and will not change,
and additional costs have not and are not expected to be incurred
related to their efforts. Also reflects the elimination of compensation
expense associated with the distribution of excess cash balances to the
former owners of the Acquired Companies immediately prior to their
dates of acquisition.
(ii) Reflects the rent expense resulting from our current lease terms as
compared to lease terms entered into by former owners. In addition,
reflects the increase in rent expense and the corresponding decrease in
real estate tax expense resulting from our leasing rather than owning
certain related facilities which were not, and in the case of Irwin
will not be, purchased from the former owners of the Acquired
Companies.
(3) Depreciation has been derived utilizing the property, plant and equipment
values of each of the Acquired Companies at the time of their acquisition,
rather than utilizing values of property, plant and equipment actually held
by each of the Acquired Companies in the period presented. Reflects the
impact on depreciation resulting from (1) the application of Orius'
depreciation policy rather than those of the former owners of the Acquired
Companies and (2) any decrease in depreciation resulting from leasing rather
than owning certain related facilities. In addition, reflects the change in
depreciation resulting from the write-up of property, plant and equipment to
fair value arising from purchase accounting.
The acquisition adjustments to depreciation expense consist of the
following:
YEAR ENDED
DECEMBER 31,
1999
------------
Depreciation resulting from change in depreciable lives:
Pro forma depreciation using Orius depreciation
policies(i)............................................. $ 1,603
Less historical depreciation of acquired companies(ii).... (2,096)
-------
(493)
Depreciation resulting from write up of fixed assets(iii)... 482
-------
$ (11)
=======
(II)
(I) ELIMINATION OF
PRO FORMA HISTORICAL
ENTITY DEPRECIATION DEPRECIATION ADJUSTMENT
------ ------------ -------------- ----------
NCS......................................................... 14 (48) (34)
Schatz...................................................... 228 (317) (89)
Copenhagen.................................................. 206 (160) 46
DAS-CO...................................................... 161 (121) 40
Texel....................................................... 40 (72) (32)
Irwin....................................................... 413 (628) (215)
Fenix....................................................... 200 (245) (45)
Midwest..................................................... 136 (230) (94)
Hattech..................................................... 205 (275) (70)
----- ------ ----
1,603 (2,096) (493)
(III)
PRO FORMA AMORTIZATION
BASED ON 5 YR AVERAGE
ENTITY LIFE OF WRITE UP
------ ----------------------
Schatz...................................................... 36
Copenhagen.................................................. 144
DAS-CO...................................................... 62
Fenix....................................................... 240
---
482
(4) Represents interest of $3,814 on amounts drawn on the revolving credit
facility to fund the Fenix and Hattech acquisitions using an assumed
interest rate of 9.08% and interest of $540 on the junior subordinated notes
issued in connection with the acquisitions of Irwin, Fenix and Midwest using
an assumed interest rate of 12%.
(5) Reflects the income tax rate that would have been in effect if the Acquired
Companies had been combined and subject to a federal statutory rate of 35%
and the applicable state statutory rate for each of the acquired businesses
throughout the period presented.
44
47
SELECTED HISTORICAL FINANCIAL DATA
In connection with the LISN acquisition, LISN's former stockholders
acquired control of Orius. As a result, LISN has been treated as the acquiring
corporation for accounting purposes even though it became a subsidiary of Orius
in the LISN acquisition. Therefore, LISN is our corporate predecessor for
accounting purposes and its historical financial statements are deemed to be our
historical financial statements.
The following table presents historical financial data for LISN, Inc., as
of and for the six months ended June 30, 2000 and as of and for each of the
years ended December 31, 1995, 1996 and 1997. Results for the years ended
December 31, 1998 and 1999 represent the combined historical results for these
periods of LISN (which had no material operations prior to 1998) and LISN, Inc.
and the results of Orius for the period from December 15, 1999 through December
31, 1999. LISN and LISN, Inc., which were companies under common control, were
combined in a May 1999 recapitalization. Historical financial statements for
LISN (the name of which was ARION, Inc. prior to the recapitalization) are
included elsewhere in this prospectus.
The selected historical financial data should be read in conjunction with
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" "Certain Relationships and Related Party
Transactions" and the financial statements and related notes included elsewhere
in this prospectus.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $349,868 $60,198 $167,018 $76,371 $40,226 $20,512 $13,876
Expenses:
Direct costs.......................... 250,682 40,202 118,539 52,659 29,691 15,425 10,468
General and administrative............ 37,029 11,718 20,577 10,627 6,063 3,688 3,121
Depreciation and amortization......... 13,760 174 1,358 383 179 145 148
-------- ------- -------- ------- ------- ------- -------
Total expenses.......................... 301,471 52,094 140,474 63,669 35,933 19,258 13,737
Income from operations.................. 48,397 8,104 26,544 12,702 4,293 1,254 139
Other (Income) Expense:
Interest expense, net................. 30,904 1,372 11,149 450 178 139 108
Other (income) expense................ (96) (96) 362 (14) (53) 8 7
-------- ------- -------- ------- ------- ------- -------
Income before tax provision............. 17,589 6,828 15,033 12,266 4,168 1,107 24
Provision for income taxes.............. 10,298 651 4,937 -- -- -- --
-------- ------- -------- ------- ------- ------- -------
Net income before extraordinary
charge................................ $ 7,291 $ 6,177 $ 10,096 $12,266 $ 4,168 $ 1,107 $ 24
======== ======= ======== ======= ======= ======= =======
Net income (loss) applicable to common
shareholders.......................... $(24,188) $ 6,177 $(71,087) $12,266 $ 4,168 $ 1,107 $ 24
OTHER DATA:
Ratio of earnings to fixed charges...... 1.52 4.33 2.20 21.93 14.19 5.27 1.14
AT JUNE 30, AT DECEMBER 31,
-------------------- -----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital................................ $ 58,089 $ 19,728 $ 112,117 $19,347 $ 5,137 $2,404 $1,468
Goodwill, net(1)............................... 418,713 -- 359,882 -- -- -- --
Total assets................................... 710,700 46,132 621,978 28,599 16,043 7,175 4,367
Series C participating, redeemable preferred
stock........................................ 241,246 -- 199,019 -- -- -- --
Securities subject to put and call
arrangements................................. -- -- 54,946 -- -- -- --
Total debt..................................... 590,966 133,100 466,866 1,182 3,071 1,678 1,546
Total shareholders equity (net capital
deficit)..................................... (215,608) (110,269) (186,851) 18,248 7,141 11 1,855
- ------------------
(1) Goodwill is amortized over its estimated useful life of 25 years.
45
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Of our pro forma revenues for the six months ended June 30, 1999,
approximately 59% was derived from External Telecom Services and 41% was derived
from Internal Telecom Services. Of these revenues, 60% was from services
provided to telecommunications services providers, 33% was from services
provided to broadband services providers and 7% was from services provided to
our commercial, governmental and other customers.
Many of our contracts are awarded on the basis of competitive bids, the
final terms and pricing of which are frequently negotiated with the customer.
However, many of our contracts that are with customers with whom we enjoy a
long-standing business relationship are renegotiated prior to expiration without
competing bids. Generally, contracts for External Telecom Services provide that
we will furnish a specified unit of service for a specified unit price. For
example, we contract to install cable for a specified rate per foot. We
recognize revenue as the related work is performed. Production reports are
inspected and approved by both our on-site quality control manager and the
customer's on-site project manager. We also provide our External Telecom
Services through master service agreements, under which we provide all specified
services under a specified dollar amount within a defined geographic area, and
turnkey agreements, under which we provide comprehensive design, engineering,
installation and maintenance services.
Our Internal Telecom Services contracts are provided on a
project-by-project basis, with revenue recognized on a percentage-of-completion
basis. Under this method, revenue is recognized on a cost-to-cost method based
on total cost incurred to date as a percentage of total estimated cost to
complete the contract. These projects generally require two to three months to
complete, with an average revenue of $20,000. We also provide our Network
Services under maintenance agreements, under which we agree to furnish a
specified unit of service for a specified price and bill our customers based on
the services performed.
Project-specific agreements are billed on either a unit basis, as work is
completed, or a deferred unit or milestone basis, when work on a specified
segment of an entire project is completed. Unbilled revenues consist of
work-in-process on contracts based on work performed, but not yet billed. All
costs associated with unbilled revenues are recorded as expenses in the same
period as the unbilled revenue. Customers are generally billed weekly. This
process is intended to keep disputed billings to a minimum, improve receivable
collections and reduce our risk on deferred billing projects. Master service
agreements are billed on a unit basis with bills delivered upon completion of a
unit of work. Turnkey agreements are billed both on a unit and deferred unit or
milestone basis. We generally bill our Internal Telecom Services customers upon
job completion, with a lag of approximately two weeks between job completion and
billing.
Direct costs include all direct costs of providing services to our
customers, other than depreciation on fixed assets that we own or use under
capital leases. We utilize subcontracted labor when the volume of our work
exceeds the capacity of our regularly employed labor force. By utilizing an
established pool of experienced subcontractors, we are able to capture
additional business which we would otherwise be unable to perform utilizing only
our in-house labor force. The benefit of the additional revenue generated
through the use of subcontracted labor is partially offset by the relatively
higher labor costs as compared to the cost of our internal work force. Materials
are typically provided by our External Telecom Services customers, other than in
connection with turnkey agreements, for which we supply materials. As part of
Internal Telecom Services, we supply accessory equipment, such as shelves, racks
and cable for use in the installation of central office equipment.
General and administrative costs include all costs of our management
personnel and the management of our subsidiaries, rent, utilities, travel and
centralized costs such as insurance administration, professional costs and
clerical and administrative overhead. Our operating subsidiaries' senior
management, and, with
46
49
respect to national accounts, our executive management, handle all sales and
marketing functions as part or their regular duties and, therefore, we do not
incur material selling expenses beyond that included under general and
administrative expenses.
ACQUISITIONS
NATG's corporate predecessor, North American Tel-Com Group, was
incorporated in Florida in 1997. Parent was incorporated in Delaware in January
1999 and Orius Capital was formed in January 2000. As a result of a corporate
reorganization in February 1999, NATG became a subsidiary of Parent. We had no
substantive operations until March 1998.
Beginning in March 1998, we acquired Cablemasters Corp., Channel
Communications, Inc., Excel Cable Construction, Inc. and Mich-Com Cable
Services, Incorporated. In June 1998, we acquired U.S. Cable, Inc., and in
August 1998, we acquired CATV Subscriber Services, Inc., Burn-Techs, Inc. and
State Wide CATV, Inc.
In February 1999, we acquired DAS-CO of Idaho, Inc., Schatz Underground
Cable, Inc., Copenhagen Utilities & Construction, Inc. and Network Cabling
Services, Inc. In May 1999, we acquired Texel Corporation and in December 1999,
we acquired LISN. In January 2000, we acquired Irwin and in April 2000, we
acquired Fenix and Midwest Splicing. We acquired Hattech in May 2000.
Our 18 completed acquisitions had pro forma 1999 revenues of approximately
$587.2 million. Prior to their acquisition by us, many of these companies were
operated with different strategic and financial objectives. Some of the former
owners of the businesses we acquired sought to maximize cash flow and
stockholder distributions, rather than reinvest earnings in future growth. In
addition, our acquired businesses operated under varying tax structures, which
influenced the historical level of owners' compensation. As a result of the
foregoing, direct costs and general and administrative expenses as a percentage
of revenue may not be comparable among the acquired businesses on a historical
basis.
In connection with the LISN acquisition, LISN's former stockholders
acquired control of Parent. As a result, LISN has been treated as the acquiring
corporation for accounting purposes even though it became a subsidiary of NATG
in the LISN acquisition. Therefore, LISN is our corporate predecessor for
accounting purposes and its historical financial statements are deemed to be our
historical financial statements.
The deemed acquisition of Parent by LISN and all of our previous
acquisitions were accounted for using the purchase method of accounting. As a
result, the historical financial statements of LISN and NATG, as the case may
be, do not include the results of operations of acquisitions prior to the date
they were acquired. The excess of the fair value of the consideration paid or to
be paid for the acquisitions, including LISN's deemed acquisition of Parent, of
$373.2 million over the fair value of the net assets so purchased has been
recorded as goodwill. The majority of this goodwill is being amortized over its
estimated useful life of 25 years as a non-cash charge to operating income. The
effect on our net income of these amortization expenses, a majority of which are
not deductible for tax purposes, is expected to be approximately $14.9 million
per year. As a result of the foregoing, we believe that the historical financial
statements of NATG and LISN included in this offering memorandum are not fully
reflective of the ongoing operations of the Company.
We entered into a credit facility in connection with our February 1999
acquisitions and incurred a one-time non-cash related charge of approximately
$770,000, net of tax benefit of approximately $431,200, representing the
write-off of deferred financing costs. In connection with the refinancing of
this credit facility as part of the LISN Acquisition, we incurred a similar
non-cash charge of approximately $2.1 million net of tax benefit of
approximately $1.1 million, representing the write-off of deferred financing
costs.
Since January of this year we have completed four acquisitions. In January
2000, we completed the acquisition of Irwin. Irwin is a Dallas, Texas based
provider of External Telecom Services to telecom
47
50
services providers in a variety of states. Irwin's primary customers include
AT&T Broadband & Internet Services, Charter Communications and Time Warner. In
April 2000, we completed the acquisitions of Fenix and Midwest Splicing. Fenix
and Midwest provide External Telecom Services to broadband service providers in
and around the Great Lakes region of the U.S. and the Midwest region of the
U.S., respectively. Fenix's primary customer is Charter Communications and
Midwest's primary customers include Media One and Paragon Cable. In May 2000 we
completed the acquisition of Hattech. Based in Chantilly, Virginia, Hattech
provides a wide range of network integration services to telecommunications
service providers and internet service providers. Hattech's primary customer is
AT&T.
The aggregate purchase price for these acquisitions was approximately $74.2
million, consisting of approximately $60.7 million of cash, $12.2 million of
Parent's securities and the assumption of $1.3 million of debt. We funded $42.0
million of the cash purchase price with borrowings under our senior credit
facilities. These four companies had aggregate revenue and EBITDA for the year
ended December 31, 1999 of $78.8 million and $15.8 million, respectively.
RESULTS OF OPERATIONS
HISTORICAL
In connection with the LISN acquisition, LISN's former stockholders
acquired control of Parent. As a result, LISN has been treated as the acquiring
corporation for accounting purposes even though it became a subsidiary of NATG
in the LISN acquisition. Therefore, LISN is our corporate predecessor for
accounting purposes and its historical financial statements are deemed to be our
historical financial statements. The financial data referred to below for the
years ended December 31, 1998 and 1999 represent the combined historical results
for these periods of LISN (which had no material operations prior to 1998) and
LISN, Inc. for both periods, and of Orius for the period from December 15, 1999
through December 31, 1999. LISN and LISN, Inc., which were companies under
common control, were combined in a May 1999 recapitalization. Historical
financial statements for LISN (the name of which was ARION, Inc. prior to the
recapitalization) are included elsewhere in this prospectus. See "Selected
Historical Financial Data." The financial data for the year ended December 31,
1997 was derived from the audited financial statements of LISN, Inc., LISN's
largest predecessor company.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue. Revenue increased 481.2%, or $289.7 million, from $60.2 million
for the six months ended June 30, 1999 to $349.9 million for the six months
ended June 30, 2000. This increase in revenue was the result of the deemed
acquisition of Orius by LISN in December 1999. LISN's revenue, excluding the
revenues attributable to Orius, increased $52.1 million or 86.5%. The increase
in LISN's revenue was primarily due to increased revenue from EF&I Services
performed for Verizon, AT&T and Ameritech in both new and existing geographic
markets.
Direct Costs. Direct costs increased 523.6%, or $210.5 million, from $40.2
million for the six months ended June 30, 1999 to $250.7 million for the six
months ended June 30, 2000. Excluding the direct costs attributable to Orius,
LISN's direct costs increased $36.6 million, or 91.1%, and remained constant as
a percent of revenue. This increase was primarily due to additions to LISN's
labor force in response to an increased level of activity.
General and Administrative Expenses. General and administrative expenses
increased 162.7%, or $22.9 million, from $14.1 million for six months ended June
30, 1999 to $37.0 million for the six months ended June 30, 2000. Excluding the
general and administrative expenses attributable to Orius, LISN's general and
administrative expenses increased $0.7 million or 5.0%. Excluding Orius, these
amounts represent a 10.2% decrease in general and administrative expenses as a
percentage of revenue from 23.4% in 1999 to 13.2% in 2000. The increase in
general and administrative expenses was primarily due to the increase in
administrative staff and salaries resulting from LISN's increased activity.
48
51
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $13.5 million, from $.3 million for the six months ended June
30, 1999 to $13.8 million for the six months ended June 30, 2000. This increase
in depreciation and amortization expense is the result of the inclusion of Orius
in the results for the six months ended June 30, 2000 and the inclusion of
amortization of goodwill from the LISN acquisition in our operating results.
Interest Expense. Interest expense increased $29.3 million, from $1.4
million for the six months ended June 30, 1999 to $30.7 million for the six
months ended June 30, 2000. This increase was due to higher levels of debt
incurred under our senior credit facilities in connection with the LISN
acquisition.
Provision for Income Taxes. The provision for income taxes increased 100%,
or $9.6 million, from $0.7 for the six months ended June 30, 1999 to $10.3
million for the six months ended June 30, 2000, reflecting an increase in the
effective tax rate of 58.5% for federal, state and local taxes for three months
ended March 31, 2000. This increase is the result of the change in LISN's status
from an S corporation to a C corporation in connection with the recapitalization
of LISN in May 1999. As an S corporation, LISN was generally not subject to
federal income tax at the corporate level.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue increased 119%, or $90.6 million, from $76.4 million for
the year ended December 31, 1998 to $167.0 million for the year ended December
31, 1999. This increase was due primarily from increased revenue from EF&I
Services performed for Bell Atlantic in both existing and new geographic
markets.
Direct Costs. Direct costs increased 125%, or $65.9 million, from $52.7
million for the year ended December 31, 1998 to $118.5 million for the year
ended December 31, 1999. The increase was the result of an increase in our labor
force due to our increased level of activity, and represents a 2% increase in
direct costs as a percentage of revenue from 69% for the year ended December 31,
1998 to 71% for the year ended December 31, 1999. This increase is attributable
to an increased use of subcontractors necessary to achieve revenue growth and a
one-time bonus of $1.5 million paid to installers and engineers in connection
with the recapitalization of LISN in May 1999.
General and Administrative Expenses. General and administrative expenses
increased 94%, or $9.9 million, from $10.6 million for the year ended December
31, 1998 to $20.5 million for the year ended December 31, 1999. The increase in
general and administrative expenses was due primarily to a one-time bonus of
$5.0 million paid to LISN's administrative employees in connection with the
recapitalization of LISN in May 1999. These amounts represent a 2.0% decrease in
general and administrative expenses as a percentage of revenue from 14% for the
year ended December 31, 1998 to 12% for the year ended December 31, 1999. This
decrease resulted from leveraging these expenses over an increased revenue base.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $0.4 for the year ended December 31, 1998 and $1.4 for the year
ended December 31, 1999. This increase was primarily due to the amortization of
$0.2 million of finance costs in connection with the recapitalization of LISN in
May 1999 and the amortization of $0.7 million in goodwill in connection with the
LISN acquisition.
Interest Expense. Interest expense was $0.5 for the year ended December 31,
1998 and $10.5 million for the year ended December 31, 1999. This increase was
due to higher levels of debt incurred in connection with the recapitalization of
LISN in May 1999.
Provision for Income Taxes. The provision for income taxes was $0.0 for the
year ended December 31, 1998 and $4.9 million for the year ended December 31,
1999, reflecting an effective tax rate of 31% for federal, state and local taxes
for the year ended December 31, 1999. This increase is the result of the change
in LISN's status from an S corporation to a C corporation in connection with the
recapitalization of LISN in May 1999. As an S corporation, LISN was generally
not subject to federal income tax at the corporate level.
49
52
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased 90.0%, or $36.2 million, from $40.2 million for
the year ended December 31, 1997 to $76.4 million for the year ended December
31, 1998. This increase was primarily due to increased revenue from EF&I
Services performed for Bell Atlantic, AT&T and Ameritech in existing and new
geographic markets.
Direct Costs. Direct costs increased 78.0%, or $23.2 million, from $29.7
million for the year ended December 31, 1997 to $52.9 million for the year ended
December 31, 1998. The increase was the result of an increase in LISN's labor
force due to an increased level of activity, and represents a 4.7% decrease in
direct costs as a percentage of revenue from 73.9% for the year ended December
31, 1997 to 69.2% for the year ended December 31, 1998. This decrease was
attributable to the improved productivity of LISN's labor force.
General and Administrative Expenses. General and administrative expenses
increased 76.3%, or $4.5 million, from $5.9 million for the year ended December
31, 1997 to $10.4 million for the year ended December 31, 1998. These amounts
represent a 1.1% decrease in general and administrative expenses as a percentage
of revenue from 14.7% for the year ended December 31, 1997 to 13.6% for the year
ended December 31, 1998. The increase in general and administrative expenses was
primarily due to increases in administrative staff and salaries, and accounted
for $3.0 million of the $4.5 million increase.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $179,000 for the year ended December 31, 1997 and $383,000 for the
year ended December 31, 1998.
Interest Expense. Interest was $178,000 for the year ended December 31,
1997 and $450,000 for the year ended December 31, 1998.
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma financial data
and the data as a percentage of revenue for the periods indicated. This
financial data gives pro forma effect to those transactions described under the
heading "Unaudited Pro Forma Financial Statements," as if those transactions had
occurred at the beginning of the periods presented. See "Unaudited Pro Forma
Financial Statements." For purposes of the discussion below, we have included
unaudited pro forma financial data because we believe it provides a more
meaningful basis for period-to-period comparisons than the actual historical
financial data.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------------- ----------------------------------
2000 1999 1999 1998
--------------- --------------- --------------- ---------------
$ % $ % $ % $ %
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
STATEMENT OF
OPERATIONS DATA:
Revenue............. $369.5 100.0% $251.1 100.0% $587.2 100.0% $390.6 100.0%
Direct costs........ 263.3 71.3% 181.9 72.4% 419.1 71.4% 279.5 71.6%
General and
administrative
expenses......... 41.9 11.3% 27.2 10.8% 63.4 10.8% 45.8 11.7%
Depreciation and
amortization
expense.......... 14.5 3.9% 8.0 3.2% 26.8 4.6% 23.1 5.9%
Interest expense,
net.............. 32.6 8.8% 32.6 13.0% 64.8 11% 64.8 16.7%
Provision for income
taxes............ 10.7 2.9% 5.3 2.1% 11.0 1.9% (2.3) (0.5)%
OTHER DATA:
EBITDA.............. 64.3 17.4% 42.0 16.7% 104.6 17.8% 65.3 16.7%
50
53
Pro Forma Six Months Ended June 30, 2000 Compared to Pro Forma Six Months
Ended June 30, 1999
Revenue. Revenue increased 47.2%, or $118.5 million, from $251.1 million
for the six months ended June 30, 1999 to $369.5 million for the six months
ended June 30, 2000. This growth was attributable in part to a 47.4% increase in
revenue from our External Telecom Services customers, which accounted for $70.7
million or 59.7% of the total increase. A milder than expected winter and
improved pricing arrangements on certain jobs contributed to the increase in
External Telecom Services revenue. Revenue from our Internal Telecom Services
customers increased 51.4%, which accounted for $52.4 million, or 44.3% of the
total increase. Included in that amount was a $52.3 million increase in revenue
from EF&I Services which increased 70.3% due primarily to an increase in
services provided to Verizon. Revenue from Network Services increased 0.7%, or
$0.1 million, due to a general increase in demand for our Network Services.
Direct Costs. Direct costs increased 44.8%, or $81.5 million, from $181.9
million for the six months ended June 30, 1999 to $263.3 million for the six
months ended June 30, 2000. The increase was the result of our increased level
of business activity. As a percent of revenue, direct costs decreased from 72.4%
for the six months ended June 30, 1999 to 71.3% for the six months ended June
30, 2000. Direct costs as a percent of revenue decreased most significantly with
respect to those broadband customers for whom we provide External Telecom
Services. In the first half of 1999, several of our subsidiaries recorded
significant expenses relating to project accounting and accounts receivable.
Similar expenses did not need to be recorded during the first half of 2000, as
we have put in place more effective quality control procedures relating to
collections and lingering project costs. Improved pricing on certain projects
for our broadband customers contributed to the decrease in direct costs as a
percent of revenue.
General and Administrative Expenses. General and administrative expenses
increased 53.9%, or $14.7 million, from $27.2 million for the six months ended
June 30, 1999 to $41.9 million for the six months ended June 30, 2000. The
increase was due to increased payroll and other expenses resulting from our
growth. As a percent of revenue, the level of general and administrative
expenses increased from 10.8% for the six months ended June 30, 1999 to 11.3%
for the six months ended June 30, 2000. Management expects to be able to
maintain this level of general and administrative expenses as a percent of
revenue throughout 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $8.0 million for the six months ended June 30, 1999 and $14.5
million for the six months ended June 30, 2000.
Interest Expense. Interest expense, net, was $32.6 million for the six
months ended June 30, 1999 and $32.6 million for the six months ended June 30,
2000. We expect that our interest expense will increase in 2000 over 1999 levels
due to the utilization of the $100.0 million in borrowing capacity under the
senior credit facilities, which is available for working capital and
acquisitions.
Provision for Income Taxes. Provision for income taxes increased $2.0
million to $7.3 million for the six months ended June 30, 2000. Our effective
tax rate increased from 22.8% for the six months ended June 30, 1999 to 42.2%
for the six months ended June 30, 2000. Our effective tax rate is affected by
the non-deductibility of $6.3 million of goodwill attributable to acquisitions,
which will cause us to experience a significantly higher effective tax rate than
statutory levels for the foreseeable future.
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Pro Forma Year Ended December 31, 1999 Compared to Pro Forma Year Ended
December 31, 1998
Revenue. Revenue increased 50.3%, or $196.6 million, from $390.6 million
for the year ended December 31, 1998 to $587.2 million for the year ended
December 31, 1999. This growth was attributable in part to a 45% increase in
revenue from our External Telecom Services customers, which accounted for $107.2
million, or 59%, of the total increase. Favorable weather conditions at key
external telecom project sites and a general increase in demand for our External
Telecom Services contributed to this increase. Revenue from our Internal Telecom
Services customers increased 57%, which accounted for $89.4 million, or 41%, of
the total increase. Included in that amount was a $69.0 million increase in
revenue for EF&I Services, primarily performed for Verizon, which accounted for
38% of the total increase. Revenue from Network Services grew 10% over the
comparable period, or $5.5 million, due to a general increase in demand for our
Network Services.
Direct Costs. Direct costs increased 49.9%, or $139.6 million, from $279.5
million for the year ended December 31, 1998 to $419.1 million for the year
ended December 31, 1999. The increase was the result of an increase in our level
of activity. As a percentage of revenue, direct costs remained flat from the
year ended December 31, 1998 to the year ended December 31, 1999.
General and Administrative Expenses. General and administrative expenses
increased 38.4%, or $17.6 million, from $45.8 million for the year ended
December 31, 1998 to $63.4 for the year ended December 31, 1999. The increase in
general and administrative expenses was due to increased payroll and other
expenses required to service our increased level of activity. These amounts
represent a 0.9% decrease in general and administrative expenses as a percentage
of revenue from 11.7% for the year ended December 31, 1998 to 10.8% for the year
ended December 31, 1999. This decrease resulted from leveraging these expenses
over an increased revenue base. We expect to be able to maintain this level of
general and administrative expenses as a percentage of revenue for the year
ending December 31, 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $23.1 million for the year ended December 31, 1998 and $26.8 million
for the year ended December 31, 1999.
Interest Expense. Interest expense, net, was $64.8 million for the year
ended December 31, 1998 and $64.8 million for the year ended December 31, 1999.
We expect that our interest expense will increase in 2000 over 1999 levels due
to the utilization of the $100.0 million in borrowing capacity under the senior
credit facilities, which is available for working capital and acquisitions.
Provision for Income Taxes. The provision for income taxes increased $13.3
million, from a benefit of $2.3 million for the year ended December 31, 1998 to
an expense of $11.0 million for the year ended December 31, 1999. Our effective
tax rate is affected by the non-deductibility of $9.6 million of goodwill in
each period attributable to acquisitions, which will cause us to experience a
significantly higher effective tax rate than statutory levels for the
foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the LISN acquisition, we entered into the senior credit
facilities. The senior credit facilities were amended and restated on July 5,
2000 to provide for the tranche C term loan. The senior credit facilities
provide for aggregate borrowings of up to $435.0 million, consisting of the
following:
- $100.0 million revolving credit facility to be used for permitted
acquisitions and for working capital purposes, with sublimits of $75.0
million for acquisition loans and $50.0 million for working capital loans
and a maximum of $100.0 million in borrowings at any one time;
- $75.0 million tranche A term loan with a $50.0 million letter of credit
subfacility;
- $200.0 million tranche B term loan; and
- $60.0 million tranche C term loan.
Working capital loans borrowed under the revolving credit facility can only
be used for working capital purposes, capital expenditures and other general
corporate purposes. Acquisition loans borrowed
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under the revolving credit facility may only be used to finance a limited number
of acquisitions that are otherwise permitted by the terms of the senior credit
facilities. To the extent that the amount borrowed for acquisition loans exceeds
$50.0 million, the amount available for working capital loans is reduced dollar
for dollar.
As of July 5, 2000, there was $288.6 million of outstanding indebtedness
under the senior credit facilities (excluding $5.7 million of letters of credit
and $7.2 million of standby letters of credit), $50.0 million available under
the revolving credit facility for working capital and other corporate purposes
and $75.0 million available for acquisitions, although no more than $100.0
million in the aggregate may be borrowed under the revolving credit facility.
The proceeds of the tranche A and tranche B term loans were used to finance
the LISN acquisition and, except as described below, were fully drawn down at
the closing of the LISN acquisition and may not be reborrowed. The proceeds of
the tranche C term loan were used to repay loans outstanding under the revolving
credit facility and may not be reborrowed. Our obligation to certain of our
stockholders in connection with the put and call agreements entered into in
connection with the LISN acquisition are supported by $46.5 million of letters
of credit issued under the tranche A term loan letter of credit subfacility.
These letters of credit will be drawn to fully fund the amounts payable upon the
exercise of our call options. As of March 31, 2000, we had drawn $40.8 under
these letters of credit. In addition, a total of $7.2 million of standby letters
of credit have been issued under the revolving credit facility. These standby
letters of credit will expire in accordance with their terms without being drawn
when we exercise our call options.
As of July 5, 2000, rates on borrowings under the senior credit facilities
ranged from 9.6% to 10.3%. Borrowings of working capital under the revolving
credit facility are due December 15, 2004 and may be borrowed, repaid and
reborrowed prior to maturity. Until December 15, 2001, acquisition loans under
the revolving credit facility may be borrowed, repaid and reborrowed. On
December 15, 2001, any acquisition loans outstanding will be converted into an
amortizing term loan, payable quarterly, with 20% of the loan payable in 2002,
25% of the loan payable in 2003 and 55% of the loan payable in 2004, with the
final payment due December 15, 2004. Borrowings under the tranche A term loan
are due December 15, 2004, borrowings under the tranche B term loan are due
December 15, 2006 and borrowings under the tranche C term loan are due December
15, 2007. The tranche A, tranche B and tranche C term loans are payable
quarterly in arrears.
Our senior credit facilities and the indenture governing the notes contain
numerous restrictive covenants, including, among other things, covenants that
limit the issuers' ability to borrow money, make capital expenditures, use
assets as security in other transactions, pay dividends, incur contingent
obligations, sell assets and enter into leases and transactions with affiliates.
In addition, the senior credit facilities require us to meet specified financial
ratios and tests. In the event that we fail to comply with the various covenants
contained in our senior credit facilities, we would be in default under our
senior credit facilities and the maturity of substantially all of our long-term
indebtedness could be accelerated. All borrowings under the senior credit
facilities are guaranteed by, and are secured by substantially all of the assets
of, Parent and all of our present and future domestic subsidiaries.
We used approximately $43.2 million of the proceeds from the offering of
the outstanding notes to repay $42.6 in aggregate principal amount of the
tranche B term loan. Under the terms of the senior credit facilities, we were
required to repay this amount at 101% of the principal amount. We used
approximately $102.0 million of the proceeds of the offering of the notes to
repay our $100.0 senior subordinated term loan, plus accrued interest, that was
used to fund a portion of the LISN acquisition. We used approximately $57.0
million of the proceeds of the tranche C term loan to repay loans outstanding
under the revolving credit facility and the remainder for related fees and
expenses.
We expect that our principal sources of liquidity will be from cash flow
generated from operations and borrowings under the senior credit facilities. We
believe that these funds will be sufficient to meet our needs for the next
twelve months. Our principal uses of liquidity will be to meet our debt service
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obligations, provide working capital availability, finance our capital
expenditures and partially fund future acquisitions.
The combined capital expenditures of NATG and LISN for 1999 were
approximately $13.0 million. Our capital expenditures for 1999 included an
upgrade to our management information system and for additions to vehicles and
equipment of approximately $8.9 million and a $1.2 million expansion of LISN's
Amherst, Ohio corporate offices, including a $420,000 land purchase. We
anticipate that our capital expenditures in 2000 will be approximately $16.0
million.
The majority of our working capital requirements are attributable to billed
and unbilled accounts receivable. As of December 31, 1999, on a pro forma basis,
our billed days sales outstanding were 76 days and our unbilled days sales
outstanding were 14 days. We believe our days sales outstanding for billed and
unbilled receivables are generally in-line with the industry average and
generally reflect the payment policies of telecom services providers. Our
accounts receivable balance has increased due to the increased utilization of
milestone billing by our customers. With milestone billing, a customer will only
accept a bill upon completion of a discrete portion of a project, without regard
to the time it takes for the portion to be completed. The milestone billing
terms for our large turnkey projects, which represent 14% of the balance of our
receivables, have been a significant contributor to our balance of receivables
days sales outstanding. We have taken proactive steps to try to reduce our
unbilled accounts receivable balance and have been successful in negotiating
pre-payments with respect to our turnkey contracts to alleviate the burden on
our working capital.
As part of our growth strategy, we intend to pursue selective acquisitions.
We cannot predict the timing, size or success of any prospective acquisitions
and the related capital commitments. To the extent that we seek to grow by
acquisitions that involve consideration other than Parent's securities, our
capital requirements may increase. We expect to fund future acquisitions
primarily with issuances of additional Parent securities, the available portion
of our acquisition facility and cash flow from operations.
As of June 30, 2000, we had $0 cash and cash equivalents, working capital
of $66.0 million, short-term debt of $69.0 million and long-term debt, net of
current maturities of $521.9 million.
During the six months ended June 30, 2000, operating activities provided
$1.8 million of net cash primarily due to growth in our revenue. We used $72.7
million in cash in investing activities, which included $14.2 million for
capital expenditures and $58.5 million for acquisitions. Financing activities
provided cash of $42.2 million, resulting primarily from proceeds from the
issuance of the outstanding notes and from borrowings under the senior credit
facilities offset by payments in connection with put/call arrangements and
repayment of debt.
During the year ended December 31, 1999, operating activities provided
$13.8 million. We used net cash in investing activities of $170.2 million,
including $166.1 million relating to the LISN acquisition. Financing activities
provided a net cash flow of $182.3 million, resulting primarily from borrowings
under the senior credit facilities.
Parent intends to file a registration statement with the SEC relating to a
proposed initial public offering of shares of its common stock with an estimated
aggregate value of $250 million. We expect that the offering will be completed
in the fourth quarter of 2000. The proceeds of the offering to be received by
Parent are expected to be used to repay a portion of the indebtedness under the
senior credit facility, to prepay a portion of the notes, to prepay a portion of
Parent's junior subordinated notes and for general corporate purposes. We cannot
assure you that the offering will be completed or, if completed, that it will be
on the terms outlined above. The offering will be made pursuant to an effective
registration statement and this prospectus shall not be deemed to be an offer to
sell our common stock.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Our operations are seasonal, generally resulting in reduced revenues and
profits during the first and fourth quarters relative to other quarters. Factors
affecting the seasonality of our business are holiday
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season shut-downs, adverse weather conditions and year-end budgetary spending
patterns of our customers. These factors can negatively affect telecom systems
repair, replacement and expansion. Additionally, our industry can be highly
cyclical. As a result, our business volume may be adversely affected by declines
in new projects in various geographic regions. Quarterly results may also be
materially affected by the timing and magnitude of acquisitions and related
costs, variations in the margins of projects performed during any particular
quarter, the timing and volume of work under new agreements, customer spending
patterns, termination of existing agreements, costs incurred in connection with
internal growth, changes in our mix of customers, contracts or business,
fluctuations in construction and design costs, and regional and general economic
conditions. Accordingly, our operating results in any particular quarter may not
be indicative of the results that can be expected for any other quarter or for
the entire year.
MARKET RISK
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange and interest rates. Although
we are not subject to material foreign currency exchange risk, we are exposed to
changes in interest rates. All of our debt, other than the notes, is variable
rate debt. Interest rate changes generally do not affect the fair market value
of variable rate debt but do impact future earnings and cash flows, assuming
other factors are held constant. Conversely, for fixed rate debt, interest
changes do not impact future cash flow and earnings, but do impact the fair
market value of fixed rate debt, assuming other factors are held constant. At
June 30, 2000, we had variable rate debt of approximately $285.8 million and
fixed rate debt of approximately $150.0 million. Holding other variables
constant (such as debt levels) a one percentage point increase in interest rates
would have had an estimated impact on pre-tax earnings and cash flows for next
year of approximately $2.6 million. In order to manage our interest rate risk,
we have entered into interest rate cap agreements and swaps with a notional
amount of $118.0 million as of June 30, 2000. These agreements limit, but do not
eliminate, our exposure in the event LIBOR exceeds 7.0%.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for our 2001
financial statements. This Statement requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Due to the complexity of
this Statement, we are still evaluating the impact, if any, on our financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" (SAB 101), which affects the recognition and disclosures
about revenues. SAB 101 is applicable for our fourth quarter 2000 financial
statements. We do not expect the adoption of SAB 101 to have a significant
impact on our financial statements.
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BUSINESS
INTRODUCTION
We believe that we are one of the largest independent providers of
comprehensive telecom infrastructure services in the U.S., with operations in 48
states. We offer a full spectrum of services, including:
- External Telecom Services -- installation, design, engineering and
maintenance of fiber optic, coaxial and copper cable networks for the
telecom industry; and
- Internal Telecom Services -- engineering, furnishing and installation of
network equipment and related components and related maintenance
services, primarily in the central offices of telecommunications services
providers, which we refer to as "EF&I Services," and similar network
services for commercial, governmental and institutional entities, which
we refer to as "Network Services."
We believe that our ability to provide comprehensive, quality service on a
nationwide basis positions us as a leading, full-service provider of telecom
infrastructure services to the telecom industry. For the six months ended June
30, 2000, we had pro forma revenue of $369.5 million and pro forma EBITDA of
$64.3 million. For the year ended December 31, 1999, we had pro forma revenue of
$587.2 million and pro forma EBITDA of $104.6 million.
Our 1999 pro forma revenue was derived 59% from External Telecom Services
and 41% from Internal Telecom Services. More than 80% of our 1999 pro forma
revenue was generated from repeat customers, often under turnkey agreements,
master service agreements and preferred provider arrangements. Our principal
customers include providers of telecommunications services, such as Ameritech,
AT&T, Bell Atlantic, DTI, GTE, MCI WorldCom, Verizon and Williams
Communications, and providers of broadband services, such as Adelphia, AT&T
Broadband & Internet Services, Charter Communications, Clearsource, Comcast, Cox
Communications, Digital Access and Universal Access. We also provide our Network
Services for customers such as Compaq, Dell, EDS and World Bank.
The LISN acquisition provided us with access to the significant and rapidly
growing central office EF&I Services market. As a result of this acquisition, we
believe that we are the largest independent provider of EF&I Services to the
telecom industry in the U.S. We design configurations for a broad range of
equipment installations using our engineering capabilities, implement the
designs with our extensive installation expertise and furnish our customers with
a variety of accessory equipment such as racking materials, wire and cables.
INDUSTRY TRENDS
Market data used throughout this prospectus are based on our internal
estimates and from industry publications, including reports generated by the
Multimedia Telecommunications Association, World Information Technologies, Inc.
and Dataquest. Neither we nor any of our affiliates requested that these reports
be prepared, nor have we independently verified these reports. These
organizations have not consented to the inclusion of data from their reports in
our prospectus, nor have we sought their consent. Similarly, our internal
estimates, while we believe them to be reliable, have not been verified by an
independent source.
We estimate that the market for telecom infrastructure services exceeded
$40 billion in 1998 and that the market possesses positive growth dynamics. The
MultiMedia Telecommunications Association estimates that telecommunications and
broadband services providers spent over $19 billion on telecom infrastructure
services in 1998 and projects expenditures will grow at a compound annual rate
of approximately 14% through 2002. According to World Information Technologies,
Inc., expenditures for EF&I Services accounted for approximately $5 billion of
the total telecom infrastructure services expenditures by telecommunications and
broadband services providers in 1998, and are projected to grow at a compound
annual rate of approximately 41% through 2002. Expenditures for Network Services
by
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commercial, governmental and institutional entities are estimated by Dataquest
to have exceeded $20 billion in 1998 and are estimated by Dataquest to grow at a
compound annual rate of approximately 18% through 2002.
We believe that our industry presents substantial growth opportunities for
large companies like us with significant capital resources, broad geographic
coverage, comprehensive technical capabilities and the ability to provide
responsive, high quality service on a consistent basis. Growth in our industry
has been driven by the following trends:
- Telecom Deregulation. The Telecommunications Act of 1996 substantially
revised prior law by preempting state and local government control over
access to the telecommunications and cable television market. The
Telecommunications Act eliminated regulatory barriers to competition such
as the antitrust consent decree that had restricted the Regional Bell
Operating Companies from offering long distance telephone service, many
federal pricing regulations that had affected cable television providers
and FCC restrictions that had prevented telephone companies from offering
cable television services. In response to these changes, existing and
newly created companies have raced to install new networks and upgrade
existing networks to enter new markets to maintain or gain market share.
The Telecommunications Act also required that competitive local exchange
carriers be granted access to existing central offices of incumbent local
exchange carriers, a practice known as co-location, which requires
rewiring of the switches and has significantly increased demand for EF&I
Services. We believe the elimination of these entry barriers has
increased and will continue to increase competition among telecom
services providers and drive additional investment in telecommunications
network infrastructure. In addition, many state regulatory commissions
have eliminated pricing regulations for telecom providers, thus requiring
these providers to become efficient in installing and maintaining their
telecom and cable television networks so as to be price competitive. As a
result, providers are entering new markets, offering services that once
were reserved for incumbent providers, and expanding and improving their
existing networks.
- Increased Voice, Video and Data Traffic on Telecom Networks. Growth in
demand for Internet services, telecommunications voice and data traffic,
electronic commerce, delivery of information and entertainment services,
and the growth, use and reliance on personal computers has created an
increased need for greater bandwidth. Bandwidth refers to both the speed
and breadth of voice, video and data communications. Bandwidth is limited
by the size and the physical and technological characteristics of the
cable, equipment or other facilities through which communications flow.
Because of the physical limitations of existing network facilities,
telecom services providers are upgrading facilities with new and
innovative technology, expanding and, in many cases, replacing existing
telecom infrastructure to allow for increased bandwidth in order to offer
faster and greater volume of communications flow.
- Increased Outsourcing. The level of outsourcing by telecom services
providers is expected to continue to increase due to the need of these
service providers to upgrade and expand their networks as a result of
increased competition. The outsourcing trend has largely been driven by
the efforts of telecom services providers to expedite the expansion,
maintenance, replacement and enhancement of their networks, to reduce
costs and to focus on their core competencies. Companies that specialize
in providing telecom infrastructure services to the telecom industry are
generally able to provide these services on a lower cost basis. In
addition, we believe that telecom services providers are seeking to
reduce the number of their telecom infrastructure services providers, and
thereby the administrative expense and managerial burden of managing
their services providers, by establishing preferred relationships with a
select number of services providers that are able to consistently offer
comprehensive solutions to their network needs across a broad geographic
area.
- Customer Consolidation. While deregulation has created new market
participants, consolidation in the telecom industry has created
geographically diverse and in some cases integrated providers. The
expansion of the geographic markets served by telecom services providers
has increased the
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requirement for telecom infrastructure services providers to have broad
geographic coverage capabilities. As the size and scope of telecom services
providers have expanded, they are increasingly requiring telecom infrastructure
services providers to provide installation, design, engineering, and
maintenance services simultaneously over multiple geographic regions. Many
of the smaller regional and local companies in our industry do not have
the financial resources or personnel necessary to provide comprehensive
service capabilities over a broad geographic area or the ability to manage
multiple projects.
- Emergence of Preferred Service Providers. We believe that telecom
services providers increasingly prefer to simplify vendor management
through the use of telecom infrastructure service providers with
significant capital resources, broad geographic coverage, comprehensive
technical capabilities and the ability to provide responsive, quality
service on a consistent basis. Telecom infrastructure services providers
must be able to rapidly mobilize their capital equipment, financial
assets and personnel resources to effectively respond to the increasing
scale and time constraints of customer demands. As telecom services
providers expand their geographic market, we believe they often desire to
extend existing relationships with their existing telecom infrastructure
service providers to these new markets and are increasing the use of
turnkey and master service agreements. Turnkey agreements typically
require the telecom infrastructure service provider to install, design,
engineer and often maintain a comprehensive network for a specific
project. Master service agreements typically require the telecom
infrastructure service provider to install, design and maintain systems
and equipment for a variety of projects over a three to five year period
in a specified geographic area. Telecom infrastructure services providers
must be able to support the substantial initial working capital and
equipment commitments required for these turnkey and master service
agreements. This trend favors large services providers like us with
significant capital resources over smaller industry competitors.
COMPETITIVE STRENGTHS
We believe that we possess a number of competitive strengths that position
us as a leading provider of telecom infrastructure services and provide us with
the ability to meet the increased demand for these services and to take
advantage of the strong technology-driven growth occurring in the telecom
industry, including:
- Comprehensive Service Capabilities. We believe that we are one of the few
service providers with the capability to offer our customers integrated
and comprehensive telecom infrastructure services, including
installation, design, engineering, furnishing and maintenance services.
This capability is important to our customers, who increasingly prefer to
simplify their vendor management through the use of fewer preferred
service providers who can offer comprehensive solutions to their telecom
infrastructure needs. In addition, we believe our comprehensive service
capabilities across nearly all competing telecom infrastructure
technologies minimizes our risk of technological obsolescence.
- Broad Geographic Coverage. Consolidation in the telecom industry has
created geographically diverse telecom services providers who require
telecom infrastructure services providers with similarly broad
geographical capabilities. The telecom infrastructure services industry
is highly fragmented, with the seven largest public companies, together
with Orius, accounting for less than 6% of estimated total industry
revenues in 1999, and includes hundreds of significantly smaller local
and regional companies that can only offer their services over a limited
geographic area. We believe that our ability to provide our services to
customers on a nationwide basis positions us to be a preferred service
provider to our customers and provides us with a competitive advantage
over local and regional companies in our industry. We have significantly
broadened our geographic presence in the past two years through strategic
acquisitions, including our acquisition of LISN, and currently have
operations in 47 states.
- Strong Customer Relationships. More than 80% of our 1999 pro forma
revenue was derived from repeat customers. Through our operating
subsidiaries, we have enjoyed business relationships with
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many of our larger customers for more than 20 years. In addition, we are
a preferred service provider to a number of these customers. As a result
of our strong customer relationships, we are well positioned to
capitalize on the increasing trend of telecom services providers towards
greater outsourcing of their telecom infrastructure needs.
- Reputation and Commitment to Quality. We believe that we have a
reputation in our industry for responsive, high quality service, as
evidenced by LISN's receipt of customer service awards, including
Siemens' "1998 Contractor of the Year" and GTE's "Supplier Recognition
Award" in 1997. Our commitment to quality is further evidenced by LISN's
achievement in September 1998 and continued renewal of ISO 9002
certification.
- Decentralized Operating Strategy. We manage our operations on a
decentralized basis while maintaining overall operating and financial
controls and strategic planning at our corporate headquarters. Our
operating subsidiaries have been in business for an average of more than
20 years and retain responsibility for the operations, profitability and
growth of their individual businesses. We believe that our decentralized
operating structure retains the entrepreneurial spirit of each of the
businesses we acquire and permits us to capitalize on the acquired
businesses' customer relationships, local and regional market knowledge,
local brand name recognition and specialized skills. At the same time,
our management team coordinates overall marketing strategies to maximize
the utilization of our resources and reviews operations at our
subsidiaries to identify those practices that can be implemented
successfully throughout our operations.
- Experienced Management. Our executive management and the senior
management of our operating subsidiaries have an average of over 20 years
of experience in the telecom infrastructure services industry and our
chief executive officer, William J. Mercurio, has more than 25 years of
experience in this industry. Our executive management team also has
substantial acquisition experience, having completed 18 acquisitions
since 1998, including the LISN Acquisition. In addition, we have
generally retained key personnel from acquired companies, which has
enabled us to strengthen our management team. We also benefit from the
considerable financial, management and acquisition experience of our
largest stockholder, Willis Stein & Partners, a leading private equity
investment firm based in Chicago, Illinois with more than $1.2 billion of
assets under management as of December 31, 1999.
BUSINESS STRATEGY
Our objective is to enhance what we believe is our position as one of the
largest independent providers of comprehensive telecom infrastructure services
in the U.S. We seek to utilize our competitive strengths to take advantage of
substantial growth opportunities in the telecom industry that favor large
companies like us with significant capital resources. Key elements of our growth
and operating strategies include the following:
- Continue to Grow Internally. We believe we can continue to achieve
internal growth by:
Continuing to Develop National Service Capabilities. To meet our
customers' increasing preference for service providers who can provide
telecom infrastructure services on a nationwide basis, we have expanded
our business to include operations in 48 states. Continued expansion
into markets in which we do not currently have a significant presence is
fundamental to our strategy of enhancing what we believe is our position
as one of the largest providers of comprehensive telecom infrastructure
services in the U.S. Part of this strategy involves securing large,
long-term contracts in new geographic markets that provide us with the
local presence necessary to capture business from other potential
customers in these markets.
Focusing on Cross-Selling Opportunities. Our comprehensive service
offerings and broad geographic coverage provide us with the opportunity
to expand our service offerings across our customer base. For example,
we believe that our strong relationships with our External Telecom
Services customers located in the Southwestern and Western regions of
the U.S. provide us with
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the opportunity to expand our EF&I Services in these regions. Similarly,
our strong relationships with our EF&I Services customers in the
Northeastern and Mid-Atlantic regions of the U.S. provide us with the
opportunity to expand our External Telecom Services in that region.
Maximizing Performance of Existing Operations. We have been able to
increase internal growth by enhancing the performance of the businesses
we have acquired through the integration of their resources with our
existing operations. Although our operating subsidiaries retain
responsibility for the operations, profitability and growth of their
individual businesses, our executive management team has responsibility
for overall operations, financing, capital expenditures, corporate
strategy, acquisitions and the coordination of overall marketing and
bidding strategies to maximize the utilization of our resources. By
combining overlapping operations of the businesses we have acquired, we
have achieved, and believe we can continue to achieve, more efficient
asset and personnel utilization and reductions in incremental overhead
and general and administrative expenses. As we grow internally and
acquire additional businesses, we will seek to realize additional cost
savings and other benefits through shared purchasing, bidding,
scheduling and the establishment of best practices.
Expanding Our Service Offerings. We believe that opportunities
exist to grow internally by expanding the services we offer. We are
targeting new services that are complementary to the services we
currently offer, such as installing telecommunications software,
installing and maintaining wireless networks and providing testing,
turn-up, monitoring and dispatch repair and maintenance services. We
believe that opportunities also exist in the Internal Telecom Services
market to generate additional revenue by providing our current services
for a broader set of manufacturers' products. In addition, we are
expanding our design and engineering services, which are in particularly
high demand by telecom services providers. The expansion of our design
and engineering services can provide us with both an increased revenue
stream and the opportunity to exert greater control over project flow
and specifications, which in turn can provide us with a competitive
advantage in bidding for the related installation and maintenance work.
- Selectively Pursuing Strategic Acquisitions. We plan to continue to
pursue strategic acquisitions in the fragmented telecom infrastructure
services industry. We have acquired 18 companies since March 1998,
including our acquisition of LISN, and have gained significant experience
in identifying, purchasing and integrating telecom infrastructure
businesses.
- Attract, Train and Retain Highly Qualified Personnel. We focus on
attracting and retaining a highly trained and motivated workforce in
order to consistently deliver innovative customer solutions and
high-quality service. Our strategy is to become the employer of choice in
each of the markets in which we operate by offering our employees
comprehensive ongoing internal technical and managerial training programs
throughout their careers, competitive compensation and employee benefits,
career development opportunities, geographic mobility and equity
participation in our success.
TELECOM INFRASTRUCTURE SERVICES
EXTERNAL TELECOM SERVICES
Design and Engineering. We offer a variety of design and engineering
capabilities as part of our External Telecom Services. We design aerial, buried
and underground fiber optic, coaxial and copper cable systems for all segments
of our customers' network infrastructure. Our engineering services include the
design of service area concept boxes, terminals, buried and aerial drops and the
proper administration of feeder and distribution cable pairs. For competitive
access providers, we design building entrance laterals, fiber rings and conduit
systems. We obtain rights of way and permits in support of engineering
activities, and provide installation management and inspection personnel in
conjunction with engineering services or on a stand-alone basis. In addition,
for broadband services providers we perform make ready studies, strand
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mapping, field walk out, computer-aided radio frequency design and drafting, and
fiber optic cable routing and design.
Installation and Maintenance. We provide a full range of installation and
maintenance services to our customers. The services we provide include the
splicing and placing of cable, excavation of trenches in which to place the
cable, placement of related structures such as poles, anchors, conduits,
manholes, cabinets and closures, placement of drop cable from the main
distribution lines to the customer's home and businesses, and maintenance and
removal of these facilities. We have the capacity to directionally bore the
placement of cables, a highly specialized and increasingly necessary method of
placing buried cable networks in congested urban and suburban markets where
trenching is highly impractical due to the disruptive effect of trenching on the
surrounding area. We also employ a licensed rail plow device which enables us to
bury cable on railway easements expeditiously at a low cost.
INTERNAL TELECOM SERVICES
EF&I Services
Engineering. We engineer design configurations for a broad range of
equipment installations, ranging from low-end frame relays, which serve as an
interface between user and network equipment, to advanced broadband digital
cross-connect systems and digital subscriber lines, or DSLs, and platforms,
which enable high speed data and video transmission. Our engineers create
computer-generated schematic drawings that are tailored to each specific
installation project. All drawings are verified for accuracy with the central
office records through site surveys or on-line database checks. Our engineers
develop creative solutions to installation and upgrade projects for central
office switching, transmission and power systems. Our engineers work closely
with customers' engineers to develop detailed installation instructions and
drawings to ensure that the installation process is performed efficiently and
correctly.
Equipment Furnishing. We provide accessory equipment such as shelves, racks
and cable for use in the installation of central office equipment. This service
ensures an availability of supplies and enables us to meet accelerated
installation timetables. Our furnishing operations provide us with a significant
competitive advantage as a result of our ability to ship equipment on a
just-in-time basis in 24 hours or less and to pre-pack materials specific to a
given job site on a lower cost basis.
Installation. Our team of over 1,200 installation technicians has extensive
experience installing a full range of central office equipment, including
asynchronous and synchronous optical network multiplexers, T1 repeaters, digital
loop carrier systems, data bridges, network monitoring devices, alarming
systems, routers, power equipment, DSL and other equipment. Prior to beginning
installation, the installation technician reviews engineering drawings and
checks job site materials against specifications. The responsibilities of the
installation team include taking inventory of equipment, mounting, cabling and
wiring to schematics, performing functional equipment tests, integrating new
equipment with the existing exchange, and updating all specifications and
drawings. The installation team tests the system prior to reporting a completed
package to engineering in order to ensure that the equipment functions properly.
Network Services
We provide a variety of interior wiring services which include the
installation, design, engineering and maintenance of communications networks in
commercial, institutional and governmental facilities. These services generally
include the establishment and maintenance of computer operations, telephone
systems, local area networks and wide area networks, Internet access and systems
for monitoring environmental controls or security procedures.
ACQUISITION PROGRAM
Since our formation in August 1997, we have acquired 18 telecom
infrastructure services providers. These companies had pro forma revenues for
the twelve months ended December 31, 1999 of
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approximately $587.2 million. For a list of the businesses we have acquired, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Acquisitions."
We believe that we are regarded by acquisition candidates as an attractive
acquirer because of the following factors:
- our strategy for creating a nationwide comprehensive and professionally
managed business servicing the telecom industry,
- opportunities to participate in a larger organization with greater access
to capital resources,
- our decentralized operating strategy which retains the entrepreneurial
spirit of the acquired businesses by allowing acquired companies to
retain responsibility for their own individual operations, profitability
and growth,
- our potential for increased profitability due to centralized
administrative functions, enhanced management information systems and
economies of scale, and
- the potential for owners of the businesses being acquired to realize some
liquidity, while continuing to participate in our planned growth through
continued equity ownership in our company.
We have developed a set of financial, geographic and management criteria
designed to assist management in the evaluation of acquisition candidates. We
seek out acquisition candidates that have strong historical and projected
financial performance and experienced management teams that will be compatible
with our corporate culture and operating philosophy. In addition, we look for
acquisition candidates that satisfy one or all of the following criteria:
- whether the acquisition will add additional and/or complementary
technical capabilities,
- whether the acquisition will augment our market share or increase our
range of services,
- composition and size of the candidate's customer base,
- whether the geographic location of the candidate will enhance or expand
our market area or ability to attract other acquisition candidates, and
- potential synergies gained by combining the acquisition candidate with
our existing operations.
We anticipate that acquisition candidates will typically have annual
revenues ranging from $10 million to $40 million, although we would consider
acquiring a company with revenues outside this range. All acquisitions are
subject to initial evaluation and approval by our management before being
recommended to our board of directors. The evaluation by management includes
comprehensive financial, accounting and legal due diligence of the acquisition
candidate. We expect the management of our acquired companies to continue to
play an instrumental role in identifying and assisting in the completion of
future acquisitions.
We expect to use Parent's equity or debt securities for all or a portion of
the consideration for future acquisitions. We may also be required to utilize
our cash resources to pursue our acquisition program, whether through additional
borrowings under our senior credit facilities, cash on hand or otherwise.
BIDDING AND CONTRACTS
Our senior management team coordinates overall bidding strategies to
maximize the utilization of our resources, with all bids over $1.0 million being
approved by our senior management. Bids are prepared utilizing the local
expertise of our operating subsidiaries. When appropriate, our operating
subsidiaries work together in bidding for, winning and executing new contracts
by pooling their available resources, technical expertise and coverage in
different geographic areas.
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EXTERNAL TELECOM SERVICES
Our three primary types of External Telecom Services contracts include:
- installation contracts for specific projects,
- master service agreements for all specified services within a defined
geographic territory, and
- turnkey agreements for comprehensive installation, design, engineering
and maintenance services.
Project-Specific Contracts. We refer to contracts covering bids for
particular services at specified prices as project-specific contracts.
Generally, these contracts cover most installation projects with a duration of
one year or longer. The majority of these contracts provide that we will furnish
a specified unit of service for a specified price. For example, we contract to
install cable for a specified rate per foot. Pro forma revenue for
project-specific contracts was approximately $156 million in 1997, $194 million
in 1998, $269 million in 1999 and $166 million for the six months ended June 30,
2000.
Master Service Agreements. We refer to contracts with telecom services
providers to perform all work within a specific geographic area as master
service agreements. Under master service agreements, project services are
provided upon the execution of work orders, which will describe the work to be
undertaken. Each master service agreement contemplates hundreds of individual
installation and maintenance projects, generally resulting in less than $50,000
in revenue per project. These agreements generally have a term ranging from
three to five years and often contain price adjustment provisions based on
inflation. Under our master service agreements, our customers generally reserve
the right to use their own regularly employed personnel to perform services. In
addition, our customers generally retain the right to solicit competitive bids
with respect to projects that exceed a specified dollar amount, generally
$50,000. Pro forma revenue for master service agreements was approximately $41
million in 1997, $41 million in 1998, $40 million in 1999 and $31 million for
the six months ended June 30, 2000.
Turnkey Agreements. We refer to contracts covering a comprehensive spectrum
of services, including the installation, design, engineering, and maintenance of
telecommunications and broadband networks on a fixed unit-priced basis, as
turnkey agreements. As we continue to grow and expand the scope of services we
provide, we are able to enter into an increasing number of contracts to provide
turnkey services. Even though these are generally long-term agreements, the
pricing for our services is not necessarily fixed because these agreements often
contain price adjustment provisions that are favorable to us, as well as
performance and completion incentives. Because turnkey contracts are invoiced
based on units of work completed at specified milestones per the contracts'
terms, these agreements require substantial initial working capital and
equipment, which historically have been partially funded by customer
prepayments. Pro forma revenue for turnkey agreements was approximately $0 in
1997, $5 million in 1998, $38 million in 1999 and $23 million for the six months
ended June 30, 2000.
Our contracts for External Telecom Services are awarded on a competitive
basis, a negotiated basis, or a combination of the two depending on the nature
of the contract and the customer. Upon receipt of a request for proposal, we
develop a detailed bid which meets the unique specifications and requirements of
each project. This process often entails strategic business analysis, resource
planning, network design, cost and engineering studies and, in some cases,
development of financing alternatives for the project. Bids may be structured as
fixed price or cost plus, depending on the requirements of the request for
proposal, and are typically quoted on a per unit basis. In either case, we
believe that we enjoy a favorable competitive position due to our ability to
provide a full range of high quality installation, design, engineering and
maintenance services nationwide. Although master service agreements have
historically been awarded in a competitive bidding process, recent trends have
been toward securing or extending these contracts on negotiated terms. With the
rapid expansion of telecommunications and broadband networks, we believe that
more master service agreements will be awarded on the basis of negotiated terms
to the telecommunications or broadband services providers' preferred providers,
as opposed to the competitive bidding process. All of our External Telecom
Services contracts are generally terminable upon 90 days' notice or less.
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INTERNAL TELECOM SERVICES
EF&I Services Contracts. We generally provide EF&I Services on a
project-by-project basis. Each of these projects generates average revenue of
approximately $20,000 and requires from two weeks to three months to complete,
with the majority completed in less than a month. In 1998 we completed
approximately 5,000 individual EF&I Services projects, and in 1999, we completed
approximately 8,000 additional projects. Pro forma revenue for EF&I Services
contracts was $21 million in 1996, $40 million in 1997, $76 million in 1998,
$145 million in 1999 and $127 million for the six months ended June 30, 2000.
Regional Bell Operating Companies are our primary customers for EF&I
Services. We typically secure two or three-year, fixed price agreements with the
Regional Bell Operating Companies, who generally establish non-binding contracts
with only "preferred" vendors. We have achieved preferred status with many of
our customers, including Bell Atlantic and Ameritech. These non-binding
contracts outline the payment terms and pricing parameters for various types of
projects. Although these contracts do not stipulate a minimum amount of work to
be designated to a vendor during the term of the contract, preferred provider
status does act as a barrier to entry, allowing preferred providers to perform
their services at their maximum service capacity. Regional Bell Operating
Companies such as Bell Atlantic typically limit their number of preferred
vendors to between three and six vendors per region.
We calculate the pricing of our projects for other customers based on the
type of equipment to be installed and the complexity of the engineering and
installation services required. We generally recognize revenue from EF&I
Services contracts on our books as a percentage of project completion, with
completion being measured by comparing actual costs incurred to estimated
project costs, and bill our customers at job completion. Because our EF&I
projects are generally short in duration (two weeks to three months, but
generally less than one month) and are for less than $20,000, this method of
revenue recognition does not present any material risk of misstating revenues.
The lag between completion and billing is approximately two weeks and payments
are due within 45 days from the billing date (net 30 terms). Progress billing is
only allowed in the Bell Atlantic contract and on a job-by-job negotiated basis
with other customers.
Network Services Contracts. We generally provide our Network Services on a
project-by-project basis for a fixed fee and recognize revenue on a percentage
of completion basis as our costs are incurred. Each of these projects generates
average revenue of approximately $15,000 and generally requires one week to 30
days to complete. These contracts are generally billed upon project completion.
We also provide our Network Services under maintenance agreements, under which
we agree to furnish a specified unit of service for a specified price and bill
our customers based on the services performed.
CUSTOMERS
We regularly serve a diverse group of more than 300 customers, which can be
categorized in three broad market segments:
- telecommunications services providers, such as Regional Bell Operating
Companies, incumbent local exchange carriers, competitive local exchange
carriers, long-distance service providers and independent telephone
companies, which accounted for approximately 60% of our pro forma 1999
revenue;
- broadband services providers, such as Media One and Time Warner, which
accounted for approximately 33% of our 1999 pro forma revenue; and
- commercial entities, such as Dell and Compaq, governmental entities such
as the FDIC, and institutional entities, such as utility providers and
public school districts, requiring Network Services, which together
accounted for approximately 7% of our 1999 pro forma revenue.
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The following table sets forth our top ten customers, which accounted for
approximately 69.7% of our pro forma revenue for the six months ended June 30,
2000:
TOP 10 CUSTOMERS
% OF REVENUE FOR
THE SIX MONTHS ENDED
NAME MARKET SEGMENT SERVICES PROVIDED JUNE 30, 2000
- ---- ------------------ ----------------- --------------------
Verizon Telecommunications Internal Telecom 25.2
AT&T Broadband Telecommunications Internal Telecom 9.6
Metro Media Fiber Telecommunications External Telecom 5.5
Charter Communications Broadband External Telecom 4.8
Time Warner Broadband External Telecom 4.6
AT&T Telecommunications Internal 4.3
Williams Communications Telecommunications External Telecom 4.0
U.S. West Telecommunications External Telecom 3.4
DTI Telecommunications External Telecom 3.3
Media One Broadband External Telecom 2.8
In recent months, our revenue from Verizon has increased in both absolute
terms and as a percentage of our revenue and this trend may continue for the
foreseeable future. Verizon contributed approximately 61% of LISN's 1998
revenue. Because LISN's business with Verizon is governed by 13 separate
relationships with individual Verizon operating units that are each
independently responsible for issuance of work orders to LISN within their
operating regions, customer diversification effectively exists within the
Verizon relationship, since a change in our relationship with one unit will not
necessarily affect our relationship with the other units. Verizon's need for
telecom infrastructure services has kept LISN operating at or near full capacity
for the past seven years in the regions LISN serves Verizon.
SALES AND MARKETING
Our sales and marketing efforts are focused on increasing the value of
comprehensive services provided to existing customers, actively cross-marketing
additional services to our existing customer base and developing new customer
relationships. These efforts are primarily the responsibility of regional
management, supplemented by our executive management team with respect to
national accounts. Regional management at each of our operating subsidiaries has
been responsible for developing and maintaining successful long-term
relationships with customers, which helps facilitate our repeat business and
generate cross-marketing opportunities.
We currently have a sales and marketing integration team, comprised of
executive management of Parent and senior management of its subsidiaries,
including LISN, working to maximize our sales and marketing opportunities. This
team is actively identifying logical cross-selling opportunities, developing
procedures for joint-bidding and developing procedures for delivering sales
opportunities to the business unit best positioned to respond to the customer's
requirements.
Many of our customers or prospective customers have a qualification
procedure for becoming an approved vendor based upon the satisfaction of
particular performance and safety standards set by the customer. These customers
often maintain a list of vendors meeting their standards and award contracts for
individual jobs only to vendors which meet their standards. This customer
approval process has been expedited by LISN's achievement in September 1998 of
ISO 9002 certification. We strive to maintain our status as a preferred and
qualified vendor to these customers.
BACKLOG
We define our backlog as the uncompleted portion of services to be
performed under project specific contracts and the estimated value of future
services that we expect to provide under master service agreements and other
contracts. As of June 30, 2000, our pro forma backlog was approximately $663
million. Of that amount, approximately $303 million was for work scheduled to be
performed in 2000
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and approximately $318 million is for work scheduled to be performed in 2001.
All our backlog can be canceled at any time upon the notice provided in these
agreements without penalty except, in some cases, for the recovery of our actual
committed costs and profit on work performed up to the date of cancellation.
However, we have not historically had any significant cancellations. We are
unable to provide backlog information for periods prior to 1999 since our
subsidiaries did not maintain any consistent information on contract backlog
prior to their acquisition by Parent.
Under our master service agreements and certain of our maintenance
contracts, our customers do not commit to the volume of services to be
purchased. Rather, these contractual provisions commit us to perform these
services if requested by the customer and commit the customer to obtain these
services from us if they are not performed internally. Many of the contracts are
multi-year contracts and we include revenues from all the services projected to
be performed over the life of the contract in our backlog based upon our
historical relationships with our customers and experience in these types of
contracts.
SAFETY AND RISK MANAGEMENT
We are committed to ensuring that our employees perform their work in a
safe environment. We regularly communicate with our employees to promote safety
and to instill safe work habits through our company-wide employee training and
educational programs. We have dedicated risk managers at each of our operating
subsidiaries who review all accidents and claims, examine trends and implement
changes in procedures or communications to address any safety issues. We also
have a dedicated risk manager at our corporate headquarters who monitors the
risk management programs at our subsidiaries and establishes overall corporate
risk management objectives and standards.
EMPLOYEES
As of June 30, 2000, we had approximately 5,885 employees, approximately
15% of whom were salaried, approximately 80% of whom were paid on an hourly
basis and approximately 5% of whom were paid on a production basis. Our hourly
employees have an average hourly wage of $15 per hour. Our employees are
generally non-union, although we do provide union labor when required, as in
certain markets such as New York City. As of June 30, 2000, approximately 20% of
our employees were affiliated with unions. We maintain a core of technical and
managerial personnel from which we draw to supervise all projects. As the need
arises, we also subcontract with independent contractors to supply additional
manpower to complete specific projects. As of June 30, 2000, on a pro forma
basis, we had approximately 1,800 subcontracted workers. We consider relations
with our employees to be good.
We employ more than 750 qualified installers with skill levels that meet or
exceed Bellcore GR-1275-CORE section 23, an industry-wide quality standard.
Technicians go through a two-week formal training period and an estimated 12 to
18 more months on the job before they are fully trained. Most of the technicians
have a trade school/high school education or have prior experience in the
telecom sector. Recruiting, training and retaining technicians is a key focus
area for us.
EQUIPMENT AND FACILITIES
We operate a fleet of owned and leased trucks and trailers, support
vehicles and specialty installation equipment, such as backhoes, excavators,
trenchers, generators, boring machines, cranes, wire pullers and tensioners. The
total size of the equipment fleet is approximately 2,200 units. We believe that
these vehicles generally are well-maintained and adequate for our present
operations. We believe that in the future, we will be able to lease or purchase
this equipment at favorable prices due to our larger size and the volume of our
leasing and purchasing activity.
Our corporate headquarters are located in leased space in West Palm Beach,
Florida. The total leased area for our corporate headquarters and our
subsidiaries' headquarters that are leased is approximately 283,611 square feet
and the total annual base rent for these facilities is approximately $2.0
million. The leases for these facilities have terms ranging from month-to-month
to five years. None of the individual leases is material to our operations.
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The following is a list of our facilities, each of which is leased, with
the exception of the headquarters for Schatz Underground Cable in Villa Ridge,
Missouri, which includes the training, warehouse and distribution facility, the
Schatz Underground Cable regional office in Kansas City, Missouri, the LISN
headquarters in Amherst, Ohio and LISN's training and regional office in Lorain,
Ohio. In addition to those facilities listed, our subsidiaries also lease
various district field offices, equipment yards, shop facilities and temporary
storage locations. We also lease other smaller properties as necessary to enable
us to efficiently perform our obligations under master service agreements and
other contracts. We believe that our facilities are generally adequate for our
needs. We do not anticipate difficulty in replacing any facilities or securing
additional facilities, if needed. All of our owned properties and our leases are
pledged to secure repayment of the senior credit facilities.
FACILITY LOCATION
- -------- -------------------
Orius Headquarters.......................................... West Palm Beach, FL
Texel headquarters.......................................... Reston, VA
Copenhagen Utilities & Construction headquarters............ Clackamas, OR
Network Cabling Services headquarters....................... Houston, TX
Schatz Underground Cable headquarters....................... Villa Ridge, MO
Schatz Underground Cable regional facility.................. Kansas City, MO
DAS-CO of Idaho headquarters................................ Nampa, ID
State Wide CATV headquarters................................ Tampa, FL
CATV Subscriber Services headquarters....................... Greensboro, NC
U.S. Cable headquarters..................................... O'Fallon, MO
Channel Communications headquarters......................... Sheboygan, WI
Cablemaster headquarters.................................... Fairview, PA
Mich-Com Cable Construction headquarters.................... Stuart, FL
Excel Cable Construction headquarters....................... Jacksonville, FL
LISN headquarters........................................... Amherst, OH
LISN regional office facility............................... Beltsville, MD
LISN regional office facility............................... E. Rutherford, NJ
LISN regional office facility............................... Dallas, TX
LISN regional office facility............................... Green Bay, WI
LISN regional office facility............................... Elkhorn, WI
LISN regional office facility............................... Washington, DC
LISN regional office facility............................... Hunt Valley, MD
LISN engineering facility................................... Westborough, MA
LISN regional office facility............................... Chicago, IL
LISN training and regional office facility.................. Lorain, OH
LISN regional office facility............................... Denver, CO
LISN regional office facility............................... King of Prussia, PA
LISN regional office facility............................... Atlanta, GA
LISN regional office facility............................... Livermore, CA
LISN regional office facility............................... Pittsburgh, PA
Fenix headquarters.......................................... Green Bay, WI
Midwest Splicing headquarters............................... Arden Hills, MN
Irwin headquarters.......................................... Dallas, TX
Hattech headquarters........................................ Chantilly, VA
Hattech regional office facility............................ Keiser, OR
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COMPETITION
The telecom infrastructure services industry is highly fragmented. We
believe that the seven largest public companies in the industry, together with
Orius, accounted for less than 6% of total estimated industry revenues in 1999,
with Orius accounting for approximately 1%. The industry consists of a small
number of large companies with a national presence and hundreds of smaller local
and regional companies that generally have more limited service capabilities and
geographic coverage. The telecom infrastructure industry is highly competitive,
requiring substantial resources and skilled and experienced personnel. We
compete with other companies in all of the markets in which we operate, some of
the larger of which may have greater financial, technical and marketing
resources than we do, including Dycom Industries, Inc., MasTec, Inc., Quanta
Services, Inc. and others. There are relatively few barriers to entry into the
markets in which we operate and, as a result, any organization that has adequate
financial resources, access to technical expertise and customer relationships
may become a competitor to us. We may also face competition from the in-house
service organizations of our existing or prospective customers which often
employ personnel who perform some of the same types of services as those
provided by us. Although a significant portion of these services is currently
outsourced, we cannot assure you that our existing or prospective customers will
continue to outsource service requirements for installation, design, engineering
and maintenance services in the future.
We believe that the principal competitive factors in the telecom
infrastructure industry include technical expertise, reputation, price, quality
of service, availability of skilled technical personnel, geographic presence,
breadth of service offerings, adherence to industry standards and financial
stability. We believe that we compete favorably within our industry on the basis
of these factors.
LEGAL PROCEEDINGS
We occasionally are a party to legal proceedings incidental to our ordinary
business operations. At present, we are not a party to any pending legal
proceedings that we believe could have a material adverse effect on our
business, financial condition or results of operations.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to federal, state and local
environmental and occupational health and safety requirements, including those
relating to discharges of substances to the air, water and land, the handling,
storage and disposal of wastes and the cleanup of properties affected by
pollutants. We do not currently anticipate any material adverse effect on our
business or financial condition as a result of our efforts to comply with such
requirements.
In the future, federal, state, local or foreign governments could enact new
or more stringent laws or issue new or more stringent regulations concerning
environmental and worker health and safety matters that could effect our
operations. Also, in the future, contamination may be found to exist at our
facilities or off-site locations where we have sent wastes. We could be held
liable for any newly-discovered contamination. It is possible that changes in
environmental and worker health and safety requirements or liabilities from
newly-discovered contamination could have a material effect on our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning Parent's executive
officers and directors:
NAME AGE POSITION
- ---- --- --------
William J. Mercurio.................... 59 President, Chief Executive Officer and Chairman of
the Board of Directors
Robert E. Agres........................ 40 Vice President and Chief Financial Officer
Joseph P. Powers....................... 54 Vice President -- Operations
Martin Kobs............................ 49 President -- Telecommunications Services Group
Donald J. Vanke........................ 57 President and CEO -- LISN and Director
John J. Leonbruno...................... 41 President -- EF&I Services
E. Scott Kasprowicz.................... 47 President -- Network Services
Catherine Caudell...................... 51 Vice President -- Human Resources
Robert E. Beardsley.................... 45 Vice President -- Information Systems
Gregory M. Barr........................ 34 Director
Robert C. Froetscher................... 42 Director
Jack E. Reich.......................... 49 Director
Avy H. Stein........................... 46 Director
William J. Mercurio has been Parent's President, Chief Executive Officer
and Chairman of Parent's Board of Directors since its formation in August 1997.
Mr. Mercurio has more than 25 years of experience in our industry. From 1995 to
1997, Mr. Mercurio served as President and Chief Executive Officer of Able
Telcom Holding Corp., a publicly-traded telecom installation, design,
engineering and maintenance services company. From 1986 to 1995, Mr. Mercurio,
who is a certified public accountant, owned a consulting and accounting firm.
From 1971 to 1986, Mr. Mercurio held various positions with Burnup & Sims, Inc.
at the time a publicly-traded telecom infrastructure service provider, including
Senior Vice President, Chief Financial Officer and was a member of the Board of
Directors. While at Burnup & Sims, Mr. Mercurio participated in over 30
acquisitions and was responsible for all financing and accounting matters.
Robert E. Agres has been Parent's Chief Financial Officer since June 1998.
From 1993 to 1997, Mr. Agres served as Senior Vice President and Chief Financial
Officer of Triarc Beverage Group, where he was primarily responsible for
Triarc's subsidiary, Royal Crown Company, Inc. From 1997 to 1998 Mr. Agres was a
private financial consultant. Mr. Agres, who is a CPA, has more than 15 years of
experience in accounting and financial reporting including work at two public
companies and public accounting at KMG prior to joining Parent.
Joseph P. Powers has been Parent's Vice President for Operations since its
formation in August 1997. Mr. Powers has more than 32 years of experience in the
telecom infrastructure services industry. From 1995 to 1997, he served as
President of Able Communication Services, Inc., a wholly-owned subsidiary of
Able Telcom. From 1990 to 1995, he was Director of Operations for Voltelcon, the
telecom installation, design, engineering and maintenance services division of
Volt Information Sciences.
Martin Kobs was appointed President -- Telecommunications Services Group in
October 1999. Prior to that position, Mr. Kobs served as Director -- Operations
from July 1998 to October 1999. Mr. Kobs has over 26 years of experience in the
telecom industry. From 1996 to 1998, Mr. Kobs served as President of Able
Integrated Systems, a subsidiary of Able Telcom. From 1993 to 1996, Mr. Kobs was
Director of Operations for Volt Information Sciences. From 1986 to 1998, he
served as Operations Manager of Burnup & Sims Communications Services.
Donald J. Vanke has served as a Director of Parent since the LISN
acquisition. Mr. Vanke has been President and CEO of LISN since 1998 and, prior
to that time, was Vice President of LISN. As Vice President, Mr. Vanke was
responsible for quality, purchasing, finance and information systems. Prior to
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joining LISN, he was President and CEO of DCM, a manufacturer of direct current
motors, from 1978 until 1984. Prior to that Mr. Vanke was Vice President of
Tenna, a manufacturer of electric antennae and mirrors from 1972 until 1978.
From 1964 until 1972, Mr. Vanke was a Manager at Ernst & Young.
John J. Leonbruno was appointed President -- EF&I Services in September
2000. Prior to that position, Mr. Leonbruno served as Senior Vice President of
Sales and Marketing at LISN from March 2000 to September 2000. Mr. Leonbruno has
over 16 years of experience in the telecommunications industry. From 1996 to
2000, Mr. Leonbruno served as Vice President of Global Sales and Service with
MCI Worldcom. From 1994 to 1996, Mr. Leonbruno served as General Manager of
Custom Business with Ameritech.
E. Scott Kasprowicz was appointed President -- Network Services in August
2000. Mr. Kasprowicz is the founder of Texel Corporation, one of our operating
divisions, which we acquired from Mr. Kasprowicz in 1999. Mr. Kasprowicz has
been the President of Texel since 1983 and has over 20 years of experience in
the telecom industry. Texel is a provider of voice and data cable installation,
and system design and engineering services.
Catherine Caudell joined Orius as Vice President -- Human Resources in
August 2000. Ms. Caudell has over 20 years of experience in the field of human
resource management and performance technology. Prior to joining Orius, Ms.
Caudell was Executive Vice President of Human Resources for Service
Intelligence, a multi-state call center and customer service organization, from
1995 until 2000. From 1987 to 1995, Ms. Caudell was Vice President of Human
Resources for Telstar Communications, where she was involved in taking the
organization from 800 to over 25,000 employees.
Robert E. Beardsley has served as Vice President -- Information Systems
since June 2000. Prior to joining Orius, Mr. Beardsley was employed as a
principal consultant with PricewaterhouseCoopers, LLP in its Management
Consulting Services group from 1998 to 2000. From 1998 to 2000, Mr. Beardsley
acted as Internal Project Manager for Harris Publishing. From 1994 to 1996, Mr.
Beardsley was a principal at Practical Systems, which sold and deployed Solomon
financial software. Mr. Beardsley is a certified public accountant.
Gregory M. Barr has served as a Director of Parent since the LISN
acquisition. Mr. Barr is a principal at Navis Partners (formerly Fleet Equity
Partners). Prior to joining Navis, Mr. Barr was with McKinsey & Company where he
worked as a management consultant in a variety of industries and at Goldman,
Sachs & Company as a financial analyst in the Investment Banking Division. Mr.
Barr serves on the board of directors of several privately-held companies.
Robert C. Froetscher has served as a Director of Parent since the LISN
acquisition. Mr. Froetscher is a Managing Director of Willis Stein & Partners.
Prior to joining Willis Stein & Partners in 1998, Mr. Froetscher was Senior Vice
President and General Manager of APAC Teleservices with responsibility for
running two of APAC's divisions from 1996 to 1997. From 1994 to 1996 he was Vice
President, Sales and Service for Ameritech's Consumer Division, directed 5,300
employees and had responsibility for a business that generated $4.5 billion in
revenue in 1996. Previously, Mr. Froetscher spent almost nine years with MCI in
a variety of executive positions in marketing, sales, service and operations.
Jack E. Reich has served as a Director of Parent since the LISN
acquisition. Mr. Reich has spent 25 years in the communications industry and
held various positions in the local, long distance, data, equipment
manufacturing and Internet segments of this industry. Currently, Mr. Reich is
President of KJE, Inc., a management and investment consulting firm. Most
recently, he served as President and Chief Executive Officer of e.spire
Communications, Inc. from December 1996 through November 1998. e.spire is a
public competitive local exchange carrier. Prior to joining e.spire, Mr. Reich
served as President of Custom Business Service with Ameritech, Inc. Mr. Reich
joined Ameritech from MCI where he held various positions from April 1986 to
April 1994. Mr. Reich departed MCI as their President of the Multi-National
Accounts Division responsible for marketing and operations to that company's
largest customers. Mr. Reich currently serves on the board of directors of
Digex, Inc. (DIGX), a publicly held web-hosting company.
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Avy H. Stein has served as a Director of Parent since the LISN acquisition.
Mr. Stein is a Managing Director of Willis Stein & Partners. Prior to the
formation of Willis Stein & Partners in 1994, Mr. Stein was a Managing Director
of Continental Illinois Venture Corporation from 1989 through 1994. Previously,
Mr. Stein served as a consultant to the CEO of NL Industries, Inc. From 1985 to
1988, he was founder/ CEO of Regent Corporation. From 1984 to 1985, Mr. Stein
was President of Cook Energy Corporation and Vice President of Corporate
Planning and Legal Affairs at Cook International, Inc. From 1980 through 1983,
Mr. Stein was an attorney with Kirkland & Ellis. He also serves as a director of
Racing Champions Corporation, CTN Media Group, Inc., Tremont Corporation and
Aavid Thermal Technologies, Inc., as well as a number of private companies.
Each director is elected to serve until the next annual meeting of
stockholders or until a successor is duly elected and qualified. Each of the
current directors were elected as provided by the terms of an investor rights
agreement. See "Certain Relationships and Related Party Transactions -- Investor
Rights Agreement." There are no family relationship between any of our executive
officers or directors.
DIRECTOR COMPENSATION
Parent does not currently pay any fees to its directors. However, all
directors are reimbursed for out-of-pocket expenses incurred in connection with
the rendering of services as a director.
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal years ended
December 31, 1999 and 1998 concerning compensation Parent paid to its chief
executive officer and the four other executive officers who were its most highly
compensated officers during those years who were compensated over $100,000
during that year. Other annual compensation primarily represents amounts paid
for auto allowances.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------- OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- -------- ------------
William J. Mercurio.............................. 1999 $373,750(1) $100,000 $9,000
President and Chief Executive Officer 1998 135,375 100,000 6,750
Robert E. Agres.................................. 1999 155,833 25,000 0
Vice President and Chief Financial Officer
Joseph P. Powers................................. 1999 191,667 60,000 6,600
Vice President -- Operations 1998 101,250 60,000 4,500
William Mullen(2)................................ 1999 157,693 40,000 1,014
President -- Broadband Services Group
Donald J. Vanke.................................. 1999 300,000 505,770 0
President and CEO -- LISN
- ---------------
(1) In connection with certain of our 1999 acquisitions, we paid Mr. Mercurio
and Associates, P.A., an affiliate of Mr. Mercurio, a consulting fee of
$550,000 for assistance in identification of, and due diligence with respect
to, acquisition candidates.
(2) Mr. Mullen is no longer an officer of Orius.
OPTION GRANT TABLE
No stock options were granted to the named executive officers during the
year ended December 31, 1999. Parent's former stock option plan was terminated
in connection with the LISN acquisition. Each of the outstanding options was
terminated in exchange for an amount equal to the difference between (1) the
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per share price paid to the holders of Parent's common stock who received cash
for their shares of common stock in connection with the LISN acquisition, less
(2) the exercise price of each option. In connection with the LISN acquisition,
Mr. Agres received $132,949 in exchange for his options to purchase Parent's
common stock.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table shows aggregate exercises of options in the year ended
December 31, 1999 by the named executive officers and the aggregate value of
unexercised options held by each named executive officer as of December 31,
1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL
YEAR AND YEAR-END OPTION VALUES
YEAR END(#) YEAR END($)
SHARES ------------- -------------
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------------- ------------- -------------
William J. Mercurio................... -- -- -- --
Robert E. Agres(1).................... 15,541 132,949 -- --
Joseph P. Powers...................... -- -- -- --
William Mullen........................ -- -- -- --
Donald J. Vanke(2).................... -- -- 0/252,226.32 $0/$1,664,166
- ---------------
(1) Mr. Agres' options became vested and were exercised in connection with the
LISN acquisition.
(2) At the time of the LISN acquisition, Mr. Vanke held options to purchase
679.66 shares of LISN common stock. In connection with the LISN acquisition,
these options were converted into the right to purchase 250,533.2 shares of
Parent's common stock (as adjusted for our March 2000 10-for-1 stock split)
and 1,693.12 shares of Parent's series C preferred stock. The calculated
value of these options is based on the values per share at the time of the
LISN acquisition.
EXECUTIVE EMPLOYMENT AGREEMENTS
Mr. Mercurio. In connection with the LISN acquisition, Parent entered into
a senior management agreement with Mr. Mercurio. The agreement provides that Mr.
Mercurio shall serve as president, chief executive officer and chairman of the
board of Parent and shall devote his full business time and attention to its
affairs. The agreement is for a term ending on February 28, 2003. Mr. Mercurio
is entitled under the agreement to a base salary equal to $470,000 per year,
which may be increased by the board in its discretion and will be subject to
yearly increases based on the Consumer Price Index. In addition to his base
salary, Mr. Mercurio is entitled to receive an annual bonus based upon Parent's
financial performance, as measured by its EBITDA. Mr. Mercurio will not receive
a bonus unless Parent's EBITDA is greater than 1.125 times its prior year's
EBITDA. If EBITDA exceeds this amount, Mr. Mercurio is entitled to receive a
bonus ranging from 50% to 100% of his base salary.
Parent and Mr. Mercurio may each terminate the agreement at any time, with
or without cause, provided that, if we terminate Mr. Mercurio without "cause,"
or if he terminates his employment with "good reason," we must continue to pay
him his base salary for two years and must pay him a pro rata portion of his
bonus for the year of his termination. "Cause" includes the commission of a
felony or a crime involving moral turpitude; an act or omission with respect to
Parent involving dishonesty or fraud that has resulted in or is likely to result
in material harm to Parent; chronic drug or alcohol use; the repeated failure to
perform his duties as directed by the board; negligent or willful misconduct
with respect to Parent; or the material breach of the terms of his management
agreement. "Good reason" means the relocation of our executive offices outside
of West Palm Beach, Florida; a material breach by us of the terms of the
management agreement; or the assignment to Mr. Mercurio of duties inconsistent
with his position at Parent.
If Parent terminates Mr. Mercurio for cause or if he terminates his
employment without good reason, he would be entitled to receive only his base
salary through the date of termination. If Mr. Mercurio is
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terminated for disability, he is entitled to receive his base salary for six
months. In the event the agreement is terminated according to its terms in
February 2003, Parent may, at its option, continue to pay Mr. Mercurio his base
salary for one year as a severance payment. Mr. Mercurio has agreed not to
compete with Parent until the later of (1) the second anniversary of the
termination of the management agreement if Mr. Mercurio resigns without good
reason or is terminated with cause or (2) the time as we cease making any
severance payments to him under the management agreement.
Under the management agreement, Parent agreed to sell to Mr. Mercurio
shares of Parent's common stock equal to .75% of its outstanding common stock
for a price per share equal to the price at which shares were purchased by all
investors in the LISN acquisition. Mr. Mercurio purchased these shares on
January 16, 2000 by issuance of a promissory note in the amount of $252,633,
which is secured by a pledge of the 188,810 shares purchased. The note bears
interest at a rate of 5.88% per annum. Fifty percent of these shares will vest
over four years. The remaining 50% vest on the fifth anniversary of the closing
of the LISN acquisition, provided that vesting will be accelerated with respect
to 25% of this 50% in each year that Parent achieves its EBITDA target. All of
Mr. Mercurio's shares will become immediately vested upon the occurrence of the
following events: (1) Willis Stein & Partners ceases to own 50% of the shares
owned by it as of the closing of the LISN acquisition, (2) if prior to an
initial public offering of Parent, a person or group of persons who were not
stockholders immediately after the LISN acquisition acquire a number of shares
necessary to elect a majority of the board or (3) a change of control occurs. A
"change of control" means (1) any person who was not a stockholder immediately
following the LISN acquisition owns the greater of (a) 25% of Parent's voting
stock or (b) the greatest combined voting power of any person who was a
stockholder immediately following the LISN acquisition; (2) during any two year
period, persons who constituted the board at the beginning of the period cease
to constitute a majority of the board; (3) if Parent consummates a merger and
stockholders who were stockholders prior to the merger cease to own 80% of the
surviving company's equity; (4) a sale of all or substantially all of Parent's
assets; or (5) any person commences a tender offer or receives an option to
acquire 25% or more of Parent's voting stock, unless the board makes a good
faith determination that this action would not constitute a material change in
the control of Parent.
If Mr. Mercurio ceases to be employed by Parent for any reason, Parent will
have the option to repurchase his unvested shares at their original cost. Parent
will be able to purchase his vested shares only if he fails to repay the
promissory note issued to purchase the shares within 60 days following his
termination. Mr. Mercurio's shares will be subject to the restrictions on
transfer contained in the investor rights agreement, described under the heading
"Certain Relationships and Related Party Transactions -- Investor Rights
Agreement."
Messrs. Agres and Powers. Parent also entered into employment agreements
with Mr. Agres and Mr. Powers. Mr. Agres' agreement provides that he will be
employed as Chief Financial Officer for a term ending December 14, 2001 and will
receive a base salary of $195,000 per year. Mr. Powers agreement provides that
he will be employed as a Vice President for a term ending February 28, 2003 and
will receive a base salary of $230,000 per year. Parent may terminate Messrs.
Agres' and Powers' employment at any time for "cause," which includes (1) a
material breach of the terms of the executive's agreement, (2) willful
misconduct in the performance of the executive's duties; (3) an act of fraud
intended to result in the executive's enrichment at Parent's expense, (4)
conviction of a felony or fraud, (5) entry of an order preventing the executive
from performing activities that are essential to the performance of the
executive's agreement, or (6) willful or deliberate conduct intended to
materially damage Parent's business. If either of Messrs. Agres or Powers is
terminated for cause or voluntarily terminates his employment, he would be
entitled to receive his base salary through the date of termination. If either
Messrs. Agres or Powers is terminated due to disability, he would be entitled to
receive his base salary for one year following termination. If either is
terminated without cause, he would be entitled to receive his base salary for
the remainder of his employment term. Mr. Agres has agreed not to compete with
Parent for a period ending the later of (1) December 14, 2001 and (2) one year
after the termination of his employment. Mr. Powers has agreed not to compete
with Parent for a period ending the later of (1) February 28, 2003 or (2) one
year after the termination of his employment.
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Mr. Vanke. Mr. Vanke has an employment agreement with LISN, dated May 28,
1999, which expires on May 27, 2001. Mr. Vanke's employment agreement provides
that he will serve as President and Chief Executive Officer of LISN and will
receive a base salary of $300,000. In addition, Mr. Vanke receives a bonus equal
to 100% of his base salary based on the achievement of certain EBITDA targets by
LISN, as determined by Mr. Vanke and LISN's board of directors prior to the
start of each fiscal year. If LISN terminates Mr. Vanke without cause or if he
terminates his employment for good reason prior to May 2001, LISN must pay Mr.
Vanke his base salary through the later of six months following his termination
or through May 2001. If Mr. Vanke's employment is terminated for cause or if he
terminates his employment without good reason, he will be entitled to only his
base salary through the date of termination. "Cause" includes (1) the commission
of a felony or fraud, (2) chronic drug or alcohol abuse or conduct causing LISN
substantial public disgrace, (3) substantial and repeated failure to perform his
duties as directed by LISN's board of directors, (4) gross negligence or willful
misconduct or (5) any other material breach of his employment agreement. "Good
Reason" includes the relocation of LISN's offices outside of the Cleveland, Ohio
area or the Company's breach of the terms of the employment agreement. Mr. Vanke
has agreed not to compete with LISN during his employment and for two years
thereafter.
Mr. Mullen. Pursuant to Mr. Mullen's employment agreement with us, we will
pay his estate an amount equal to his base salary of $225,000 through August
2001.
STOCK OPTIONS
Mr. Agres held options under Parent's former stock option plan, which was
terminated in connection with the LISN acquisition. Each of his outstanding
options was terminated in exchange for an amount equal to the difference between
(1) the per share price paid to holders of Parent's common stock who received
cash for their shares of common stock in connection with the LISN acquisition,
less (2) the exercise price for the option. In connection with the LISN
acquisition, Mr. Agres received $132,949 in exchange for his options to Parent
common stock.
PARENT EQUITY INCENTIVE PLAN
In connection with the LISN acquisition, Parent adopted the 1999 Orius
Management Equity Compensation Plan. The plan provides for the grant of shares
of Parent's common stock, class B common stock and series C preferred stock or
options to purchase these shares to its and its subsidiaries' employees,
directors, officers, consultants and advisors. Under the plan, Parent has
reserved for issuance (1) 1,253,321 shares of common stock, (2) 1,100,000 shares
of class B common stock and (3) 7,000 shares of series C preferred stock. The
plan is administered by Parent's board of directors.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
GENERAL
We have, from time to time, entered into various transactions with certain
of our officers, directors and principal stockholders and entities in which
these parties have an interest. We believe that these transactions have been on
terms no less favorable to us than could be obtained in a transaction with an
independent third party.
TRANSACTIONS IN CONNECTION WITH THE LISN ACQUISITION
General
In connection with the LISN acquisition, Messrs. Mercurio, Agres, Powers
and Mullen received the following in exchange for their equity interests in
Parent and Mr. Vanke received the following in exchange for his equity interest
in LISN:
SERIES C JUNIOR
NAMED EXECUTIVE COMMON PREFERRED SUBORDINATED
OFFICER CASH STOCK(1) STOCK NOTES
- --------------- ---------- -------- --------- ------------
William J. Mercurio(2)................... $8,007,183 538,590 4,261 $2,945,133
Robert E. Agres(3)....................... 410,213 18,650 148 101,981
Joseph P. Powers(4)...................... 1,959,105 131,780 1,043 720,581
William Mullen........................... 3,415,154 229,710 1,818 1,256,132
Donald J. Vanke(5)....................... -- 266,250 2,107 1,455,934
- ---------------
(1) As adjusted for our March 2000 10-for-1 stock split.
(2) Includes amounts received by trusts in which Mr. Mercurio's wife serves as
trustee.
(3) Includes $132,949 received by Mr. Agres in exchange for his options to
purchase Parent common stock.
(4) Includes amounts received by Mr. Powers' wife.
(5) Includes amounts received by Mr. Vanke in exchange for his additional
investment of $900,000 at the time of the LISN acquisition.
Investor Rights Agreement
In connection with the LISN acquisition, Parent and each of its
stockholders entered into an investor rights agreement. This agreement provides
that Parent's board of directors will be established at seven directors or any
higher number designated by Willis Stein & Partners. The agreement provides that
the board will consist of:
- Parent's chief executive officer, who will initially be Mr. Mercurio;
- one person designated by Parent's stockholders prior to the LISN
acquisition, provided that the designee is one of Parent's or Parent's
subsidiaries' senior executives and the designee is reasonably acceptable
to Willis Stein & Partners;
- one person designated by Willis Stein & Partners, provided that the
designee is one of Parent's or Parent's subsidiaries' senior executives
and the designee is reasonably acceptable to Parent's chief executive
officer, and who will initially be Mr. Vanke; and
- the remainder shall be designated by Willis Stein & Partners, and
initially will be Mr. Stein, Mr. Froetscher, Mr. Barr and Mr. Reich.
The investor agreement generally restricts the transfer of any shares of
Parent's stock or junior subordinated notes held by the parties to the investor
agreement by requiring that Willis Stein & Partners approve any transfers of
these securities, with some limited exceptions. The parties to the investor
agreement have granted Parent a right of first refusal with respect to its stock
and junior subordinated notes, which, if not exercised by Parent, may be
exercised by Willis Stein & Partners and some of its other stockholders. Each
party to the investor agreement has the right to participate in any transfer of
shares by any other party to the agreement, with some limited exceptions. In
addition, Parent has agreed not to issue
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any equity securities to Willis Stein & Partners or its affiliates unless the
parties to the investor agreement are given the opportunity to purchase their
pro rata share on substantially the same terms. Each party to the investor
agreement has agreed to consent to a sale of Parent if Willis Stein & Partners
votes to approve the sale.
The investor agreement also provides that Willis Stein & Partners may
request, at any time, that all or any portion of its common stock or class B
common stock be registered with the SEC. In the event that Willis Stein &
Partners makes a request for registration, the other parties to the investor
agreement who hold common stock or class B common stock will be entitled to
participate in the registration. Parent has also granted the parties to the
investor agreement piggyback registration rights with respect to registrations
by it and Parent has agreed to pay all expenses relating to the piggyback
registrations.
Consulting Agreement with Mr. Reich
Mr. Reich receives consulting payments from us in an amount of $15,000 per
month. In exchange, Mr. Reich provides consulting services for five days per
month, in such areas as identifying and consummating acquisitions, sales and
marketing and human resources. We compensate Mr. Reich for consulting in excess
of five days per month at a rate of $3,000 per day. Mr. Reich received options
to purchase shares of LISN common stock at the time this agreement was entered
into, which were converted into options to purchase 9,394.99 shares of Parent
common stock and 634.92 shares of Parent series C preferred in connection with
the LISN acquisition.
RELATED PARTY LEASES
Parent is a party to two leases with entities controlled by Mr. Ebersole, a
former director of Orius, for the lease of Channel's headquarters and office
space. The combined monthly rent for both leases is approximately $12,100. These
leases expire in April 2000 and April 2001, respectively. The lease expiring in
April 2000 has been on a year-to-year basis since 1995.
U.S. Cable, Inc., a subsidiary of NATG, is a party to a lease agreement
with WMC Properties, a general partnership that was 25% owned by William Mullen,
a former director of Parent, at the time the lease was entered into. The lease
is for U.S. Cable's headquarters and office space located in O'Fallon, Missouri
at a current rate of $61,800 per year, subject to an increase of 3% per annum.
The lease expires July 2003.
Texel Corporation, a subsidiary of NATG, is a party to a lease agreement
with Trison, LLC, an affiliate of Mr. Kasprowicz. The lease is for Texel's
headquarters in Reston, Virginia at a rate of $406,042 per year, subject to an
increase of 3% per annum. The lease expires June 30, 2005, and contains a
renewal option for an additional five-year term.
1999 ACQUISITIONS
In February 1999, we acquired Schatz, DAS-CO, Copenhagen and Network in a
transaction that was designed to give tax-free treatment to the issuance of
stock to the former stockholders of the acquired companies. To complete these
acquisitions all of the existing stockholders of these companies exchanged their
interests in the respective companies for new interests in Parent. HIG acquired
7,546.38 shares of Parent's series B preferred stock for $7.6 million, which was
redeemed in connection with the LISN acquisition for an aggregate of $44.0
million in cash. Parent also sold 1,066,219 shares of its common stock to its
then existing stockholders and employees for $2.4 million. The following
officers, directors and former principal stockholders, and their immediate
family members and affiliated entities, purchased the number of shares indicated
at $2.34 per share in cash: Mr. Mercurio -- 132,319, Mr. Agres -- 41,444, and
Mr. Mullen -- 106,717. In connection with the 1999 acquisitions, Parent paid (1)
Mercurio and Associates, PA., an affiliate of Mr. Mercurio, a consulting fee of
$550,000 for assistance in identification of, and due diligence with respect to,
acquisition candidates and (2) HIG $267,000 for fees and expenses.
In May 1999, we acquired the stock of Texel Corporation from Mr.
Kasprowicz, one of our executive officers, for $26.3 million in cash plus the
issuance of 1,030,335 shares of Parent's common stock. In
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September 2000, we paid Mr. Kasprowicz approximately $3.0 million in settlement
of litigation brought by Mr. Kasprowicz, alleging that amounts were owed to him
as a purchase price adjustment in connection that purchase. In return for this
payment, Mr. Kasprowicz has released all claims against Orius relating to this
matter.
RECAPITALIZATION OF LISN
LISN was recapitalized in May 1999 by an investor group led by Willis Stein
& Partners, certain co-investors and members of LISN's management. Willis Stein
& Partners and its co-investors contributed approximately $70.3 million in
capital. Willis Stein & Partners and its co-investors received $49.2 million in
junior subordinated notes, $10.6 million in preferred stock and $10.5 million in
common stock. Members of management retained approximately 15% of LISN's equity.
In connection with the recapitalization, LISN agreed to make a cash payment
to three of its former stockholders based on LISN's results of operations for
the year ended December 31, 1999, including Mr. Vanke. Based on LISN's results
of operations, LISN paid these stockholders an aggregate of $4.0 million, $0.5
million of which was paid to a trust formed for the benefit of Mr. Vanke.
FAMILY RELATIONSHIPS
Rosemarie Mulholland, the daughter of Mr. Mercurio, is Parent's Secretary
and Treasurer. Ms. Mulholland, a certified public accountant, received total
compensation of $90,967 from us in 1999, including a salary of $80,467 and an
accrued bonus of $10,500. Ms. Mulholland also received options to purchase 9,325
shares of our common stock, which were repurchased in connection with the LISN
Acquisition for $77,701 in cash.
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PRINCIPAL STOCKHOLDERS
All of the outstanding capital securities of NATG is owned by Parent. Orius
Capital is a wholly owned subsidiary of NATG. The table below lists information
about the beneficial ownership of Parent's capital stock as of June 30, 2000,
including shares which these persons have the right to acquire within 60 days
upon the exercise of options, by (a) each person whom we know to own
beneficially more than 5% of any class of Parent's stock, (b) each of Parent's
directors and named executive officers and (c) all of Parent's directors and
executive officers as a group. Unless otherwise stated, each of the persons in
the table has sole voting and investment power with respect to the securities
beneficially owned and each person's address is the same as Parent's. We have
otherwise calculated beneficial ownership in accordance with the applicable
rules and regulations under the Exchange Act. See "Description of Parent's
Securities" for a description of the terms of Parent's capital stock.
SERIES C PREFERRED COMMON STOCK
-------------------- ---------------------
NUMBER OF PERCENT NUMBER OF PERCENT
SHARES OF CLASS SHARES OF CLASS
--------- -------- ---------- --------
Willis Stein & Partners(1).......................... 84,896.6 41.3% 10,730,017 41.5%
227 West Monroe Street, Suite 4300, Chicago, IL
60606
Navis Partners(2)................................... 12,073.9 5.9 1,526,009 5.9
50 Kennedy Plaza, Providence, RI 02903
Goldman, Sachs & Co.(3)............................. 10,643.8 5.2 1,345,258 5.2
One New York Plaza, 40th Floor, New York, NY 10004
Abu Dhabi Investment Authority (4).................. 10,643.8 5.2 1,345,258 5.2
P.O. Box 7106 Corniche Street, Abu Dhabi, United
Arab Emirates
William J. Mercurio(5).............................. 4,187.6 2.0 718,071 2.8
Robert E. Agres..................................... 147.6 * 18,650 *
Joseph P. Powers(6)................................. 1,042.6 * 131,775 *
Donald J. Vanke..................................... 2,106.6 1.0 266,252 1.0
Gregory M. Barr(2).................................. -- -- -- --
Robert C. Froetscher(1)............................. -- -- -- --
Jack E. Reich....................................... 423.3 * 62,633 *
Avy H. Stein(1)..................................... -- -- -- --
All Directors and Officers as a group (9 persons)... 108,546.6 52.8 13,917,058 53.8
- ---------------
* Less than one percent.
(1) Includes shares held by Willis Stein & Partners II, L.P. and Willis Stein &
Partners Dutch, L.P. (the "Willis Stein entities"). John R. Willis and Avy
H. Stein, as managers of Willis Stein & Partners Management II, L.L.C.,
which is the general partner of Willis Stein & Partners Management II, L.P.,
which is the general partner of the Willis Stein entities, may each be
deemed to beneficially own the shares held of record by the Willis Stein
entities. Each of these persons disclaims beneficial ownership of these
shares. Mr. Froetscher is a Managing Director of Willis Stein & Partners.
Mr. Froetscher disclaims beneficial ownership of the shares held of record
by the Willis Stein entities.
(2) Includes shares held by Chisholm Partners III, L.P., Kennedy Plaza Partners,
Fleet Venture Resources, Inc. and Fleet Equity Partners VI, L.P. These
entities are affiliates of Navis Partners (formerly Fleet Equity Partners),
of which Mr. Barr is a principal. Mr. Barr disclaims beneficial ownership of
the shares held by these entities.
(3) Includes shares held by GS Private Equity Partners III, L.P., GS Equity
Partners II, L.P., GS Private Equity Partners II Offshore, GS Private Equity
Partners II Direct Fund, GS Private Equity Partners III Offshore and GS
Private Equity Partners Connecticut, which are private equity investment
funds affiliated with Goldman, Sachs & Co.
(4) The Abu Dhabi Investment Authority is an instrumentality of the government
of the Emirate of Abu Dhabi and is wholly owned and controlled by that
government.
(5) Includes shares held by various trusts in which Mr. Mercurio's wife serves
as trustee.
(6) Includes shares held of record by Mr. Powers' wife.
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DESCRIPTION OF PARENT'S SECURITIES
GENERAL
Parent's authorized capital stock consists of: 10,000 shares of series A
convertible preferred stock, par value $.0001 per share; 7,596.38 shares of
series B convertible preferred stock, par value $.0001 per share; 200,000,000
shares of series C participating preferred stock, par value $.01 per share;
200,000,000 shares of series D preferred stock, par value $.01 per share;
200,000,000 shares of common stock, par value $.01 per share; and 200,000,000
shares of class B common stock, $.01 per share. As of June 30, 2000, there were
no shares of series A preferred stock, no shares of series B preferred stock,
205,739.77 shares of series C preferred stock, no shares of series D preferred
stock, no shares of class B common stock and 25,887,559.27 shares of common
stock outstanding. Parent's classes of stock generally differ with respect to
dividend payment, liquidation preference, redemption, conversion and voting
rights. All classes of its stock vote together as a class on all matters to be
voted upon by its stockholders. The common stock is entitled to one vote per
share, the class B common is entitled to 10 votes per share and the series C
preferred stock is entitled to 75 votes per share.
SERIES C PREFERRED STOCK
Dividends on the series C preferred stock accrue daily at a rate of 12% per
annum on the liquidation value of the series C preferred stock plus all
accumulated and unpaid dividends. The liquidation value of the series C
preferred stock is $1,000. These dividends are cumulative and must be paid
before dividends are paid on any shares of common stock. Holders of series C
preferred stock also participate in any dividends paid to the holders of common
stock on an as converted basis. Upon a liquidation of Parent, the holders of
series C preferred stock would be entitled to receive the liquidation value of
their stock plus accrued and unpaid dividends prior to any distributions to the
holders of common stock. The series C preferred stock will be redeemed on
December 31, 2019 at its purchase price, plus accrued dividends and plus the
liquidation value of the common stock into which it is convertible.
Upon the consummation of an initial public offering, the holders of a
majority of the series C preferred stock may cause all or any portion of the
outstanding series C preferred stock to be converted into (1) shares of class B
common (or, if no shares of class B common are outstanding, common stock), and
(2) shares of series D preferred stock. Each holder of series C preferred stock
will receive (1) a number of shares of common stock equal to series C
liquidation value divided by the conversion price for the series C preferred
stock and (2) the number of shares of series D preferred stock with a
liquidation value equal to the liquidation value of the series C preferred stock
converted, plus accrued and unpaid dividends.
The series D preferred stock is similar in rights and preferences to the
series C preferred stock, but is not convertible into common stock and is
redeemable by Parent at any time. In addition, a majority of the holders of the
series D preferred stock may cause Parent to redeem some or all of the series D
preferred stock at any time. Parent may pay the redemption price for the series
D preferred stock by issuance of common stock with an equivalent fair market
value in lieu of cash if it is prohibited by the terms of its debt from making
the redemption payment in cash or if the holders of the series D preferred stock
do not object to receiving the redemption payment in common stock.
COMMON STOCK
Dividends on the common stock are payable when and as declared by Parent's
board of directors, subject to the rights of the holders of any preferred stock.
The holders of the common stock participate in any distributions upon
liquidation ratably, subject to the rights of the holders of its preferred
stock.
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JUNIOR SUBORDINATED NOTES
As of June 30, 2000, there was $141.7 million of Parent's junior
subordinated notes outstanding. The LISN acquisition resulted in each
stockholder of Parent, except to the extent the stockholder's shares are subject
to put and call agreements, owning Parent common stock, series C preferred stock
and junior subordinated notes with fair values representing approximately
9%-54%-37%, respectively, of the fair market value of the securities. Parent's
obligations under the junior subordinated notes are subordinated to all of
Parent's senior debt (as defined under the terms of the junior subordinated
notes), including its guarantee in respect of the senior credit facilities and
the notes. The junior subordinated notes bear interest at a rate of 12.0% per
annum, a maximum of 40% of which is payable in cash beginning January 15, 2001,
and the remainder of which is deferred and accrues as additional principal. In
addition, after December 15, 2004, if at the end of any interest accrual period
the amount of accrued and unpaid original issue discount exceeds an amount equal
to the product of the issue price and the yield to maturity (the "Maximum
Amount"), then interest will be paid so as to reduce the unpaid original issue
discount to an amount less than the Maximum Amount. Cash interest can be paid by
Parent only to the extent Parent has available funds and only so long as the
payments are permitted under the terms of, among other things, the senior credit
facilities and the notes.
Because Parent is a holding company with no independent operations, the
only sources of funds for making payments on the subordinated promissory notes
are (1) dividends from NATG, the payment of which is limited by the terms of the
senior credit facilities and the notes and (2) additional capital contributions
from its stockholders. If there is a default under the junior subordinated notes
because NATG is prohibited under the terms of the senior credit facilities or
the notes from paying sufficient dividends for Parent to meet its cash interest
obligations under its junior subordinated notes, or if Parent otherwise defaults
on its obligations in respect of the junior subordinated notes, the holders of
the junior subordinated notes will be prohibited from taking any actions or
exercising any remedies against Parent or any of its subsidiaries until all
senior debt, including the senior credit facilities and the Notes, has been
repaid in full; provided, that the holders may accelerate their junior
subordinated notes if senior debt is accelerated, but are prohibited from taking
any further action. The junior subordinated notes become due and payable on the
later of (1) December 15, 2009 and (2) the first anniversary of the date on
which any debt raised in a high yield offering, such as the notes being issued
in this offering, is repaid.
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DESCRIPTION OF SENIOR CREDIT FACILITIES
General. In connection with the LISN acquisition, NATG entered into the
senior credit facilities with Bankers Trust Company, Bank of America, N.A. and
certain other lenders. The senior credit facilities were amended and restated on
July 5, 2000 to provide for the tranche C term loan. The senior credit
facilities provide for aggregate borrowings of approximately $435.0 million. The
senior credit facilities consist of the following:
- $75.0 million tranche A term loan with a $50.0 million letter of credit
subfacility;
- $200.0 million tranche B term loan;
- $60.0 million tranche C term loan; and
- $100.0 million revolving credit facility to be used for permitted
acquisition loans and for working capital purposes, with sublimits of
$75.0 million for acquisition loans and $50.0 million for working capital
loans and a maximum of $100.0 million in borrowings at any one time.
As of July 5, 2000, there was $288.6 million of outstanding indebtedness
under the senior credit facilities (excluding $2.0 million of letters of credit)
and $50.0 million available under the senior credit facilities for working
capital and other corporate purposes and $75.0 million available for
acquisitions, although no more than $100.0 in the aggregate may be borrowed
under the revolving credit facilities. The amount outstanding under the senior
credit facilities includes $5.7 million of letters of credit issued under the
tranche A term loan letter of credit subfacility. These letters of credit
support the obligations under put and call agreements with some of Parent's
stockholders. These letters of credit will be drawn to fully fund the amounts
payable upon exercise of our call options. In addition, the amount available for
working capital loans has been reduced by $7.2 million of letters of credit
issued under the revolving credit facility to support other contingent
obligations in connection with the put and call agreements. These letters of
credit will expire in accordance with their terms without being drawn upon
exercise of the call options. We used a portion of the proceeds of the offering
of the outstanding notes to repay a portion of the tranche B term loan. See "Use
of Proceeds."
Interest. Amounts outstanding under the senior credit facilities bear
interest, at our option, at a rate per annum equal to either (1) the base rate
or (2) the eurodollar rate, as determined by Bankers Trust Company, in each case
plus an additional margin. The base rate is the higher of (x) the rate announced
from time to time by Bankers Trust Company as its prime lending rate, and (y)
the overnight federal funds rate plus 0.5%. The additional margin for the
revolving credit facility, including for any acquisition loans converted into
term loans under that facility, and the tranche A term loan is initially 2.0%
for base rate loans and 3.0% for eurodollar rate loans. The additional margin
for tranche B term loans is initially 2.5% for base rate loans and 3.5% for
eurodollar rate loans and the additional margin for the tranche C term loans is
initially 2.75% for base rate loans and 3.75% for eurodollar rate loans. The
additional margin for tranche A term loans and the revolving credit facility
adjusts according to a performance pricing grid based on our ratio of total debt
to EBITDA, ranging from (1) for base rate loans, 2.0% to 0.75% and (2) for
eurodollar rate loans, 3.0% to 1.75%. As of July 5, 2000, our borrowings under
the senior credit facilities bore interest at rates ranging from 9.6% to 10.3%.
Maturity. Borrowings under the revolving credit facility that are used for
working capital purposes are due December 15, 2004 and may be borrowed, repaid
and reborrowed prior to maturity. Until December 15, 2001, amounts borrowed
under the revolving credit facility that are used for acquisitions may be
borrowed, repaid and reborrowed. On December 15, 2001, (1) any acquisition loans
outstanding will be converted into an amortizing term loan, payable quarterly,
with 20% of the loan payable in 2002, 25% of the loan payable in 2003 and 55% of
the loan payable in 2004, with the final payment due December 15, 2004 and (2)
to the extent that acquisition loans exceed $50.0 million on that date, amounts
available for working capital purposes will be permanently reduced to the
difference between $100.0 million and the amount of the converted acquisition
loans.
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Borrowings under the tranche A term loan are due December 15, 2004,
borrowings under the tranche B term loan are due December 15, 2006 and
borrowings under the tranche C term loan are due December 15, 2007. The tranche
A and tranche B term loans are payable quarterly in arrears beginning March 31,
2000. The tranche C term loans are payable quarterly in arrears beginning
September 30, 2000. The tranche A, tranche B and tranche C term loans will be
repaid as provided in the following annual amortization schedule.
AMORTIZATION
---------------------------------------------------------------
YEAR TRANCHE A TERM LOAN TRANCHE B TERM LOAN TRANCHE C TERM LOAN
- ---- ------------------- ------------------- -------------------
1.................... $ 6,000,000 $ 1,573,593 $ 300,000
2.................... 11,250,000 1,573,593 600,000
3.................... 15,000,000 1,573,593 600,000
4.................... 18,750,000 1,573,593 600,000
5.................... 24,000,000 1,573,593 600,000
6.................... -- 74,745,672 600,000
7.................... -- 74,745,672 600,000
8.................... -- -- 56,100,000
Mandatory Prepayments. Parent must prepay the loans outstanding under the
senior credit facilities with (1) the net proceeds of specified asset sales, (2)
any "excess cash flow," as defined in the senior credit agreement, as of the
95(th)day following the end of each of Parent's fiscal years, (3) 50% of the net
offering proceeds from the sale of Parent's equity securities or junior
subordinated notes, and (4) the proceeds of the incurrence of any indebtedness,
in each case subject to the exceptions set forth in the senior credit agreement.
Prepayment Penalty on Tranche B Term Loan. If we repay all or any portion
of the tranche B term loan or tranche C term loan prior to December 15, 2001, we
must repay these term loans at 101% of their principal amount. The portion of
the tranche B term loan repaid with the proceeds of the offering of the
outstanding notes was repaid at 101% of the principal amount repaid.
Use of Proceeds. Subject to the applicable sublimits, the proceeds of the
revolving credit facility are available solely for working capital purposes,
capital expenditures and other general corporate purposes and to finance
acquisitions permitted under the terms of the senior credit facilities, subject
to restrictions on the number and value of acquisitions made. The proceeds of
the tranche A and tranche B term loans were used to finance the LISN acquisition
and were fully drawn down at the closing of the LISN acquisition, other than the
letters of credit issued under the tranche A term loan letter of credit
subfacility, which loans will be made when the letters of credit are drawn upon
in connection with our exercise of the call options. Tranche A and tranche B
term loans may not be reborrowed. The proceeds of the tranche C term loan were
used to repay loans outstanding under the revolving credit facility and related
fees and expenses and may not be reborrowed.
Security and Guarantees. The senior credit facilities are secured by a
first priority security interest in substantially all of our existing and
after-acquired tangible and intangible assets, including, without limitation,
receivables, contract rights, securities, intellectual property, inventory,
equipment, real estate and all stock and promissory notes, with the exception
that no more than 65% of the voting stock of any of our foreign subsidiaries
shall be pledged. All of the borrowers' obligations under the senior credit
facilities are fully and unconditionally guaranteed by all of its present and
future domestic subsidiaries and by Parent.
Covenants. The senior credit facilities require us to meet certain
financial tests, including, without limitation, minimum net worth, maximum
leverage ratio, minimum fixed charge coverage ratio, minimum interest coverage
ratio and maximum capital expenditure tests. In addition, borrowings under the
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acquisition facility are subject to additional debt incurrence tests. The senior
credit facilities contain certain covenants, including the following:
- restrictions on indebtedness;
- restrictions on mergers, consolidations and some types of acquisitions
and asset sales;
- restrictions on dividends and stock repurchases; and
- restrictions on the types of businesses in which we can engage.
Events of Default. The senior credit facilities contain customary events of
default, including, without limitation:
- payment defaults;
- breaches of representations and warranties;
- covenant defaults;
- cross-defaults to certain other indebtedness, including the Notes;
- certain events of bankruptcy and insolvency;
- the failure of any guaranty or security document supporting the senior
credit facilities to be in full force and effect; and
- a change of control of Parent.
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DESCRIPTION OF THE NOTES
The outstanding notes were issued under an indenture among the issuers,
Parent, the other guarantors and United States Trust Company of New York, as
trustee. The following is a summary of the material provisions of the indenture.
It does not include all of the provisions of the indenture. We urge you to read
the indenture because it defines your rights. The terms of the notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939, as amended. A copy of the indenture may be
obtained from the issuers. You can find definitions of certain capitalized terms
used in this description under "-- Certain Definitions."
The notes are unsecured obligations of the issuers, ranking subordinate in
right of payment to all senior debt to the extent set forth in the indenture.
The issuers issued the notes in fully registered form in denominations of
$1,000 and integral multiples of $1,000. The trustee presently is acting as
paying agent and registrar for the notes. The notes may be presented for
registration of transfer and exchange at the offices of the registrar, which is
currently the trustee's corporate trust office. The issuers may change any
paying agent and registrar without notice to holders of the notes. The issuers
will pay principal, and premium, if any, on the notes at the trustee's corporate
trust office in New York, New York. At the issuers' option, interest may be paid
at the trustee's corporate trust office or by check mailed to the registered
address of holders of the notes.
Any notes that remain outstanding after the completion of the exchange
offer, together with the exchange notes issued in connection with the exchange
offer, will be treated as a single class of securities under the indenture.
In the event that Parent ceases to own and control a majority of the voting
securities of NATG, all references in the indenture to Parent's board of
directors will be deemed to be references to NATG's board of directors.
PRINCIPAL, MATURITY AND INTEREST
Notes in an aggregate principal amount of $150.0 million were issued on the
original issue date of the notes. Additional notes may be issued from time to
time, subject to the limitations set forth under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness." The aggregate
principal amount of notes issued under the indenture shall not exceed $300.0
million. The notes will mature on February 1, 2010.
Interest on the notes will accrue at the rate of 12 3/4% per annum and will
be payable semiannually in cash on each February 1 and August 1 commencing on
August 1, 2000, to the persons who are registered holders at the close of
business on the fifteenth day of the month immediately preceding the applicable
interest payment date. Interest payable at maturity will be payable to the
person to whom principal is payable. Interest on the notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the original issue date of the notes. The interest rate
on the notes is subject to increase in some circumstances.
The notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. Except as described below, the notes are not
redeemable before February 1, 2005. After February 1, 2005, the issuers may
redeem the notes at their option, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices if redeemed during
the
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twelve-month period commencing on February 1 of the year set forth below. The
redemption prices are expressed as percentages of the principal amounts of the
notes.
YEAR PERCENTAGE
- ---- ----------
2005..................................................... 106.375%
2006..................................................... 104.250%
2007..................................................... 102.125%
2008 and thereafter...................................... 100.000%
In addition, the issuers must pay accrued and unpaid interest on the notes
redeemed.
Optional Redemption Upon Equity Offerings. At any time, from time to time,
on or prior to February 3, 2003, the issuers may, at their option, use the net
cash proceeds of one or more equity offerings to redeem up to 35% of the
aggregate principal amount of the notes issued under the indenture at a
redemption price equal to 112.75% of the principal amount of the notes plus
accrued and unpaid interest on the notes, if any, to the date of redemption. In
order to do so, the following conditions must be met.
(1) At least 65% of the aggregate principal amount of notes issued
under the indenture must remain outstanding immediately after the
redemption.
(2) The issuers must make the redemption not more than 60 days after
the consummation of the equity offering.
The issuers are not prohibited, however, from acquiring the notes by means
other than a redemption, whether by means of a tender offer or otherwise,
assuming the acquisition of the notes does not otherwise violate any provision
of the indenture.
SELECTION AND NOTICE OF REDEMPTION
In the event that the issuers choose to redeem less than all of the notes,
selection of the notes for redemption will be made by the trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or,
(2) on a pro rata basis, by lot or by any method the trustee deems
fair and appropriate.
No notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the net cash proceeds of an equity
offering, the trustee will select the notes only on a pro rata basis or on as
nearly a pro rata basis as is practicable, subject to DTC procedures. Notice of
redemption will be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each holder of notes to be redeemed at its
registered address. On and after the redemption date, interest will cease to
accrue on notes or portions of notes called for redemption as long as the
issuers have deposited with the paying agent funds in satisfaction of the
applicable redemption price.
SUBORDINATION
The payment of all obligations on or relating to the notes is subordinated
in right of payment, to the extent described below and in the indenture, to the
prior payment in full in cash or cash equivalents of all obligations in respect
of senior debt, including with respect to the senior secured credit agreement.
However, payments and distributions made relating to the notes from the trust
described under "-- Legal Defeasance and Covenant Defeasance" shall not be
subordinated in right of payment.
The holders of senior debt will be entitled to receive payment in full in
cash or cash equivalents of all obligations due in respect of senior debt,
including interest after the commencement of any bankruptcy or other like
proceeding, whether or not the interest is an allowed claim in the proceeding,
before the holders
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of notes will be entitled to receive any payment or distribution of any kind or
character under the notes. This would apply in the event of any distribution to
creditors of the issuers:
(1) in a liquidation or dissolution of either issuer;
(2) in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to either issuer or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of either issuer's assets and liabilities.
The issuers also may not make any payment or distribution of any kind or
character under the notes or acquire any notes for cash or property or otherwise
if:
(1) a payment default on any senior debt occurs and is continuing; or
(2) any other default occurs and is continuing on designated senior
debt that permits holders of the designated senior debt to accelerate its
maturity and the trustee receives a notice of the default from the
representative of any designated senior debt. This notice is referred to as
a payment blockage notice.
Payments on and distributions with respect to any obligations under the
notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which the
default is cured or waived; and
(2) in case of a nonpayment default, the earliest of:
- the date on which all nonpayment defaults are cured or waived, so
long as no other event of default exists,
- 180 days after the date on which the applicable payment blockage
notice is received or
- the date on which the trustee receives notice from the
representative for the designated senior debt rescinding the
payment blockage notice, unless the maturity of any designated
senior debt has been accelerated.
No new payment blockage notice may be delivered unless and until 360 days
have elapsed since the effectiveness of the immediately prior payment blockage
notice.
No nonpayment default that existed or was continuing on the date of
delivery of any payment blockage notice to the trustee shall be, or be made, the
basis for a subsequent payment blockage notice unless the default shall have
been cured or waived for a period of not less than 90 consecutive days. However,
any subsequent action, or any breach of any financial covenants for a period
commencing after the date of the initial payment blockage notice shall
constitute a new default for this purpose.
The issuers must promptly notify holders of senior debt if payment of the
notes is accelerated because of an event of default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of an issuer, holders of the
notes may recover less ratably than creditors of the issuer who are holders of
senior debt.
At July 5, 2000, the aggregate amount of senior debt outstanding would have
been $288.6 million, excluding unused commitments of $100.0 million under our
senior credit facilities.
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GUARANTEES
The guarantors will, jointly and severally, unconditionally guarantee the
issuers' obligations under the notes and the indenture. Each guarantee will be
subordinated to the prior payment in full of senior debt of the relevant
guarantor in the same manner and to the same extent that the notes are
subordinated to senior debt. Each guarantee will rank equally with all other
senior subordinated debt of the relevant subsidiary guarantor. A guarantor will
not be permitted to incur indebtedness that is junior in right of payment to
senior indebtedness but senior in right of payment to its guarantee.
At July 5, 2000:
- outstanding senior debt of the guarantors would have been $288.6 million;
and
- the guarantors would have had no senior subordinated indebtedness other
than the guarantees.
Although the indenture limits the amount of indebtedness that the guarantor
subsidiaries may incur, this indebtedness may be substantial and all of it may
be senior debt of the guarantors.
The obligations of each guarantor under its guarantee will be limited as
necessary to prevent that guarantee from constituting a fraudulent conveyance or
fraudulent transfer under applicable law.
In the event a guarantor is sold or disposed of, whether by merger,
consolidation, the sale of its capital stock or the sale of all or substantially
all of its assets and whether or not the guarantor is the surviving corporation
in the transaction, to a person which is not Parent, an issuer or a restricted
subsidiary, the guarantor will be released from its obligation under its
guarantee. The guarantor will be released from its guarantee only if, among
other things, the sale or other disposition is in compliance with the indenture,
including the covenants described under "-- Certain Covenants -- Limitation on
Asset Sales" and "-- Certain Covenants -- Merger, Consolidation and Sale of
Assets."
In addition, a guarantor will be released from its obligations under the
indenture, its guarantee and the registration rights agreement if Parent
designates the subsidiary as an unrestricted subsidiary and the designation
complies with the other applicable provisions of the indenture.
CHANGE OF CONTROL
Upon the occurrence of a change of control, each holder will have the right
to require that the issuers purchase all or a portion of the holder's notes at a
purchase price equal to 101% of the principal amount of the notes plus accrued
interest to the date of purchase.
Within 30 days following the date upon which the issuers obtain actual
knowledge that a change of control occurred, the issuers must send, by first
class mail, a notice to each holder, with a copy to the trustee, which notice
shall govern the terms of the change of control offer. The notice shall state,
among other things, the purchase date, which must be no earlier than 30 days nor
later than 45 days from the date the notice is mailed, other than as may be
required by law or stock exchange rule. Holders electing to have a note
purchased in a change of control offer will be required to surrender the note,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the note completed, to the paying agent at the address specified in the notice
prior to the close of business on the third business day prior to the purchase
date.
Prior to the mailing of the notice referred to above, but in any event
within 30 days following the date upon which the issuers obtain actual knowledge
of any change of control, the issuers covenant to:
(1) repay in full and terminate all commitments under indebtedness
under the senior secured credit agreement and all other senior debt the
terms of which require repayment upon a change of control or offer to repay
in full and terminate all commitments under all indebtedness under the
senior secured credit agreement and all other senior debt and to repay the
indebtedness owed to each lender which has accepted the offer; or
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(2) obtain the requisite consents under the senior secured credit
agreement and all other senior debt to permit the repurchase of the notes
as provided below.
If the issuers do not first repay their senior debt or obtain the consent
of the lenders of their senior debt as described above, the issuers will be
prohibited from offering to repurchase or repurchasing the notes. The issuers'
failure to comply with the covenant described in the immediately preceding
paragraph may constitute an event of default described in clause (3), but shall
not constitute an event of default described in clause (2), under "Events of
Default" below.
If a change of control offer is made, there can be no assurance that the
issuers will have available funds sufficient to pay the change of control
purchase price for all the notes that might be delivered by holders seeking to
accept the change of control offer. In the event the issuers are required to
purchase outstanding notes in a change of control offer, the issuers expect that
they would seek third party financing to the extent it does not have available
funds to meet its purchase obligations. However, there can be no assurance that
the issuers would be able to obtain this financing.
The definition of change of control includes a phrase relating to the sale,
lease, exchange or other transfer of "all or substantially all" of the assets of
NATG and its restricted subsidiaries taken as a whole. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise definition of the phrase under applicable law. 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 NATG and its restricted subsidiaries taken
as a whole, and therefore it may be unclear as to whether a change of control
has occurred and whether the holders have the right to require the issuers to
repurchase the notes.
Neither the issuers nor the trustee may waive the covenant relating to a
holder's right to redemption upon a change of control. Restrictions in the
indenture described in this prospectus on the ability of Parent and its
restricted subsidiaries to incur additional indebtedness, to grant liens on its
property, to make restricted payments and to make asset sales may also make more
difficult or discourage a takeover, whether favored or opposed by management.
Consummation of any of these transactions in certain circumstances may require
redemption or repurchase of the notes, and there can be no assurance that the
issuers or the acquiring party will have sufficient financial resources to
effect the redemption or repurchase. These restrictions and the restrictions on
transactions with affiliates may, in certain circumstances, make more difficult
or discourage any leveraged buyout of Parent or any of its restricted
subsidiaries by management. While the restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the indenture may not afford the holders protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations under the Exchange
Act or other securities laws to the extent those laws and regulations are
applicable in connection with the repurchase of notes in a change of control
offer. To the extent that the provisions of any securities laws or regulations
conflict with the "Change of Control" provisions of the indenture, the issuers
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Change of Control"
provisions of the indenture by virtue of complying with those laws.
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CERTAIN COVENANTS
The indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. NATG shall not, and shall not permit any
of its restricted subsidiaries to directly or indirectly:
(1) declare or pay any dividend or make any distribution on or in respect
of shares of NATG's capital stock to holders of its capital stock, other than
dividends or distributions payable in qualified capital stock of NATG,
(2) purchase, redeem or otherwise acquire or retire for value any capital
stock of NATG or any capital stock of any subsidiary of NATG not held by an
issuer or subsidiary guarantor, or any warrants, rights or options to purchase
or acquire shares of any class of that capital stock, or declare or pay any
dividend, or make any distribution, on or in respect of that capital stock,
(3) make any principal payment on, purchase, defease, redeem, prepay or
otherwise acquire or retire for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, any subordinated
indebtedness, or
(4) make any restricted investment.
Each of the actions set forth in clauses (1), (2), (3) and (4) above are
referred to as a "restricted payment".
However, a restricted payment may be made, if at the time of the restricted
payment and immediately after giving effect to the restricted payment,
(1) no default or event of default has occurred and is continuing,
(2) NATG is able to incur at least $1.00 of additional indebtedness, other
than permitted indebtedness, in compliance with the covenant described under
"-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness,"
and
(3) the aggregate amount of restricted payments, including the proposed
restricted payment, made subsequent to December 31, 1999 shall not exceed the
sum of:
(a) 50% of the cumulative consolidated net income, or if cumulative
consolidated net income is a loss, minus 100% of the loss, of NATG earned
subsequent to December 31, 1999 and through the last day of the fiscal
quarter ending prior to the date the restricted payment occurs (the
"Reference Date") treating that period as a single accounting period; plus
(b) 100% of the aggregate net cash proceeds of, or fair market value
of property other than cash, determined in good faith by the board of NATG,
constituting, any equity contribution received by NATG from a holder of
NATG's capital stock to the extent not required to be used to repay
indebtedness under the senior secured credit agreement or redeem notes
under the indenture; plus
(c) (A) the lesser of:
- 100% of the aggregate amount of cash and/or fair market value of
property other than cash, as determined in good faith by the board
of directors of Parent, received by an issuer or subsidiary
guarantor from the disposition or sale of any restricted
investment, other than to a subsidiary of Parent, that was made
after the original issue date of the notes and
- the initial amount of that investment; plus
(B) an amount equal to the net reduction in restricted investments
in unrestricted subsidiaries of NATG resulting from dividends,
repayments of loans or advances or other transfers of assets, in each
case to an issuer or subsidiary guarantor from an unrestricted
subsidiary; plus
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(C) to the extent any unrestricted subsidiary of NATG is
redesignated as a restricted subsidiary, the lesser of:
- the amount of NATG's initial investment in the unrestricted
subsidiary and
- the fair market value of NATG's Investment in the
unrestricted subsidiary as of the date of its
redesignation;
no amount shall be included in this clause (c) to the extent the amount
is included in consolidated net income of NATG.
The foregoing provisions in this covenant do not, however, prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of the dividend or
notice of the redemption if the dividend or redemption would have been
permitted on the date of declaration or notice;
(2) the acquisition of any subordinated indebtedness, either:
- solely in exchange for shares of qualified capital stock of Parent,
- through the application of net proceeds of a substantially
concurrent sale for cash, other than to a restricted subsidiary of
Parent, of shares of qualified capital stock of Parent, or
- with the net cash proceeds of permitted refinancing indebtedness
used to refinance the subordinated indebtedness;
(3) so long as no default or event of default has occurred and is
continuing, dividends or loans to Parent to enable Parent to repurchase
junior subordinated notes and/or capital stock of Parent from former or
current employees, officers, directors or consultants of Parent or any of
its subsidiaries or their authorized representatives upon the death,
disability or termination of employment of these persons, in an amount not
to exceed $2.0 million in any calendar year. NATG may carry over and make
in a subsequent year, in addition to the amounts permitted for a given
fiscal year, the amount of dividends or loans permitted to have been made
but not made in any preceding fiscal year up to a maximum of $10.0 million
in any fiscal year;
(4) so long as no default or event of default has occurred and is
continuing, dividends or loans to Parent not to exceed $100,000 in any
fiscal year, to enable Parent to make payments to holders of its capital
stock in lieu of issuance of fractional shares of its capital stock;
(5) dividends or loans to Parent to enable Parent to repurchase, or
the repurchase by NATG or a restricted subsidiary of NATG, for cash under
the put/call agreements, shares of Parent common stock and Parent preferred
stock issued and outstanding prior to the original issue date of the notes;
(6) dividends or loans to Parent in an amount not to exceed $250,000
in any calendar year for the purpose of permitting Parent to pay its
ordinary operating expenses, including, without limitation, directors'
fees, indemnification obligations, professional fees and expenses;
(7) dividends or loans to Parent solely for the purpose of paying
franchise taxes, federal, state and local income taxes and any related
interest and penalties, if any, payable by Parent, provided, that any the
income is attributable to income of NATG and its restricted subsidiaries;
or
(8) so long as no default or event of default shall have occurred and
be continuing or would occur as a consequence of the restricted payment,
other restricted payments in an aggregate amount not to exceed $7.5 million
since the original issue date of the notes.
In determining the aggregate amount of restricted payments made subsequent
to the original issue date of the notes in accordance with clause (3) of the
first paragraph of this covenant, amounts expended under clauses (1), the first
two bullet points of (2), (3), (4) and (6), in each case to the extent not
duplicative of amounts already included.
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The amount of all restricted payments other than cash or an investment,
which shall be valued as set forth in the definition of investments, shall be
the fair market value on the date of the restricted payment of the asset(s) or
securities proposed to be transferred or issued to or by NATG or the subsidiary,
as the case may be, in connection with the restricted payment. The fair market
value of any assets or securities that are required to be valued by this
covenant shall be determined by the board of directors of Parent, whose
resolution shall be conclusive. The board of directors' determination must be
based upon an opinion or appraisal issued by an independent financial adviser if
the fair market value exceeds $10.0 million.
Not later than the date of making any restricted payment, NATG shall
deliver to the trustee an officers' certificate stating that the restricted
payment complies with the indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed. These calculations may
be based upon Parent's latest available internal quarterly financial statements.
Limitation on Incurrence of Additional Indebtedness. NATG shall not, and
shall not permit any of its restricted subsidiaries to, directly or indirectly,
incur any indebtedness, other than permitted indebtedness. However, if no
default or event of default has occurred and is continuing at the time or as a
consequence of the incurrence of the indebtedness, NATG or any subsidiary
guarantor may incur indebtedness including, without limitation, acquired
indebtedness, if on the date of the incurrence of the indebtedness, after giving
effect to the incurrence of the indebtedness, the consolidated fixed charge
coverage ratio is:
- greater than 2.0 to 1.0 during the period commencing on the original
issue date of the notes and ending January 31, 2002,
- 2.25 to 1.0 during the period commencing February 1, 2002 and ending
January 31, 2004, and
- 2.5 to 1.0 after January 31, 2004.
In addition, NATG shall not, and shall not permit any of its restricted
subsidiaries to, directly or indirectly, incur any contingent obligations in
respect of any junior subordinated notes.
Limitation on Transactions with Affiliates. NATG shall not, and shall not
permit any of its restricted subsidiaries to, directly or indirectly, enter into
or permit to exist any transaction with or for the benefit of any affiliate
other than:
(1) affiliate transactions permitted under the following paragraph, and
(2) affiliate transactions on terms that are no less favorable to NATG or
the restricted subsidiary, as the case may be, than those that might reasonably
have been obtained in a comparable transaction on an arm's-length basis from a
person that is not an affiliate of NATG or the restricted subsidiary.
All affiliate transactions and each series of related affiliate
transactions that are similar or part of a common plan involving aggregate
payments or other property with a fair market value in excess of $2.5 million
shall be approved by the board of directors of NATG or the restricted
subsidiary, as the case may be. The approval shall be evidenced by a resolution
stating that the board of directors has determined that the transaction complies
with these provisions. If NATG or any restricted subsidiary enters into an
affiliate transaction that involves an aggregate fair market value of more than
$10.0 million, NATG or the restricted subsidiary, as the case may be, shall,
prior to the consummation of the transaction, obtain an opinion that the
affiliate transaction complies with the requirements of this covenant from an
independent financial advisor and file the opinion with the trustee.
The restrictions set forth in the preceding paragraph shall not apply to:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees, agents or consultants of Parent, NATG
or any restricted subsidiaries of NATG as determined in good faith by Parent's
board of directors or senior officers;
(2) transactions exclusively between or among any of NATG or any restricted
subsidiaries of NATG, provided that the transactions are not otherwise
prohibited by the indenture;
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(3) any agreement as in effect as of the original issue date of the notes
or any amendment to those agreements or any transaction contemplated by those
agreements or any replacement agreement so long as any the amendment or
replacement agreement is not more disadvantageous to NATG or its subsidiaries,
as the case may be, in any material respect, than the original agreement as in
effect on the original issue date of the notes;
(4) restricted payments permitted under the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments";
(5) any issuance of securities or other payments, awards or grants in cash,
securities or otherwise under employment arrangements, stock options and stock
ownership plans of Parent entered into in the ordinary course of business and
approved by Parent's board of directors;
(6) the payment of reasonable and customary management, consulting and
advisory fees and related out of pocket expenses of Willis Stein and its
affiliates, including, without limitation, in connection with acquisitions,
divestitures, or financings by Parent or any of its restricted subsidiaries, in
each case as may be approved by the board of directors of Parent in good faith;
(7) loans and advances to employees and officers of Parent and its
restricted subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $1.0 million at any time outstanding;
(8) indemnification agreements provided for the benefit of Parent or any
restricted subsidiary of Parent from officers, directors, employees agents or
consultants of Parent or any restricted subsidiary of Parent;
(9) transactions effected as part of a qualified receivables transaction;
and
(10) the payment to Jack Reich for consulting services under his consulting
agreement with Parent and its subsidiaries as in effect as of the original issue
date of the notes or any amendment to the agreement or any transaction
contemplated by the agreement or in any replacement agreement so long as any
amendment or replacement agreement is not more disadvantageous to Parent or its
subsidiaries, as the case may be, in any material respect than the original
agreement as in effect on the original issue date of the notes.
Limitation on Liens. NATG shall not, and shall not permit any of its
restricted subsidiaries to, directly or indirectly,
(1) create, incur, assume or permit to exist any lien on or with respect to
any property or asset of any kind of NATG or any of its restricted subsidiaries,
whether now owned or later acquired, or any income or profits from the property
or assets, or
(2) file or permit the filing of, or permit to remain in effect, any
financing statement or other similar notice of any lien with respect to the
property, asset, income or profits under the Uniform Commercial Code of any
state or under any similar recording or notice statute, unless,
(a) in the case of liens securing subordinated indebtedness, the notes
and guarantees are secured by a lien on the property, assets or proceeds
that is senior in priority to the liens and
(b) in all other cases, the notes and guarantees are equally and
ratably secured.
Notwithstanding the foregoing, this covenant shall not prohibit or apply to
- liens securing the senior secured credit agreement;
- liens securing senior debt and liens securing senior debt of the
guarantors;
- liens securing the notes and the guarantees;
- liens of an issuer or subsidiary guarantor on assets of any other issuer
or subsidiary guarantor; and
- permitted liens.
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Prohibition on Incurrence of Senior Subordinated Debt. NATG shall not, and
shall not permit any of its restricted subsidiaries to, directly or indirectly,
incur any indebtedness, other than the notes and the guarantees and indebtedness
owed to an issuer or a wholly owned restricted subsidiary of an issuer, that is
by its terms, or by the terms of any agreement governing the indebtedness, is
subordinated in right of payment to any other indebtedness of the person.
This restriction shall not apply if the indebtedness:
- is incurred by an issuer or subsidiary guarantor and
- is by its terms, or by the terms of any agreement governing the
indebtedness, made expressly subordinate to the obligations of the issuer
or subsidiary guarantor under the indenture, the notes, in the case of an
issuer, and the guarantees, in the case of a subsidiary guarantor, to the
same extent and in the same manner as the obligations are subordinated to
senior debt.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. NATG shall not, and shall not permit any of its restricted
subsidiaries to, directly or indirectly, create or permit to exist or become
effective any encumbrance or restriction on the ability of any restricted
subsidiary of NATG to:
(1) pay dividends or make any other distributions on or in respect of
its capital stock;
(2) make loans or advances to pay any indebtedness or other obligation
owed to any issuer or subsidiary guarantor; or
(3) transfer any of its property or assets to any issuer or subsidiary
guarantor,
except for any encumbrances or restrictions existing under or by reason of:
(a) applicable law, regulations or orders of any governmental or
judicial authority;
(b) the indenture, the notes, the guarantees, or the senior secured
credit agreement to the extent incurred in accordance with the indenture;
(c) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of NATG or any restricted subsidiary of
NATG;
(d) agreements existing on the original issue date of the notes to the
extent and in the manner those agreements are in effect on the original
issue date of the notes;
(e) any restriction or encumbrance on assets being sold that is
contained in contracts for the sale of assets permitted by the indenture
pending the close of the sale;
(f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (3) above on the property acquired;
(g) restrictions of the nature described in clause (3) above on the
transfer of assets subject to any lien permitted under the indenture
imposed by the holder of the lien;
(h) any instrument governing indebtedness or capital stock of a person
acquired by NATG or any of its restricted subsidiaries as in effect at the
time of the acquisition, except to the extent the indebtedness or capital
stock was incurred in connection with or in contemplation of the
acquisition, which encumbrance or restriction is not applicable to any
person, or the properties or assets of any person, other than the person,
or the property or assets of the person, so acquired, provided that, in the
case of indebtedness, the indebtedness was permitted by the terms of the
indenture to be incurred;
(i) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, asset sale agreements,
stock sale agreements and other similar agreements entered into in the
ordinary course of business;
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(j) any encumbrance or restriction on a receivables entity effected in
connection with a qualified receivables transaction;
(k) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
or
(l) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred under an agreement referred to in
clause (b) or (d) above. The provisions relating to the encumbrance or
restriction contained in the indebtedness must be no less favorable to the
issuers or subsidiary guarantors in any material respect as determined by
the board of directors of Parent in its reasonable and good faith judgment
than the provisions relating to the encumbrance or restriction contained in
agreements referred to in clause (b) or (d) above.
Merger, Consolidation and Sale of Assets. No issuer shall, in a single
transaction or series of related transactions, consolidate or merge with or into
any person, or sell, assign, transfer, lease, convey or otherwise dispose of, or
cause or permit any restricted subsidiary of the issuer to sell, assign,
transfer, lease, convey or otherwise dispose of, all or substantially all of the
assets of the issuer and its restricted subsidiaries, determined on a
consolidated basis for the issuer and its restricted subsidiaries, whether as an
entirety or substantially as an entirety to any person. This restriction shall
not apply if:
(1) either
- the issuer shall be the surviving or continuing corporation, or
- the surviving entity, if other than the issuer, (a) shall be a
corporation, partnership, trust or a limited liability company
organized and validly existing under the laws of the United States or
any state thereof or the District of Columbia and (b) shall expressly
assume, by supplemental indenture, executed and delivered to the
trustee, the due and punctual payment of the principal of, and
premium, if any, and interest on all of the notes and the performance
of every covenant of the notes, this indenture and the registration
rights agreement on the part of the issuer to be performed or
observed;
(2) immediately after giving effect to the transaction and the
assumption contemplated by clause (1)(b) above, including giving effect to
any indebtedness and acquired indebtedness incurred or anticipated to be
incurred in connection with the transaction, the issuer or the surviving
entity, as the case may be, shall be able to incur at least $1.00 of
additional indebtedness, other than permitted indebtedness, in compliance
with the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness";
(3) immediately before and immediately after giving effect to the
transaction and the assumption contemplated by clause (1)(b) above,
including, without limitation, giving effect to any indebtedness and
acquired indebtedness incurred or anticipated to be incurred and any lien
granted in connection with the transaction, no default or event of default
shall have occurred or be continuing; and
(4) the issuer or surviving entity, as the case may be, shall have
delivered to the trustee an officers' certificate and an opinion of
counsel, each stating that the consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with the transaction, the supplemental
indenture comply with the applicable provisions of this indenture and that
all conditions precedent in the indenture relating to the transaction have
been satisfied.
The indenture does not prohibit the merger of an issuer with an affiliate
incorporated solely for the purpose of reincorporating or similarly reorganizing
in another jurisdiction.
For purposes of the immediately preceding paragraph, the transfer of all or
substantially all of the properties or assets of one or more restricted
subsidiaries of an issuer the capital stock of which constitutes
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all or substantially all of the properties and assets of the issuer, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the issuer.
Each guarantor, other than any guarantor whose guarantee is to be released
in accordance with the terms of the guarantee and the indenture in connection
with any transaction complying with the provisions of the covenant described
under "-- Certain Covenants -- Limitation on Asset Sales", shall not, and NATG
shall not cause or permit any guarantor to, consolidate with or merge with or
into any person. This restriction shall not apply if:
(1) the entity formed by or surviving any the consolidation or merger, if
other than the guarantor, is a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States or
any state of the United States or the District of Columbia;
(2) the entity assumes by supplemental indenture all of the obligations of
the guarantor under the indenture and on its guarantee;
(3) immediately after giving effect to the transaction, no default or event
of default shall have occurred and be continuing; and
(4) immediately after giving effect to the transaction and the use of any
net proceeds from the transaction on a pro forma basis, Parent could satisfy the
provisions of clause (2) of the first paragraph of this covenant.
Any merger or consolidation of a guarantor with and into an issuer, with
the issuer being the surviving entity, or a guarantor that is a wholly owned
subsidiary of an issuer need only comply with clause (4) of the first paragraph
of this covenant.
Notwithstanding anything to the contrary in this covenant, no transaction
shall be permitted under this covenant unless after giving effect to the
transaction, there shall be a co-issuer of the notes that is a corporation
organized and existing under the laws of the United States or any state of the
United States or the District of Columbia.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of an issuer in accordance with this covenant in
which the issuer is not the surviving entity, the surviving entity shall succeed
to, and be substituted for, and may exercise every right and power of, the
issuer under the indenture and the notes with the same effect as if the
surviving entity had been named as an issuer.
Limitation on Asset Sales. NATG shall not, and shall not permit any of its
restricted subsidiaries to, consummate an asset sale, unless
(1) NATG or the applicable restricted subsidiary, as the case may be,
receives consideration at the time of the asset sale which, taken as a whole, is
at least equal to the fair market value of the assets sold or otherwise disposed
of, as determined in good faith, by Parent's board of directors;
(2) at least 75% of the consideration received by the issuers or the
restricted subsidiary, as the case may be, from the asset sale is received at
the time of the disposition and consists of one of the following:
- cash or cash equivalents;
- any liabilities, as shown on NATG's or the restricted subsidiary's most
recent balance sheet, of NATG or the restricted subsidiary, other than
liabilities that are by their terms subordinated to the notes, that are assumed
by the transferee of the assets,
- any securities, notes or other obligations received by NATG or the
subsidiary from the transferee that are converted by NATG or the subsidiary into
cash within 180 days after the asset sale, to the extent of the cash received;
and
- any combination of the foregoing.
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(3) upon the consummation of an asset sale, NATG shall apply, or cause its
restricted subsidiary to apply, the net cash proceeds relating to the asset sale
within 365 days of receipt of the net cash proceeds either:
- to prepay any senior debt and, in the case of any senior debt under any
revolving credit facility, effect a permanent reduction in the availability
under the revolving credit facility. The permanent reduction in availability
need not be made prior to December 15, 2001 to the extent that the senior debt
being repaid had been borrowed under the acquisition subfacility of the
revolving credit facility under the senior secured credit agreement
- to invest in or to acquire other properties and assets that replace the
properties and assets that were the subject of the asset sale or in properties
and assets that will be used or useful in a permitted business ("replacement
assets") and/or
- to acquire all or substantially all of the assets of, or all of the
voting stock of, another person engaged in a permitted business. If voting stock
is acquired, the person must become a subsidiary guarantor.
NATG may not sell or otherwise dispose of any capital stock of the Orius Capital
except in compliance with the covenant described under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets."
Pending the final application of any net cash proceeds, NATG or the
restricted subsidiary may temporarily reduce revolving credit borrowings or
otherwise invest the net cash proceeds in any manner that is not otherwise
prohibited by the indenture. On the 366th day after an asset sale or the earlier
date, if any, on which the senior management or board of directors, as the case
may be, of NATG or the restricted subsidiary determines not to apply the net
cash proceeds relating to the asset sale as set forth in clause (3) of the
preceding paragraph (each, a "net proceeds offer trigger date"), the aggregate
amount of net cash proceeds which has not been applied on or before the net
proceeds offer trigger date as permitted in clause (3) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by NATG or the
restricted subsidiary to make a net proceeds offer". The net proceeds offer
shall be on a date not less than 30 nor more than 60 days following the
applicable net proceeds offer trigger date, from all holders on a pro rata
basis, that principal amount of notes equal to the net proceeds offer amount at
a price equal to 100% of the principal amount of the notes to be purchased, plus
accrued and unpaid interest on the notes, if any, to the date of purchase.
If at any time any non-cash consideration received by NATG or the
restricted subsidiary, as the case may be, in connection with any asset sale is
converted into or sold or otherwise disposed of for cash, other than interest
received with respect to any non-cash consideration, then the conversion or
disposition shall be deemed to constitute an asset sale under the indenture and
the net cash proceeds of the asset sale shall be applied in accordance with this
covenant.
The issuers may defer the net proceeds offer until there is an aggregate
unutilized net proceeds offer amount equal to or in excess of $10.0 million
resulting from one or more asset sales, at which time, the entire unutilized net
proceeds offer amount, and not just the amount in excess of $10.0 million, shall
be applied as provided in this paragraph.
In the event of the transfer of substantially all, but not all, of the
property and assets of NATG and its restricted subsidiaries as an entirety to a
person in a transaction permitted under the covenant described under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets," the successor
corporation shall be deemed to have sold the properties and assets of NATG and
its subsidiaries not so transferred for purposes of this covenant, and shall
comply with the provisions of this covenant with respect to the deemed sale as
if it were an asset sale. In addition, the fair market value of the properties
and assets of NATG or the subsidiaries deemed to be sold under the terms of this
paragraph less the fair market value of all liabilities of the person related to
the property and assets not transferred shall be deemed to be net cash proceeds
for purposes of this covenant.
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NATG and its restricted subsidiaries will be permitted to consummate an
asset sale without complying with the provisions of this covenant to the extent
that:
(1) at least 75% of the consideration for the asset sale constitutes
replacement assets; and
(2) the asset sale is for fair market value as determined in good faith by
the board of directors of Parent.
Any consideration not constituting replacement assets received by NATG or any of
its restricted subsidiaries in connection with any asset sale permitted to be
consummated under this clause shall constitute net cash proceeds subject to the
provisions of this covenant.
Notice of each net proceeds offer shall be mailed or caused to be mailed,
by first class mail, by NATG or the relevant subsidiary within 30 days following
the applicable net proceeds offer trigger date to all holders of notes at their
last registered addresses, with a copy to the trustee. A net proceeds offer
shall remain open for a period of 20 business days or a longer period as may be
required by law. The notice shall contain all instructions and materials
necessary to enable the holders to tender notes in the net proceeds offer and
shall comply with the procedures set forth in the indenture. To the extent that
the aggregate amount of notes tendered is less than the net proceeds offer
amount, NATG or the relevant restricted subsidiary may use the remaining net
proceeds offer amount for general corporate purposes or for any other purpose
not prohibited by the indenture, and any remaining net cash proceeds then be
deemed not to constitute net cash proceeds.
NATG and its restricted subsidiaries intend to comply with the requirements
of Rule 14e-1 under the Exchange Act to the extent those laws and regulations
are applicable in connection with the repurchase of notes as part of a net
proceeds offer. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, NATG and its
restricted subsidiaries shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached their obligations under
this covenant by virtue of their compliance with those laws.
The agreements governing the issuers' outstanding senior debt currently
prohibit the issuers from purchasing any notes, and also provide that specified
change of control or asset sale events would constitute a default under those
agreements. Any future credit agreements or other agreements relating to senior
debt to which the issuers become parties may contain similar restrictions and
provisions. In the event a change of control or asset sale occurs at a time when
the issuers are prohibited from purchasing notes, the issuers could seek the
consent of their senior lenders to the purchase of notes or could attempt to
refinance the borrowings that contain the prohibition. If the issuers do not
obtain the necessary consent or repay the borrowings, the issuers would be
prohibited from purchasing the notes. In that case, the issuers' failure to
purchase tendered notes would constitute an event of default under the indenture
which would, in turn, constitute a default under the senior debt. In these
circumstances, the subordination provisions in the indenture would likely
restrict payments to the holders of notes.
Conduct of Business. NATG shall not, and shall not permit any of its
restricted subsidiaries to, engage in any business other than permitted
businesses.
Orius Capital shall engage in no business other than the issuance of the
notes. Orius Capital may only engage in those activities that are incidental to:
- the maintenance of is corporate existence in compliance with applicable
law,
- legal, tax and accounting matters in connection with any of the foregoing
activities and
- entering into, and performing its obligations under, the documents to
which it is a party.
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Reports to Holders. Whether or not required by the rules and regulations of
the SEC, so long as any notes are outstanding, Parent and the issuers shall
furnish the holders of notes:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if Parent or the
issuers were required to file those Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of Parent and its consolidated
subsidiaries. If Parent shall cease to own more than a majority of the voting
securities of NATG, of NATG and its consolidated subsidiaries, Parent's
financial statements shall show, in reasonable detail, either on the face of the
financial statements or in the related footnotes, the information required to be
presented for the issuers and the guarantors under Staff Accounting Bulletin 53
or any successor interpretation or rule of the SEC,
(2) with respect to the annual information only, a report by the certified
independent accountants of Parent and its consolidated subsidiaries, or, if
Parent shall cease to own more than a majority of the voting securities of NATG,
of NATG and its consolidated subsidiaries, in each case, within five days after
the time specified in the rules and regulations of the SEC;
(3) all current reports that would be required to be filed with the SEC on
Form 8-K if Parent or the issuers were required to file those reports, in each
case within two days after the time periods specified in the SEC's rules and
regulations.
Following the consummation of the exchange offer, whether or not required
by the rules and regulations of the SEC, Parent or NATG will file a copy of all
of the above information and reports with the SEC for public availability within
the time periods specified in the SEC's rules and regulations, unless the SEC
will not accept the filing. Parent or NATG will make the information available
to securities analysts and prospective investors upon request. In addition, for
so long as any notes remain outstanding, NATG shall furnish to the holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered under Rule 144A(d)(4) under the Securities
Act. Parent and the issuers will also comply with the other provisions of TIA
sec. 314(a).
Additional Subsidiary Guarantees. NATG will cause any subsidiary of NATG
that after the original issue date of the notes first becomes a guarantor of an
issuer's obligations under the senior secured credit agreement to, within 10
days of the date on which it became a guarantor:
(1) execute and deliver to the trustee a supplemental indenture under which
the subsidiary shall unconditionally guarantee all of the issuers' obligations
under the notes and the indenture on the terms set forth in the indenture; and
(2) deliver to the trustee an opinion of counsel that the supplemental
indenture has been duly authorized, executed and delivered by the subsidiary and
constitutes a legal, valid, binding and enforceable obligation of the
subsidiary.
After these conditions are satisfied, the subsidiary shall be a guarantor for
all purposes of the indenture.
In the event that the senior secured credit agreement shall no longer be in
effect, NATG shall cause any domestic restricted subsidiary of NATG, other than
a receivables entity or a restricted subsidiary that is already a guarantor, to
promptly:
(1) execute and deliver to the trustee a supplemental indenture under which
the subsidiary shall unconditionally guarantee all of the issuers' obligations
under the notes and the indenture on the terms set forth in the indenture; and
(2) deliver to the trustee an opinion of counsel that the supplemental
indenture has been duly authorized, executed and delivered by the subsidiary and
constitutes a legal, valid, binding and enforceable obligation of the
subsidiary.
After these conditions are satisfied, the subsidiary shall be a guarantor for
all purposes of the indenture.
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Payments for Consent NATG will not, and will not permit any of its
subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any holder of notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the indenture or the notes unless the consideration is offered to be paid and
is paid to all holders of the notes that consent within the time frame set forth
in the relevant solicitation documents.
Disposal of Subsidiary Stock. Except for any sale of 100% of the capital
stock or other equity securities of a restricted subsidiary effected in
compliance with the covenants described under "-- Certain
Covenants -- Limitation on Restricted Payments" and "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets," NATG will not, and will
not permit any of its restricted subsidiaries to, directly or indirectly sell,
assign, pledge or otherwise encumber or dispose of any shares of capital stock
or other equity securities of any restricted subsidiary of NATG, except:
(1) to qualify directors if required by applicable law,
(2) to an issuer or subsidiary guarantor, and
(3) liens in favor of the lenders under the senior secured credit
agreement.
EVENTS OF DEFAULT
The following events are defined in the indenture as "events of default":
(1) the failure to pay interest on any notes when the interest becomes due
and payable and the default continues for a period of 30 days, whether or not
the payment is prohibited by the subordination provisions of the indenture;
(2) the failure to pay the principal on any notes, when the principal
becomes due and payable, at maturity, upon redemption or otherwise, including
the failure to make a payment to purchase notes tendered pursuant to a change of
control offer or a net proceeds offer or a mandatory redemption, whether or not
the payment is prohibited by the subordination provisions of the indenture;
(3) a default in the observance or performance of any other covenant or
agreement contained in the indenture which default continues for a period of 30
days after the issuers receive written notice specifying the default and
demanding that the default be remedied from the trustee or the holders of at
least 25% of the outstanding principal amount of the notes;
(4) the failure to pay at final stated maturity, giving effect to any
applicable grace periods and any extensions of the maturity date, the principal
amount of any indebtedness of NATG or any restricted subsidiary of NATG or the
acceleration of the final stated maturity of the indebtedness if the aggregate
principal amount of the indebtedness, together with the principal amount of any
other indebtedness in default for failure to pay principal at final maturity or
which has been accelerated, aggregates $10.0 million or more at any time. NATG
or its restricted subsidiary shall have a 20-day grace period to cure this
default;
(5) one or more judgments in an aggregate amount in excess of $10.0 million
shall have been rendered against NATG or any of its significant subsidiaries and
the judgments remain undischarged, unpaid or unstayed for a period of 60 days
after the judgment or judgments become final and non-appealable;
(6) specified events of bankruptcy affecting Parent, an issuer or any of
their Significant Subsidiaries; or
(7) (a) any guarantee or any provision of any guarantee shall cease to be
in full force or effect, other than in accordance with its express terms, or (b)
Parent or any other guarantor or any person acting by or on behalf of the
guarantor shall deny or disaffirm the guarantor's obligations under its
guarantee, or (c) Parent or any other guarantor shall default in the due
performance or observance of any term,
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covenant or agreement on its part to be performed or observed, after giving
effect to any applicable grace periods, as provided in its guarantee.
If an event of default, other than an event of default specified in clause
(6) above with respect to an issuer, shall occur and be continuing, the trustee
or the holders of at least 25% in principal amount of the notes then outstanding
may declare the principal of and accrued interest on all the notes to be due and
payable by notice in writing to the issuers and the trustee specifying the
respective event of default and that it is a "notice of acceleration". Principle
and accrued interest on the notes:
(1) shall become immediately due and payable; or
(2) if there are any amounts outstanding under the senior secured credit
agreement, shall become immediately due and payable upon the first to occur of
an acceleration under the senior secured credit agreement or 5 business days
after receipt by the issuers and the representative under the senior secured
credit agreement of the acceleration notice but only if the event of default is
then continuing.
If an event of default specified in clause (6) above with respect to an
issuer occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding notes shall
become and be immediately due and payable without any declaration or other act
on the part of the trustee or any holder.
The indenture provides that, at any time after a declaration of
acceleration of the notes, the holders of a majority in principal amount of the
notes may rescind and cancel the declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing events of default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration;
(3) to the extent the payment of interest is lawful, interest on overdue
installments of interest and overdue principal, which has become due otherwise
than by the declaration of acceleration, has been paid;
(4) if the issuers have paid the trustee its reasonable compensation and
reimbursed the trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an event of default of the type
described in clause (6) of the description above of events of default, the
trustee shall have received an officers' certificate to the effect that the
event of default has been cured or waived. No rescission shall affect any
subsequent default or impair any right consequent to any subsequent default.
The holders of a majority in principal amount of the notes may waive any
existing default or event of default under the indenture, and its consequences,
except a default in the payment of the principal of or interest on any notes.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture and under the TIA. Subject to the provisions of the
indenture relating to the duties of the trustee, the trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless the holders have
offered to the trustee reasonable indemnity. Subject to all provisions of the
indenture and applicable law, the holders of a majority in aggregate principal
amount of the then outstanding notes 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.
Under the indenture, Parent and the issuers are required to provide
officers' certificates to the trustee promptly upon any officer obtaining
knowledge of any default or event of default that has occurred and, if
applicable, describe the default or event of default and its status. In
addition, Parent and the issuers are required to provide this certification at
least annually whether or not they know of any default or event of default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
A director, officer, employee, member, stockholder or incorporator, as
such, of Parent or any of its subsidiaries shall not have any liability for any
obligations of the issuers in connection with the notes. However, this shall in
no way limit the obligations of any guarantor in respect of the guarantees. Each
holder by accepting a note waives and releases this liability, and this waiver
and release are part of the consideration for the issuance of the notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The issuers may, at their option and at any time, elect to have their
obligations and the obligations of the guarantors discharged with respect to the
outstanding notes and guarantees. This is called legal defeasance. Legal
defeasance means that the issuers shall be deemed to have paid and discharged
the entire indebtedness represented by the outstanding notes, except for:
(1) their obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or stolen
notes and the maintenance of an office or agency for payments;
(2) the rights, powers, trust, duties and immunities of the trustee and the
issuers' obligations in connection with those rights, powers, trust, duties and
immunities; and
(3) the legal defeasance provisions of the indenture.
In addition, the issuers may, at their option and at any time, elect to
have the obligations of the issuers released with respect to specified covenants
that are described in the indenture. This is called covenant defeasance. After
the covenant defeasance, any omission to comply with those covenants shall not
constitute a default or event of default under the notes. In the event covenant
defeasance occurs, certain events, not including non-payment, bankruptcy,
receivership, reorganization and insolvency event, described under "Events of
Default" will no longer constitute an event of default with respect to the
notes.
In order to exercise either legal defeasance or covenant defeasance:
(1) the issuers must irrevocably deposit with the trustee, in trust, for
the benefit of the holders cash in U.S. dollars, non-callable U.S. government
obligations, or a combination of the two, in an amount as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the notes on the
stated date for payment or on the applicable redemption date, as the case may
be;
(2) in the case of legal defeasance, each issuer shall have delivered to
the trustee an opinion of counsel in the United States reasonably acceptable to
the trustee confirming that:
(a) the issuers have received from, or there has been published by,
the Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that, and the opinion of counsel shall confirm
that, the holders will not recognize income, gain or loss for federal income tax
purposes as a result of the legal 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 the legal defeasance had not occurred;
(3) in the case of covenant defeasance, each issuer shall have delivered to
the trustee an opinion of counsel in the United States reasonably acceptable to
the trustee confirming that the holders will not recognize income, gain or loss
for federal income tax purposes as a result of the covenant 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 the covenant defeasance had not
occurred;
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(4) no default or event of default shall have occurred and be continuing on
the date of the deposit, other than a default or event of default under the
indenture resulting from the incurrence of indebtedness, all or a portion of
which will be used to defease the notes concurrently with the incurrence;
(5) the legal defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under the indenture, other than
a default or event of default under the indenture resulting from the incurrence
of indebtedness, all or a portion of which will be used to defease the notes
concurrently with the incurrence, or any other material agreement or instrument
to which Parent or any of its restricted subsidiaries is a party or by which
Parent or any of its restricted subsidiaries is bound;
(6) each issuer shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by the issuers with the intent
of preferring the holders over any other creditors of the issuers or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the issuers or others;
(7) each issuer shall have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the legal defeasance or the covenant defeasance have been
complied with;
(8) each issuer shall have delivered to the trustee an opinion of counsel
to the effect that:
(a) the trust funds will not be subject to any rights of holders of
senior debt or guarantor senior debt, including, without limitation, those
arising under the indenture; and
(b) assuming no intervening bankruptcy of an issuer between the date
of deposit and the 91st day following the date of deposit and that no
holder is an insider of an issuer, after the 91st day following the date of
deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and
(9) specified other customary conditions precedent are satisfied.
The opinion of counsel required by clause (2) above concerning legal
defeasance need not be delivered if all notes not previously delivered to the
trustee for cancellation (1) have become due and payable or (2) will become due
and payable on the maturity date within one year under arrangements satisfactory
to the trustee for the giving of notice of redemption by the trustee in the
name, and at the expense, of the issuers.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect,
except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture as to all outstanding notes
when:
(1) either:
(a) all the notes authenticated and delivered have been delivered to
the trustee for cancellation; or
(b) all notes not previously delivered to the trustee for cancellation
have become due and payable and the issuers shall have irrevocably
deposited or caused to be deposited with the trustee funds in an amount
sufficient to pay principal of, premium, if any, and interest on the
outstanding notes not previously delivered to the trustee for cancellation,
to the date of deposit together with irrevocable instructions from the
issuers directing the trustee to apply the funds to the payment of the
notes at maturity or redemption, as the case may be;
(2) the issuers have paid all other sums payable under the indenture by
them; and
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(3) each issuer has delivered to the trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the indenture
relating to the satisfaction and discharge of the indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the issuers, the guarantors and the trustee, without the
consent of the holders, may amend the indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as the change
does not, in the opinion of the trustee, adversely affect the rights of any of
the holders in any material respect. In formulating its opinion on those
matters, the trustee will be entitled to rely on evidence as it deems
appropriate, including, without limitation, only on an opinion of counsel and an
officers' certificate. Other modifications and amendments of the indenture may
be made with the consent of the holders of a majority in principal amount of the
then outstanding notes issued under the indenture, except that, without the
consent of each holder affected, no amendment may:
(1) reduce the amount of notes whose holders must consent to an amendment,
supplement or waiver;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any notes, or change the date on which any notes may be
subject to redemption or reduce the redemption or purchase price of the notes;
(4) make any notes payable in money other than that stated in the notes;
(5) make any change in provisions of the indenture protecting the right of
each holder to receive payment of principal of and interest on the notes on or
after the due date of the notes or to bring suit to enforce payment on the
notes;
(6) modify or change any provision of the indenture or the related
definitions affecting the subordination or ranking of the notes or any guarantee
in a manner which adversely affects the holders; or
(7) release Parent or any guarantor that is a significant subsidiary of
Parent or an issuer from any of its obligations under its guarantee or the
indenture otherwise than in accordance with the terms of the indenture.
GOVERNING LAW
The indenture provides that it, the notes and any guarantees will be
governed by, and construed in accordance with, the laws of the state of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of these principles would require that the law of
another jurisdiction be applied.
THE TRUSTEE
The indenture provides that, except during the continuance of an event of
default, the trustee will perform only those duties as are specifically set
forth in the indenture or the TIA. During the existence of an event of default,
the trustee will exercise the rights and powers vested in it by the indenture,
and use the same degree of care and skill in its exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
The indenture and the provisions of the TIA contain limitations on the
rights of the trustee, should it become a creditor of an issuer, to obtain
payments of claims in some cases or to realize on property received in respect
of any claim as security or otherwise. Subject to the TIA, the trustee will be
permitted to engage in other transactions. If the trustee acquires any
conflicting interest as described in the TIA, it must eliminate the conflict or
resign.
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CERTAIN DEFINITIONS
Set forth below is a summary of some of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all of
these terms, as well as any other terms used in this description for which no
definition is provided.
"acquired indebtedness" means indebtedness of a person or any of its
restricted subsidiaries existing at the time the person becomes a restricted
subsidiary of NATG or at the time it merges or consolidates with or into NATG or
any of its restricted subsidiaries or is assumed in connection with the
acquisition of assets from the person. This indebtedness shall constitute
acquired indebtedness whether or not incurred by the person in connection with,
or in anticipation or contemplation of, the person becoming a restricted
subsidiary of NATG or the acquisition, merger or consolidation.
"acquisition loans" means all acquisition loans under and as defined in the
senior secured credit agreement as in effect on the original issue date of the
notes.
"affiliate" means, as applied to any person, any other person directly or
indirectly controlling, controlled by, or under common control with, that
person. For the purposes of this definition, "control", as applied to any
person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that person, whether
through the ownership of voting securities or by contract or otherwise. For
purposes of the covenant described under "-- Certain Covenants -- Limitation on
Transactions with Affiliates," any person who owns more than 10% of voting
equity of a second person or who is an officer or director of that second person
shall be an affiliate of that second person.
"asset acquisition" means
(1) an investment by NATG or any of its restricted subsidiaries in any
other person as a result of which the person shall become a restricted
subsidiary of NATG or shall be merged with or into NATG or any restricted
subsidiary of NATG or
(2) the acquisition by NATG or any restricted subsidiary of NATG of the
assets of any person, other than a restricted subsidiary of NATG, not in the
ordinary course of business.
"asset sale" means any direct or indirect sale, issuance, conveyance
transfer, lease, other than operating leases entered into in the ordinary course
of business, assignment or other transfer for value by Parent or any restricted
subsidiary of NATG to any person other than NATG or any wholly owned restricted
subsidiary of NATG of
(1) any capital stock of any restricted subsidiary of NATG; or
(2) any other property or assets of NATG or any restricted subsidiary of
NATG other than in the ordinary course of business. An asset sale shall not
include:
(a) a transaction or series of related transactions for which NATG or
any restricted subsidiary of NATG receives aggregate consideration of less
than $1,000,000;
(b) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of NATG as permitted under the covenant
described under "-- Certain Covenants -- Merger, Consolidation and Sale of
Assets;"
(c) any sale or other disposition of obsolete assets no longer used or
useful in the business of NATG or any of its restricted subsidiaries;
(d) a disposition consisting of the making of a permitted investment,
the making of a restricted payment permitted under the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments," or the
liquidation of cash equivalents;
(e) the leasing or licensing of real or personal property, including
intellectual property, in the ordinary course of business for periods not
in excess of one year, subject to automatic renewals;
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(f) the issuance of capital stock by a restricted subsidiary of NATG
to NATG or a wholly owned restricted subsidiary of NATG;
(g) sales of accounts receivable and related assets of the type
specified in the definition of "qualified receivables transaction" to a
receivables entity for cash or purchase money notes in an amount equal to
the fair market value of the accounts receivable and related assets;
(h) transfers of accounts receivable and related assets of the type
specified in the definition of "qualified receivables transaction," or of a
fractional undivided interest in these accounts receivable, or related
assets, by a receivables entity in a qualified receivables transaction; and
(i) the cancellation of promissory notes issued to Parent as permitted
under the covenant described under clause (9) of the covenant described
under "-- Certain Covenants -- Limitations on Transactions with
Affiliates."
"board of directors" means, as to any person, the board of directors of
that person or any duly authorized committee of that person's board of directors
or, in the case of a person that is not a corporation, the analogous governing
body of that person.
"board resolution" means, with respect to any person, a copy of a
resolution certified by the secretary or an assistant secretary of that person
to have been duly adopted by the board of directors of that person and to be in
full force and effect on the date of the certification, and delivered to the
trustee.
"business day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the city of New York are required or authorized
by law or other governmental action to be closed.
"capital stock" means
(1) with respect to any person that is a corporation, any and all shares,
interests, participations or other equivalents, however designated and whether
or not voting, of corporate stock, including each class of common stock and
preferred stock of that person and including any warrants, options or rights to
acquire any of these interests and instruments convertible into any of these
interests, and
(2) as to any person that is not a corporation, any and all partnership,
membership or other equity interests of that person.
"capitalized lease obligation" means, as to any person, the obligations of
that person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP. For purposes of this definition, the
amount of the obligations at any date shall be the capitalized amount of the
obligations at that date, determined in accordance with GAAP.
"cash equivalents" means
(1) any evidence of indebtedness, maturing not more than one year after the
date of issue, issued by the United States of America or any instrumentality or
agency of the United States of America, the principal, interest and premium, if
any, of which is guaranteed fully by, or backed by the full faith and credit of,
the United States of America,
(2) dollar denominated time deposits, certificates of deposit and bankers
acceptances maturing not more than one year after the date of purchase, issued
by:
(a) any lender under the senior secured credit agreement,
(b) a commercial banking institution having, or which is the principal
banking subsidiary of a bank holding company having, combined capital and
surplus and undivided profits of not less than $200.0 million and a
commercial paper rating of "P-1" or higher according to Moody's, "A-1" or
higher according to S&P or the equivalent rating by any other nationally
recognized rating agency (referred to as, an "approved bank") or
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(c) a non-United States commercial banking institution which is either
currently ranked among the 100 largest banks in the world by assets,
according to the American Banker, has combined capital and surplus and
undivided profits of not less than $500.0 million or whose commercial paper
or the commercial paper of the bank's holding company has a rating of "P-1"
or higher according to Moody's, "A-1" or higher according to S&P or the
equivalent rating by any other nationally recognized rating agency,
(3) commercial paper, maturing not more than 270 days after the date of
purchase, issued or guaranteed by a corporation, other than Parent or any
subsidiary of Parent or any of their respective affiliates, organized and
existing under the laws of any state within the United States of America with a
rating of "P-1" or higher according to Moody's or "A-1" or higher according to
S&P,
(4) demand deposits with any bank or trust company maintained in the
ordinary course of business,
(5) repurchase or reverse repurchase agreements covering obligations of the
type specified in clause (1) with a term of not more than seven days with any
approved bank, and
(6) shares of any money market mutual fund rated at least AAA or the
equivalent rating by S&P or at least AAA or the equivalent by Moody's.
"change of control" means
(1) any sale, lease or transfer of all or substantially all of the assets
of NATG and its restricted subsidiaries, taken as a whole, to any person or
group, as that term is used in Section 13(d)(3) of the Exchange Act,
(2) the liquidation or dissolution of Parent or any issuer,
(3) prior to a qualified IPO,
(a) Willis Stein and its affiliates cease to beneficially own, and
have the exclusive power to vote, directly or indirectly, at least 35% of
the outstanding voting securities of Parent entitled to vote, including,
without limitation, under any valid and enforceable stockholders or other
voting agreement, for the election of a majority of the members of the
board of directors of Parent, and in any event sufficient to direct or
cause the direction of the management and policies of Parent,
(b) any person or group, as that term is used in Section 13(d)(3) of
the Exchange Act, other than Willis Stein and its affiliates or a permitted
group, shall become the owner, directly or indirectly, beneficially or of
record, of a greater number of the voting securities of Parent than the
number of voting securities of Parent then owned beneficially and of record
by Willis Stein and its affiliates or
(c) the nominees of Willis Stein and its affiliates shall at any time
fail or cease to constitute a majority of the members of the board of
directors of Parent,
(4) after a Qualified IPO,
(a) (i) any person or group, as that term is used in Section 13(d)(3)
of the Exchange Act, other than Willis Stein and its affiliates or a
permitted group, shall at any time become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 35%
of the outstanding voting securities of Parent and (ii) the percentage of
voting securities beneficially owned by Willis Stein and its affiliates is
less than the percentage so owned or acquired by that person or group, or
(b) the replacement of a majority of the directors on the board of
directors of Parent over a two-year period from the directors who
constituted the board of directors of Parent at the beginning of that
period, and the replacement shall not have been approved by a vote of at
least a majority of the board of directors of Parent then still in office
who either were members of the board of directors at the beginning of that
period or whose election as a member of the board of directors was
previously so approved, or
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(5) Parent ceases to beneficially own and have the exclusive power to vote
with respect to all of the issued and outstanding capital stock of NATG free and
clear of all liens other than liens arising under the senior secured credit
agreement.
"common stock" of any person means any and all shares, interests or other
participations in, and other equivalents, however designated and whether voting
or non-voting, of that person's common stock, whether outstanding on the
original issue date of the notes or issued after the original issue date of the
notes, and includes, without limitation, all series and classes of common stock.
"consolidated EBITDA" means, for any period, the sum, without duplication,
of the amounts for that period of
(1) consolidated net income,
(2) consolidated interest expense,
(3) provisions for taxes based on income,
(4) total depreciation expense,
(5) total amortization expense, and
(6) other non-cash items reducing consolidated net income,
less other non-cash items increasing consolidated net income other than the
accrual of revenue in the ordinary course of business. All of the foregoing
shall be determined on a consolidated basis for the person and its subsidiaries
in conformity with GAAP.
"consolidated fixed charge coverage ratio" shall mean the ratio of
consolidated EBITDA of NATG during the four full fiscal quarters for which
internal financial statements are available ending on or prior to the date of
the transaction giving rise to the need to calculate the consolidated fixed
charge coverage ratio to consolidated fixed charges of NATG for that four
quarter period.
For purposes of this definition, "consolidated EBITDA" and "consolidated
fixed charges" shall be calculated after giving effect on a pro forma basis for
the period of the calculation to
(1) (a) the incurrence or repayment of any indebtedness of NATG or any
of its restricted subsidiaries giving rise to the need to make the
calculation, and the application of the proceeds from the incurrence or
repayment, and
(b) any incurrence or repayment of other indebtedness and
(c) the application of the proceeds from the incurrence or
repayment, other than the incurrence or repayment of indebtedness in the
ordinary course of business for working capital purposes under the
working capital facilities,
occurring during the four quarter period or at any time subsequent to
the last day of the four quarter period and on or prior to the date of
the transaction giving rise to the need to make the calculation
transaction date, as if the incurrence or repayment, as the case may be,
and the application of the proceeds from the incurrence or repayment,
occurred on the first day of the four quarter period, and
(2) any asset sales or other dispositions or asset acquisitions,
including, without limitation,
(a) any asset acquisition giving rise to the need to make the
calculation as a result of NATG or one of its restricted subsidiaries,
including any person who becomes a restricted subsidiary as a result of
the asset acquisition, incurring indebtedness and
(b) any consolidated EBITDA, provided that the consolidated EBITDA
shall be included only to the extent includable under the definition of
"consolidated net income" or to the extent it is excluded under clause
(2) of the definition of "consolidated net income", and shall be
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calculated on a pro forma basis with respect to the asset acquisition
taking into account the pro forma adjustments, if any, resulting from
the asset acquisitions, attributable to the assets which are the subject
of the asset acquisition or asset sale during the four quarter period or
at any time subsequent to the four quarter period,
occurring during the four quarter period or at any time subsequent to
the last day of the four quarter period and on or prior to the date of
the transaction giving rise to the need to make the calculation , as if
the asset sale or other disposition or asset acquisition, including any
related incurrence of indebtedness, occurred on the first day of the
four quarter period.
If NATG or any of its restricted subsidiaries directly or indirectly
guarantees indebtedness of a third person, the preceding sentence shall give
effect to the incurrence of the guaranteed indebtedness as if NATG or the
restricted subsidiary had directly incurred or otherwise assumed the guaranteed
indebtedness, calculated to avoid duplication. In calculating "consolidated
fixed charges" for purposes of determining the denominator, but not the
numerator, of the "consolidated fixed charge coverage ratio,"
(1) interest on outstanding indebtedness, determined on a fluctuating basis
as of the date of the transaction giving rise to the need to make the
calculation and which will continue to be so determined of that date, shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on the indebtedness in effect on that date;
(2) if interest on any indebtedness actually incurred on the date of the
transaction giving rise to the need to make the calculation may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on that date will be deemed to have been in effect during the four
quarter period; and
(3) notwithstanding clause (1) above, interest on indebtedness determined
on a fluctuating basis, to the extent the interest is covered by interest rate
agreements relating to the indebtedness, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of those agreements.
"consolidated fixed charges" shall mean, with respect to any person for any
period, the sum, without duplication, of
(1) consolidated interest expense, before amortization or write-off of debt
issuance costs associated with the offering of the notes on the original issue
date of the notes, plus
(2) to the extent not included in consolidated interest expense, the
product of
(a) the amount of all dividend payments on any series of capital stock
of that person, other than dividends paid in qualified capital stock, paid
in cash during that period, times
(b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal, state
and local tax rate of that person, expressed as a decimal.
"consolidated interest expense" shall mean, with respect to any person for
any period, the sum of, without duplication:
(1) the aggregate of the interest expense of that person and its restricted
subsidiaries for the period determined on a consolidated basis in accordance
with GAAP, including without limitation,
(a) any amortization of debt discount and amortization or write-off of
deferred financing costs,
(b) the net costs under interest rate agreements,
(c) all capitalized interest, and
(d) the interest portion of any deferred payment obligation; and
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(2) the interest component of capitalized lease obligations paid, accrued
and/or scheduled to be paid or accrued by that person and its restricted
subsidiaries during the period as determined on a consolidated basis in
accordance with GAAP.
"consolidated net income" shall mean, for any period for any person, the
net income or loss of the person and its restricted subsidiaries on a
consolidated basis for the period taken as a single accounting period determined
in conformity with GAAP. There shall be excluded:
(1) the income or loss of any person, other than a restricted subsidiary of
the person, in which any other person, other than the first person or any of its
restricted subsidiaries, has a joint interest, except to the extent of the
amount of dividends or other distributions actually paid to the first person or
any of its restricted subsidiaries by the second person during the period,
(2) the income or loss of any other person accrued prior to the date it
becomes a restricted subsidiary of the first person or is merged into or
consolidated with the first person or any of its restricted subsidiaries or
whose assets are acquired by the first person or any of its restricted
subsidiaries,
(3) the income of any subsidiary of the first person to the extent that the
declaration or payment of dividends or similar distributions by that restricted
subsidiary of that income is not at the time permitted by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that restricted subsidiary,
(4) any after-tax gains or losses attributable to asset sales, without
regard to the $1.0 million limitation set forth in the definition of asset
sales, and
(5) to the extent not included in clauses (1) through (4) above, any net
non-cash extraordinary gains or net noncash extraordinary losses.
For purposes of computing consolidated net income there shall be excluded
from the computation of consolidated net income, without duplication and to the
extent not otherwise excluded from the computation of consolidated net income,
(a) non-recurring fees and expenses incurred in connection with the
consummation of the LISN acquisition in an aggregate amount not to exceed
$16.0 million, and
(b) non-recurring fees and expenses incurred in connection with the
issuance of the outstanding notes on the original issue date in an
aggregate amount not to exceed $7.0 million.
For purposes of computing consolidated net income, but only to the extent
used in determining the consolidated fixed charge coverage ratio, there shall be
excluded from the computation, without duplication and to the extent not
otherwise excluded from the computation, non-recurring fees and expenses
incurred in connection with the consummation of any asset acquisition in an
aggregate amount not to exceed 5% of the total consideration for the asset
acquisition.
"contingent obligations" means as to any person, any obligation of that
person guaranteeing or intending to guarantee any indebtedness, leases,
dividends or other obligations ("primary obligations") of any other person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of the person, whether or not contingent,
(1) to purchase any primary obligation or any property constituting
direct or indirect security for the primary obligation,
(2) to advance or supply funds (a) for the purchase or payment of any
primary obligation or (b) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor,
(3) to purchase property, securities or services primarily for the
purpose of assuring the owner of any primary obligation of the ability of the
primary obligor to make payment of the primary obligation, or
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(4) otherwise to assure or hold harmless the owner of the primary
obligation against loss in respect of the primary obligation.
However, the term "contingent obligation" shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any contingent obligation shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which the
contingent obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect of the primary obligation, assuming
the person is required to perform under the primary obligation, as determined by
the person in good faith.
"currency agreement" means any foreign exchange contract, currency swap
agreement, futures contract, option contract, synthetic cap or other similar
agreement or arrangement designed to protect NATG or any of its restricted
subsidiaries against fluctuations in currency values.
"default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an event of default.
"designated senior debt" means:
(1) indebtedness under or in respect of the senior secured credit agreement
and
(2) any other indebtedness constituting both senior debt and guarantor
senior debt which, at the time of determination, has an aggregate principal
amount of at least $25.0 million and is specifically designated in the
instrument evidencing senior debt as "designated senior debt" by the issuers.
"disqualified capital stock" means that portion of any capital stock which,
by its terms, or by the terms of any security into which it is convertible or
for which it is exchangeable, or upon the happening of any event, matures or is
mandatorily redeemable as a result of a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder of the capital stock on or prior
to the maturity date. Any capital stock that would constitute disqualified
capital stock solely because the holder of the capital stock has the right to
require the repurchase of the capital stock upon the occurrence of a change of
control or an asset sale, shall not constitute disqualified capital stock if the
terms of the capital stock provide that the capital stock may not be repurchased
or redeemed under those provisions unless the issuers have first complied with
their obligations described under the captions "-- Change of Control" and
"Certain Covenants -- Limitation on Asset Sales" and that the repurchase or
redemption complies with the covenant under the caption "-- Certain
Covenants -- Limitation on Restricted Payments."
"documents" has the meaning ascribed to this term in the senior secured
credit agreement as in effect on the original issue date of the notes.
"equity offering" means a public or private offering of qualified capital
stock of Parent or an issuer, other than public offerings with respect to
Parent's or an issuer's common stock on Form S-8 or any replacement form Form
S-8.
"existing debt" means the indebtedness of NATG and its restricted
subsidiaries that was incurred prior to, and remained outstanding after, the
issuance of the outstanding notes and the application of the proceeds from the
issuance of the notes. Existing Debt shall not include any obligations in
respect of the senior secured credit agreement.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in any other statements by any other
entity as may be approved by a significant segment of the accounting profession
of the United States, as in effect from time to time.
"guarantees" means the guarantees of the notes by the guarantors.
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"guarantor" means:
(1) Parent,
(2) each restricted subsidiary of Parent other than the issuers, and
(3) each restricted subsidiary of Parent that in the future executes a
supplemental indenture in which the restricted subsidiary agrees to be
bound by the terms of the indenture as a guarantor;
Any guarantor shall cease to be a guarantor when its guarantee is released in
accordance with the terms of the indenture.
"guarantor senior debt" means with respect to any guarantor, the principal
of, premium, if any, interest, including any interest accruing subsequent to the
filing of a petition of bankruptcy, whether or not the interest is an allowed
claim under applicable law, fees, expenses, indemnities and other amounts and
obligations incurred or owing on any indebtedness of a guarantor, whether
outstanding on the date the outstanding notes were issued or created, incurred,
assumed or guaranteed after that date. Any particular indebtedness will not be
guarantor senior debt if the instrument creating or evidencing the debt provides
that the indebtedness shall not be senior in right of payment to the guarantee
of the guarantor. "Guarantor senior debt" shall also include the principal of,
premium, if any, interest on, including any interest accruing subsequent to the
filing of a petition of bankruptcy, whether or not the interest is an allowed
claim under applicable law, on:
(1) all monetary obligations of every nature under the senior secured
credit agreement, including, without limitation, obligations to pay principal
and interest, reimbursement obligations under letters of credit, fees, expenses
and indemnities and
(2) all IRA obligations, in each case whether outstanding on the original
issue date of the outstanding notes or later incurred.
However, "guarantor senior debt" shall not include
(1) any indebtedness of a guarantor to a subsidiary of the guarantor,
(2) indebtedness to, or guaranteed on behalf of, any director,
officer, employee of either a guarantor or any subsidiary of a guarantor,
including, without limitation, amounts owed for compensation,
(3) indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services,
(4) indebtedness represented by disqualified capital stock,
(5) any liability for federal, state, local or other taxes owed or
owing a guarantor,
(6) indebtedness to the extent incurred in violation of the covenant
described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness,"
(7) indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the guarantor, and
(8) any indebtedness which is, by its express terms, subordinated in
right of payment to any other indebtedness of a guarantor including,
without limitation, in the case of Parent, indebtedness evidenced by the
junior subordinated notes.
"Hedging Obligations" of any person means any obligation of the person
under
(1) an interest rate agreement,
(2) a currency agreement, and
(3) any synthetic arrangement.
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"incur" means, with respect to any indebtedness or other obligation of any
person, to create, issue, incur, by conversion, exchange or otherwise, assume,
including by the acquisition of assets subject to indebtedness, guarantee or
otherwise become liable in respect of the indebtedness or other obligation or
the recording, as required by GAAP or otherwise, of any indebtedness or other
obligation on the balance sheet of person. However,
(1) any amendment, modification or waiver of any document under which
indebtedness was previously incurred shall only be deemed to be an incurrence of
indebtedness if and to the extent the amendment, modification or waiver (A)
increases the principal of, or interest rate or premium payable on, the
indebtedness or (B) changes to an earlier date the stated maturity, or the date
of any scheduled or required principal payment on, the indebtedness or the time
or circumstances under which the indebtedness shall be redeemed, and
(2) any indebtedness of a person existing at the time the person becomes,
after the original issue date of the outstanding notes, a restricted subsidiary
of NATG, whether by merger, consolidation, acquisition or otherwise, shall be
deemed to be incurred by the restricted subsidiary at the time it becomes a
restricted subsidiary of NATG.
"indebtedness" of any person shall mean, without duplication,
(1) all indebtedness of the person for borrowed money,
(2) the deferred purchase price of assets or services, including any
earn-out obligations in connection with any acquisition, which in accordance
with GAAP would be shown on the liability side of the balance sheet of that
person,
(3) the face amount of all letters of credit issued for the account of that
person and, without duplication, all unreimbursed drafts drawn under any letter
of credit,
(4) all indebtedness of a second person secured by any lien on any property
owned by a first person, excluding advances or prepayments made to any borrower
or any of their subsidiaries under turnkey agreements entered into in the
ordinary course of business with TCI or any of its affiliates, whether or not
the indebtedness has been assumed,
(5) all capitalized lease obligations of that person,
(6) all obligations of that person to pay a specified purchase price for
goods or services whether or not delivered or accepted, i.e., take-or-pay and
similar obligations,
(7) all hedging obligations of that person, and
(8) all contingent obligations of that person, other than contingent
obligations arising from the guarantee by that person of the obligations of
Parent and/or its subsidiaries to the extent the guaranteed obligations do not
constitute indebtedness and are otherwise permitted under the indenture.
Indebtedness shall not include trade payables and accrued expenses, in each case
arising in the ordinary course of business.
"independent financial advisor" means an accounting, appraisal, valuation
or investment banking firm (1) that does not, and whose directors, officers and
employees or affiliates do not, have a direct or indirect financial interest in
Parent or any of its subsidiaries and (2) which, in the judgment of the board of
directors of Parent, is otherwise independent and qualified to perform the task
for which it is to be engaged.
"interest payment date" means the stated maturity of an installment of
interest on the notes.
"interest rate agreement" means any interest rate swap agreement, any
interest rate cap agreement, any interest rate collar agreement or other similar
agreement or arrangement designed to protect Parent or any restricted subsidiary
of Parent against fluctuations in interest rates.
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"investment" by any person in any other person means, with respect to any
person, any direct or indirect loan or other extension of credit, including,
without limitation, a guarantee, or capital contribution to, by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others, or any purchase, acquisition by the
person of any capital stock, bonds, notes, debentures or other securities or
evidences of indebtedness issued by, any other person. "Investment" shall
exclude extensions of trade credit by the issuers and their restricted
subsidiaries on commercially reasonable terms in accordance with their normal
trade practices and advances to employees for moving, entertainment and travel
expenses, drawing accounts and similar expenditures in the ordinary course of
business. For the purposes of the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments":
(1) NATG shall be deemed to have made an "investment" equal to the fair
market value of the net assets of any restricted subsidiary of NATG at the time
that the restricted subsidiary is designated an unrestricted subsidiary. The
aggregate amount of investments made subsequent to the original issue date of
the outstanding notes shall exclude, to the extent the designation as an
unrestricted subsidiary was included as a restricted payment, the fair market
value of the net assets of any unrestricted subsidiary at the time that the
unrestricted subsidiary is designated a restricted subsidiary, not to exceed the
amount of the investment deemed made at the date of designation of the
subsidiary as an unrestricted subsidiary.
(2) The amount of any investment shall be the original cost of the
investment plus the cost of all additional investments by NATG or any of its
restricted subsidiaries, without any adjustments for increases or decreases in
value, or write-ups, writedowns or write-offs of the investment, reduced by the
payment of dividends or distributions, including tax sharing payments, in
connection with the investment or any other amounts in connection with the
investment.
No payment of dividends or distributions or receipt of any amounts in
respect of the investment shall reduce the amount of any investment if the
payment of dividends or distributions or receipt of any amounts would be
included in consolidated net income. If NATG or any restricted subsidiary of
NATG sells or otherwise disposes of any capital stock of any Restricted
Subsidiary of NATG such that, after giving effect to the sale or disposition,
NATG no longer owns, directly or indirectly, more than 50% of the outstanding
common stock of the restricted subsidiary, NATG shall be deemed to have made an
investment on the date of the sale or disposition equal to the fair market value
of the capital stock of the restricted subsidiary not sold or disposed of.
"investor rights agreement" means the investor rights agreement, dated
December 15, 1999, between Parent and its stockholders entered into in
connection with the LISN acquisition, as in effect on the original issue date of
the outstanding notes.
"IRA obligation" means the obligations of a person under an interest rate
agreement.
"junior subordinated notes" means, collectively, those certain unsecured
and unguaranteed 12% subordinated promissory notes dated December 15, 1999
outstanding on the original issue date of the outstanding notes and additional
junior subordinated promissory notes issued after the original issue date of the
outstanding notes with substantially similar terms.
"lien" means any lien, mortgage, pledge, assignment, security interest,
charge, hypothecation, preference, priority, privilege, lease or encumbrance of
any kind, including any conditional sale or other title retention agreement, any
lease similar in nature, and any agreement to give any security interest, and
any option, trust or other preferential arrangement having the same practical
effect.
"maturity date" means February 1, 2010, the final maturity date of the
notes.
"Moody's" means Moody's Investors Service, Inc.
"net cash proceeds" means, with respect to any asset sale, the proceeds in
the form of cash or cash equivalents including payments in respect of deferred
payment obligations when received in the form of
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cash or cash equivalents, other than the portion of any deferred payment
constituting interest, received by Parent or any of its restricted subsidiaries
from the asset sale net of:
(1) reasonable out-of-pocket expenses and fees relating to the asset sale,
including, without limitation, legal, accounting and investment banking fees and
sales commissions,
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements,
(3) any portion of any of the proceeds which Parent determines in good
faith should be reserved for post-closing adjustments, to the extent Parent
delivers to the trustee an officers' certificate signed by the chief financial
officer of Parent as to this determination. On the day all post-closing
adjustments have been determined, which shall not be later than six months
following the date of the respective asset sale, the amount, if any, by which
the reserved amount in respect of the sale or disposition exceeds the actual
post-closing adjustments payable by Parent or any of its restricted subsidiaries
shall constitute net cash proceeds received by Parent or the restricted
subsidiaries on that date, and
(4) repayment of indebtedness that is required to be repaid in
connection with the asset sale.
"non-recourse debt" means indebtedness:
(1) as to which neither NATG nor any of its restricted subsidiaries,
other than a receivables entity,
- provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute indebtedness,
- is directly or indirectly liable as a guarantor or otherwise, or
- constitutes the lender; and
(2) as to which the lenders of the debt have been notified in writing
that they will not have any recourse to the stock or assets of NATG or any
of its restricted subsidiaries, other than a receivables entity.
"noteholder" or "holder" means the person in whose name a note is
registered on the registrar's books.
"officer" means, with respect to any person, the chairman of the board, the
chief executive officer, the president, any vice president, the chief financial
officer, the controller, the treasurer or the secretary of that person.
"officers' certificate" of a person means a certificate signed by two
officers of that person.
"opinion of counsel" means a written opinion from legal counsel which
opinion and counsel are reasonably acceptable to the trustee.
"parent preferred stock" means the series C participating preferred stock
of Parent.
"permitted business" means the business of Parent and its restricted
subsidiaries as of the original issue date of the notes and any business
reasonably related, complementary or ancillary to that business or a reasonable
expansion of that business.
"permitted group" means any group of investors deemed to be a person, as
defined in Section 13(d)(3) of the Exchange Act, by virtue of the investor
rights agreement.
"permitted indebtedness" means
(1) obligations under this indenture, the notes and the guarantees,
(2) indebtedness incurred under the senior secured credit agreement in
an aggregate principal amount at any time outstanding not to exceed $410.0
million, less the amount of all permanent
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prepayments of senior term loans actually made and permanent reductions of
commitments relating to revolving loans or acquisition loans and the
termination of unused rollover letters of credit availability,
(3) existing debt,
(4) IRA obligations covering indebtedness otherwise permitted by the
indenture to the extent the notional principal amount of the IRA
obligations does not exceed the principal amount of the indebtedness to
which the IRA obligations relate,
(5) the incurrence by NATG or any of its restricted subsidiaries of
hedging obligations that are incurred for the purpose of fixing or hedging
the value of foreign currencies or the cost of commodities purchased or
received by NATG or any of its restricted subsidiaries,
(6) permitted refinancing indebtedness,
(7) indebtedness of NATG or a restricted subsidiary of NATG to NATG or
a restricted subsidiary of NATG, provided, that
- if as of any date any person other than NATG or a Restricted
Subsidiary of NATG holds any indebtedness or holds a lien in respect
of any indebtedness, other than a lien in connection with the senior
secured credit agreement, that date shall be deemed the incurrence of
indebtedness not constituting permitted indebtedness by the issuer of
that indebtedness and.
- if an issuer or subsidiary guarantor is the obligor on that
indebtedness, that indebtedness shall constitute subordinated
indebtedness,
(8) indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds in the ordinary course of business,
provided that the indebtedness must be extinguished within five business
days of incurrence,
(9) obligations in respect of workers' compensation claims,
self-insurance obligations, performance, surety and other similar bonds and
completion guarantees provided by NATG or a restricted subsidiary of NATG
in the ordinary course of business in accordance with customary industry
practice, in amount and for purposes customary in the industry,
(10) indebtedness arising from agreements of NATG or restricted
subsidiary of NATG providing for indemnification, adjustment of purchase
price, earn out or other similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, assets, or a
restricted subsidiary of NATG, other than guarantees of indebtedness
incurred by any person acquiring all or any portion of the business, assets
or restricted subsidiary for the purpose of financing the acquisition. The
maximum assumable liability in respect of all of this indebtedness shall at
no time exceed the gross proceeds actually received by an issuer or
subsidiary guarantor in connection with the disposition,
(11) capitalized lease obligations, mortgage financings and purchase
money obligations of an issuer or subsidiary guarantor incurred for the
purpose of financing all or a part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of an issuer or subsidiary guarantor, not to exceed $20.0 million
at any one time outstanding,
(12) guarantees by an issuer or subsidiary guarantor of indebtedness
of an issuer or subsidiary guarantor that was incurred in accordance with
the terms of the indenture,
(13) the accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any indebtedness in the
form of additional indebtedness with the same terms, so long as In each
case, this amount is included in consolidated fixed charges of NATG as
accrued,
(14) the incurrence by a receivables entity of indebtedness in a
qualified receivables transaction that is non-recourse debt, except for
standard securitization undertakings,
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(15) customary earn-out obligations owing in connection with any asset
acquisition,
(16) unsecured indebtedness of restricted subsidiaries of NATG not
organized under the laws of the United States or any state of the United
States and consisting of working capital lines of credit in an aggregate
amount not to exceed the dollar equivalent of $5.0 million at any time
outstanding,
(17) the incurrence of indebtedness arising from the endorsement of
negotiable instruments in the ordinary course of business, and
(18) additional unsecured indebtedness of NATG or its restricted
subsidiaries, other than contingent obligations NATG or its restricted
subsidiaries with respect to junior subordinated notes, in an aggregate
principal amount not to exceed $5.0 million at any one time outstanding.
"permitted investments" means
(1) investments by NATG or any restricted subsidiary of NATG, other
than a receivables entity, in a person if as a result of the investment
that person transfers or conveys all or substantially all of its assets to
NATG or any restricted subsidiary of NATG, other than a receivables entity,
provided, that the person's primary business is a permitted business,
(2) investments by NATG or any restricted subsidiary of NATG, other
than a receivables entity, in NATG or any restricted subsidiary of NATG,
other than a receivables entity, or in any person if, as a result of the
investment, that person shall become, whether by consolidation, merger or
otherwise, a restricted subsidiary of NATG, provided, that the person's
primary business is a permitted business,
(3) investments by NATG or its restricted subsidiaries existing on the
original issue date of the notes, which shall exclude any Investment
described in clause (9) below,
(4) investments in cash and cash equivalents;
(5) loans and advances to employees and officers of Parent and its
restricted subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $1.0 million at any one time
outstanding,
(6) interest rate agreements entered into in the ordinary course of
NATG's or its restricted subsidiaries' businesses and otherwise in
compliance with the indenture,
(7) investments in securities of trade creditors or customers received
as a result of any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of the trade creditors or customers,
(8) investments made by NATG or its subsidiaries as a result of
consideration received in connection with an asset sale made in compliance
with the covenant described under "-- Certain Covenants -- Limitation on
Asset Sales",
(9) investments in women/minority owned business enterprises in an
aggregate amount not to exceed $5.0 million at any time,
(10) deposits made in the ordinary course of business consistent with
past practices to secure the performance of leases,
(11) investments by NATG or any Guarantor in a receivables subsidiary
or any investment by a receivables subsidiary in any other person, in each
case in connection with a qualified receivables transaction, provided, that
the Investment in a receivables entity is in the form of a purchase money
note or an equity interest,
(12) indebtedness permitted to be incurred under the covenant
described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness", and
(13) additional investments not to exceed $5.0 million at any time.
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"permitted liens" means
(1) liens for taxes or claims either not delinquent or contested in
good faith by appropriate proceedings and as to which Parent or a
subsidiary shall have set aside on its books reserves as may be required by
GAAP,
(2) statutory liens of landlords and liens of carriers, warehousemen,
mechanics and materialmen and other liens imposed by law incurred in the
ordinary course of business for sums not yet delinquent or being contested
in good faith by appropriate proceedings, provided that
(a) any proceedings commenced for the enforcement of the liens
shall have been stayed or suspended within 30 days of the commencement
of the proceedings and
(b) a reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made,
(3) liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, trade contracts, performance and return-of-money bonds and other
similar obligations, exclusive of obligations for the payment of borrowed
money,
(4) any attachment or judgment lien not constituting an event of
default under clause (5) under the definition of "events of default",
(5) permitted real property encumbrances, easements, rights-of-way,
restrictions, minor defects, encroachments or irregularities in title and
other similar charges or encumbrances not interfering in any material
respect with the ordinary conduct of the business of Parent or any of its
Restricted Subsidiaries,
(6) any interest or title of a lessor under any capitalized lease
obligation or mortgage permitted to be incurred under clause (11) of the
definition of permitted indebtedness, provided that the liens do not extend
to any property or assets which is not leased property subject to the
capitalized lease obligation or mortgage or other property subject to a
permitted lien held by the lien holder of the capitalized lease obligation,
(7) liens to finance property or assets, including the cost of
construction, of any restricted subsidiary of NATG acquired in the ordinary
course of business provided that (a) the related purchase money obligations
shall be permitted to be incurred under the covenant described under
"-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness," and shall not exceed the cost of the property or assets,
including the cost of construction, and shall not be secured by any
property or assets of NATG or any restricted subsidiary other than the
property and assets so acquired and (b) the lien securing the indebtedness
shall be created within 90 days of the acquisition or construction,
(8) liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of NATG or any
of its restricted subsidiaries, including rights of offset and set-off,
(9) liens arising out of consignment or similar arrangements for the
sale of goods in the ordinary course of business,
(10) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Parent and its restricted
subsidiaries,
(11) liens arising from filing Uniform Commercial Code financing
statements regarding leases,
(12) liens in favor of TCI or any of its affiliates securing advances
made to NATG or any of its restricted subsidiaries under turnkey agreements
entered into in the ordinary course of business with
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TCI or any of its affiliates, provided that the liens shall only attach to
property, including proceeds of the property, which is purchased with the
applicable advance and shall automatically terminate when the applicable
advance has been fully paid,
(13) liens attaching solely to cash earnest money deposits made by
NATG or any of its restricted subsidiaries in connection with any letter of
intent or purchase agreement entered into by it in connection with an asset
acquisition,
(14) liens deemed to exist in connection with repurchase agreements
and other similar permitted investments,
(15) customary rights of set off, revocation, refund or chargeback
under deposit agreements or under the UCC of banks or other financial
institutions where any issuer maintains deposits in the ordinary course of
business permitted by the indenture,
(16) liens on accounts receivable for which attempts at collection
have been undertaken by a third party authorized by the person owing the
accounts receivable,
(17) liens arising from the granting of a license by NATG or any
restricted subsidiary of NATG to any person in the ordinary course of
business,
(18) liens arising by operation of law on insurance policies and the
proceeds of insurance policies to secure premiums under the insurance
policies,
(19) liens relating solely to assets to be sold in any asset sale
permitted in the indenture and arising out of the sale agreements governing
the asset sale,
(20) liens on property of a person existing at the time the person is
acquired by, merged with or into, or consolidated with NATG or any
restricted subsidiary of NATG, provided that the liens were in existence
prior to the contemplation of the acquisition, merger or consolidation and
do not extend to any assets other than those of the person acquiring merged
into or consolidated with NATG or the restricted subsidiary,
(21) liens existing on the original issue date of the notes,
(22) liens on assets transferred to a receivables entity or on assets
of a receivables entity, in either case incurred in connection with a
qualified receivables transaction, and
(23) liens incurred in the ordinary course of business of any
restricted subsidiary of NATG with respect to obligations that do not
exceed $3.0 million in the aggregate at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit, other than trade credit in the ordinary
course of business, and (b) do not in the aggregate materially detract from
the value of the property or materially impair the use of the property in
the operation of business by the restricted subsidiary.
"permitted real property encumbrances" means
(1) those liens, encumbrances and other matters affecting title to any
real property securing senior debt to the extent found reasonably
acceptable by the agent for the senior debt,
(2) easements, encroachments, covenants, rights of way, minor defects,
irregularities, encumbrances on title or similar restrictions on any real
property securing senior debt which do not, in the reasonable opinion of
the agents for that senior debt, materially impair the real property for
the purposes for which it is held by the owner or lessor of the real
property or the lien on the real property created in favor of that senior
debt, and
(3) municipal and zoning ordinances, which are not violated in any
material respect by the existing improvements and the present use of any
real property securing senior debt.
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"permitted refinancing indebtedness" means any refinancing by NATG or any
restricted subsidiary of NATG of indebtedness incurred in accordance with the
covenant described under the caption "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness" (other than under clauses (2), (4), (5),
(6), (7), (8), (9), (10), (11), (12), (13), (14), (15), (16), (17), or (18) of
the definition of Permitted Indebtedness), in each case that does not:
(A) result in an increase in the aggregate principal amount of
indebtedness of the person as of the date of the proposed refinancing, plus
the amount of any premium required to be paid under the terms of the
instrument governing the indebtedness and plus the amount of reasonable
expenses incurred by the person in connections with the refinancing; or
(B) create indebtedness with: (1) a weighted average life to maturity
that is less than the weighted average life to maturity of the indebtedness
being refinanced or (2) a final maturity earlier than the final maturity of
the indebtedness being refinanced;
provided, that if (x) the indebtedness being refinanced ranked equally with
the notes or the guarantees, the refinancing indebtedness shall rank either
equally with or junior to the notes or the guarantees, as applicable, and (y)
the indebtedness being refinanced constituted subordinated indebtedness, the
refinancing indebtedness shall be subordinated to the notes and the guarantees,
as applicable, at least to the same extent and in the same manner as the
indebtedness being refinanced.
"person" means any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
or any government or political subdivision or any agency, department or
instrumentality any government or political subdivision.
"principal" of any indebtedness, including the notes, means the principal
amount of the indebtedness plus the premium, if any, on the indebtedness. In the
case of indebtedness issued with original issue discount, "principal" shall
refer to the accreted value of the indebtedness.
"pro forma adjustments" means, with respect to a particular asset
acquisition, adjustments to eliminate the effect of any non-recurring expenses
or income from the asset acquisition with respect to NATG and its restricted
subsidiaries or any acquired person or assets on consolidated EBITDA, determined
in good faith by the chief financial officer of Parent and approved by the board
of directors of Parent, as set forth in an officers' certificate delivered to
the trustee setting forth in reasonable detail the basis for the adjustments.
"purchase money note" means a promissory note of a receivables entity
evidencing a line of credit, which may be irrevocable, from NATG or any of its
restricted subsidiaries to a receivables entity in connection with a qualified
receivables transaction, which note shall be repaid from cash available to the
receivables entity, other than amounts required to be established as reserves
under agreements, amounts paid to investors in respect of interest, principal
and other amounts owing to the investors and amounts paid in connection with the
purchase of newly generated receivables.
"purchase money obligations" of any person shall mean any obligations of
that person or any of its restricted subsidiaries to any seller or any other
person incurred or assumed in connection with the purchase of real or personal
property to be used in the business of that person or any of its restricted
subsidiaries within 180 days of the purchase.
"put/call agreement" means the Orius call agreements, Orius put agreements,
HIG call agreements and HIG put agreements, as each of these terms is defined in
the reorganization agreement and as each may be amended, restated, supplemented
or otherwise modified from time to time.
"qualified capital stock" means any capital stock that is not disqualified
capital stock or that is not indebtedness that is convertible or exchangeable
into capital stock.
"qualified IPO" means a bona fide underwritten sale to the public of
Parent's common stock registered on a registration statement, other than on Form
S-8 or any other form relating to securities
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issuable under any benefit plan of Parent or any of its restricted subsidiaries,
as the case may be, that is declared effective by the SEC and results in gross
cash proceeds, exclusive of underwriter's discounts and commissions and other
expenses, of at least $50.0 million.
"qualified receivables transaction" means any transaction or series of
transactions as a result of which NATG or any of its restricted subsidiaries may
sell, convey or otherwise transfer to (a) a receivables entity, in the case of a
transfer by NATG or any of its restricted subsidiaries, and (b) any other person
in case of a transfer by a receivables entity, or may grant a security interest
in:
- any accounts receivable, whether now existing or arising or acquired in
the future, of NATG or any of its restricted subsidiaries, and
- any assets related to the accounts receivable including, without
limitation, all collateral securing the accounts receivable, all
contracts and contract rights and all guarantees or other obligations in
respect to the accounts receivable and equipment, proceeds of the
accounts receivable and other assets, including contract rights, which
are customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable,
- all of the foregoing for the purpose of providing working capital
financing on terms that are more favorable to NATG and its restricted
subsidiary than would otherwise be available at that time.
"receivables entity" means a wholly owned subsidiary of NATG, or another
person in which NATG or any restricted subsidiary of NATG makes an investment
and to which NATG or any restricted subsidiary of NATG transfers accounts
receivable and related assets, that engages in no activities other than in
connection with the financing of accounts receivable and that is designated by
the board of directors of NATG, as provided below, as a receivables entity and
(1) no portion of the indebtedness or any other obligations, contingent or
otherwise, of which
(a) is guaranteed by NATG or any of its restricted subsidiaries, other
than the receivables entity, excluding guarantees of obligations, other
than the principal of, and interest on, indebtedness, under standard
securitization undertakings,
(b) is recourse to or obligates NATG or any of its restricted
subsidiaries, other than the receivables entity in any way other than under
standard securitization undertakings or
(c) subjects any property or asset of NATG or any of its restricted
subsidiaries, other than the receivables entity, directly or indirectly,
contingently or otherwise, to the satisfaction of the obligations, other
than under standard securitization undertakings,
(2) with which neither NATG nor any of its restricted subsidiaries, other
than the receivables entity, has any material contract, agreement, arrangement
or understanding other than on terms no less favorable to NATG or the restricted
subsidiary than those that might be obtained at the time from persons that are
not affiliates of Parent, other than fees payable in the ordinary course of
business in connection with servicing receivables of such entity, and
(3) to which neither NATG nor any restricted subsidiary of NATG, other than
such receivables entity, has any obligation to maintain or preserve the entity's
financial condition or cause the entity to achieve certain levels of operating
results.
Any designation by the board of directors shall be evidenced to the trustee by
filing with the trustee a certified copy of the resolution of the board of
directors giving effect to the designation and an officers' certificate
certifying that the designation complied with the foregoing conditions.
"record date" means the applicable record date specified in the notes. If
any specified date is not a business day, the record date shall be the first day
immediately preceding the specified day that is a business day.
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"redemption date," when used with respect to any note to be redeemed, means
the date fixed for the redemption under the indenture and the notes.
"redemption price," when used with respect to any note to be redeemed,
means the price fixed for the redemption, payable in immediately available
funds, under the indenture and the notes.
"refinance" means, in respect of any security or indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or indebtedness in exchange or replacement for, the security
or indebtedness in whole or in part. "Refinanced" and "refinancing" shall have
correlative meanings.
"registrar" means the person acting as registrar under the indenture.
"registration rights agreement" means the registration rights agreement
dated as of the original issue date of the outstanding notes among the issuers,
the guarantors and the initial purchasers.
"reorganization agreement" means the agreement and plan of reorganization,
dated November 8, 1999, by and among LISN Holdings, Parent and Orius Merger Sub,
Inc.
"representative" means the indenture trustee or other trustee, agent or
representative in respect of any designated senior debt. If, and for so long as,
any designated senior debt lacks a representative, then the representative for
the designated senior debt shall at all times be the holders of a majority in
outstanding principal amount of the designated senior debt in respect of any
designated senior debt.
"responsible officer" means, when used with respect to the trustee, any
officer in the corporate trust office of the trustee including any vice
president, assistant vice president, assistant secretary, treasurer, assistant
treasurer, or any other officer of the trustee who customarily performs
functions similar to those performed by the persons who at the time hold these
offices, respectively, or to whom any corporate trust matter is referred because
of the officer's knowledge of and familiarity with the particular subject.
"restricted investment" means any investment other than a permitted
investment.
"restricted subsidiary" of any person means any subsidiary of that person
which at the time of determination is not an unrestricted subsidiary. For the
avoidance of doubt, the issuers shall be deemed to be restricted subsidiaries of
Parent, and Orius Capital shall be deemed to be a restricted subsidiary of NATG.
"revolving loans" means all revolving loans under and as defined in the
senior secured credit agreement as in effect on the original issue date of the
notes.
"rollover letters of credit" means all rollover letters of credit under and
as defined in the senior secured credit agreement as in effect on the original
issue date of the outstanding notes.
"S&P" means Standard & Poor's Ratings Services.
"senior debt" means the principal of, premium, if any, interest, including
any interest accruing subsequent to the filing of a petition of bankruptcy
whether or not the interest is an allowed claim under applicable law, fees and
expenses on any indebtedness of an issuer, whether outstanding on the original
issue date of the outstanding notes or later created, incurred, assumed or
guaranteed. Any particular indebtedness shall not be senior debt if the
instrument creating or evidencing the same expressly provides that the
indebtedness shall not be senior in right of payment to the notes. "Senior debt"
shall also include the principal of, premium, if any, and interest on, including
any interest accruing subsequent to the filing of a petition of bankruptcy
whether or not the interest is an allowed claim under applicable law, and all
other amounts owing in connection with,
- all monetary obligations of every nature under the senior secured
credit agreement, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit,
fees, expenses and indemnities and
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- all IRA obligations, in each case whether outstanding on the
original issue date of the outstanding notes or later incurred.
Notwithstanding the above, "senior debt" shall not include
(1) any indebtedness of an issuer to a subsidiary of Parent,
(2) any indebtedness to, or guaranteed on behalf of, any director,
officer or employee of Parent or any of its subsidiaries, including,
without limitation, amounts owed for compensation,
(3) indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services,
(4) indebtedness represented by Disqualified Capital Stock,
(5) any liability for federal, state, local or other taxes owed or
owing by an issuer,
(6) indebtedness to the extent incurred in violation of the covenant
described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness,"
(7) indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to an issuer and
(8) any indebtedness which is, by its express terms, subordinated in
right of payment to any other indebtedness of an issuer.
"senior loans" means all loans under and as defined in the senior secured
credit agreement.
"senior secured credit agreement" means the credit agreement, dated as of
December 15, 1999, among NATG, LISN, LLC, the various lending institutions party
to the credit agreement and Bankers Trust Company, as agent, together with the
documents related to the credit agreement, including, without limitation, any
guaranty agreements and security documents, in each case as these agreements may
be amended.
"senior term loan" means all term loans under and as defined in the senior
secured credit agreement as in effect on the original issue date of the
outstanding notes and shall include any acquisition term loans, as defined in
the senior secured credit agreement as in effect on the original issue date of
the notes to the extent termed out and any subsequent term loans under the
senior secured credit agreement that refinance the term loans or acquisition
term loans, or any subsequent term loans.
"significant subsidiary," with respect to any person, means any restricted
subsidiary of that person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"standard securitization undertakings" means representations, warranties,
covenants and indemnities entered into by NATG or any subsidiary of NATG that
are reasonably customary in qualified receivables transactions intended to
create non-recourse debt.
"subordinated indebtedness" means indebtedness of any issuer or guarantor
which is expressly subordinated in right of payment to the obligations of the
issuer or guarantor in respect of the indenture, the notes and the guarantees,
as applicable.
"subsidiary" means, with respect to any person, any corporation,
partnership, association, joint venture or other business entity of which more
than 50% of the total voting power of shares of stock or other ownership
interests entitled, without regard to the occurrence of any contingency, to vote
in the election of the person or persons, whether directors, managers, trustees
or other persons performing similar functions, having the power to direct or
cause the direction of the management and policies of the entity is at the time
owned or controlled, directly or indirectly, by that person or one or more of
the other subsidiaries of that person or by a combination of that person and its
subsidiaries.
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"subsidiary guarantor" means any guarantor that is also a subsidiary of
NATG.
"synthetic arrangement" means any derivative product that provides for the
synthetic purchase or repurchase of any indebtedness or securities, including
equity and debt securities.
"TCI" shall mean TCI Atlantic, Inc., a Colorado corporation.
"unrestricted subsidiary" of any person means (1) any subsidiary of such
person that at the time of determination shall be or continue to be designated
an unrestricted subsidiary by the board of directors of that person in the
manner provided below and (2) any subsidiary of an unrestricted subsidiary.
The board of directors of a person may designate any subsidiary, including
any newly acquired or newly formed subsidiary, of that person to be an
unrestricted subsidiary unless the subsidiary owns any capital stock of, or owns
or holds any lien on any property of, Parent or any other restricted subsidiary
of Parent that is not a subsidiary of the subsidiary to be so designated. To
designate a subsidiary as an unrestricted subsidiary:
(a) Parent must deliver a copy of the relevant board resolution to the
trustee together with an officers' certificate from Parent certifying that
the designation complies with the terms of the indenture, including the
requirements set forth in this definition and in the covenant described
under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness," and
(b) each subsidiary to be so designated and each of its subsidiaries
must not have at the time of designation, and must not subsequently,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable for any indebtedness as to which the lender has recourse
to any of the assets of Parent or any of its restricted subsidiaries.
Under no circumstances may an issuer be designated as an unrestricted
subsidiary.
The board of directors may designate any unrestricted subsidiary to be a
restricted subsidiary only if
(1) immediately after giving effect to the designation, Parent would
be able to incur at least $1.00 of additional indebtedness, other than
permitted indebtedness, in compliance with the covenant described under
"-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness," and
(2) immediately before and immediately after giving effect to the
designation, no default or event of default shall have occurred and be
continuing.
Any designation shall be evidenced to the trustee by promptly filing with the
trustee a copy of the board resolution giving effect to the designation and an
officers' certificate from Parent certifying that the designation complied with
the foregoing provisions.
"U.S. government obligations" means direct obligations of, and obligations
guaranteed by, the United States of America for the payment of which the full
faith and credit of the United States of America is pledged and which are not
callable or redeemable at the issuer of the obligation's option.
"U.S. legal tender" means the coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
"voting securities" means any class of capital stock of a person pursuant
to which the holders of the capital stock have, at the time of determination,
the general voting power under ordinary circumstances to vote for the election
of directors, managers, trustees or general partners of the person, irrespective
of whether or not at the time any other class or classes will have or might have
voting power by reason of the happening of any contingency.
"weighted average life to maturity" means, when applied to any indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of the indebtedness
into
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(2) the sum of the total of the products obtained by multiplying (a) the
amount of each then remaining installment, sinking fund, serial maturity, or
other required payment of principal, including payment at final maturity, in
respect of the indebtedness by (b) the number of years, calculated to the
nearest one-twelfth, which will elapse between that date and the making of the
payment.
"wholly owned restricted subsidiary" of any person means any wholly owned
subsidiary of that person, which at the time of determination is a restricted
subsidiary of that person.
"wholly owned subsidiary" of any person means any subsidiary of that person
of which all the outstanding voting securities, are owned by that person or any
wholly owned subsidiary of that person other than in the case of a foreign
subsidiary, directors' qualifying shares or an immaterial amount of shares
required to be owned by other persons under applicable law.
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BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL NOTES
Rule 144A Global Note. Notes that were offered and sold to QIBs under Rule
144A were issued in the form of one or more registered notes in global form,
without interest coupons (collectively, the "Rule 144A Global Note"). The Rule
144A Global Note was deposited on the original issue date of the notes with DTC
and was registered in the name of Cede & Co., as nominee of DTC, or are in the
custody of the trustee under the FAST Balance Certificate Agreement between DTC
and the trustee. Interests in the Rule 144A Global Note were available for
purchase only by QIBs.
Regulation S Global Notes. Notes offered and sold in offshore transactions
to Non-U.S. Persons in reliance on Regulation S were issued in the form of one
or more registered notes in global form, without interest coupons (collectively,
the "Regulation Global Note"). The Regulation S Global Note is deposited with,
or on behalf of, a custodian for DTC in the manner described in the preceding
paragraph for credit to the respective accounts of the purchasers or to other
accounts as they may have directed at Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euroclear System "Euroclear", or Clearstream
Banking, societe anonyme.
Investors may hold their interests in the Regulation S Global Note directly
through Euroclear or Cedel, or through organizations other than Euroclear or
Cedel that are participants in the DTC system. Euroclear and Cedel will hold the
interests in the Regulation S Global Note on behalf of their participants
through customers' securities accounts in their respective names on the books of
their respective depositaries. These depositaries, in turn, will hold the
interests in the Regulation S Global Note in customers' securities accounts in
the depositaries' names on the books of DTC.
Institutional Accredited Investor Global Note. In connection with the sale
of notes to an institutional accredited investor, beneficial interests in any of
the global notes may be exchanged for interests in a separate note in registered
form, without interest coupons (the "Institutional Accredited Investor Global
Note"), which was deposited on the original issue date of the outstanding notes
with, or on behalf of, a custodian for DTC in the manner described in the
preceding paragraphs.
Except as set forth below, the rule 144A Global Note, the Regulation S
Global Note and the Institutional Accredited Investor Global Note (collectively,
the "global notes") may be transferred, in whole and not in part, solely to
another nominee of DTC or to a successor of DTC or its nominee. Beneficial
interests in the global notes may not be exchanged for notes in physical,
certificated form except in the limited circumstances described below.
All interests in the global notes, including those held through Euroclear
or Clearstream, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Clearstream may also be subject to the
procedures and requirements of those systems.
EXCHANGES AMONG THE GLOBAL NOTES
Exchanges of beneficial interests in one global note for interests in
another global note will be subject to the applicable rules and procedures of
DTC and its direct and indirect participants, including Clearstream and
Euroclear. Any beneficial interest in one of the global notes that is
transferred to a person who takes delivery in the form of an interest in another
global note will, upon transfer, cease to be an interest in that global note and
become an interest in the global note to which the beneficial interest is
transferred and, accordingly, will then be subject to all transfer restrictions,
if any, and other procedures applicable to beneficial interests in the global
note to which the beneficial interest is transferred for as long as it remains
an interest in that global note.
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CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Clearstream set forth below are provided solely as a matter of convenience.
These operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. Neither
we nor the initial purchasers takes any responsibility for these operations or
procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised us that it is (1) a limited purpose trust company organized
under the laws of the State of New York, (2) a "banking organization" within the
meaning of the New York Banking Law, (3) a member of the Federal Reserve System,
(4) a "clearing corporation" within the meaning of the Uniform Commercial Code,
as amended and (5) a "clearing agency" registered under Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and
facilitates the clearance and settlement of securities transactions between
participants through electronic book-entry changes to the accounts of its
participants, which eliminates the need for physical transfer and delivery of
certificates. DTC's participants include securities brokers and dealers,
including the initial purchasers, banks and trust companies, clearing
corporations and certain other organizations. Indirect access to DTC's system is
also available to other entities such as banks, brokers, dealers and trust
companies, referred to as "indirect participants", that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly. Investors who are not participants may beneficially own securities
held by or on behalf of DTC only through participants or indirect participants.
Under procedures established by DTC (1) upon deposit of each global note,
DTC credited the accounts of participants designated by the initial purchasers
with an interest in the global note and (2) ownership of the notes is shown on,
and the transfer of ownership of the notes will be effected only through,
records maintained by DTC, with respect to the interests of participants, and
the records of participants and the indirect participants, with respect to the
interests of persons other than participants.
The laws of some jurisdictions may require that some types purchasers of
securities take physical delivery of the securities in definitive form.
Accordingly, the ability to transfer interests in the notes represented by a
global note to these persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest
in notes represented by a global note to pledge or transfer the interest to
persons or entities that do not participate in DTC's system, or to otherwise
take actions in respect of the interest, may be affected by the lack of a
physical definitive security in respect of the interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or its nominee, as the case may be, will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a global
note will not be entitled to have notes represented by the global note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated notes, and will not be considered the owners or holders
of notes under the indenture for any purpose, including with respect to the
giving of any direction, instruction or approval to the trustee under the
indenture. Accordingly, each holder owning a beneficial interest in a global
note must rely on the procedures of DTC and, if the holder is not a participant
or an indirect participant, on the procedures of the participant through which
the holder owns its interest, to exercise any rights of a holder of notes under
the indenture or a global note. We understand that under existing industry
practice, in the event that we request any action of holders of notes, or a
holder that is an owner of a beneficial interest in a global note desires to
take any action that DTC, as the holder of the global note, is entitled to take,
DTC would authorize the participants to take the action and the participants
would authorize holders owning through the participants to take the action or
would otherwise act upon the instruction of the holders. Neither we nor the
trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of notes by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to the notes.
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Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any notes represented by a global note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the global note representing the notes
under the indenture. Under the terms of the indenture, the issuers and the
trustee may treat the persons in whose names the notes, including the global
notes, are registered as the owners of the notes for the purpose of receiving
payment on the notes and for any and all other purposes whatsoever. Accordingly,
neither we nor the trustee has or will have any responsibility or liability for
the payment of these amounts to owners of beneficial interests in a global note,
including principal, premium, if any, liquidated damages, if any, and interest.
Payments by the participants and the indirect participants to the owners of
beneficial interests in a global note will be governed by standing instructions
and customary industry practice and will be the responsibility of the
participants or the indirect participants and DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, these
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in the system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of the system. Euroclear or Clearstream, 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 relevant global notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a global note from a
participant in DTC will be credited, and any crediting will be reported to the
relevant Euroclear or Clearstream participant, during the securities settlement
processing day, which must be a business day for Euroclear and Clearstream,
immediately following the settlement date of DTC. Cash received in Euroclear or
Clearstream as a result of sales of interest in a global note by or through a
Euroclear or Clearstream participant to a participant in DTC will be received
with value on the settlement date of DTC but will be available in the relevant
Euroclear or Clearstream cash account only as of the business day for Euroclear
or Clearstream following DTC's settlement date.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the global notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform these procedures, and these procedures may be
discontinued at any time. Neither we nor the trustee will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
CERTIFICATED NOTES
If (1) we notify the trustee in writing that DTC is no longer willing or
able to act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within 90
days of this notice or cessation, (2) we, at our option, notify the trustee in
writing that they elect to cause the issuance of notes in definitive form under
the indenture or (3) upon the occurrence and continuation of an event of default
under the indenture if DTC so requests, then, upon surrender by DTC of the
global notes, certificated notes will be issued to each person that DTC
identifies as the beneficial owner of the notes represented by the global notes.
Upon any issuance, the trustee is
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required to register the certificated notes in the name of the person or persons
or the nominee of any of these persons and cause the same to be delivered to
these persons.
Neither we nor the trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each of these persons may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes, including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of ownership of the notes. This discussion is a general summary only and does
not address all tax aspects of ownership of the notes that may be relevant to a
prospective investor's particular circumstances. This discussion deals only with
notes held as capital assets and does not deal with the consequences to special
classes of holders of the notes, such as dealers in securities or currencies,
life insurance companies, tax exempt entities, financial institutions, persons
with a functional currency other than the U.S. dollar, U.S. expatriates or
investors in pass-through entities such as partnerships. It does not deal with
the effects of any arrangement entered into by a holder of the notes that
partially or completely hedges the notes, or otherwise holds the notes as part
of a synthetic security or other integrated investment. In general, this
discussion assumes that a holder acquires notes at original issue. The
discussion is based upon the Internal Revenue Code of 1986, as amended, and the
related regulations, rulings, and judicial decisions as of the date of this
prospectus, any of which may be repealed or modified in a manner resulting in
federal income tax consequences that differ from those described below. This
discussion does not address the tax considerations arising under the laws of any
foreign, state or local jurisdiction. In addition, the discussion relies upon
the description provided to us by the DTC, Euroclear, and Clearstream of their
depository procedures and the procedures of their participants and indirect
participants in maintaining a book-entry system reflecting beneficial ownership
of the notes.
PURCHASERS OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
U.S. FEDERAL INCOME TAX CONSEQUENCES RESULTING FROM THEIR PARTICULAR SITUATIONS,
AND STATE, LOCAL, FRANCHISE, GIFT AND ESTATE TAX CONSEQUENCES, OR OTHER
CONSEQUENCES UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
U.S. HOLDERS
The following discussion addresses the U.S. federal income tax consequences
to a U.S. holder of a note. For purposes of this discussion, a "U.S. holder" is
a noteholder that is (1) a citizen or resident of the United States for United
States federal income tax purposes, including an alien individual who is a
lawful permanent resident of the United States or meets the "substantial
presence" test prescribed under the Code, (2) a corporation, partnership, or
other entity organized under the laws of the United States or any political
subdivision of the United States, (3) an estate taxed by the United States
without regard to its source of income or (4) a trust if the trust has validly
elected to be treated as a United States person for U.S. federal income tax
purposes or if (a) a court within the United States can exercise primary
supervision over its administration and (b) one or more United States persons
have authority to control all of its substantial decisions.
Exchange Offer in Connection with Registration of the Notes
We have obtained an opinion from Kirkland & Ellis that the exchange of the
outstanding notes for the exchange notes, which have substantially identical
terms, in connection with the registration of the exchange notes will not be a
taxable event for federal income tax purposes. Consequently, no gain or loss
will be recognized by U.S. holders and non-U.S. holders of the outstanding notes
upon receipt of the exchange notes and ownership of the exchange notes will be
considered a continuation of ownership of the outstanding notes. For purposes of
determining gain or loss upon the subsequent sale or exchange of the exchange
notes, a holder will have the same tax basis and holding period in the exchange
notes that the holder had in the outstanding notes. The U.S. federal income tax
consequences of holding and disposing of the exchange notes will be the same as
those of holding and disposing of the outstanding notes.
Payments of Interest
Payments of stated interest on a note will be taxable as ordinary interest
income at the time it is received or accrued, depending upon the method of
accounting applicable to the holder of the note.
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Additional Interest
The interest rate on the notes may be increased if the notes are not
registered with the SEC within prescribed time periods. We believe that the
possibility that any additional interest will be paid is "remote and incidental"
under applicable Treasury Regulations and, therefore, that any additional
interest will be taxable to U.S. holders at the time that it accrues or is
received in accordance with each U.S. holder's method of accounting. The
Internal Revenue Service may take a different position, which could affect the
time when the additional interest, if any, would be taxable to a U.S. holder.
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of the notes, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange or retirement, less a portion allocable to any accrued and
unpaid interest, which will be taxable as ordinary income, and the U.S. holder's
adjusted tax basis in the notes. A U.S. holder's adjusted tax basis in the notes
generally will be the U.S. holder's cost of the notes, less any principal
payments received by the holder.
Gain or loss recognized by a U.S. holder on the sale, exchange or
retirement of the notes will be capital gain or loss. The gain or loss will be
long-term capital gain or loss if the notes have been held by the U.S. holder
for more than twelve months. In the case of a noncorporate U.S. holder,
long-term capital gain is subject to a maximum U.S. Federal tax rate of 20%. The
deductibility of capital losses by U.S. holders is subject to certain
limitations.
Market Discount
Any gain or loss on a disposition of a note would generally be a capital
gain or loss. However, a subsequent purchaser of a note who did not acquire the
note at its original issue, and who acquires the note at a price that is less
than the stated redemption price of the note at its maturity (i.e., the face
amount of the note if it is issued at par), may be required to treat the note as
a "market discount bond." Any recognized gain on a disposition of the note would
then be treated as ordinary income to the extent that it does not exceed the
"accrued market discount" on the note. In general, accrued market discount is
that amount that bears the same ratio to the excess of the stated redemption
price of the note over the purchaser's basis in the note immediately after its
acquisition, as the number of days the purchaser holds the note bears to the
number of days after the date the purchaser acquired the note up to and
including the date of its maturity. In addition, there are rules deferring the
deduction of all or part of the interest expense on indebtedness incurred or
continued to purchase or carry the bond and permitting a purchaser to elect to
include accrued market discount in income on a current basis.
Backup Withholding and Information Reporting
In general, a U.S. holder of a note will be subject to backup withholding
at the rate of 31% with respect to interest, principal and premium, if any, paid
on a note unless the holder (1) is an entity, including corporations, tax-exempt
organizations and certain qualified nominees, that is exempt from withholding
and, when required, demonstrates this fact or (2) provides us with its Taxpayer
Identification Number ("TIN"), which, for an individual, would be the holder's
Social Security Number, certifies that the TIN provided is correct and that the
holder has not been notified by the Internal Revenue Service that it is subject
to backup withholding due to underreporting of interest or dividends and
otherwise complies with applicable requirements of the backup withholding rules.
In addition, payments of interest, principal and premium to U.S. holders that
are not corporations, tax-exempt organizations or qualified nominees will
generally be subject to information reporting requirements.
The amount of any backup withholding from a payment to a U.S. holder will
be allowed as a credit against the holder's federal income tax liability and may
entitle the holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
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NON-U.S. HOLDERS
The following discussion addresses the principal U.S. federal income tax
consequences to a noteholder that is not a U.S. holder. We refer to these
holders in this discussion as non-U.S. holders. As discussed above, this
discussion does not address all tax aspects of ownership of the notes that may
be relevant to a prospective investor's particular circumstances, including
holding the notes through a partnership or holding the notes through a hybrid
entity, i.e. an entity that is a pass-through entity for U.S. tax purposes but
not for foreign tax purposes.
Payments of Interest
Generally, payments of stated interest on a note will not be subject to
U.S. federal income tax if the interest qualifies as portfolio interest.
Interest on the notes will qualify as portfolio interest if the non-U.S. holder
(1) does not actually or constructively own 10% or more of the total combined
voting power of our voting stock, (2) is not a "controlled foreign corporation"
with respect to which we are a "related person," as those terms are defined in
the Internal Revenue Code and (3) provides the required certifications that the
beneficial owner of the notes is not a U.S. person. However, the interest on the
notes will be taxed at regular U.S. federal income tax rates if the interest
constitutes income that is effectively connected with the conduct of a U.S.
trade or business and, if the non-U.S. holder can claim the benefit of an income
tax treaty, the interest is attributable to a U.S. permanent establishment or
fixed base. This income is referred to in this discussion as U.S. trade or
business income. If the non-U.S. holder is a corporation, interest that
constitutes U.S. trade or business income may also be subject to the "branch
profits tax" at 30% or, if applicable, a lower rate determined by an income tax
treaty.
Interest that neither qualifies as portfolio interest nor constitutes U.S.
trade or business income will be subject to U.S. withholding tax at the rate of
30%, unless the withholding tax is reduced or eliminated by an applicable income
tax treaty. To claim the protection of an income tax treaty, a non-U.S. holder
must provide a properly executed Form 1001 prior to the payment of interest, and
must periodically update Form 1001 or, if necessary, provide us with the
applicable successor form. New regulations scheduled to take effect on January
1, 2001, will replace these forms with new forms and procedures, and may require
a non-U.S. holder to obtain a TIN and provide documentary evidence of residence
in order to claim a treaty benefit.
Sale, Exchange or Redemption of Notes
Gain realized by a non-U.S. holder on the sale, exchange, redemption or
other disposition of a note generally will not be subject to U.S. federal income
tax unless (1) the gain constitutes U.S. trade or business income, (2) the
non-U.S. holder is an individual who holds the note as a capital asset and is
present in the United States for 183 days or more in the taxable year of the
disposition or (3) the non-U.S. holder is a former citizen or resident of the
United States subject to certain rules related to that status.
Federal Estate Tax
Notes held by an individual who is not a citizen or resident of the United
States for U.S. federal estate tax purposes at the time of his or her death will
not be subject to U.S. federal estate tax if the interest on the notes qualifies
for the portfolio interest exemption from U.S. federal income tax under the
rules described above.
Information Reporting and Backup Withholding
We must report to the Internal Revenue Service and to each non-U.S. holder
any interest that is subject to U.S. withholding tax or that is exempt from
withholding tax under either a tax treaty or the portfolio interest exemption.
Copies of these information returns may also be available to the tax
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authorities of the country in which the non-U.S. holder resides under the
provisions of various treaties or agreements for the exchange of information.
Non-U.S. holders other than corporations may be subject to backup
withholding and additional information reporting. Neither backup withholding nor
information reporting will apply to payments of portfolio interest by us to a
non-U.S. holder if the non-U.S. holder properly certifies that it is not a U.S.
holder or otherwise establishes an exemption. However, the certification or
exemption is not effective if we or our paying agent has actual knowledge that
the holder is a U.S. holder or that the conditions of another exemption relied
upon by the non-U.S. holder are not satisfied.
Payments of principal on the notes by us to a non-U.S. holder may be
subject to backup withholding and information reporting unless the non-U.S.
holder properly certifies as to those items described below in connection with
payments made by brokers or otherwise establishes an exemption, provided that
neither we nor our paying agent has actual knowledge that the holder is a U.S.
holder or that the conditions of another exemption relied upon by the non-U.S.
holder are not satisfied.
Neither backup withholding nor information reporting will apply to the
payment of proceeds from the disposition of the notes to or through the U.S.
office of any broker if the non-U.S. holder (1) properly certifies (A) that he
is not a U.S. holder, (B) that he does not expect to be present within the
United States for 183 days or more during the calendar year and (C) none of his
gains from transactions effected with the payor during the calendar year are
expected to be effectively connected with a U.S. trade or business; or (2)
otherwise establishes an exemption, and neither we nor our paying agent has
actual knowledge that the conditions of any claimed exemption are not satisfied.
If proceeds from the disposition of the notes are paid to or though the foreign
office of a U.S. broker, information reporting, but not backup withholding, is
required unless the broker has documentary evidence that the owner is a foreign
person and the broker has no actual knowledge to the contrary. Similar rules
apply to the foreign office of a foreign broker if either (1) the foreign broker
is a controlled foreign corporation with the meaning of the Internal Revenue
Code or (2) 50% or more of the gross income of the foreign broker during a
specified testing period was effectively connected with the conduct of a trade
or business within the United States. If proceeds from the disposition of the
notes are paid to or through the foreign office of a foreign broker that does
not have these characteristics, neither information reporting nor backup
withholding is required.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. holder will be allowed as
a refund or credit against the non-U.S. holder's federal income tax liability.
New regulations revising the information and reporting rules will become
effective on January 1, 2001. In general, these new regulations will not
materially change the withholding and information reporting requirements, but
will change various forms and certification procedures. Non-U.S. holders should
consult their own tax advisors concerning the applicability and effect, if any,
of the new regulations on an investment in the exchange notes.
PLAN OF DISTRIBUTION
Each participating broker-dealer that receives exchange notes for its own
account as a result of the exchange offer must acknowledge that it will deliver
a prospectus in connection with any resale of the exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a participating broker-dealer in connection with resales of exchange notes
received in exchange for outstanding notes if the outstanding notes were
acquired as a result of market-making activities or other trading activities. We
have agreed that we will make this prospectus, as amended or supplemented,
available to any participating broker-dealer for use in connection with these
resales for a period of time as is necessary to comply with applicable law;
provided that this period shall not be required to exceed 270 days.
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We will not receive any proceeds from any sales of the exchange notes by
participating broker dealers. Exchange notes received by participating
broker-dealers for their own account as a result of the exchange offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
exchange notes or a combination of these methods of resale, at market prices
prevailing at the time of resale, at prices related to prevailing market prices
or negotiated prices. Any 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 a participating broker-dealer and/or the
purchasers of any exchange notes. Any participating broker-dealer that resells
the exchange notes that were received by it for its own account as a result of
the exchange offer and any broker or dealer that participates in a distribution
of the exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on the resale of the exchange notes and any
commissions or concessions received by these 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 participating broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of one year after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any participating broker-dealer that requests these documents in
the letter of transmittal.
Prior to the exchange offer, there has not been any public market for the
outstanding notes. The outstanding notes have not been registered under the
Securities Act and will be subject to restrictions on transferability to the
extent that they are not exchanged for exchange notes by holders who are
entitled to participate in this exchange offer. The holders of outstanding
notes, other than any holder that is our affiliate within the meaning of Rule
405 under the Securities Act, who are not eligible to participate in the
exchange offer are entitled to certain registration rights, and we are required
to file a shelf registration statement with respect to their outstanding notes.
The exchange notes will constitute a new issue of securities with no established
trading market. We do not intend to list the exchange notes on any national
securities exchange or to seek the admission of the notes to trading in the
National Association of Securities Dealers Automated Quotation System. In
addition, any market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the exchange
offer and the pendency of the shelf registration statements. Accordingly, no
assurance can be given that an active public or other market will develop for
the exchange notes or as to the liquidity of the trading market for the exchange
notes. If a trading market does not develop or is not maintained, holders of the
exchange notes may experience difficulty in reselling the exchange notes or may
be unable to sell them at all. If a market for the exchange notes develops, it
may be discontinued at any time.
LEGAL MATTERS
The validity of the exchange notes and the guarantees and other legal
matters, including the tax-free nature of the exchange, will be passed upon on
our behalf by Kirkland & Ellis, a partnership that includes professional
corporations, Chicago, Illinois.
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INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Orius Corp. and subsidiaries
(formerly LISN Holdings, Inc.) as of December 31, 1999 and 1998 and for each of
the three years ended December 31, 1999 included in this prospectus have been
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Orius Corp. and subsidiaries
(formerly NATG Holdings Inc.) as of December 14, 1999 and December 31, 1998 and
for the period ended December 14, 1999 and the year ended December 31, 1998
included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Channel Communications, Inc.,
f/k/a Kenya Corp., as of December 31, 1997 and for the year then ended included
in this prospectus have been included in reliance on the report of Williams
Young, LLC, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of U.S. Cable, Inc. as of September 30, 1997 and
June 30, 1998 and for the year ended September 30, 1997 and the nine months
ended June 30, 1998 included in this prospectus have been included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of CATV Subscriber Services, Inc. and its
subsidiary as of December 31, 1997 and August 31, 1998 and for the year ended
December 31, 1997 and the eight months ended August 31, 1998 included in this
prospectus have been included in reliance of the report of
PricewaterhouseCoopers LLP, independent accountants, given the authority of said
firm as experts in auditing and accounting.
The financial statements of DAS-CO of Idaho, Inc. as of February 26, 1999
and for the period ended February 26, 1999 included in this prospectus have been
included in reliance of the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of DAS-CO of Idaho, Inc. as of December 31, 1998
and for each of two years in the period ended December 31, 1998 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Schatz Underground Cable, Inc. as of December
31, 1998 and for each of the two years in the period ended December 31, 1998
included in this prospectus have been included in reliance on the report of
Milhouse, Martz & Neal, L.L.P., independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Texel Corporation as of May 24, 1999 and for
the period ended May 24, 1999 included in this prospectus have been included in
reliance of the report of PricewaterhouseCoopers LLP, independent accountants,
given the authority of said firm as experts in auditing and accounting.
The financial statements of Texel Corporation as of December 31, 1997 and
1998 and for each of two years in the period ended December 31, 1998 included in
this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Hattech, Inc. as of December 31, 1999, December
31, 1998 and for each of the three years ended December 31, 1999 included in
this prospectus have been included in reliance on the report of Offutt Childers
& Putman, P.C., independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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The financial statements of Copenhagen Utilities & Construction Inc. as of
December 31, 1997 and 1998 and February 26, 1999 and for the period January 1,
1999 through February 26, 1999, and for each of two years in the period ended
December 31, 1998, included in this prospectus have been included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We are not currently subject to the periodic reporting and other
informational requirements of the Exchange Act. We have agreed that, whether or
not it is required to do so by the rules and regulations of the SEC, for so long
as any of the notes remain outstanding, we will furnish to the holders of the
notes and file with the SEC, unless the SEC will not accept the filing,
following the consummation of the exchange offer: (1) all quarterly and annual
financial information that would be required to be contained in a filing with
the SEC on Forms 10-Q and 10-K if we or Parent were required to file those
forms, including a Management's Discussion and Analysis of Financial Condition
and Results of Operations and, with respect to the annual information only, a
report by our certified independent accountants and (2) all reports that would
be required to be filed with the SEC on Form 8-K if we were required to file
those reports. You may read and copy any reports we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. All reports filed with the SEC will be
available on the SEC's web site at http://www.sec.gov. In addition, for so long
as any of the notes remain outstanding, we have agreed to make available to any
prospective purchaser of the notes or beneficial owner of the notes in
connection with any sale of the notes, the information required by Rule
144A(d)(4) under the Securities Act.
135
138
INDEX TO FINANCIAL STATEMENTS
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
Interim Financial Statements -- June 30, 2000 and 1999
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Income......................... F-4
Consolidated Statements of Cash Flow...................... F-5
Notes to Consolidated Financial Statements................ F-6
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
Financial Statements -- December 31, 1999, 1998 and 1997
Report of Independent Accountants......................... F-11
Consolidated Balance Sheets............................... F-12
Consolidated Statements of Income......................... F-13
Consolidated Statements of Cash Flows..................... F-14
Consolidated Statements of Changes in Stockholders'
Equity................................................. F-16
Notes to Consolidated Financial Statements................ F-17
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
Financial Statements -- December 14, 1999, December 31,
1998 and December 31, 1997
Report of Independent Accountants......................... F-31
Consolidated Balance Sheets............................... F-33
Consolidated Statements of Income......................... F-34
Consolidated Statements of Cash Flows..................... F-35
Consolidated Statements of Changes in Stockholders'
Equity................................................. F-36
Notes to Consolidated Financial Statements................ F-37
U.S. CABLE, INC.
Financial Statements -- September 30, 1997 and June 30,
1998
Report of Independent Accountants......................... F-50
Balance Sheets............................................ F-51
Statements of Operations.................................. F-52
Statements of Cash Flows.................................. F-53
Statements of Changes in Shareholders' Equity............. F-54
Notes to Financial Statements............................. F-55
DAS-CO OF IDAHO, INC.
Financial Statements -- December 31, 1997 and 1998 and
February 26, 1999
Report of Independent Accountants......................... F-60
Balance Sheet............................................. F-62
Statements of Income...................................... F-63
Statements of Changes in Stockholders' Equity............. F-64
Statements of Cash Flows.................................. F-65
Notes to Financial Statements............................. F-66
SCHATZ UNDERGROUND CABLE, INC.
Financial Statements -- December 31, 1998 and 1997
Independent Auditor's Report.............................. F-69
Balance Sheet............................................. F-70
Statement of Income and Retained Earnings................. F-71
Statement of Cash Flows................................... F-72
Notes to Financial Statements............................. F-73
F-1
139
CATV SUBSCRIBER SERVICES, INC. AND ITS SUBSIDIARY
Financial Statements -- December 31, 1997 and August 31,
1998
Report of Independent Accountants......................... F-77
Balance Sheets............................................ F-78
Statements of Operations.................................. F-79
Statements of Cash Flows.................................. F-80
Statements of Changes in Shareholders' Equity............. F-81
Notes to Financial Statements............................. F-82
TEXEL CORPORATION
Financial Statements -- December 31, 1997 and 1998 and May
24, 1999 and March 31, 1998 and 1999 unaudited
Report of Independent Accountants......................... F-87
Balance Sheets............................................ F-89
Statements of Operations.................................. F-90
Statements of Cash Flows.................................. F-91
Statements of Changes in Shareholders' Equity............. F-92
Notes to Financial Statements............................. F-93
HATTECH, INC.
Financial Statements -- December 31, 1999, 1998 and 1997
Report of Independent Accountants......................... F-97
Balance Sheets............................................ F-98
Statements of Income and Retained Earnings................ F-99
Statements of Cash Flows.................................. F-100
Notes to Financial Statements............................. F-101
COPENHAGEN UTILITIES & CONSTRUCTION INC.
Financial Statements -- December 31, 1997 and 1998 and
February 26, 1999
Report of Independent Accountants......................... F-110
Balance Sheets............................................ F-113
Consolidated Statements of Operations..................... F-114
Statements of Cash Flows.................................. F-115
Notes to Financial Statements............................. F-116
F-2
140
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
2000 1999
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 28,664,199
Accounts receivable....................................... 158,427,789 128,780,860
Costs and estimated earnings in excess of billings........ 29,907,675 24,675,434
Inventories............................................... 26,353,743 16,453,878
Other current assets...................................... 881,957 4,728,028
------------- -------------
Total current assets.............................. 215,571,164 203,302,399
------------- -------------
Property and equipment, net................................. 58,220,756 44,399,631
Goodwill, net............................................... 418,713,182 359,881,615
Other assets................................................ 18,194,921 14,394,187
------------- -------------
Total assets...................................... $ 710,700,023 $ 621,977,832
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowing under credit facility........................... $ 57,000,000 $ --
Current portion of debt and leases........................ 12,031,243 8,796,941
Accounts payable -- trade................................. 34,808,300 29,640,803
Accrued liabilities....................................... 40,775,106 34,050,765
Payable to shareholder.................................... -- 11,454,413
Other current liabilities................................. 12,867,692 7,240,943
------------- -------------
Total current liabilities......................... 157,482,341 91,183,865
------------- -------------
Long-term debt and leases................................... 521,934,804 458,069,425
Deferred tax liability...................................... 5,643,962 5,609,352
------------- -------------
685,061,107 554,862,642
------------- -------------
Commitments and contingencies
Securities subject to put and call arrangements............. -- 54,946,000
Series C participating, redeemable preferred stock,
200,000,000 authorized, 205,317 and 194,371 issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively.............................................. 241,246,473 199,019,074
Stockholders' equity (net capital deficiency):
Common stock $.01 par value, 200,000,000 shares
authorized............................................. 258,250 250,254
Paid in capital........................................... 34,388,640 33,365,746
Note due from stockholder................................. (252,633) --
Retained deficit.......................................... (250,001,814) (220,465,884)
------------- -------------
Total stockholders' equity (net capital
deficiency)..................................... (215,607,557) (186,849,884)
------------- -------------
Total liabilities and stockholders' equity (net
capital deficiency)............................. $ 710,700,023 $ 621,977,832
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
141
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
2000 1999
------------ -----------
Revenues.................................................... $349,868,233 $60,197,910
Expenses:
Direct costs.............................................. 250,681,695 40,202,186
General and administrative................................ 37,028,933 11,717,592
Depreciation and amortization............................. 13,760,478 174,374
------------ -----------
Total operating expenses.......................... 301,471,106 52,094,152
------------ -----------
Income from operations...................................... 48,397,127 8,103,758
------------ -----------
Other expense (income):
Interest expense, net..................................... 30,903,961 1,372,246
Other expense (income).................................... (95,783) (95,751)
------------ -----------
Total other expenses.............................. 30,808,178 1,276,495
------------ -----------
Income before provision for income taxes.................... 17,588,949 6,827,263
------------ -----------
Provision for income taxes................................ 10,297,878 651,268
------------ -----------
Net income.................................................. $ 7,291,071 $ 6,175,995
============ ===========
Net income applicable to common shareholders:
Net income as reported.................................... $ 7,291,071 $ 6,175,995
Accretion and dividends on Series C participating
redeemable preferred stock............................. (31,479,452) --
------------ -----------
Net (loss) income applicable to common shareholders......... $(24,188,381) $ 6,175,995
============ ===========
Pro forma net income data:
Net income as reported.................................... $ 7,291,071 $ 6,175,995
Pro forma adjustment to provision for income taxes........ -- --
------------ -----------
Pro forma net income...................................... $ 7,291,071 $ 6,175,995
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
142
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
2000 1999
------------- -------------
Operating activities:
Net income.................................................. $ 7,291,071 $ 6,175,995
Adjustments to reconcile net cash provided by (used in)
operating activities:
Depreciation and amortization............................. 13,760,478 174,374
Changes in assets and liabilities
Accounts receivable.................................... (25,315,688) (11,897,049)
Inventories............................................ (7,260,264) (1,351,780)
Other assets........................................... 417,416 (93,564)
Accounts payable and accrued liabilities............... 8,846,591 (1,276,016)
Other liabilities...................................... 4,053,623 --
------------- -------------
Net cash provided by (used in) operating
activities...................................... 1,793,227 (5,716,008)
------------- -------------
Investing activities:
Capital expenditures...................................... (13,165,801) (1,325,874)
Acquisitions.............................................. (59,522,642) --
------------- -------------
Net cash used in investing activities............. (72,688,443) (1,325,874)
------------- -------------
Financing activities:
Borrowings on debt facilities............................. 108,533,287 --
Proceeds from issuance of long-term debt.................. 150,000,000 75,000,000
Distributions paid to stockholders........................ (11,454,413) (6,141,864)
Repayment of long-term debt............................... (151,639,902) (1,182,200)
Amounts paid for deferred financing costs................. (4,626,719) (2,269,238)
Retirement of Common Stock................................ -- (125,718,555)
Issuance of Common Stock.................................. (48,581,236) 67,731,151
Redemption of securities subject to put and call
arrangements........................................... --
------------- -------------
Net cash provided by financing activities......... 42,231,017 7,419,294
------------- -------------
Net decrease in cash and cash equivalents................... (28,664,199) 377,412
Cash and cash equivalents at beginning of period............ 28,664,199 2,788,838
------------- -------------
Cash and cash equivalents at end of period.................. $ -- $ 3,166,250
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
143
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
OVERVIEW
The interim consolidated financial statements of Orius Corp. ("Orius"), the
successor to LISN Holdings, Inc. ("LISN"), and its subsidiaries (the "Company")
as of June 30, 2000 and December 31, 1999 and for the period ended June 30, 2000
and 1999 include the accounts of Orius and its subsidiaries and in the opinion
of management, includes all necessary adjustments, consisting of only normal
recurring adjustments, to present fairly the consolidated financial position and
results of operations of the Company for the periods presented. The accompanying
unaudited consolidated financial statements have been prepared by the Company,
without audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures made are adequate to make the information presented not
misleading. Accordingly, these unaudited consolidated financial statements and
related notes should be read in conjunction with the consolidated financial
statements and notes thereto included in this prospectus. Reported interim
results of operations are based in part on estimates, and are not necessarily
indicative of those expected for the year.
The financial information as of and for the period ended June 30, 1999
represents the information of LISN, which was deemed the accounting acquirer in
the December 15, 1999 business combination.
ORIUS/LISN TRANSACTION
On December 15, 1999, Orius and LISN entered into a business combination in
which the former stockholders of LISN acquired control of Orius and its
subsidiaries. Accordingly, LISN is considered the acquiring corporation and
corporate predecessor for accounting purposes. Also in connection with the
transaction, the Company entered into a $275.0 loan and credit facility and a
$100.0 million bridge loan that were utilized to pay off all the outstanding
debt of the Company and LISN as of December 14, 1999 (the valuation date). The
bridge loan and a portion of the loan and credit facility have been retired with
the proceeds of a private placement of Senior Subordinated Debt in February
2000.
2. STOCK SPLIT
On March 9, 2000, the Orius Board of Directors authorized a 10 for 1 stock
split. All share amounts presented in these financial statements have been
restated to reflect the split.
3. ORIUS/LISN TRANSACTION
On December 15, 1999, LISN's former shareholders acquired control of Orius
and its wholly-owned subsidiary, NATG, through the following steps:
- Former LISN shareholders, members of management and certain co-investors
invested an aggregate cash amount of $112.2 million in LISN immediately
prior to the transaction. In exchange for this investment, a "strip" of
Orius securities were issued comprised of $41.3 million of junior
subordinated notes, $60.8 million of Series C redeemable preferred stock
and $10.1 million of common stock.
- Former LISN shareholders exchanged LISN common stock, preferred stock and
junior subordinated notes for a similar strip of securities issued by
Orius.
- NATG borrowed $328.5 million under the new multi-tranche senior credit
facilities and the senior subordinated term loan, and repaid
approximately $256.1 million of LISN and Orius indebtedness.
F-6
144
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- Convertible preferred stock, junior subordinated notes, warrants and a
portion of the common stock of Orius were redeemed. This redemption
included put and call arrangements with certain Orius security holders
which will require payment of approximately $54.9 million and the
issuance of additional strips of Orius securities in the first half of
2000.
- Orius management rolled over approximately one-half of the value of their
equity interests in Orius for a strip of securities comprised of $30.4
million in aggregate principal amount of Orius junior subordinated notes,
$44.7 in preferred stock and $8.3 million in common stock. Although LISN
is the acquiring corporation for accounting purposes, the transaction
resulted in LISN becoming a wholly-owned subsidiary of NATG which is a
wholly-owned subsidiary of Orius.
As the accounting predecessor, LISN's historical financial statements are
the historical financial statements of Orius.
The total purchase consideration of $165.5 million in cash and $83.5
million in Orius rollover value (excluding amounts payable under put/call
arrangements) plus transaction related expenses of $6.3 million exceeded the
fair value of the tangible net assets acquired by $360.5 million, which is being
amortized on a straight-line basis over 25 years.
4. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $974,581 and $916,601 at June 30,
2000 and December 31, 1999, respectively. Included in accounts receivable at
June 30, 2000 are unbilled receivables of $13,545,667 and retainage of
$12,475,593.
The balances billed but not paid by customers pursuant to retainage
provisions in customer contracts will be due upon completion of the contracts,
substantially all of the retention balances at March 31, 2000 are expected to be
collected within the next twelve months. Unbilled accounts receivable relate to
the Company's unit based contracts and represent revenue the Company is entitled
to based upon the units delivered as of the balance sheet date.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings, and related billings on uncompleted projects
at June 30, 2000 and December 31, 1999.
2000 1999
------------ ------------
Costs and estimated earnings on uncompleted contracts.... $114,826,073 $107,039,766
Billings to date......................................... 84,918,298 82,364,332
------------ ------------
Net costs and earnings in excess of billings............. $ 29,907,775 $ 24,675,434
============ ============
Costs and estimated earnings in excess of billings....... $ 30,107,379 $ 27,098,079
Billings in excess of costs and estimated earnings....... (199,064) (2,422,645)
------------ ------------
Net costs and earnings in excess of billings............. $ 29,907,775 $ 24,675,434
============ ============
6. ACQUISITIONS
On January 25, 2000, the Company acquired Irwin Utilities of Texas Inc.
(Irwin). Irwin is a provider of external telecom services to broadband customers
throughout the southern and central regions of the U.S. The total purchase
consideration of $16.0 million, consisting of $12.0 million in cash and $4.0
million in common stock, preferred stock and junior subordinated debt, exceeded
the fair value of the tangible net assets acquired by $12.3 million, which is
being amortized on a straight-line basis over 25 years. Results for Irwin have
been included in the consolidated results of the Company from the date of
acquisition.
F-7
145
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
In April 2000, the Company acquired Fenix Communications, Inc. (Fenix) and
Midwest Splicing and Activation, Inc. (Midwest). Fenix and Midwest provide
external telecom services to broadband service providers. In May 2000, the
Company acquired Hattech, Inc. (Hattech). Hattech provides a wide range of
network integration services. The total purchase consideration of $57.2 million
consisting of $48.7 million cash (excluding of $2.2 million of transaction
related expenses) and $8.5 million in common stock, preferred stock and junior
subordinated debt exceeded the fair value of the tangible net assets acquired by
$45.3 million which is being amortized on a straight-line basis over 25 years.
Results of Fenix, Midwest and Hattech have been included in the consolidated
results of the Company from the date of acquisition.
Total purchase consideration for these acquisitions is as follows:
COMMON PREFERRED JUNIOR
------------------- ----------------- SUBORDINATED
CASH SHARES VALUE SHARES VALUE NOTES TOTAL
---- ------ ----- ------ ----- ------------ -----
(NUMBERS IN THOUSANDS, EXCEPT SHARE NUMBERS)
Irwin..................... $12,000 269,052.30 $ 361 2,128.76 $2,152 $1,471 $15,984
Fenix..................... 15,675 114,347.21 758 904.72 993 625 18,051
Midwest................... 7,750 16,313.09 108 932.21 1,023 736 9,617
Hattech................... 25,252 33,685.08 262 2,086.85 2,324 1,670 29,508
------- ---------- ------ -------- ------ ------ -------
$60,677 $1,489 $6,492 $4,502 $73,160
======= ====== ====== ====== =======
Shares issued in connection with these transactions were valued using
valuation models that take into account earnings multiples of comparable
companies.
The following unaudited pro forma financial information represents the
unaudited pro forma results of operations as if the aforementioned acquisitions
were completed on January 1, 1999. These pro forma results give effect to
increased interest expense for acquisition-related debt and amortization of
related goodwill. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of operations which would have
been achieved had these acquisitions been completed on January 1, 1999, nor are
the results indicative of the Company's future results of operations.
SIX-MONTH PERIOD
ENDED JUNE 30,
-----------------
2000 1999
------- -------
IN MILLIONS
Revenues.................................................... $369.5 $251.1
Net Income.................................................. 6.7 (3.9)
7. LONG-TERM DEBT AND CAPITAL LEASES
In December 1999 NATG entered into a new credit agreement with Deutsche
Bank Securities Inc., Bankers Trust and a syndication of banks. The new credit
agreement includes a revolving credit facility, in an aggregate amount not to
exceed $100 million at any time, maturing on December 12, 2004, and a $275
million senior secured term loan credit facility. The term loan facility was
allocated among a $75 million Term Loan A with a letter of credit facility,
maturing on December 15, 2004; and a $200 million Term Loan B facility, maturing
December 15, 2006.
During the first quarter of 2000, the company completed a private offering
of $150 million of 12.75% Senior Subordinated Notes due in 2010. A portion of
the proceeds from this offering was used to pay down the principal amount
outstanding on Term Loan B.
Amounts under the revolving credit facility and Term Loan A facility bear
interest, at NATG's choice, of either the Federal Funds Rate plus 0.50% or the
Eurodollar rate, in each case plus an applicable margin of 0.75% to 2.00% and
1.75% to 3.00%, respectively, determined on the most recent total debt to
F-8
146
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
EBITDA ratio. Amounts under Term Loan B facility bear interest, at the Company's
choice, of either Bankers Trust Prime Rate or the Federal Funds Rate plus 0.50%,
in either case plus a margin of 2.50%. Loans made under the revolving credit
facility and the Term Loan A facility are collateralized by a pledge of all the
assets of the Company and its subsidiaries. The credit facility also contains
affirmative and negative covenants relating to the Company's operations. The
Company was in compliance with these covenants at June 30, 2000.
As of June 30, 2000 and December 31, 1999, long-term debt and capital lease
obligations consisted of the following:
Bank Credit Facilities:
2000 1999
------------ ------------
Revolving credit facility, maturing on December 15, 2004;
interest rate of prime or Federal Funds Rate plus 0.50% or
Eurodollar Rate, plus a margin of 0.75% to 2.0% or 1.75%
to 3.0%, respectively, determined based on the most recent
total debt to EBITDA ratio................................ $ 57,000,000 $ --
Term Loan A, amortizing with final payment due December 15,
2004; interest rate of prime or Federal Funds Rate plus
0.50% or Eurodollar Rate, plus margin of 0.75% to 2.0% or
1.75% to 3.0%, respectively, determined based on most
recent total debt to EBITDA ratio......................... 72,000,000 28,531,511
Term Loan B, amortizing with final payment due December 15,
2006; interest rate of prime or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.5%............... 156,572,528 200,000,000
Senior Subordinated Notes, interest paid semiannually with
maturity on February 1, 2010; interest rate of 12.75%..... 150,000,000 --
Senior Subordinated bridge loan maturing December 15, 2007;
interest rate of LIBOR plus 6.5%.......................... -- 100,000,000
Junior Subordinated Notes including accrued interest of
$9,095,879 and $671,505 at June 30, 2000 and December 31,
1999, respectively, maturing on the later of December 15,
2009 or the first anniversary of the date on which any
debt in a high yield offering is repaid; interest rate of
12%....................................................... 150,710,184 134,972,505
Other debt and capital lease obligations.................... 4,683,335 3,362,350
------------ ------------
Total debt and capital lease obligations.......... 590,966,047 466,866,366
Less current portion........................................ (69,031,243) (8,796,941)
------------ ------------
Long-term debt.................................... $521,934,804 $458,069,425
============ ============
8. SECURITIES SUBJECT TO PUT AND CALL ARRANGEMENTS
At June 30, 2000 and December 31, 1999, securities subject to put and call
arrangements are as follows:
2000 1999
----------- -----------
Securities subject to put and call arrangements:
Series B preferred stock................................. $ -- $39,420,000
Redeemable common stock.................................. -- 15,526,000
----------- -----------
$ -- $54,946,000
=========== ===========
F-9
147
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
As discussed in the footnotes to the December 31, 1999 audited financial
statements certain of the Orius securities were subject to put and call
arrangements whereby Orius Corp. had a call and the security holders had a put.
In March 2000, the Series B preferred stock and $3,610,964 of the redeemable
common stock were redeemed by Orius Corp. In connection with those redemptions,
NATG borrowed $41.1 million from its credit facilities. The remainder of the
redeemable common stock was redeemed by the Company in the second quarter
through borrowings from its credit facilities and the issuance of junior
subordinated debt and preferred stock.
9. SERIES C PARTICIPATING PREFERRED STOCK
The Orius Series C participating preferred stock accrues dividends daily at
a rate of 12% per annum based on a liquidation value $1,000 per share and
participates in any dividends paid to holders of the common stock. The Series C
participating preferred stock will be redeemed on December 31, 2019 at its
purchase price, plus accrued dividends and the liquidation value of the common
stock into which it is convertible.
At June 30, 2000 and December 31, 1999, the total recorded value of the
Series C preferred stock has been determined based upon purchase price of $1,000
per share, accrued and unpaid dividends of $11,852,610 and $995,918,
respectively, and a value per common share of $7.77 and $1.34 (adjusted for the
stock split discussed in Note 2), respectively. The purchase price of $1,000 per
share and the value per common share of $1.34 were based upon the values of the
preferred and common stock purchased in connection with the Orius/LISN
transaction. Subsequent value per common share is adjusted quarterly based upon
the Company's performance, recent transactions and comparable trading multiples.
For the period ended December 31, 1999, the amount attributable to the
accretion of the Series C preferred stock of $78,816,000, reflects the
adjustment to the preferred stock held by the former LISN shareholders. For the
six months ended June 30, 2000 the resulting accretion is $19,626,842. Accretion
is recorded as an increase in the retained deficit and a reduction of the income
available to common shareholders.
10. NOTE DUE FROM STOCKHOLDER
In January 2000, pursuant to an employment agreement, the Company issued
188,810 shares of restricted common stock with a 5-year vesting period to its
chairman and chief executive officer. These shares were purchased at fair value
as determined by the LISN transaction in return for a full recourse promissory
note with a term of 5 years and a stated interest rate of 6.46%. At June 30,
2000, the balance due of $252,633 is shown as a reduction in stockholders'
equity.
11. SUBSEQUENT EVENTS
In July 2000 the Company entered into additional borrowings of $60 million
under Term Loan C of the senior credit facility which were primarily used to pay
down amounts due under the revolving credit facility. Amounts under the Term
Loan C due September 30, 2007 facility bear interest, at the Company's option,
of either the higher of the Prime Rate or the overnight Federal Funds Rate plus
0.50% and a margin of 2.75%, or the Eurodollar rate and a margin of 3.75%.
F-10
148
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Orius Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity (net capital
deficiency) and of cash flows present fairly, in all material respects, the
financial position of Orius Corp. and Subsidiaries (formerly LISN Holdings,
Inc., the Company) as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 31, 2000
F-11
149
ORIUS CORP AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,664,199 $ 2,788,838
Accounts receivable....................................... 128,780,860 13,260,102
Costs and estimated earnings in excess of billings........ 24,675,434 6,632,421
Inventories............................................... 16,453,878 2,405,224
Other current assets...................................... 4,728,028 70,825
------------- -----------
Total current assets.............................. 203,302,399 25,157,410
Property and equipment, net................................. 44,399,631 3,386,839
Goodwill, net............................................... 359,881,615 --
Other assets................................................ 14,394,187 54,520
------------- -----------
Total assets...................................... $ 621,977,832 $28,598,769
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt and leases........................ $ 5,505,387 $ 82,933
Accounts payable -- trade................................. 29,640,803 3,294,811
Accrued liabilities....................................... 34,050,765 5,874,098
Payable to shareholder.................................... 11,454,413 --
Deferred tax liability.................................... 5,948,752 --
Other current liabilities................................. 1,292,191 --
------------- -----------
Total current liabilities......................... 87,892,311 9,251,842
------------- -----------
Long-term debt and leases................................... 461,360,979 1,099,267
Deferred tax liability...................................... 5,609,352 --
------------- -----------
466,970,331 1,099,267
------------- -----------
Commitments and contingencies
Securities subject to put and call arrangements............. 54,946,000 --
Series C participating, redeemable preferred stock,
200,000,000 authorized; 194,372 issued and outstanding.... 199,019,074 --
Stockholders' equity (net capital deficiency):
Common stock, no par value, 200,000 shares authorized..... -- 11,000
Common stock $.01 par value, 200,000,000 shares
authorized............................................. 25,025 --
Paid in capital........................................... 33,590,975 --
Retained (deficit) earnings............................... (220,465,884) 18,236,660
------------- -----------
Total stockholders' equity (net capital
deficiency)..................................... (186,849,884) 18,247,660
------------- -----------
Total liabilities and stockholders' equity (net
capital deficiency)............................. $ 621,977,832 $28,598,769
============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
150
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1999 1998 1997
------------ ----------- -----------
Revenues............................................. $167,018,298 $76,371,641 $40,226,291
Expenses:
Direct costs....................................... 118,539,189 52,659,507 29,690,823
General and administrative......................... 20,576,668 10,626,753 6,062,985
Depreciation and amortization...................... 1,357,765 383,469 179,247
------------ ----------- -----------
Total operating expenses................... 140,473,622 63,669,729 35,933,055
------------ ----------- -----------
Income from operations..................... 26,544,676 12,701,912 4,293,236
Other expense (income):
Interest expense, net.............................. 11,148,761 450,595 177,822
Miscellaneous...................................... 362,105 (14,913) (52,600)
------------ ----------- -----------
Total other expenses....................... 11,510,866 435,682 125,222
------------ ----------- -----------
Income before provision from income taxes
and extraordinary charge................. 15,033,810 12,266,230 4,168,014
Provision for income taxes........................... 4,936,866 -- --
------------ ----------- -----------
Income before extraordinary charge................... 10,096,944 12,266,230 4,168,014
Extraordinary charge for debt retirement, net of tax
benefit of $897,000................................ 1,372,239 -- --
------------ ----------- -----------
Net income........................................... $ 8,724,705 $12,266,230 $ 4,168,014
============ =========== ===========
Pro forma net income data:
Net income as reported............................. $ 8,724,705 $12,266,230 $ 4,168,014
Pro forma adjustment to provision for income
taxes........................................... 1,199,320 4,293,180 1,417,125
------------ ----------- -----------
Pro forma net income............................... $ 7,525,385 $ 7,973,050 $ 2,750,889
============ =========== ===========
Net income applicable to common shareholders:
Net income as reported............................. $ 8,724,705 $12,266,230 $ 4,168,014
Accretion and dividends on Series C participating
redeemable preferred stock...................... (79,811,918) -- --
------------ ----------- -----------
Net (loss) income applicable to common
shareholders.................................... $(71,087,213) $12,266,230 $ 4,168,014
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
151
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1999 1998 1997
------------- ----------- -----------
Cash flows from operating activities:
Net income........................................ $ 8,724,705 $12,266,230 $ 4,168,014
Adjustments to reconcile net income to net cash used
for operating activities:
Depreciation and amortization..................... 1,357,765 383,469 179,247
Extraordinary charge.............................. 1,372,239 -- --
Deferred taxes.................................... 64,100 -- --
Change in assets and liabilities:
Accounts receivable............................ (4,705,053) (6,190,981) (5,601,655)
Costs and estimated earnings in excess of
billings..................................... (8,755,989) (2,513,966) --
Inventories.................................... (82,260) (1,527,110) --
Other assets................................... 2,919,324 17,677 (56,401)
Accounts payable -- trade...................... 4,849,725 388,861 1,078,044
Accrued expenses............................... 8,039,232 3,095,168 1,545,116
------------- ----------- -----------
Net cash provided by operating
activities.............................. 13,783,788 5,919,348 1,312,365
------------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (4,015,434) (1,923,554) (1,038,702)
Purchase of Orius Corp., net of cash acquired..... (166,130,033) -- --
Investment in other entities...................... (100,000) -- --
Increase in accounts receivable -- related
party.......................................... -- (619,521)
------------- ----------- -----------
Net cash used for investing activities.... (170,245,467) (1,923,554) (1,658,223)
------------- ----------- -----------
Cash flows from financing activities:
Amounts paid for deferred financing costs......... (12,391,361) -- --
Decrease in overdraft............................. -- (164,525) --
Distributions paid to shareholders................ (6,141,864) (1,160,000) --
Proceeds from notes payable -- bank............... 403,531,510 --
Payments of notes payable -- bank................. (256,131,105) (2,562,200) 821,508
Issuance of junior notes.......................... 637,000 -- --
Issuance of common stock.......................... 67,867,196 -- --
Issuance of preferred stock....................... 136,955 -- --
Investment by LISN shareholders................... 112,239,334 -- --
Advances from bank for construction costs......... -- 673,742 570,658
Retirement of common stock........................ (127,410,625) -- --
------------- ----------- -----------
Net cash provided by (used for) financing
activities.............................. 182,337,040 (3,212,983) 1,392,166
------------- ----------- -----------
Net increase in cash.............................. 25,875,361 782,811 1,046,308
Cash at beginning of period....................... 2,788,838 2,006,027 959,719
------------- ----------- -----------
Cash at end of period............................. $ 28,664,199 $ 2,788,838 $ 2,006,027
============= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
152
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1999 1998 1997
----------- -------- --------
Supplemental information disclosure:
Interest paid............................................ $ 9,172,948 $111,875 $159,519
Income taxes paid........................................ $ 1,055,422 $ -- $ --
Non-cash activity:
Deferred stock redemption................................ $ 7,885,450 $ -- $ --
Deferred taxes resulting from conversion to C
corporation........................................... 4,574,200 -- --
Exchange of common stock for junior notes................ 58,100,000 -- --
Exchange of common stock for preferred stock............. 12,491,500 -- --
Deemed dividend on preferred stock....................... 826,042 -- --
Transfer of junior notes and accrued interest to Orius... 62,677,993 -- --
Rollover of Orius Corp. common stock..................... 83,421,453 -- --
Exchange of common stock for Orius Corp. common stock.... 15,260,297 -- --
Exchange of Series A preferred stock for Orius Series C
participating, redeemable preferred stock............. 13,525,078 -- --
Accretion associated with Series C participating,
redeemable preferred stock............................ 79,811,918 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
153
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
TOTAL
STOCKHOLDERS'
COMMON STOCK RETAINED EQUITY (NET
------------------------- EARNINGS CAPITAL
SHARES AMOUNT (DEFICIT) DEFICIENCY)
---------- ------------ ------------- -------------
Balance at December 1996................ 11,000,000 $ 11,000 $ -- $ 11,000
Adjustment for LISN Holdings, Inc. and
LISN Inc. combination.............. 2,962,416 2,962,416
Net income............................ 4,168,014 4,168,014
---------- ------------ ------------- -------------
Balances at December 31, 1997........... 11,000,000 11,000 7,130,430 7,141,430
Distributions to S Corporation
stockholders....................... (1,160,000) (1,160,000)
Net income............................ 12,266,230 12,266,230
---------- ------------ ------------- -------------
Balances at December 31, 1998........... 11,000,000 11,000 18,236,660 18,247,660
Distributions to S Corporation
stockholders....................... (6,141,864) (6,141,864)
Effects of recapitalization
transaction:
Retirement of common stock......... (9,514,990) (9,515) (127,401,110) (127,410,625)
Issuance of common stock........... 5,055,480 67,731,151 67,731,151
Exchange of common stock for junior
notes and Series A redeemable
preferred stock.................. (5,080,050) (52,608,384) (17,983,116) (70,591,500)
Conversion to C corporation........ (4,577,600) (4,577,600)
Accretion of amounts due for
redemption of common stock....... (11,511,641) (11,511,641)
Proceeds from private placement of
Strips............................. 9,730 136,045 136,045
Effects of December 15, 1999
transaction with Orius Corp.:
Issuance of Orius common stock to
LISN shareholders................ 9,867,780
Investment by LISN shareholders.... 7,518,040 10,101,540 10,101,540
Exchange of former Orius
shareholder interests............ 6,169,490 8,254,163 8,254,163
Accretion associated with Series C
participating, redeemable
preferred stock including
dividends........................ (79,811,918) (79,811,918)
Net income............................ 8,724,705 8,724,705
---------- ------------ ------------- -------------
Balances at December 31, 1999........... 25,025,480 $ 33,616,000 $(220,465,884) $(186,849,884)
========== ============ ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
154
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION
OVERVIEW
Orius Corp. (Orius or the Company), a holding company with no independent
operations, is the parent of NATG Holdings, LLC (NATG) and is the successor to
LISN Holdings, Inc. (LISN, formerly Arion, Inc.). NATG is engaged in the
business of providing telecommunications infrastructure services in the
continental United States.
Prior to the Orius/LISN transaction discussed below, LISN and Orius Corp.
and its subsidiaries operated separate businesses. During 1999, LISN underwent a
recapitalization, and later in 1999 LISN and Orius entered into a business
combination. See Note 15 for further discussion. The 1998 and 1997 financial
statements presented herein are those of LISN. The 1999 statement of income
presents the operation of only LISN through December 14, 1999 and includes the
operations of NATG from December 15, 1999 through December 31, 1999.
LISN RECAPITALIZATION
On May 28, 1999, Arion, Inc. (Arion) entered into a Recapitalization
Agreement whereby, Arion was renamed LISN Holdings, Inc. The assets of Arion
were then transferred to Arion Sub, Inc., a wholly-owned subsidiary of Arion.
Also, on May 28, 1999, the shareholders of LISN, Inc. contributed all of their
shares to Arion. Arion was formed in 1997 to purchase and warehouse LISN's
inventory. The combination of LISN Holdings, Inc. and LISN, Inc. has been
accounted for in a manner similar to a pooling of interests, as Arion and LISN
were owned by the same shareholders in exactly the same ownership percentages
and share amounts, and both the ownership and assets of the combined entity were
identical before and after the two companies were combined. Accordingly, the
1998 Arion financial statements have been restated and referred to here as LISN
Holdings, Inc. LISN, Inc. continued to operate as a wholly-owned subsidiary of
Arion. In connection with this reorganization, Arion entered into a $75,000,000
credit facility that was utilized to pay off all outstanding debt of LISN, Inc.
as of May 27, 1999, and to finance the redemption of Arion's outstanding shares.
For further information, see Note 3.
ORIUS/LISN TRANSACTION
On December 15, 1999, Orius and LISN entered into a business combination in
which the former stockholders of LISN acquired control of Orius and its
subsidiaries. Accordingly, LISN is considered the acquiring corporation and
corporate predecessor for accounting purposes. Also in connection with the
transaction, the Company entered into a $275,000,000 loan and credit facility
and a $100 million bridge loan that were utilized to pay off all the outstanding
debt of the Company and LISN as of December 14, 1999 (the valuation date). For
further information, see Note 5.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
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 amounts reported in the financial statements and
accompanying notes. Significant estimates made in the preparation of these
financial
F-17
155
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements include those related to the revenue recognized and costs and
expenses associated with contracts in process at period end, allowances for
doubtful accounts, and the estimated lives of long-lived assets. Actual results
could differ from those estimates and such differences may be material to the
financial statements.
REVENUE RECOGNITION
Prior to the Orius/LISN transaction, substantially all of the Company's
revenues were earned from contracts under fixed price arrangements. For fixed
price contracts, the Company recognizes revenue and the related costs under the
percentage-of-completion method. Revenues and earnings from these contracts are
recognized as the related costs are incurred based on the relationship of costs
incurred to total estimated contract costs. Costs and estimated earnings in
excess of billings for contracts-in-progress represents revenue recognized but
not yet billed. Billings in excess of costs and estimated earnings represents
billings on contracts for which costs have not yet been incurred and revenue and
earnings have not been recognized.
In connection with the Orius/LISN transaction, the Company assumed and
continues to offer contracts that provide for payments for units delivered by
the Company. These contracts generally entitle the Company to revenue for each
unit of work completed. Accordingly, the Company accounts for revenue and
related costs associated with these types of contracts using the
units-of-delivery revenue recognition method. Revenue is recognized as the
related units are completed, and costs allocable to the delivered units are
recognized as the cost of earned revenue. Unbilled revenues consist of
work-in-process on contracts based on management's estimate of work performed,
but not billed. All costs associated with unbilled revenues are recorded as
expenses in the same period as the unbilled revenue.
Additionally, the Company recognizes revenues from short-term contracts
with duration less than two weeks under the completed contract method. Billings
and costs are accumulated on the balance sheet, and no profit is recorded before
completion or substantial completion of the work.
At the time a loss on any contract becomes known, the entire amount of the
estimated loss is accrued.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments purchased with a
maturity of three months or less to be cash equivalents. For purposes of the
consolidated statements of cash flows, the Company considers these to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 39 years. Leasehold improvements
are amortized over the remaining term of the facilities' lease. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is recognized in
the period. Expenditures for maintenance and repairs are expensed as incurred.
INVENTORY
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market. Inventory consists of items purchased for use in projects and
substantially all of the Company's inventories can be used in multiple projects.
F-18
156
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
For federal tax purposes and in selected states, LISN had elected to be
treated under Subchapter S of the Internal Revenue Code. As such, all income,
expenses, and tax credits were passed through to the individual stockholders.
State taxes were paid by LISN and recorded in general and administrative
expenses in 1998 and 1997.
Effective May 28, 1999, LISN converted to a C Corporation and accounts for
income taxes in accordance with Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of the
liability method of computing deferred income taxes. Under this method deferred
income taxes are recorded to reflect the income tax consequences on future years
of temporary differences between the income tax and financial reporting bases of
assets and liabilities as of the balance sheet date. Under the liability method,
deferred income taxes are adjusted for tax rate changes as they occur. A net
deferred tax liability of $4,577,600 was established on May 28, 1999 as a result
of the conversion to a C corporation.
The Company and its subsidiaries file a consolidated federal income tax
return. Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximate the
recorded values due to the relatively short terms of the instruments and the
floating interest rate on a substantial portion of the Company's debt. The
Company has entered interest rate cap arrangements, but the fair values of those
caps approximate their recorded values.
INTANGIBLE ASSETS
The excess of the purchase price over the fair market value of the tangible
net assets of acquired businesses (goodwill) is amortized on a straight-line
basis over its estimated useful life of 25 years. The appropriateness of the
carrying value of goodwill is reviewed periodically by the Company at a
subsidiary level. An impairment loss for the difference between fair value and
recorded value is recognized when the projected undiscounted future cash flows
are less than the carrying value of goodwill. No impairment loss has been
recognized in the period presented. Amortization expense from the date of the
Orius/LISN transaction and included in these financial statements was $602,498
for 1999. The intangible assets at December 31, 1999 are net of accumulated
amortization of $602,498.
Included in other assets are intangible assets for deferred financing costs
which are amortized over the term of the related debt facility. At December 31,
1999 deferred financing costs of $9,876,058 are included in other assets. For
1999, $755,267 of amortization expense related to these costs has been included
in interest expense.
CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable are due from
companies within the telecommunications industry located throughout the United
States. Credit is extended based on an evaluation of the customer's financial
condition and, generally, collateral is not required. Credit losses are provided
for in the consolidated financial statements.
The Company maintains various bank accounts and at times, amounts may be in
excess of FDIC insurance limits.
F-19
157
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation," which was effective for the Company beginning August
1, 1996. SFAS No. 123 requires expanded disclosures of stock based compensation
arrangements with employees, and encourages, but does not require, compensation
cost to be measured based on the fair value of the equity instrument awarded.
Under SFAS No. 123, companies are permitted, however, to continue to apply
Accounting Principle Board (APB) Opinion No. 25, which recognized compensation
based on the intrinsic value of the equity instrument awarded. The Company
applies APB Opinion No. 25 to its stock based compensation awards to employees.
See Note 19.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
accounting and reporting of derivative instruments, including certain derivative
instruments imbedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as other assets or liabilities in the statement of financial
position, and measure those instruments at fair value. This statement is
effective for the Company's 2001 financial statements. Due to the complexity of
this statement, the Company is still evaluating its impact, if any, on our
financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" (SAB 101), which affects the recognition and disclosures
about revenues. SAB 101 is applicable for the Company's fourth quarter 2000
financial statements. Management expects its adoption will not be significant to
the financial statements.
3. RECAPITALIZATION
On May 28, 1999, the Company sold 50.554778 shares of common stock for
$70,250,000 (less $2,518,849 of transaction related fees) and redeemed 95.149888
shares for $133,910,625 (less $6,500,000 which remained in the Company to fund
employee bonuses which were recorded as expenses). An additional $11,454,413
will be redeemed during 2000 and is reflected as a liability at December 31,
1999. Also on May 28, 1999, 41.81114 shares of common stock were converted to
Junior Notes (see Note 12) payable in the amount of $58,100,000 and 8.9894
shares of common stock were exchanged for 8.989394 shares of Series A Preferred
stock with a market value of $12,491,500. In accordance with the
Recapitalization Agreement, an additional 5.67469 shares of common stock were to
be redeemed for $7,885,450 on January 2, 2000.
4. STOCK SPLIT
The LISN Board of Directors authorized a stock split (10,000 to 1)
effective August 16, 1999 resulting in 146,042.82 shares of common stock
outstanding and 89,894 shares of Preferred Series A stock outstanding. All share
amounts presented in these financial statements have been restated to reflect
the share split.
5. ORIUS/LISN TRANSACTION
On December 15, 1999, LISN's former shareholders acquired control of Orius
and its wholly-owned subsidiary, NATG, through the following steps:
- Former LISN shareholders, members of management and certain co-investors
invested an aggregate cash amount of $112.2 million in LISN immediately
prior to the transaction. In exchange for this
F-20
158
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment, a "strip" of Orius securities were issued comprised of $41.3
million of junior subordinated notes, $60.8 million of Series C
redeemable preferred stock and $10.1 million of common stock.
- Former LISN shareholders exchanged LISN common stock, preferred stock and
junior subordinated notes for a similar strip of securities issued by
Orius.
- NATG borrowed $328.5 million under the new multi-tranche senior credit
facilities and the senior subordinated term loan, and repaid
approximately $256.1 million of LISN and Orius indebtedness.
- Convertible preferred stock, junior subordinated notes, warrants and a
portion of the common stock of Orius were redeemed. This redemption
included put and call arrangements with certain Orius security holders
which will require payment of approximately $54.9 million and the
issuance of additional strips of Orius securities in the first half of
2000. See Notes 15 and 21.
- Orius management rolled over approximately one-half of the value of their
equity interests in Orius for a strip of securities comprised of $30.4
million in aggregate principal amount of Orius junior subordinated notes,
$44.7 in preferred stock and $8.3 million in common stock.
Although LISN is the acquiring corporation for accounting purposes (because
former LISN shareholders acquired approximately 75% of common equity interests)
the transaction resulted in LISN becoming a wholly-owned subsidiary of NATG,
which is a wholly-owned subsidiary of Orius. As the accounting predecessor,
LISN's historical financial statements are the historical financial statements
of Orius and include the results of Orius' operations from December 15, 1999
through December 31, 1999.
Of the total purchase price of $314.5 million, $163.7 million was paid in
cash to Orius stockholders in connection with the redemption for their existing
equity interests, $83.5 million represents the value of the Orius securities
which were retained by Orius stockholders or exchanged for new Orius equity, $61
million represents the amount of cash paid to Orius stockholders to redeem their
equity securities pursuant to the put/call arrangements (of which $54.9 million
remains outstanding at December 31, 1999) and $6.3 million represents
transaction related expenses. The purchase price of $314.5 million exceeded the
fair value of the tangible net assets acquired by $360.5 million, which is being
amortized on a straight-line basis over 25 years.
The excess purchase price over the fair value of the assets acquired has
been allocated to goodwill. While the various synergies of the Orius/LISN
combination are readily identifiable, the company believes that these are not
reliably measurable and, accordingly, considers these to be elements of
goodwill.
6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
In addition to the recapitalization discussed in Note 3 and the Orius/LISN
transaction discussed in Note 5, Orius acquired twelve companies at various
times during 1998 and 1999 prior to the Orius/LISN transaction. The following
unaudited pro forma financial information represents the unaudited results of
operations as if the Orius/LISN transaction and the twelve Orius acquisitions
had occurred on January 1 of each year (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Revenues.................................................... $508,386 $341,097
Net income (loss)........................................... 7,092 (10,600)
The pro forma results do not necessarily represent results which would have
occurred if the combination had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
F-21
159
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $916,601 and $252,000 at December
31, 1999 and 1998, respectively. Included in accounts receivable at December 31,
1999 are unbilled receivables of $13,532,519 and retainage of $8,188,908.
The balances billed but not paid by customers pursuant to retaining
provisions in customer contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts, the majority of the retention balances at December 31, 1999 are
expected to be collected within the next twelve months. Unbilled accounts
receivable relate to the Company's unit based contracts and represent revenue
the Company is entitled to based upon the units delivered as of the balance
sheet date.
8. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Contracts totaling $174.5 million and $57.4 million were in process at
December 31, 1999 and December 31, 1998, respectively. Costs and estimated
earnings, and related billings on uncompleted projects at December 31 are as
follows:
1999 1998
------------ -----------
Costs and estimated earnings on uncompleted contracts....... $107,039,766 $40,008,845
Billings to date............................................ 82,364,332 33,376,424
------------ -----------
Net costs and earnings in excess of billings................ $ 24,675,434 $ 6,632,421
============ ===========
Costs and estimated earnings in excess of billings.......... 27,098,079 7,025,078
Billings in excess of costs and estimated earnings.......... (2,422,645) (392,657)
------------ -----------
Net costs and earnings in excess of billings................ $ 24,675,434 $ 6,632,421
============ ===========
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1999 and
1998:
ESTIMATED
USEFUL LIFE 1999 1998
----------- ----------- -----------
Land................................................... $ 519,250 $ 99,250
Building and improvements.............................. 3-39 years 7,026,897 2,152,599
Office equipment....................................... 3-6 years 5,598,133 1,027,062
Vehicles............................................... 5 years 9,558,244 903,581
Machinery and equipment................................ 10 years 23,539,784 482,515
----------- -----------
46,242,308 4,665,007
Less: accumulated depreciation......................... (1,842,677) (1,278,168)
----------- -----------
Property and equipment, net............................ $44,399,631 $ 3,386,839
=========== ===========
Depreciation expense amounted to $606,767, $383,469 and $179,247 for the
years ended December 31, 1999, 1998 and 1997, respectively.
F-22
160
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1999:
1999 1998
----------- ----------
Accrued compensation & benefits............................. $19,761,433 $5,021,189
Accrued post acquisition adjustments........................ 8,570,441 --
Accrued interest............................................ 1,655,952 --
Other....................................................... 4,062,939 852,909
----------- ----------
$34,050,765 $5,874,098
=========== ==========
Included in accrued liabilities are post acquisition adjustments related to
companies acquired by NATG prior to the Orius/LISN transaction. Pursuant to
certain of the purchase agreements, the Company will be required to give
additional consideration of cash and Orius common stock to the former acquired
company shareholders upon attainment of specified financial criteria over the
period ended December 31, 1999 and the year ended December 31, 2000. The amount
of cash and shares to be issued cannot be determined until the periods expire
and the attainment of the criteria is established. The Company accounts for this
additional consideration when the specified financial criteria are achieved and
it is probable it will be paid. At December 31, 1999, based upon the attainment
of fiscal 1999 targets for certain acquisitions, additional consideration of
$3.0 million has been recorded as additional purchase price and included as a
liability to the former stockholders of the acquired companies. If targets are
achieved in 2000, the Company may be obligated to pay additional consideration
of $2.9 million and issue up to 120,000 shares of common stock. Additionally, at
December 31, 1999, certain purchase price adjustments in the amount of
approximately $5.6 million related to 1999 acquisitions have also been recorded.
11. INVESTMENTS
During 1999, LISN purchased 49% interests in two telecommunications
infrastructure companies for aggregate consideration of $100,000. LISN also
entered into credit agreements totaling $1.15 million with these investees
pursuant to which LISN is committed to loaning funds for the investees' working
capital. The Company accounts for these investments under the equity method.
Losses of $468,000 were recorded as part of other expense for 1999 which
represented the Company's 49% interest in the losses of the investees and
charges associated with anticipated losses on loans made under the credit
agreement to one of the investees. The investment value at December 31, 1999 is
zero.
12. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As of December 31, 1998, the Company had a line of credit which allowed it
to borrow up to $10.0 million. The line of credit expired in May 1999. There
were no borrowings on this line of credit as of December 31, 1998.
On May 28, 1999, in connection with the Recapitalization Agreement (see
Note 3), LISN entered into a new $100.0 million Credit Agreement with
BankBoston. N.A. ("BankBoston"). The balance due of $75.0 million plus accrued
interest of $1,689,522 was repaid in connection with the Orius/LISN transaction.
Unamortized deferred financing fees of $2,269,239 were written off resulting in
an extraordinary charge to income of $1,372,239, net of tax benefits of
$897,000.
The Company moved into a new building in Amherst, Ohio in January 1998. The
Company entered into a 15 year mortgage note for $1.2 million with an annual
fixed interest rate of 9%, and monthly principal payments of $6,911 plus
interest through March 16, 2013. The balance due on this debt was $1.2 million
as of December 31, 1998. The outstanding balance was repaid in connection with
the Orius/ LISN transaction.
F-23
161
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 15, 1999, NATG entered into a new credit agreement with
Deutsche Bank Securities Inc., Bankers Trust and a syndication of banks. The new
credit agreement includes a revolving credit facility, in an aggregate amount
not to exceed $100 million at any time, maturing on December 15, 2004, and a
$275 million senior secured term loan credit facility. The term loan facility is
allocated among a $75 million Term loan A with a letter of credit facility,
maturing on December 15, 2004; and a $200 million Term loan B facility, maturing
on December 15, 2006. At December 31, 1999, the total letters of credit issued
under the $100 million revolving credit facility and the $75 million Term A loan
facility were approximately $9.3 million and $46.5 million, respectively.
Amounts under the revolving credit facility and Term loan A facility bear
interest, at NATG's choice, of either the Federal Funds Rate plus 0.50% or the
Eurodollar rate, in each case plus an applicable margin of 0.75% to 2.00% and
1.75% to 3.00%, respectively, determined on the most recent total debt to EBITDA
ratio. Amounts under Term loan B facility bear interest, at NATG's choice, of
either Bankers Trust Prime Rate or the Federal Funds Rate plus 0.50%, in either
case plus a margin of 2.50%. Loans made under the revolving credit facility and
the Term loan A facility are collateralized by a pledge of all of the assets of
the Company and its subsidiaries. The credit facility also contains affirmative
and negative covenants relating to NATG's operations.
On December 15, 1999, NATG also entered into a credit agreement with
various lending institutions for a $100 million senior subordinated bridge loan
(the Bridge Loan) maturing December 15, 2007. Amounts under the Bridge Loan bear
interest at the lower of LIBOR plus 6.5% or 16% per annum.
At December 31, 1999, long-term debt and capital lease obligations
consisted of the following:
1999
------------
Bank credit facilities:
Revolving credit facility, maturing on December 15, 2004;
interest rate of prime or Federal Funds Rate plus 0.50%
or Eurodollar Rate, plus a margin of 0.75% to 2.0% or
1.75% to 3.0%, respectively, determined based on the
most recent total debt to EBITDA ratio................. $ --
Term loan A, amortizing with final payment due December
15, 2004; interest rate of prime or Federal Funds Rate
plus 0.50% or Eurodollar Rate, plus a margin of 0.75%
to 2.0% or 1.75% to 3.0%, respectively, determined
based on the most recent total debt to EBITDA ratio.... 28,531,511
Term loan B, amortizing with final payment due December
15, 2006; interest rate of prime or Federal Funds Rate
plus 0.50%, in either case plus a margin of 2.5%....... 200,000,000
Senior subordinated bridge loan maturing December 15,
2007; interest rate of LIBOR plus 6.5%................. 100,000,000
Junior subordinated notes including accrued interest of
$671,505 maturing on the later of December 15, 2009 or
the first anniversary of the date on which any debt
raised in a high yield offering is repaid; See Note 12;
interest rate of 12%................................... 134,972,505
Other debt and capital lease obligations.................... 3,362,350
------------
Total debt and capital lease obligations.................... 466,866,366
Less current portion........................................ (5,505,387)
------------
Long-term debt.............................................. $461,360,979
============
In order to manage its interest rate risk, the Company entered into
interest rate cap agreements with aggregate notional amounts of $68.9 million at
December 31, 1999. These agreements limit the Company's exposure to increases in
LIBOR over 8%. The premiums paid for the interest rate caps were deferred and
are being amortized over the life of the caps and recognized as interest
expense.
F-24
162
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL LEASE OBLIGATIONS AND EQUIPMENT LOANS
Certain subsidiaries have obligations outstanding under capital leases and
other equipment financing arrangements. The remaining obligations are payable in
monthly installments expiring at various dates through June 2003.
MATURITIES
At December 31, 1999, the estimated aggregate annual repayments for
long-term debt and capital lease obligations are as follows:
Maturities for fiscal years ending:
2,000..................................................... $ 5,505,387
2,001..................................................... 7,128,321
2,002..................................................... 8,280,205
2,003..................................................... 9,538,802
2,004..................................................... 11,441,146
Thereafter................................................ 424,972,505
------------
$466,866,366
============
12. JUNIOR SUBORDINATED NOTES
On May 28, 1999, in connection with the Recapitalization Agreement, LISN
junior subordinated notes were issued for an aggregate principal balance of
$58.1 million in exchange for common stock. These notes bear interest at a rate
of 12% per annum compounded quarterly. On August 31, 1999, LISN issued an
additional $637,000 in junior notes in association with a private placement (see
Note 14).
In connection with the Orius/LISN transaction, these notes were exchanged
for $62.6 million of Orius junior subordinated notes representing the aggregate
unpaid principal and accrued interest outstanding at December 15, 1999.
In addition to the $62.6 million of junior subordinated notes exchanged
with the former LISN note holders, Orius junior subordinated notes were issued
to Orius management in the amount of $30.4 million in partial exchange for the
rollover of their equity value, and to new and existing investors in the amount
of $41.3 million in partial exchange for their cash investment.
The Orius junior subordinated notes bear interest at a rate of 12% per
annum. A maximum of 40% of the interest is payable in cash beginning January 15,
2001 and the remainder is deferred and accrues as additional principal. Cash
interest may be paid by Orius only to the extent Orius has available funds. NATG
is limited by the terms of its debt agreements as to the amount of dividends
which may be paid to Orius. In the event of default by Orius, the holders of the
junior notes are prohibited from seeking remedy against NATG until all senior
debt obligations are repaid.
13. LISN SERIES A PREFERRED STOCK
On May 28, 1999 the Company authorized 200,000 shares of Series A Preferred
Stock, par value $.01 per share. These shares bear interest at 12% per annum
paid in kind (no dividends to be received until liquidity event). These shares
rank senior to the common stock as to dividends and distributions upon the
Company's liquidation, winding up and dissolution. These shares are subordinated
to all of the Company's current and future liabilities and shall be redeemed on
December 31, 2019.
F-25
163
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Orius/LISN transaction, these shares were converted
into shares of Orius Series C preferred stock and at December 31, 1999 no shares
of the Series A preferred stock remain outstanding.
14. PRIVATE PLACEMENTS OF LISN STRIPS
During 1999, LISN sold to its employees strips of its securities for
$10,000 each. Each strip consisted of 10.7586 shares of LISN's Company's Class B
common stock, 10.8306 shares of LISN's Series A preferred stock, and $7,000
principal 12% Junior Subordinated Notes. LISN raised $910,000 through these
sales resulting in the issuance of 979.03 shares of common stock and 985.58
shares of Series A preferred stock for $136,045 and $136,955, respectively.
15. SECURITIES SUBJECT TO PUT AND CALL ARRANGEMENTS
At December 31, 1999, securities subject to put and call arrangements are
as follows:
1999
-----------
Securities subject to put and call arrangements:
Series B preferred stock.................................. $39,420,000
Redeemable common stock................................... 15,526,000
-----------
$54,946,000
===========
As discussed in Notes 1 and 5, certain of the Orius securities are subject
to put and call arrangements whereby Orius Corp. has a call and the security
holders have a put. In March 2000, the Series B preferred stock and a portion of
the redeemable common stock were redeemed by Orius Corp. In connection with
those redemptions, NATG borrowed $41.1 million from its credit facilities and
paid Orius Corp. the funds. It is expected that the remainder of the redeemable
common stock will be retired by the Company in the first half of 2000 and NATG
will be required to fund that redemption through borrowings from its credit
facilities.
16. SERIES C REDEEMABLE PARTICIPATING PREFERRED STOCK
The Orius Series C participating preferred stock accrues dividends daily at
a rate of 12% per annum based on a liquidation value of $1,000 per share and
participates in any dividends paid to holders of the common stock. Upon a
liquidation of the Company, the holders of the Series C preferred stock would be
entitled to receive the liquidation value of their stock plus accrued and unpaid
dividends prior to any distributions to the holders of common stock. The Series
C preferred stock will be redeemed on December 31, 2019 at its purchase price,
plus accrued dividends and the liquidation value of the common stock into which
it is convertible.
Upon an initial public offering, the Series C preferred stock is
convertible at the option of the holders of a majority of the Series C preferred
stock into shares of Series D preferred stock and common stock. Each share of
Series C preferred stock is convertible into (1) a number of shares of Series D
preferred with a liquidation value equal to $1,000 plus accrued and unpaid
dividends on the Series C preferred stock, plus (2) a number of shares of common
stock equal to $1,000 divided by the conversion price of the Series C preferred
stock.
The Series D preferred stock is similar in rights and preferences to the
Series C preferred stock but is not convertible into common stock and is
redeemable by the company at any time. In addition, the holders of majority of
the Series D preferred stock can cause the company to redeem some or all of
their shares of Series D preferred stock at any time.
F-26
164
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, the total recorded value of the Series C preferred
stock has been determined based upon a purchase price of $1,000 per share,
accrued and unpaid dividends of $995,918 and a value per common share of $1.34.
The purchase price of $1,000 per share and the value per common share of $1.34
were based upon the values of the preferred and common stock purchased in
connection with the Orius/LISN transaction. Subsequent value per common share
and accretion will be adjusted quarterly based on the Company's performance,
recent transactions and comparable trading multiples.
The amount attributable to the accretion to the redemption value of the
Series C preferred stock of $78,816,000 is recorded as a direct reduction of
retained earnings and is a reduction of income available to common shareholders
and reflects the adjustment to the fair value of the preferred stock held by the
former LISN shareholders.
17. INCOME TAXES
The components of the provision for income taxes for the period ended
December 31, 1999 are:
1999
----------
Current
Federal................................................... $2,866,250
State..................................................... 1,109,517
----------
3,975,767
----------
Deferred.................................................... 47,346
Federal................................................... 16,754
----------
State..................................................... 64,100
----------
Total tax provision............................... $4,039,867
==========
The types of temporary differences between the tax bases of assets and
liabilities and their net financial reporting amounts that give rise to the
deferred liabilities and assets at December 31, 1999 are as follows:
1999
-----------
Accrued liabilities and reserves............................ $ 870,906
Other....................................................... 146,521
-----------
Total deferred tax assets................................... 1,017,427
-----------
Unbilled accounts receivable................................ 4,272,295
Accumulated depreciation and amortization................... 5,468,413
Reversal of cash basis...................................... 931,371
Contract differences........................................ 249,385
Other....................................................... 636,640
-----------
Total deferred tax liabilities.............................. 11,558,104
-----------
Net deferred tax liability.................................. $10,540,677
===========
The expected provision for income taxes at the statutory Federal income tax
rate and the actual provision for the period ended December 31, 1999 differs due
primarily to the effects of state taxes and non-deductible goodwill
amortization.
18. PROFIT SHARING AND 401(k) PLANS
The Company has a profit sharing plan covering all eligible employees, as
defined in the plan, which provides, in part, for annual discretionary Company
contributions not to exceed the maximum amount allowable as a deduction for
income tax purposes. Company contributions, included in general and
F-27
165
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative expenses, were $1,050,000, $500,000 and $200,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company has a 401(k) plan for all eligible employees. Effective with
the payroll dates after January 1, 1998, the Company contribution rate was 75%
of the first 5% of compensation contributed by the employee. Total Company
contributions amounted to $317,294, $221,501 and $61,685 for the years ended
December 31, 1999, 1998 and 1997, respectively.
19. STOCK OPTION PLAN
On July 19, 1999, the shareholders of the Company approved the Management
Equity Agreement Plan (the "Plan"). The Plan authorized the granting of stock
options for an aggregate of 3,398 shares of common stock to certain officers and
key employees of the Company at an option price of $138.96 which is the
estimated fair value on the effective date of the grant. The Options may be
exercised only to the extent they have vested. As long as an employee investor
remains employed by the Company or its Subsidiaries, 10% of such employee
investor's options will become vested annually on March 31 of each year for a
five year period commencing March 31, 2000 (each a "Vesting Date"). An
additional 10% of an employee investor's options may vest and become exercisable
on each Vesting Date, subject to achievement by the Company of target operating
performance levels for the Company's then most recently completed fiscal year,
which performance targets shall be determined annually in advance by the Board.
All remaining options shall vest and become exercisable on July 19, 2006 as long
as such employee investor has been and remains continuously employed by the
Company as of such date. Upon sale of the Company, all or any portion of the
options which have not previously vested shall become vested and exercisable
upon the occurrence of such event. The options shall expire on July 19, 2009, if
not earlier exercised. No options had vested as of December 31, 1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" for measuring compensation
expense. The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". If the Company had adopted the measurement criteria for
calculating compensation expense prescribed by SFAS 123, there would have been
no effect on the Company's consolidated financial statements for the nine months
ended December 31, 1999.
In connection with the LISN/Orius transaction, these options were equitably
adjusted and converted into options of Orius common stock.
20. SEGMENTS
Prior to the Orius/LISN transaction on December 15, 1999, the Company
operated as one segment in the internal telecom service market providing
engineering, furnishing and installation of network equipment and related
components and maintenance services. Subsequent to the transaction and to
strategically manage its business, the Company has designated an additional
operating segment. The external telecom services segment provides installation,
design engineering and maintenance of fiber optic, coaxial and copper cable
networks for the telecom industry.
F-28
166
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Identifiable assets for each operating segment at December 31, 1999 are as
follows:
1999
------------
Internal telecom services................................... $ 91,905,511
External telecom services................................... 152,597,325
------------
Total identifiable assets................................... 244,502,836
------------
Goodwill.................................................... 359,881,615
Corporate................................................... 17,593,381
------------
Total assets................................................ $621,977,832
============
Revenues and operating income for the year ended December 31, 1999 are
primarily related to the internal telecom services operating segment.
21. COMMITMENTS AND CONTINGENCIES
LEASES
The Company occupies certain facilities under noncancelable lease
agreements classified as operating leases expiring at various dates through
fiscal 2002, some of which have options to renew. The Company also leases
certain vehicles and equipment under noncancelable operating agreements.
Aggregate rental expense was approximately $559,000 and $313,000 for the years
ended December 31, 1999 and 1998, respectively. Future minimum lease commitments
under these leases are as follows:
OPERATING
LEASES
-----------
For fiscal years ending:
2000...................................................... $ 2,967,589
2001...................................................... 2,562,525
2002...................................................... 2,431,040
2003...................................................... 2,282,787
2004...................................................... 1,712,527
Thereafter................................................ 382,307
-----------
$12,338,775
===========
CREDIT LINES ISSUED TO INVESTEES
As discussed in Note 10, the Company has made loan commitments to two
investees. Any loans made pursuant to these commitments are exclusively for
working capital purposes. At December 31, 1999, open commitments under these
loan agreements total $890,000.
LITIGATION
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, it is expected that the
ultimate resolution of these matters will not have a material effect on the
Company's consolidated financial position or results of operations and cash
flows.
22. RELATED PARTY TRANSACTIONS
Certain subsidiaries of NATG lease administrative offices from partnerships
and corporations of which certain officers of the subsidiaries are the general
partners or shareholders. The total expense under these arrangements for the
period December 15, 1999 to December 31, 1999, was insignificant. Future minimum
F-29
167
ORIUS CORP. AND SUBSIDIARIES (FORMERLY LISN HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease commitments under these arrangements are $140,715 in 2000, $121,500 in
2001, $83,070 in 2002 and $33,768 in 2003.
23. SUBSEQUENT EVENTS
On January 31, 2000, the Company purchased Irwin Utilities of Texas, Inc.
for $16.8 million.
On February 9, 2000, NATG and Orius Capital Corp. (the "Issuers"), a wholly
owned subsidiary of NATG, issued $150 million of 12 3/4% Senior Subordinated
Notes due 2010 (the Notes). The proceeds from the Notes were used to repay the
Bridge Loan and a portion of the Senior Term B. The Notes are fully and
unconditionally guaranteed by the Company and all operating subsidiaries.
Because (i) the direct and indirect subsidiaries are wholly owned by the
Company, (ii) there are no nonguarantor direct or indirect subsidiaries, (iii)
the guarantees and all direct and indirect subsidiaries are full and
unconditional, and joint and several and (iv) management has determined that the
financial statements of the guarantors would not be material to investors,
financial information of the Issuers and the guarantor subsidiaries has not been
disclosed in these financial statements. Additionally, there are no significant
restrictions on the Issuers' ability to obtain funds from the subsidiaries by
dividend or loan.
During March 2000, Orius exercised its option to purchase $39.4 million of
its outstanding preferred stock and $1.7 million of its common stock. The funds
for the exercise of the call options were obtained from the Company's credit
facilities and the payment to Orius was reflected as a decrease in the Orius
Corp. securities subject to put and call arrangements.
On March 9, 2000, the Orius Board of Directors authorized a 10 for 1 stock
split. All share amounts presented in these financial statements have been
restated to reflect the split.
F-30
168
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
of Orius Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows present fairly, in all material respects, the financial position of
Orius Corp. and its subsidiaries (formerly NATG Holdings, Inc.) at December 14,
1999 and December 31, 1998, and the results of their operations and their cash
flows for the year ended December 31, 1998 and the period ended December 14,
1999, in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 31, 2000
F-31
169
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholder and Board of Directors of
Kenya Corporation and Subsidiary
Sheboygan, Wisconsin
We have audited the accompanying consolidated balance sheet of Channel
Communications, Inc. (f/k/a Kenya Corp.) as of December 31, 1997, and the
related consolidated statements of income and retained earnings and cash flows
for the year then ended. 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the consolidated
financial position of Kenya Corporation and subsidiary as of December 31, 1997,
and the consolidated results of their operations and their consolidated cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ WILLIAMS YOUNG, LLC
Madison, Wisconsin
February 27, 1998
F-32
170
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 14, 1999 AND DECEMBER 31, 1998
1999 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,513,136 $ 2,252,303
Accounts receivable, net.................................. 101,953,422 33,673,017
Inventory................................................. 13,966,393 9,542,743
Costs and estimated earnings in excess of billings, net... 10,340,896 --
Other current assets...................................... 4,932,153 852,481
------------ -----------
Total current assets.............................. 136,706,000 46,320,544
Property and equipment, net................................. 37,794,883 15,474,071
Goodwill, net............................................... 102,430,132 26,860,511
Deferred financing costs, net............................... 4,835,284 1,400,527
Other assets, net........................................... 4,583,608 917,986
------------ -----------
$286,349,907 $90,973,639
============ ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current portion of long term debt......................... $ 10,696,082 $ 5,864,268
Borrowings under credit facility.......................... 13,500,000 6,750,000
Accounts payable.......................................... 22,196,695 8,288,999
Accrued liabilities....................................... 20,049,076 5,889,749
Other liabilities......................................... 1,751,450 3,277,386
------------ -----------
Total current liabilities......................... 68,193,303 30,070,402
------------ -----------
Long term debt, less current portion........................ 157,848,906 42,649,585
Deferred income tax liability............................... 5,718,317 2,594,697
------------ -----------
Total liabilities........................................... 231,760,526 75,314,684
------------ -----------
Convertible preferred stock................................. 86,355,722 7,340,649
Value of redemption rights associated with junior
subordinated convertible note............................. 9,417,349 493,358
------------ -----------
95,773,071 7,834,007
------------ -----------
Stockholders' equity (deficit):
Warrants.................................................. 868,538 --
Common stock, par value $.01 per share; 51,804,555 shares
authorized; 14,437,509 and 10,897,151 shares issued and
outstanding at December 14, 1999 and December 31, 1998,
respectively........................................... 140 105
Additional paid-in capital................................ 31,483,834 7,427,745
Retained earnings (accumulated deficit)................... (73,536,202) 397,098
------------ -----------
Total stockholders' (deficit) equity.............. (41,183,690) 7,824,948
------------ -----------
Total liabilities and stockholders' (deficit)
equity......................................... $286,349,907 $90,973,639
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
171
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED DECEMBER 14, 1999, AND DECEMBER 31, 1998 AND 1997
CHANNEL
1999 1998 1997
------------ ----------- -----------
Revenues............................................. $314,821,066 $81,550,425 $20,267,800
Expenses:
Direct costs....................................... 237,651,744 59,896,854 15,256,758
General and administrative......................... 39,721,043 8,645,007 2,260,758
Depreciation and amortization...................... 10,293,153 3,758,708 823,602
------------ ----------- -----------
Total operating expenses................... 287,665,940 72,300,569 18,341,307
------------ ----------- -----------
Income from operations..................... 27,155,126 9,249,856 1,926,493
Other expense (income):
Interest expense, net.............................. 14,006,556 2,507,395 (66,314)
Other income....................................... (173,317) (72,345) (69,812)
------------ ----------- -----------
Total other expenses....................... 13,833,239 2,435,050 (136,126)
------------ ----------- -----------
Income before provision from income taxes and
extraordinary item.............................. 13,321,887 6,814,806 2,062,619
Provision for income taxes........................... 6,133,638 3,328,290 (137,387)
------------ ----------- -----------
Income before extraordinary charge......... 7,188,249 3,486,516
Extraordinary charge for debt retirement, net of tax
benefit of $578,000................................ 770,000 -- --
------------ ----------- -----------
Net income........................................... $ 6,418,249 $ 3,486,516 $ 2,200,006
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
172
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 14, 1999 AND DECEMBER 31, 1998 AND 1997
CHANNEL
1999 1998 1997
------------- ------------ -----------
Cash flows from operating activities:
Net income....................................... $ 6,418,249 $ 3,486,516 $ 2,200,006
Adjustments to reconcile net income to net cash
(used in) operating activities:
Provision for uncollectible accounts............. 874,880 405,284 14,047
Depreciation and amortization.................... 10,293,153 3,758,708 823,602
Extraordinary Charge............................. 770,000 -- --
Amortization of deferred financing costs......... 636,502 166,919 --
Loss (gain) on disposal of assets................ -- 53,150 (13,705)
Deferred income tax benefit...................... 272,546 (307,439) (220,276)
Charge associated with stock compensation........ 5,814,000 -- --
Changes in assets and liabilities:
(Increase) in accounts receivable............. (40,727,147) (3,859,919) (2,982,762)
(Increase) in inventories..................... (3,593,650) (9,542,743) --
(Increase) in costs and estimated earnings in
excess of billings.......................... (6,701,936) -- --
(Increase) in other assets.................... (7,046,518) 114,337 95,673
Increase in accounts payable and accrued
liabilities................................. 16,845,962 2,318,033 (112,602)
(Decrease) in other liabilities............... (977,343) (641,807) (2,185,326)
------------- ------------ -----------
Net cash (used in) operating
activities............................. (17,121,302) (4,048,961) (2,381,343)
------------- ------------ -----------
Cash flows from investing activities:
Capital expenditures............................. (8,924,866) (3,923,200) (211,947)
Proceeds from the sale of assets................. -- 75,510 57,542
Collection on notes receivable from
stockholder................................... -- -- 548,614
Purchases of subsidiaries, net of cash acquired,
including payment to accounting acquiror in
1998.......................................... (93,644,558) (40,934,547) --
------------- ------------ -----------
Net cash (used in) investing
activities............................. (102,569,424) (44,782,237) 394,209
------------- ------------ -----------
Cash flows from financing activities:
Borrowings on notes payable and line of credit... 302,441,669 61,306,677 --
Principal payments on notes payable and line of
credit........................................ (184,012,666) (13,434,749) --
Amounts paid for deferred financing costs........ (5,449,944) (1,567,446) --
Distributions paid to stockholders............... -- (6,117) (2,593,439)
Proceeds from issuance of common stock........... 2,403,123 -- --
Proceeds from issuance of convertible preferred
stock, net of costs........................... 7,569,377 4,438,500 --
------------- ------------ -----------
Net cash provided by financing
activities............................. 122,951,559 50,736,865 (2,593,439)
------------- ------------ -----------
Net increase in cash and cash equivalents.......... 3,260,833 1,905,667 (4,580,573)
Cash and cash equivalents at beginning of year..... 2,252,303 346,636 4,927,209
------------- ------------ -----------
Cash and cash equivalents at end of year........... $ 5,513,136 $ 2,252,303 $ 346,636
============= ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest......................................... $ 11,832,699 $ 2,306,701 $ 19,858
============= ============ ===========
Income taxes..................................... $ 6,109,426 $ 2,769,243 $ 2,185,326
============= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
173
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIODS ENDED DECEMBER 14, 1999 AND DECEMBER 31, 1998 AND 1997
RETAINED TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
----------------- ------------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL DEFICIT) (DEFICIT)
------ -------- ---------- ------ -------- ----------- ------------ -------------
Balance at December 31, 1996.... 275 $ 27,500 -- -- -- $ 386 $ 8,512,674 $ 8,540,560
Distributions................. (2,593,439) (2,593,439)
Net Income.................... 2,200,006 2,200,006
---- -------- ---------- ---- -------- ----------- ------------ ------------
Balance at December 31, 1997.... 275 27,500 -- -- -- 386 8,119,241 8,147,127
Distributions................. (166,787) (166,787)
Shares exchanged.............. (275) (27,500) 2,779,387 27 -- 27,473 -- --
Cash payment to accounting
acquiror.................... (4,440,635) (7,646,365) (12,087,000)
Common stock issued for
acquisitions................ 8,117,764 78 -- 11,840,521 -- 11,840,599
Accretion associated with
junior subordinated
convertible note............ (493,358) (493,358)
Accretion associated with
convertible preferred stock,
including dividends......... (2,902,149) (2,902,149)
Net income.................... 3,486,516 3,486,516
---- -------- ---------- ---- -------- ----------- ------------ ------------
Balance at December 31, 1998.... -- -- 10,897,151 105 -- 7,427,745 397,098 7,824,948
Warrants issued............... 868,538 868,538
Common stock issued for
acquisitions................ 2,511,279 25 15,838,476 15,838,501
Other common stock
issuances................... 1,029,079 10 2,403,613 2,403,623
Charge associated with stock
compensation................ 5,814,000 5,814,000
Accretion associated with
junior subordinated
convertible note............ (8,923,991) (8,923,991)
Accretion associated with
junior convertible preferred
stock, including
dividends................... (71,427,558) (71,427,558)
Net income.................... 6,418,249 6,418,249
---- -------- ---------- ---- -------- ----------- ------------ ------------
Balance at December 14, 1999.... -- $ -- 14,437,509 $140 $868,538 $31,483,834 $(73,536,202) $(41,183,690)
==== ======== ========== ==== ======== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
174
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 14, 1999 AND DECEMBER 31, 1998 AND 1997
1. COMMENCEMENT AND NATURE OF OPERATIONS
North American Tel-Com Group, Inc. (NATG) was formed in 1997 to create a
nationwide provider of comprehensive telecom infrastructure services. Prior to
March 31, 1998, NATG had no substantive operations. As further discussed in Note
2, NATG entered into a series of transactions with four other companies on March
31, 1998 and NATG began its commercial operations (the Simultaneous Business
Combination). Also discussed in Note 2, NATG went through a reorganization
during 1999 that resulted in the formation of Orius Corp. and NATG became an
indirect wholly-owned subsidiary of Orius Corp. (the Reorganization).
Orius Corp. entered into a business combination with LISN Holdings, Inc. on
December 15, 1999. That transaction was accounted for as a reverse acquisition
purchase with LISN Holdings, Inc. being deemed the accounting acquiror. As a
result of the acquisition by LISN Holdings, Inc., the 1999 financial statements
present the operations for Orius Corp. and its subsidiaries (the Company) as of
and for the period ended December 14, 1999.
2. THE SIMULTANEOUS BUSINESS COMBINATION AND THE REORGANIZATION
THE SIMULTANEOUS BUSINESS COMBINATION
On March 31, 1998, NATG and several other parties simultaneously entered
into a series of transactions and agreements including: a new stockholders'
agreement; preferred stock coupled with a redemption agreement (Notes 9 and 10)
and a junior subordinated note (Note 8) was issued to HIG Cable, Inc. (HIG), a
subsidiary of HIG Capital Management; a credit facility and loan agreement were
entered; and four stock exchange agreements were entered. The result of these
transactions was the commencement of Orius' operations.
Pursuant to the new stockholders agreement and the four stock exchange
agreements, Channel Communications, Inc. (Channel); Cablemasters Corp.
(Cablemasters); Excel Cable Construction, Inc. (Excel); and Mich-Com Cable
Services Incorporated (Mich-Com) each exchanged its common stock for common
stock of NATG and cash. In accordance with APB Opinion No. 16, Channel was
deemed to be the accounting acquiror of the other companies involved in the
Simultaneous Business Combination. This designation was made because after
giving effect to the transactions on March 31, 1998, Channel held the largest
percentage of voting common stock and was the largest entity involved in the
Simultaneous Business Combination. Accordingly, the cash paid of $12.1 million
to the former Channel shareholders was accounted for as a reduction of Channel's
March 31, 1998 equity and no value was ascribed to the NATG shares of common
stock received by the former Channel shareholders.
The 1997 financial statements presented herein are those of Channel.
THE REORGANIZATION
At December 31, 1998, the organization consisted of eight subsidiaries
operating under NATG: Channel; Cablemasters; Excel; Mich-Com; U.S. Cable, Inc.
(U.S. Cable); CATV Subscriber Services, Inc. (CATV); Statewide CATV, Inc.
(Statewide); and Burn-Techs, Inc. (Burn-Techs). At December 31, 1998, the common
stock of NATG was owned by the former owners of these companies and certain
executive officers and founders of NATG. HIG Cable, Inc. owned all the
outstanding preferred stock.
On February 8, 1999, a reorganization occurred in connection with the
acquisition of four companies and related financing. Orius Corp., a Delaware
corporation, was formed, and it formed NATG Holdings, LLC (NATG Holdings), a
Delaware limited liability company. Orius Corp. held all of the interest in NATG
Holdings. NATG Holdings formed a subsidiary, NATG Merger Sub., which was merged
with and
F-37
175
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
into NATG with NATG as the surviving corporation. As a result of the
Reorganization, NATG became an indirect wholly owned subsidiary of Orius. The
Reorganization resulted in all of the stockholders of NATG holding shares of
Orius.
Shares of common and preferred stock of NATG were converted into one-tenth
of a share of common and preferred stock of Orius, respectively. This
one-for-ten exchange was the same for all stockholders and has been reflected in
these financial statements by restating all share amounts.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company's operations consist primarily of installation, design,
engineering, and maintenance services for the telecom industry in the United
States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Orius Corp. and its
subsidiaries, all of which are wholly-owned. All material intercompany accounts
and transactions have been eliminated.
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 amounts reported in the financial statements and
accompanying notes. Significant estimates made in the preparation of these
financial statements include those related to the revenue recognized and costs
and expenses associated with contracts in process at period end, allowances for
doubtful accounts, and the estimated lives of long-lived assets. Actual results
could differ from those estimates and such differences may be material to the
financial statements.
REVENUES
Prior to the acquisitions made in 1999, substantially all of the Company's
revenues were earned from contracts that provided for payments for units
delivered by the Company. These contracts generally entitle the Company to
revenue for each unit completed. Accordingly, the Company accounts for revenue
and related costs associated with these types of contracts using the
units-of-delivery revenue recognition method. Revenue is recognized as the
related units are completed, and costs allocable to the delivered units are
recognized as the cost of earned revenue. Unbilled revenues consist of
work-in-process on contracts based on management's estimate of work performed,
but not billed. All costs associated with unbilled revenues are recorded as
expenses in the same period as the unbilled revenue. The Company also receives
advances from customers related to certain of these contracts which are
reflected as deferred revenues on the balance sheet.
With the acquisitions discussed in Note 4, the Company assumed and began to
offer contracts under fixed price arrangements. Consequently, the Company
modified its revenue recognition policy to include these types of contracts. For
fixed price contracts, the Company recognizes revenue and the related costs
under the percentage-of-completion method. Revenues and earnings from these
contracts are recognized as the related costs are incurred based on the
relationship of costs incurred to total estimated contract costs. Costs and
estimated earnings in excess of billings for contracts-in-progress represents
revenue recognized but not yet billed. Billings in excess of costs and estimated
earnings represents billings on contracts for which costs have not yet been
incurred and revenue and earnings have not been recognized.
F-38
176
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, NATG recognizes revenues from short-term contracts with
duration less than two weeks under the completed contract method. Billings and
costs are accumulated on the balance sheet, and no profit is recorded before
completion or substantial completion of the work.
At the time a loss on any contract becomes known, the entire amount of the
estimated loss is accrued.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with a
maturity of three months or less at the time of purchase. For purposes of the
consolidated statements of cash flows, the Company considers these to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed over the estimated useful life of the assets utilizing the
straight-line method. The estimated useful lives of the assets are:
buildings -- 20-30 years; leasehold improvements -- the term of the respective
lease or the estimated useful life of the improvements, whichever is shorter;
vehicles -- 3-7 years; equipment and machinery -- 3-7 years; computer software
and hardware -- 3-5 years; and furniture and fixtures -- 5-7 years. Maintenance
and repairs are expensed as incurred; expenditures that enhance the value of the
property or extend its useful life are capitalized. When assets are sold or
returned, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in income.
INVENTORY
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market. Inventory consists of items purchased for resale at cost based
on terms of customer contracts. Accordingly, there is no cost other than the
purchase price of the items purchased included in the carrying value.
Substantially all of the Company's inventories can be used in multiple
contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments approximate their
recorded values due to the relatively short-terms of the instruments and the
floating interest rate of the Company's debt. CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable are due from
companies within the telecommunications industry located throughout the United
States. Credit is extended based on an evaluation of the customer's financial
condition and, generally, collateral is not required. Credit losses are provided
for in the consolidated financial statements.
The Company maintains various bank accounts and at times, amounts may be in
excess of FDIC insurance limits.
INTANGIBLE ASSETS
The excess of the purchase price over the fair market value of the tangible
net assets of acquired businesses (goodwill) is amortized on a straight-line
basis over estimated useful lives of 10 to 25 years. The appropriateness of the
carrying value of goodwill is reviewed periodically by the Company at a
subsidiary level. An impairment loss for the difference between fair value and
recorded value is recognized
F-39
177
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
when the projected undiscounted future cash flows are less than the carrying
value of goodwill. No impairment loss has been recognized in the period
presented. Amortization expense was $3,321,242 and $766,953 for the fiscal
periods ending December 14, 1999 and December 31, 1998, respectively. The
intangible assets at December 14, 1999 and December 31, 1998 are net of
accumulated amortization of $4,088,196 and $766,953, respectively.
Deferred financing costs of $5,471,786 and $1,567,446 at December 14, 1999
and December 31, 1998, respectively, are being amortized over the term of the
related debt facility. For the period ended December 14, 1999 and December 31,
1998, $636,502 and $166,919, respectively, of amortization expense related to
these costs has been included in interest expense.
INCOME TAXES
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities.
Prior to the transaction on March 31, 1998, the Company, with the consent
of its stockholder, has elected to be an S corporation under the Internal
Revenue Code. Therefore, no provision or liability for federal and state income
taxes has been included for these periods.
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation," which was effective for the Company beginning August
1, 1996. SFAS No. 123 requires expanded disclosures of stock based compensation
arrangements with employees, and encourages, but does not require, compensation
cost to be measured based on the fair value of the equity instrument awarded.
Under SFAS No. 123, companies are permitted, however, to continue to apply
Accounting Principle Board (APB) Opinion No. 25, which recognizes compensation
based on the intrinsic value of the equity instrument awarded. The Company
applies APB Opinion No. 25 to its stock based compensation awards to employees
and properly discloses the required pro forma effect of applying SFAS No. 123 on
net income included in Note 15.
RECLASSIFICATIONS
Certain amounts presented in the prior year financial statements have been
reclassified to conform to the current year presentation.
4. ACQUISITIONS
Orius acquired seven companies during 1998 (excluding Channel) for total
consideration of $39.6 million plus transaction related expenses of $1.2
million. The cash paid for acquisitions totaled $27.6 million (net of cash
acquired of $3.0 million) and the value of the common stock issued totaled $11.8
million. Additionally, approximately $7.5 million of debt was assumed. All of
the 1998 acquisitions were accounted for as purchases and were included in the
Company's operations from the dates of acquisition. The total goodwill
associated with these transactions was approximately $27.6 million.
During 1999, five companies were acquired for total consideration of
$107.75 million plus transaction related expenses of $1.65 million.
Additionally, approximately $7.1 million of debt was assumed. Cash paid for the
four acquisitions totaled $91.9 million (net of cash acquired of $4.8 million)
and the value of common stock issued (2,511,279 shares) totaled $15.8 million.
The purchase price of each acquisition is subject to a customary purchase price
adjustment mechanism. All the 1999 acquisitions were accounted
F-40
178
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for as purchases and were included in the results of operations from the date of
acquisition. The goodwill associated with the 1999 acquisitions totaled $78.9
million.
Pursuant to certain of the purchase agreements, the Company may be required
to give additional consideration of cash and Orius common stock to the former
acquired-company shareholders upon attainment of specified financial criteria
over the periods ended December 31, 1999 and the year ending December 31, 2000.
The amount of shares and cash to be issued cannot be determined until the
periods expire and the attainment of the criteria is established. The Company
accounts for this additional consideration when the specified financial criteria
are achieved and it is probable it will be paid. At December 14, 1999, based
upon the expected attainment of fiscal 1999 targets for certain acquisitions,
additional consideration of $1.5 million has been recorded as additional
purchase price and included as a liability to the former stockholders of the
acquired companies. If targets are achieved in 2000, the Company may be
obligated to pay additional consideration of $2.9 million and issue up to
120,000 shares of common stock.
Since its commencement of operations, the following acquisitions have been
made by Orius:
ACQUISITION PRIMARY PRINCIPAL
DATE LOCATION CUSTOMERS
----------- -------------- ------------------
Cablemasters Corp............................. 3/31/98 Pennsylvania Cable TV
Excel Cable Construction, Inc................. 3/31/98 Florida Cable TV
Mich-Com Cable Services Incorporated.......... 3/31/98 Florida Cable TV
U.S. Cable, Inc............................... 6/30/98 Missouri Cable TV
CATV Subscriber Services, Inc................. 8/31/98 North Carolina Cable TV
State Wide CATV, Inc.......................... 8/31/98 Florida Cable TV
Burn-Techs, Inc............................... 8/31/98 Florida Telecommunications
Schatz Underground Cable...................... 2/26/99 Missouri Telecommunications
Copenhagen Utilities & Construction,.......... 2/26/99 Oregon Telecommunications
Das-Co of Idaho............................... 2/26/99 Idaho Telecommunications
Network Cabling Services...................... 2/26/99 Texas Network Services
Texel Corporation............................. 5/25/99 Virginia Network Services
The following unaudited pro forma financial information represents the
unaudited pro forma results of operations as if the aforementioned acquisitions
completed during the periods ended December 31, 1998 and December 14, 1999 had
been completed on January 1, 1998. These pro forma results give effect to
increased interest expense for acquisition-related debt and amortization of
related goodwill. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have been achieved had these acquisitions been completed on January
1, 1998 nor are the results indicative of the company's future results of
operations (in thousands and unaudited).
PERIOD ENDED YEAR ENDED
DECEMBER 14, DECEMBER 31,
1999 1998
------------ ------------
Revenues.................................................... $341,368 $264,740
Net income.................................................. $ 10,236 $ 9,777
F-41
179
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
At December 14, 1999, contracts accounted for using the
percentage-of-completion method totaling $89.7 million were in process. Costs
and estimated earnings, and related billings on uncompleted projects at December
14, 1999 are as follows (in thousands):
Costs and estimated earnings on uncompleted contracts....... $41,189,851
Billings to date............................................ 30,848,955
-----------
Net costs and estimated earnings in excess of billings...... 10,340,896
===========
Costs and estimated earnings in excess of billings.......... 10,955,078
Billings in excess of costs and estimated earnings.......... (614,182)
-----------
Net costs and estimated earnings in excess of billings...... $10,340,896
===========
6. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 14, DECEMBER 31,
1999 1998
------------ ------------
Contract billings........................................... $ 84,751,120 $23,673,522
Unbilled accounts receivable................................ 9,606,214 7,519,615
Retainage................................................... 8,197,404 2,818,579
------------ -----------
102,554,738 34,011,716
Less allowance for doubtful accounts........................ (601,316) (338,699)
------------ -----------
Accounts receivable, net.................................... $101,953,422 $33,673,017
============ ===========
The balances billed but not paid by customers pursuant to retaining
provisions in customer contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts, the majority of the retention balances at December 14, 1999 are
expected to be collected within the next twelve months. Unbilled accounts
receivable relate to the Company's unit based contracts and represent revenue
the Company is entitled to based upon the units delivered as of the balance
sheet date.
7. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation
and consist of the following:
DECEMBER 14, DECEMBER 31,
1999 1998
------------ ------------
Land, building and leasehold improvements................... $ 4,247,324 $ 616,258
Vehicles.................................................... 13,823,791 12,957,646
Equipment and machinery..................................... 28,276,378 7,579,213
Office equipment, including furniture and fixtures, and
computer equipment and software........................... 5,367,356 770,931
------------ -----------
51,714,849 21,924,048
Less: accumulated depreciation............................ (13,919,966) (6,449,977)
------------ -----------
Property and equipment, net................................. $ 37,794,883 $15,474,071
============ ===========
F-42
180
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain subsidiaries of the Company have entered into lease arrangements
accounted for as capitalized leases. The carrying value of assets under capital
leases at December 14, 1999 and December 31, 1998 was $950,227 and $474,326, net
of accumulated depreciation of $283,895 and $76,628, respectively. Assets under
capital leases are included as a component of vehicles and equipment and
machinery.
8. DEBT AND CAPITAL LEASE OBLIGATIONS
BANK CREDIT FACILITY
DECEMBER 14, DECEMBER 31,
1999 1998
------------ ------------
Bank credit facility:
Revolving credit facility, maturing on April 1, 2005;
interest rate of LIBOR or Federal Funds Rate plus
0.50%, in either case plus a margin of 2.00% or 0.50%,
respectively........................................... $ -- $ 6,750,000
Revolving credit facility, maturing on February 26, 2004;
interest rate of LIBOR or Federal Funds Rate plus
0.50%, plus a margin ranging from 2.25% to 3.00% for
LIBOR and 1.25% to 2.00% for Federal Funds Margin based
on leverage ratio, beginning June 30, 1999............. 13,500,000 --
Term loan, amortizing with final payment due April 1,
2003; interest rate of LIBOR or Federal Funds plus
0.50%, in either case plus a margin of 2.00% or 0.50%,
respectively........................................... -- 27,625,000
Term loan, amortizing with final payment due April 1,
2005; interest rate of LIBOR or Federal Funds plus
0.50%, in either case plus a margin of 2.375% or
0.876%, respectively................................... -- 18,950,000
Term loan A, amortizing with final payment due December 1,
2003; interest rate of LIBOR or Federal Funds plus
0.50%, plus a margin ranging from 2.25% to 3.00% for
LIBOR and 1.25% to 2.00% for Federal Funds. Margin
based on leverage ratio, beginning
June 30, 1999.......................................... 92,400,000 --
Term loan B, amortizing with final payment due December 1,
2004; interest rate LIBOR on Federal Funds Rate plus
0.50%, in either case plus a margin of 3.75% or 2.75%,
respectively........................................... 57,600,000 --
Term loan C, amortizing with final payment due December 1,
2005; interest rate LIBOR on Federal Funds Rate plus
0.50%, in either case plus a margin of 5.00% or 4.00%,
respectively........................................... 14,231,464 --
Junior subordinated convertible note, due April 15, 2005,
interest rate of 9.00%................................. 1,150,000 1,063,750
Other debt and capital lease obligations.................. 3,163,524 875,103
------------ ------------
Total debt and capital lease obligations.......... 182,044,988 55,263,853
Less: current portion..................................... (24,196,082) (12,614,268)
------------ ------------
Long-term debt............................................ $157,848,906 $ 42,649,585
============ ============
On February 26, 1999, NATG Holdings entered into a new credit agreement
with Merrill Lynch, Pierce Fenner & Smith Incorporated and PNC Bank, National
Association ("PNC"), as joint lead arrangers and a new syndication of banks
("New Credit Agreement"). The New Credit Agreement, which was amended on May 24
and September 23, 1999, includes a $50.0 million revolving credit facility,
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ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturing in five years, and a $168.5 million senior secured term loan credit
facility. The term loan facility is allocated among a $95.5 million Term A
facility, maturing on December 1, 2003; a $58 million Term loan B facility,
maturing of December 1, 2004; and a $15 million Term loan C facility, maturing
on December 1, 2005. NATG Holdings borrowed under the New Credit Agreement to
complete its acquisitions in February and May 1999 and to repay substantially
all indebtedness of NATG, and terminate all commitments to make extensions of
credit to NATG, under NATG's old credit facility with PNC.
Amounts under the revolving credit facility and term loan facility bear
interest, at NATG Holdings' choice, at either LIBOR plus an applicable margin or
the higher of PNC's corporate base rate of interest or the Federal Fund Rate
plus 0.50% (the "ABR"), in each case plus an applicable margin. For LIBOR loans,
the margin is 3.00% for the revolving credit facility and Term loan A facility,
3.75% for the Term loan B facility and 5.00% for the Term loan C facility. For
ABR loans, the margin is 2.00% for the revolving facility and Term loan A
facility, 2.75% for the Term loan B facility and 4.00% for the Term loan C
facility. Outstanding amounts under the revolving credit facility and term loan
facility are secured by substantially all of NATG Holdings' assets and the
pledge of all the outstanding shares of common stock of each of Orius' direct
and indirect subsidiaries, including NATG. The credit facility also contains
affirmative and negative covenants relating to NATG Holdings' operations.
As a result of the termination and repayment of the indebtedness
outstanding under the old credit facility, the deferred financing costs
associated with the old credit facility totaling $1,348,000 were written off
resulting in an extraordinary charge to income of $770,000, net of tax benefits
of $578,000.
CAPITAL LEASE OBLIGATIONS AND EQUIPMENT LOANS
In addition to the borrowings under the credit facility, certain
subsidiaries have obligations outstanding under capital leases and other
equipment financing arrangements. The remaining obligations are payable in
monthly installments expiring at various dates through June 2003.
MATURITIES
At December 14, 1999, the estimated aggregate annual repayments for notes
payable and capital lease obligations are as follows:
Maturities for fiscal years:
2000...................................................... $ 24,196,082
2001...................................................... 24,348,597
2002...................................................... 27,073,905
2003...................................................... 26,905,927
2004...................................................... 48,861,646
Thereafter................................................ 30,658,831
------------
$182,044,988
============
JUNIOR SUBORDINATED CONVERTIBLE NOTE
On March 31, 1998, the Company sold to HIG a $1,000,000, 9% junior
subordinated convertible note, due April 15, 2005 (the Junior Convertible Note).
The debt may be converted at any time, at the option of HIG or at the Company's
option upon an initial public offering, into 692,627 shares of the Company's
common stock. As further discussed in Note 10, the Company and HIG entered into
a redemption agreement that gives HIG certain rights to put its converted common
stock to the Company. Due to the conversion feature of the Junior Convertible
Note coupled with the redemption rights of HIG, the liability
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ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
associated with the Junior Convertible Note is adjusted at each balance sheet
date to the greater of the principal plus interest due or the fair market value
of the converted common stock. At December 14, 1999, the fair market value of
the common stock is estimated at $13.38 per share. Accordingly, the liability
for the Junior Convertible Note is recorded at $9,267,349. The amount
attributable to the accretion to the fair value of the converted common stock
for the periods ended December 14, 1999 and December 31, 1998 of $8,923,991 and
$493,358, respectively, is recorded as a reduction of retained earnings and on a
separate line in the balance sheet. The interest charge for the periods ended
December 14, 1999 and December 31, 1998 totaled $90,000 and $63,500,
respectively and was recorded as interest expense.
9. CONVERTIBLE PREFERRED STOCK
During 1998, The company issued 10,000 shares of Series A Convertible
Preferred Stock (Series A Preferred) to HIG for $4,438,500, net of $61,500 of
issue costs. The Series A Preferred has an 8% cumulative dividend, is
convertible to shares of Orius common stock, has full voting rights on an as-if
converted basis and its conversion is at the discretion of HIG. Further, HIG was
given certain redemption rights discussed in Note 10. In connection with the
Reorganization discussed above, the number of shares of common stock into which
the Series A Preferred was convertible was changed to 3,116,828. At December 14,
1999 and December 31, 1998, the total recorded value of the Series A Preferred
has been determined based upon the convertible common shares into which the
Series A Preferred was convertible as of those dates at $2.34 per common share
and $13.38 per common share, respectively. The 1998 per common share price was
based upon the pricing of the February 26, 1999 Series B Convertible Preferred
Stock discussed below and the value of the common stock used in the December 15,
1999 transaction with LISN Holdings, Inc. discussed in Note 19. The accretion to
estimated fair value and dividends during the periods ended December 14, 1999
and December 31, 1998 was $34,993,495 and $2,902,149, respectively.
In connection with the acquisitions on February 26, 1999, HIG Cable West,
Inc. purchased 7,596.38 shares of Series B Convertible Preferred Stock (Series B
Preferred) for $7,569,377. The Series B Preferred has the same rights as the
Series A Preferred and may be converted into 3,252,290 shares of Orius Corp.
common stock. At December 14, 1999, the recorded value of the Series B Preferred
has been determined based upon the converted common shares of 3,252,290 at
$13.38 per share, or $43,515,640. The accretion to estimated fair value and
dividends from February 26, 1999 to December 14, 1999 totaled $36,434,063.
10. HIG REDEMPTION RIGHTS
The Company entered into a redemption agreement on March 31, 1998 with HIG
(the Redemption Agreement) that allows HIG to redeem its converted shares of
common stock derived from the Series A and Series B Preferred and Junior
Convertible Note. Pursuant to the Redemption Agreement, HIG may cause the
Company to redeem its converted shares of common stock at the earlier of a sale
of the Company, a merger involving the Company, commencement of liquidation or
bankruptcy proceedings, or April 15, 2005. Conversion can only occur for all of
the shares of Preferred Stock at once and the junior Convertible Note must be
converted at the same time. The redemption value of the converted shares of
common stock is the greater of fair market value at the date of redemption or
the initial purchase price for the Preferred Stock and junior Convertible Note
plus any accumulated and unpaid dividends and interest. In the event of an
initial public offering of Orius common stock, HIG's redemption rights are
terminated.
11. WARRANTS TO PURCHASE COMMON STOCK
In connection with entering the new credit agreement on February 26, 1999,
the Company issued to the joint lead arrangers and certain of the banks that
participated in the new credit agreement warrants to
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183
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase a total of 371,853 shares of common stock. The warrants expire March
31, 2009 and entitle the holders to purchase common stock for $.01 per share.
The warrants are exercisable any time after the consummation of an initial
public offering, September 30, 2003 or in the event of a merger or other change
of control.
The estimated fair market value of the warrants at the date of issuance of
$868,538 has been reflected in the separate component of stockholders' equity
entitled warrants. An offsetting amount has been reflected as a discount or
reduction of the Company's long-term debt. The $858,538 of discount is being
recognized as interest expense using the effective interest method over 66
months which is the weighted average life of the credit agreement components
including the full capacity of the revolver and the Term A, B and C loans.
12. ISSUANCE OF COMMON STOCK
On February 26, 1999, the Company issued to certain of its then existing
stockholders 1,029,079 shares of common stock in exchange for cash of
$2,403,623.
13. INCOME TAXES
Effective January 1, 1997, Channel elected to be treated as an S
corporation for income tax purpose as allowed under the Internal Revenue Code.
With this conversion, the Company's net deferred tax balance of $220,276 was
reversed as a credit to the provision for income taxes. The tax liabilities for
the year ended December 31, 1997 were the responsibility of the individual
shareholder. In connection with the transaction on March 31, 1998, the Company's
S corporation status was terminated. With this termination, the Company was
required to recognize a deferred tax liability and corresponding charge to
income of $330,254 with payment to be spread over four years.
The components of the provision for income taxes for the periods ended
December 14, 1999 and December 31, 1998 are as follows:
1999 1998
---------- ----------
Current
Federal................................................... $3,512,646 $2,912,700
State..................................................... 1,770,446 723,029
---------- ----------
5,283,092 3,635,729
---------- ----------
Deferred.................................................... 267,205 (555,460)
Federal................................................... 5,341 (82,213)
---------- ----------
State..................................................... 272,546 (637,693)
---------- ----------
Total tax provision............................... $5,555,638 $2,998,036
========== ==========
F-46
184
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The types of temporary differences between the tax bases of assets and
liabilities and their net financial reporting amounts that give rise to the
deferred liabilities and assets at December 14, 1999 and December 31, 1998 are
as follows:
1999 1998
---------- ----------
Allowance for doubtful accounts............................. $ 525,750 $ 463,327
Other....................................................... 146,521 103,088
---------- ----------
Total deferred tax assets......................... 672,271 566,415
---------- ----------
Accumulated depreciation and amortization................... 5,718,307 1,893,553
Reversal of cash basis...................................... 931,371 1,267,559
Other....................................................... 886,025 --
---------- ----------
Total deferred tax liabilities.................... 7,535,703 3,161,112
---------- ----------
Net deferred tax liability........................ $6,863,432 $2,594,697
========== ==========
A reconciliation of the expected provision for income taxes at the
statutory Federal income tax rate and the actual provision for the period ended
December 14, 1999 and December 31, 1998 are as follows:
1999 1998
----------------- -----------------
AMOUNT % AMOUNT %
---------- ---- ---------- ----
Expected total tax at statutory rate.................... $3,753,360 35.0 $2,317,034 34.0
State taxes, net of federal benefit..................... 1,150,673 10.7 519,677 6.8
Nondeductible amortization.............................. 919,821 8.6 268,452 2.8
Other, net.............................................. (268,216) (2.5) (107,127) (1.5)
---------- ---- ---------- ----
$5,555,638 51.8 $2,998,036 42.1
========== ==== ========== ====
14. EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company have defined contribution plans that
provide retirement benefits to all employees that elect to participate. Under
the plans, participating employees may defer up to 15% of their base pre-tax
compensation. Generally, the Company's contributions to the plans are
discretionary.
15. STOCK OPTION PLANS
The Company has reserved 518,045 shares of common stock under its 1998
Incentive Stock Option Plan (the "Plan") which was approved by the stockholders
on March 30, 1998. The Plan provides for the granting of options to key
employees. Options are exercisable over a period of 10 years. A summary of the
status of the Plan as of December 14, 1999 and December 31, 1998 and the changes
during the years then ended is presented below:
WEIGHTED
AVERAGE
PRICE PER EXERCISE
SHARES SHARE PRICE
------- ---------- --------
Options granted............................................. 340,060 $4.83-8.69 $5.46
------- ---------- -----
Options outstanding, December 31, 1998...................... 340,060 4.83-8.69 5.46
------- ---------- -----
Options granted............................................. 366,820 6.76-8.69 7.37
Options forfeited........................................... 54,868 4.83-8.69 5.99
------- ---------- -----
Options outstanding, December 14, 1999...................... 652,012 $4.83-8.69 $6.55
======= ========== =====
F-47
185
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Grants of options under the plan are accounted for using the intrinsic
value method. Accordingly, no compensation cost has been recognized for grants
made to date. There would have been no difference in net income for the period
ended December 31, 1998 had compensation cost been determined under the
provisions of SFAS 123 regarding the minimum fair value of each grant. For
purposes of this calculation in 1998, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option pricing model.
The weighted-average assumptions used in determining fair value as disclosed for
SFAS 123 were risk-free interest rates ranging from 5.0% to 5.7% and an option
life of six years. There would have been no difference in net income for the
period ended December 14, 1999 because the Company accelerated the vesting of
all options in connection with the transaction discussed in Note 19. As a result
of the acceleration, compensation expense of $5,814,000 was recognized and that
amount would have been approximately the same under SFAS No. 123.
16. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The operating subsidiaries obtain contracts from both public and private
concerns. For the periods ended December 14, 1999 and December 31, 1998, and
1997 approximately 36%, 56%, and 72%, respectively, of the contract revenues
were from three customers (TCI, Time Warner, and MediaOne), with the largest
customer representing approximately 16% and 24%, for the two most recent
periods, respectively, of the contract revenues.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade accounts receivable.
The three customers noted above represent a significant portion of the Company's
customer base. As of December 14, 1999 and December 31, 1998, the total
outstanding trade receivables from these customers was approximately $37.4
million and $13 million, respectively, or 38% and 50%, respectively, of the
Company's outstanding trade receivables.
17. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered operating leases covering
office facilities, vehicles and equipment that have non-cancelable terms in
excess of one year. Certain of these leases contain renewal provisions and
generally require the Company to pay insurance, maintenance, and other operating
expenses. Total expense incurred under operating lease agreements for the
periods ended December 14, 1999 and December 31, 1998 and 1997, were
approximately $4,325,647, $1,183,300 and $352,913, respectively.
For fiscal years ending:
2000...................................................... $ 2,669,705
2001...................................................... 2,250,375
2002...................................................... 2,159,168
2003...................................................... 2,045,102
2004...................................................... 1,459,250
Thereafter................................................ 382,307
-----------
Total payments............................................ $10,965,907
===========
18. RELATED PARTY TRANSACTIONS
Certain subsidiaries of the Company lease administrative offices from
partnerships and corporations of which certain officers of the subsidiaries are
the general partners or shareholders. The total expense under these arrangements
was $1,145,747 during the period ended December 14, 1999. The future minimum
lease commitments under these arrangements are $700,814 in 2000, $365,140 in
2001, $329,140 in 2002 and 2003 and $55,028 in 2004.
F-48
186
ORIUS CORP. AND SUBSIDIARIES (FORMERLY NATG HOLDINGS, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSEQUENT EVENTS
On December 15, 1999, the Company merged with LISN Holdings, Inc. In
connection with that transaction, all Orius common stock and common stock
equivalents (including the Series A and B Preferred Stock, Junior Convertible
Note and stock options) were either cashed out or exchanged for new securities
at an equivalent value of $13.38 per share. Additionally, all of the Orius debt
was retired.
F-49
187
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Orius Corp.
In our opinion, the accompanying balance sheets and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of U.S. Cable, Inc. at September 30, 1997 and June 30, 1998,
and the results of its operations and its cash flows for the year ended
September 30, 1997 and the nine months ended June 30, 1998 in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
April 1, 1999
F-50
188
U.S. CABLE, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1998
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,251,340 $ 2,069,038
Accounts receivable....................................... 2,426,636 3,771,432
Deferred billings......................................... 1,393,030 2,706,321
Inventory................................................. 315,112 204,609
Prepaid expenses.......................................... 105,678 81,133
Income tax receivable..................................... -- 574,211
----------- -----------
Total current assets.............................. 8,491,796 9,406,744
----------- -----------
Property and equipment, net................................. 1,465,180 1,079,415
----------- -----------
Other assets................................................ 235,111 176,255
----------- -----------
Total assets...................................... $10,192,087 $10,662,414
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 167,433 $ --
Accounts payable.......................................... 665,798 1,014,495
Accrued payroll and payroll taxes......................... 3,294,402 3,026,879
Accrued expenses.......................................... 74,351 30,918
Income taxes payable...................................... 103,389 --
----------- -----------
Total current liabilities......................... 4,305,373 4,072,292
----------- -----------
Long-term debt.............................................. 649,187 --
----------- -----------
Shareholders' equity:
Redeemable common stock, no par value, 40,000 shares
authorized; 36,720 (1997) and 27,356 (1998) shares
issued and outstanding................................. 901,541 1,904,022
Retained earnings......................................... 6,329,855 4,686,100
Less treasury stock, 16,267 (1997) shares at cost......... (1,993,869) --
----------- -----------
Total shareholders' equity........................ 5,237,527 6,590,122
----------- -----------
Total liabilities and shareholders' equity........ $10,192,087 $10,662,414
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-51
189
U.S. CABLE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND THE PERIOD ENDED JUNE 30, 1998
1997 1998
----------- -----------
Revenues.................................................... $16,111,159 $12,354,223
----------- -----------
Cost of revenues:
Materials................................................. 404,374 466,178
Subcontracting fees....................................... 6,299,154 5,006,676
Direct labor.............................................. 1,860,541 1,445,939
Overhead expenses......................................... 3,543,693 2,326,318
----------- -----------
Total cost of revenues............................ 12,107,762 9,245,111
----------- -----------
Gross profit................................................ 4,003,397 3,109,112
General and administrative expenses......................... 2,175,709 3,440,357
----------- -----------
Income (loss) from operations............................... 1,827,688 (331,191)
----------- -----------
Other (income) expenses:
Interest income........................................... (125,026) (134,320)
Interest expense.......................................... 58,885 30,150
Miscellaneous............................................. (22,738) (145,101)
----------- -----------
Total other (income).............................. (88,879) (249,271)
----------- -----------
Income (loss) before income taxes........................... 1,916,567 (81,974)
Provision (Benefit) for income taxes........................ 766,725 (19,598)
----------- -----------
Net income (loss)........................................... $ 1,149,842 $ (62,376)
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-52
190
U.S. CABLE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND THE PERIOD ENDED JUNE 30, 1998
1997 1998
---------- -----------
Cash flows from operating activities
Net income (loss)......................................... $1,149,842 $ (62,376)
---------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on investments, net.................................. (2,599) (29,629)
Gain on sale of equipment, net............................ (40,028) (70,947)
Depreciation.............................................. 458,508 334,187
Equity in earnings of affiliated company.................. (8,398) (20,259)
Deferred income tax provision............................. (25,000) 15,000
Changes in assets and liabilities
Accounts receivable.................................... 774,118 (1,344,796)
Deferred billings...................................... 650,560 (1,313,291)
Inventory.............................................. 71,361 110,503
Other assets........................................... 6,396 24,545
Accounts payable....................................... (421,080) 348,697
Accrued payroll and payroll taxes...................... 894,596 (267,523)
Accrued expenses....................................... (18,385) (43,433)
Income taxes payable/receivable........................ 78,569 (692,600)
---------- -----------
Total adjustment.................................. 2,418,618 (2,949,546)
---------- -----------
Net cash provided (used) by operating activities............ 3,568,460 (3,011,922)
---------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (699,134) (493,830)
Proceeds from sale of property and equipment.............. 146,856 616,355
Proceeds from distributions of investment earnings........ 30,654 --
Proceeds from sale of investments......................... -- 120,049
Net increase in cash value of life insurance.............. (15,026) (11,305)
---------- -----------
Net cash (used in) provided by investing activities......... $ (536,650) $ 231,269
---------- -----------
Cash flows from financing activities:
Proceeds from borrowing on long-term debt................. 391,730 --
Principal payments on long-term debt...................... (561,999) (816,620)
Payments of dividends to shareholders..................... (207,392) (205,056
Sales of treasury stock................................... 1,132,328 1,620,027
Purchases of treasury stock............................... (391,730) --
---------- -----------
Net cash provided by financing activities................... 362,937 598,351
---------- -----------
Net decrease increase in cash and cash equivalent........... 3,394,747 (2,182,302)
Cash and cash equivalent --
Beginning of year......................................... 856,593 4,251,340
---------- -----------
Cash and cash equivalent --
End of year............................................... $4,251,340 $ 2,069,038
========== ===========
The accompanying notes are an integral part of the financial statements.
F-53
191
U.S. CABLE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND FOR THE PERIOD ENDED JUNE 30, 1998
COMMON STOCK TREASURY STOCK
------------------- RETAINED --------------------
SHARES AMOUNT EARNINGS SHARES AMOUNT
------ ---------- ----------- ------ -----------
BALANCE AT SEPTEMBER 30, 1996............. 36,720 $ 232,174 $ 5,387,405 19,697 $(2,065,100)
Net income.............................. 1,149,842
Dividends paid.......................... (207,392)
Purchases of 1,822 shares............... 1,822 (391,730)
Sales of 5,252 shares................... 669,367 (5,252) 462,961
------ ---------- ----------- ------ -----------
BALANCE AT SEPTEMBER 30, 1997............. 36,720 $ 901,541 $ 6,329,855 16,267 $(1,993,869)
Net loss................................ (62,376)
Dividends............................... (205,056)
Sales of 6,903 shares................... 1,017,666 (6,903) 602,361
Retirement of 9,364 shares.............. (9,364) (15,185) (1,376,323) (9,364) 1,391,508
------ ---------- ----------- ------ -----------
BALANCE AT JUNE 30, 1998.................. 27,356 $1,904,022 $ 4,686,100 -- $ --
====== ========== =========== ====== ===========
The accompanying notes are an integral part of the financial statements.
F-54
192
U.S. CABLE, INC.
NOTES TO FINANCIAL STATEMENTS
THE YEAR ENDED SEPTEMBER 30, 1997
AND FOR THE PERIOD ENDED JUNE 30, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of certain significant accounting policies
followed in the preparation of the financial statements.
PRINCIPAL ACTIVITIES
U.S. Cable, Inc. (the "Company,") incorporated on December 12, 1963, is a
cable installation contractor for cable companies throughout the United States.
During the course of its business, the Company grants unsecured credit to its
customers.
BASIS OF ACCOUNTING
The Company's policy is to prepare its financial statements on the accrual
basis of accounting.
REVENUE RECOGNITION
Revenue is recorded as units and footages are actually installed. If the
unit price of a contract is determined to be below estimated cost, the entire
estimated ultimate loss is accrued.
DEFERRED BILLINGS
Deferred billings consist of unbilled accounts receivable for work
performed prior to the balance sheet date. All costs associated with the
deferred billings are also recognized as expenses as of the balance sheet date.
ACCOUNTS RECEIVABLE
Accounts receivable include amounts that represent retainage on contracts
which is collectible at the conclusion of the contracts. Retainage included in
the accounts receivable balance totaled $288,770 and $607,200 as of September
30, 1997 and June 30, 1998, respectively. Historically, the Company has not
experienced any significant bad debts or pricing adjustments and, accordingly,
there is no provision for bad debts or other allowances recorded as of any
balance sheet date.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments purchased
with original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost, on a first-in, first-out (FIFO)
basis, or market. Inventory consists primarily of purchased materials used in
the installation of cable systems.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using various accelerated and straight-line methods.
Repairs and maintenance charges which do not increase the useful lives of the
assets are charged to expense as incurred. Upon sale or retirement, the cost and
related accumulated depreciation are eliminated from the respective accounts and
resulting gain or loss included in other income.
F-55
193
U.S. CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TREASURY STOCK
The Company's common stock is no par value. When common stock is
repurchased, it is recorded as treasury stock at the cost of repurchase. When
treasury stock is sold, treasury stock is reduced by the lesser of the sale
price or original cost with any excess proceeds over cost used to increase
common stock. All treasury stock was retired during the period ended June 30,
1998.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes, which have not been material, are recognized for differences
between the basis of assets and liabilities for financial statement and income
tax purposes.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments approximate the
carrying values due to their short-term maturities.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Estimates are used in the Company's revenue recognition of work-in-process,
costs associated with the work-in-progress, allowances for doubtful accounts,
depreciation and amortization, and in the estimated lives of assets.
NOTE 2 -- STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
1997 1998
-------- -------
Cash paid during the year for:
Interest.................................................... $ 59,714 $49,732
======== =======
Income taxes................................................ $713,156 $83,791
======== =======
F-56
194
U.S. CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
1997 1998
----------- -----------
Land........................................................ $ 140,075 $ --
Buildings and improvements.................................. 414,903 --
Vehicles.................................................... 1,170,674 1,398,052
Construction equipment...................................... 848,179 885,981
Office equipment............................................ 117,477 68,701
----------- -----------
2,691,308 2,352,734
Accumulated depreciation.................................... (1,598,441) (1,614,133)
----------- -----------
Total............................................. $ 1,092,867 $ 738,601
=========== ===========
NOTE 4 -- INVESTMENT IN AFFILIATED COMPANY
The Company has an investment in an affiliated company which is accounted
for using the equity method of accounting. The total investment was $19,026 at
September 30 1997. The Company sold its interest in the affiliated company
during 1998 for $62,144 resulting in a gain of $38,789. Cash received from the
affiliates in the form of distributions has not been significant.
NOTE 5 -- LONG-TERM DEBT
Long-term debt at September 30, 1997 consists of the following:
1997
---------
Promissory note to shareholder with annual installments of
$83,143 plus interest at the one-year U.S. Treasury Bill
rate determined at each anniversary....................... $ 415,714
Promissory note to shareholder payable in monthly
installments of $1,032 including interest at 8.75% secured
by certain land........................................... 37,232
Promissory note to shareholder payable in monthly
installments of $1,032 including interest at 8.75% secured
by certain land........................................... 37,232
Promissory note to shareholder, payable in annual
installments of $65,288 plus interest (tied to the rate on
US Treasury Bills)........................................ 326,442
---------
Total............................................. 816,620
Less current portion........................................ (167,433)
---------
Total............................................. $ 649,187
=========
NOTE 6 -- INCOME TAXES
The components of the provision for income taxes are:
SEPTEMBER 30, JUNE 30,
1997 1998
------------- --------
Current:
Federal................................................... $664,369 $(20,676)
State..................................................... 127,356 (13,922)
-------- --------
791,725 (34,598)
Deferred.................................................... (25,000) 15,000
-------- --------
Total tax provision (benefit)............................... $766,725 $(19,598)
======== ========
F-57
195
U.S. CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The difference between income tax expense (or benefit) calculated by
multiplying the Federal statutory rate by income (or loss) before income taxes
and the reported amount of income tax expense (or benefit) is due state taxes
and nondeductible meals and entertainment expenses. Deferred tax assets and
liabilities are not significant.
NOTE 7 -- RETIREMENT PLAN
The Company has a qualified 401(k) profit sharing plan covering all
full-time employees employed one year. The Company matches 100% of the employee
deferral amount up to 2.5% of the employee's compensation. Total Company
contributions were $38,937 for the year ended September 30, 1997, and $30,845
for the period ended June 30, 1998.
NOTE 8 -- COMMON STOCK
All of the common stock of U.S. Cable, Inc., is subject to an agreement
between the company and its shareholders who have the right to require the
Company to repurchase shares at fair market value in the event of death,
retirement and certain financial hardships.
NOTE 9 -- CONCENTRATIONS OF BANK BALANCE
The Company maintains accounts with a bank totaling $4,251,340 and
$2,069,038 at September 30, 1997 and June 30, 1998, respectively. The cash at
this bank is primarily invested in cash equivalents.
NOTE 10 -- CONCENTRATION OF CUSTOMERS
Sales to three major customers; Media One, Time Warner and Cox
Communications, who operate cable television networks, for the year ended
September 30, 1997 and the period ended June 30, 1998 were $13,889,838 and
$10,857,676, respectively representing 95%, 86% and 88% of sales, respectively.
Account receivable from the three major customers at September 30, 1997 and June
30, 1998 were $3,475,362, and $6,102,784, and, respectively representing 91% and
94% of account receivable balance, respectively.
NOTE 11 -- DIVIDEND
The Board of Directors of the Company declared and paid the dividends of
$11 and $8 per share for the year ended September 30, 1997 and the period ended
June 30, 1998, respectively.
NOTE 12 -- RELATED PARTY TRANSACTIONS
The Company paid consultancy fees of $250,000 to its shareholders for the
period ended June 30, 1998 in connection with the negotiation of the sale of the
Company's common stock to North American Tel-Com Group, Inc. ("NATG"). These
amounts were recorded as administrative expenses.
The Company sold certain land, buildings, construction equipment and other
investments to a shareholder for $672,894 during the period ended June 30, 1998
resulting in a gain of approximately $110,000 which was recorded as
miscellaneous income. Management believes the prices paid by the shareholder
approximated fair market value.
The Company sold and purchased shares of common stock to certain employees
of the Company during all the periods presented. The share prices for these
transactions were determined by a formula which management believes resulted in
share prices that approximated the fair value of the common stock. There were no
differences between the formula prices per share and the prices per share paid
or received by the company. Accordingly, no compensation expense was recorded in
the financial statements for any of these transactions.
F-58
196
U.S. CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- LEASE COMMITMENT
Prior to June 30, 1998, the Company sold its building to a shareholder and
leased it back commencing from July 1, 1998 under a capital lease agreement.
Under the capital lease agreement, the Company is required to pay the annual
lease payment for a term of five years commencing from July 1, 1998. The lease
payments are as follows:
1999........................................................ $ 60,000
2000........................................................ 60,000
2001........................................................ 60,000
2002........................................................ 60,000
2003........................................................ 60,000
--------
300,000
Less: Imputed interest...................................... (54,567)
--------
$245,433
========
NOTE 14 -- SALE OF COMMON STOCK
On June 30, 1998 the Company's shareholders entered into a stock exchange
agreement with NATG. Pursuant to that transaction, all the shares of the
Company's common stock were exchanged for cash and shares of NATG common stock.
The financial statements of the Company as of and for the period ended June 30,
1998 do not reflect the share exchange agreement.
F-59
197
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of Das-Co of Idaho, Inc.:
In our opinion, the accompanying balance sheet and the related statements
of income, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Das-Co of Idaho, Inc. (the
"Company") at February 26, 1999, and the results of its operations and its cash
flows for the period January 1, 1999 through February 26, 1999 in conformity
with accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
August 16, 2000
F-60
198
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of Das-Co of Idaho, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Das-Co of Idaho, Inc. (the
"Company") at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. 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 of these financial statements in accordance
with generally accepted auditing standards which 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 amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boise, Idaho
May 3, 1999
F-61
199
DAS-CO OF IDAHO, INC.
BALANCE SHEET
DECEMBER 31,
FEBRUARY 26, -----------------------
1999 1998 1997
------------ ---------- ----------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,498,988 $ 826,986 $ 283,383
Accounts receivable................................ 5,213,097 4,551,536 4,182,269
Unbilled accounts receivable for
contracts-in-process............................. 390,136 433,416 844,114
Inventory.......................................... 213,501 166,881 159,526
Other current assets............................... 19,087 3,213 59,412
----------- ---------- ----------
Total current assets.......................... 7,334,809 5,982,032 5,528,704
Property and equipment, net............................. 2,966,524 3,097,182 3,422,112
----------- ---------- ----------
Total assets.................................. $10,301,333 $9,079,214 $8,950,816
=========== ========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt.................. $ 175,780 $ 208,500 $ 206,180
Accounts payable................................... 2,359,590 1,258,516 683,810
Accrued liabilities................................ 205,482 115,662 127,982
Profit sharing contribution payable................ 16,667 100,000 100,000
Deferred revenue................................... -- 306,669 --
----------- ---------- ----------
Total current liabilities..................... 2,757,519 1,989,347 1,117,972
Long-term debt.......................................... 284,829 284,828 510,154
----------- ---------- ----------
Total liabilities............................. 3,042,348 2,274,175 1,628,126
----------- ---------- ----------
Contingencies and Commitments (Note 8).................. -- -- --
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; 5,000 shares
authorized and issued (including 1,200 shares held in
treasury)............................................. 5,000 5,000 5,000
Retained earnings....................................... 7,259,292 6,805,346 7,322,997
----------- ---------- ----------
Total......................................... 7,264,292 6,810,346 7,327,997
Less treasury stock, at cost............................ (5,307) (5,307) (5,307)
----------- ---------- ----------
Total stockholders' equity.................... 7,258,985 6,805,039 7,322,690
----------- ---------- ----------
Total liabilities and stockholders' equity.... $10,301,333 $9,079,214 $8,950,816
=========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-62
200
DAS-CO OF IDAHO, INC.
STATEMENTS OF INCOME
FOR THE PERIOD AND YEARS ENDED:
JANUARY 1, 1999
THROUGH DECEMBER 31,
FEBRUARY 26, -------------------------
1999 1998 1997
--------------- ----------- -----------
Revenues............................................. $5,292,295 $21,778,456 $19,126,148
---------- ----------- -----------
Costs and expenses:
Cost of revenues................................... 3,639,454 15,415,090 13,682,534
Selling, general and administrative................ 402,357 3,900,768 3,502,691
---------- ----------- -----------
Total...................................... 4,041,811 19,315,858 17,185,225
---------- ----------- -----------
Income from operations............................... 1,250,484 2,462,598 1,940,923
Other income (expense):
Interest income.................................... 9,121 86,981 62,683
Interest expense................................... (5,659) (42,914) (72,991)
Gain (loss) on disposal of assets.................. -- (4,238) 6,848
---------- ----------- -----------
Income before income tax provision................... 1,253,946 2,502,427 1,937,463
Provision for income taxes........................... -- -- --
---------- ----------- -----------
Net income................................. $1,253,946 $ 2,502,427 $ 1,937,463
========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-63
201
DAS-CO OF IDAHO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
--------------- RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------ ----------- -------- -------------
Balance at December 31, 1996............. 5,000 $5,000 $ 6,715,534 $(5,307) $ 6,715,227
Net income............................... 1,937,463 1,937,463
Distributions............................ (1,330,000) (1,330,000)
----- ------ ----------- ------- -----------
Balance at December 31, 1997............. 5,000 5,000 7,322,997 (5,307) 7,322,690
Net income............................... 2,502,427 2,502,427
Distributions............................ (3,020,078) (3,020,078)
----- ------ ----------- ------- -----------
Balance at December 31, 1998............. 5,000 5,000 6,805,346 (5,307) 6,805,039
Net income............................... 1,253,946 1,253,946
Distributions............................ (800,000) (800,000)
----- ------ ----------- ------- -----------
Balance at February 26, 1999............. 5,000 $5,000 $ 7,259,292 $(5,307) $ 7,258,985
===== ====== =========== ======= ===========
The accompanying notes are an integral part of the financial statements.
F-64
202
DAS-CO OF IDAHO, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD AND YEARS ENDED:
JANUARY 1, 1999
THROUGH DECEMBER 31,
FEBRUARY 26, -----------------------
1999 1998 1997
---------------- ---------- ----------
Increase (decrease) in cash and cash equivalents from:
OPERATING ACTIVITIES:
Net income.......................................... $1,253,946 $2,502,427 $1,937,463
Adjustments to reconcile net cash provided by
operating activities:
Depreciation and amortization.................... 131,229 937,988 883,658
(Gain) loss on disposal of assets................ -- 4,238 (6,848)
Changes in assets and liabilities:
Accounts receivable.............................. (661,561) (369,267) (1,439,915)
Unbilled accounts receivable for
contracts-in-process........................... 43,280 410,698 (352,258)
Inventories...................................... (46,620) (7,355) (139,356)
Other current assets............................. (15,875) 56,199 (15,852)
Accounts payable................................. 1,101,074 574,706 30,677
Accrued liabilities.............................. 89,820 (12,320) 62,631
Deferred revenue................................. (306,669) 306,669 --
Other............................................ (83,902) -- --
---------- ---------- ----------
Net cash inflow from operating activities........... 1,504,722 4,403,983 960,200
---------- ---------- ----------
INVESTING ACTIVITIES:
Capital expenditures............................. -- (1,014,322) (758,280)
Proceeds from sale of assets..................... -- 90,362 6,848
---------- ---------- ----------
Net cash outflow from investing activities.......... -- (923,960) (751,432)
---------- ---------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt............. (32,720) (223,006) (177,713)
Distributions.................................... (800,000) (2,713,414) (1,330,000)
---------- ---------- ----------
Net cash outflow from financing activities.......... (832,720) (2,936,420) (1,507,713)
---------- ---------- ----------
Net cash inflow (outflow) from all activities....... 672,002 543,603 (1,298,945)
Cash and cash equivalents at beginning of year...... 826,986 283,383 1,582,328
---------- ---------- ----------
Cash and cash equivalents at end of year............ $1,498,988 $ 826,986 $ 283,383
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 4,448 $ 42,914 $ 72,991
Noncash investing and financing activities:
Distribution of equipment to stockholders........ $ -- $ 306,664 $ --
The accompanying notes are an integral part of the financial statements.
F-65
203
DAS-CO OF IDAHO, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DAS-CO of Idaho, Inc. (the Company) is primarily engaged in the business of
installing underground utility, telephone, and cable transmission lines. The
Company is headquartered in Nampa, Idaho, and has offices in Twin Falls and
Pocatello, Idaho. The Company performs work under contracts with utility and
communications companies primarily in the Western United States.
On February 26, 1999 (the "acquisition date"), the Company was sold to
North American Tel-Com Group, Inc.(NATG) headquartered in West Palm Beach,
Florida, (the acquisition).
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and such differences may be material to the financial statements.
Revenue: Revenues from contracts are recognized as the related costs are
incurred based on the relationship of costs incurred to total estimated contract
costs. Unbilled accounts receivable for contracts-in-process represents revenue
recognized but not billed. Deferred revenue represents billings on contracts for
which costs have not yet been incurred and revenue has not been recognized. At
the time a loss on a contract becomes known, the entire amount of the estimated
loss is accrued.
Cash and cash equivalents: Cash and cash equivalents include cash balances
on deposit with banks, overnight repurchase agreements, and various other
financial instruments purchased with a remaining maturity of three months or
less. At times, balances on deposit with banks may exceed amounts insured by the
Federal Deposit Insurance Corporation.
Inventory: Inventories are stated at the lower of cost, on a first-in,
first-out basis, or market.
Property and Equipment: Property and equipment is stated at cost.
Depreciation and amortization is computed over the estimated useful life of the
assets utilizing the straight-line method. The estimated useful lives of the
assets are: leasehold improvements -- the term of the respective lease or the
estimated useful life of the improvements, whichever is shorter; vehicles -- 5
years; equipment and machinery -- 5 years; computer equipment -- 3-5 years; and
other equipment -- 10 years. Maintenance and repairs are expensed as incurred;
expenditures that enhance the value of the property or extend its useful life
are capitalized. When assets are sold or retired, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain or
loss is included in income.
Income Taxes: Prior to the acquisition date, the Company was an S
corporation for income tax purposes, and accordingly, any income tax liabilities
for the periods prior to acquisition were the responsibility of the respective
stockholders.
Subsequent to the acquisition date, the Company became part of the
consolidated group for federal income tax purposes.
F-66
204
DAS-CO OF IDAHO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
DECEMBER 31,
FEBRUARY 26, -----------------------
1999 1998 1997
------------ ---------- ----------
Contract billings........................................ $4,385,190 $4,117,007 $4,180,459
Retainages............................................... 827,907 434,529 1,810
---------- ---------- ----------
Total.......................................... $5,213,097 $4,551,536 $4,182,269
========== ========== ==========
The balances billed but not paid by customers pursuant to retainage
provisions in customer contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, retainages are expected to be collected within twelve
months.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
DECEMBER 31,
FEBRUARY 26, -------------------------
1999 1998 1997
------------ ----------- -----------
Land and leasehold improvements....................... $ 282,400 $ 282,400 $ 267,601
Equipment and machinery............................... 5,083,807 5,149,400 5,224,075
Vehicles.............................................. 2,274,269 2,274,269 2,048,723
Office equipment...................................... 252,865 252,865 256,175
Computer equipment.................................... 128,337 128,337 134,337
----------- ----------- -----------
8,021,678 8,087,271 7,930,911
Less accumulated depreciation and amortization........ (5,055,154) (4,990,089) (4,508,799)
----------- ----------- -----------
Property and equipment, net........................... $ 2,966,524 $ 3,097,182 $ 3,422,112
=========== =========== ===========
4. DEBT:
Long-term debt consists of the following:
DECEMBER 31,
FEBRUARY 26, ---------------------
1999 1998 1997
------------ --------- ---------
Contract payable with monthly payments of $19,802,
including interest at 7.062%, due April 2001; equipment
is pledged as collateral................................ $ 460,609 $ 493,328 $ 704,606
Contract payable with monthly payments of $1,099,
including interest at 7.9%, due November 1998; equipment
is pledged as collateral................................ -- -- 11,728
--------- --------- ---------
460,609 493,328 716,334
Less current portion...................................... (175,780) (208,500) (206,180)
--------- --------- ---------
Total long-term debt...................................... $ 284,829 $ 284,828 $ 510,154
========= ========= =========
At February 26, 1999, the Company had an unsecured $1 million revolving
line of credit available through a financial institution, bearing interest at 2%
over the LIBOR index rate (7.94% at February 26, 1999). The note was guaranteed
by the stockholders. There were no amounts outstanding at February 26,
F-67
205
DAS-CO OF IDAHO, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1999 and December 31, 1998 and 1997. As part of the acquisition, the line of
credit agreement was terminated.
Maturities of long-term debt at February 26, 1999 are as follows:
1999........................................................ $175,780
2000........................................................ 223,583
2001........................................................ 61,246
--------
$460,609
========
5. PROFIT SHARING PLAN:
The Company sponsors a 401(k) profit sharing plan covering substantially
all full-time employees. Company discretionary contributions to the plan totaled
$16,667, $100,000 and $100,000 for 1999, 1998 and 1997, respectively.
6. TRANSACTIONS WITH RELATED PARTY:
During 1999, the Company leased office and shop facilities from businesses
owned by a related party on a month-to-month basis. On February 26, 1999 these
lease agreements were restructured to require minimum annual lease payments of
$168,744 for each of the next five years. Rental expense for these leases
totalled $169,200, $155,000 and $28,124 for 1997, 1998 and 1999, respectively.
7. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
In 1999, revenues from two customers represented approximately 67% and 21%;
in 1998, revenues from three customers represented approximately 41%, 13%, and
12% of total revenue; and in 1997, revenues from three customers represented
approximately 50%, 16%, and 15% of total revenue.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and accounts receivable. The Company grants credit, generally without
collateral, to its customers, which include utility companies,
telecommunications providers and commercial companies located primarily in the
Western United States. Consequently, the Company is subject to potential credit
risk related to changes in business and economic factors throughout the Western
United States.
8. CONTINGENCIES AND COMMITMENTS:
The company is subject to lawsuits and other legal claims in the normal
course of its operations. Management believes that the resolution of any such
lawsuits and legal claims, if any, will not have a material impact on the
Company's financial position, results of operations or cash flows.
9. SALE OF COMMON STOCK
On February 26, 1999 the Company's shareholders entered into a stock
exchange agreement with NATG. Pursuant to the agreement, all the shares of the
Company's common stock were exchanged for cash and shares of NATG common stock.
The financial statements of the Company as of and for the period ended February
26, 1999 do not reflect the share exchange agreement.
F-68
206
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Schatz Underground Cable, Inc. and Orius Corp.
We have audited the accompanying balance sheet of Schatz Underground Cable,
Inc. as of December 31, 1998 and 1997, and the related statements of income,
retained earnings and cash flows for the two years ended December 31, 1998.
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 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 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 Schatz Underground Cable,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the two years ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ MILHOUSE, MARTZ & NEAL, L.L.P.
Maryland Heights, Missouri
February 17, 1999
F-69
207
SCHATZ UNDERGROUND CABLE, INC.
BALANCE SHEET
DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
ASSETS
Current assets:
Cash (Note 12)............................................ $ 2,080,720 $ 917,337
Accounts receivable, trade (Notes 1, 4 & 11).............. 5,533,608 4,947,062
Inventory (Notes 1, 2 & 4)................................ 873,287 391,886
Prepaid expenses.......................................... 269,579 210,762
Deferred income tax benefit (Note 6)...................... 1,193,204 47,200
Prepaid income taxes...................................... -- --
----------- -----------
Total current assets.............................. 9,950,398 6,514,247
Property, plant and equipment (Notes 1 & 3)................. 7,483,645 6,858,690
Other assets (Note 1)....................................... 19,332 13,615
----------- -----------
Total assets...................................... $17,453,375 $13,386,552
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, line of credit (Note 4).................... $ -- $ --
Notes payable, current (Note 5)........................... 2,543,486 2,115,383
Accounts payable.......................................... 540,973 535,598
Accrued salaries.......................................... 3,672,358 473,300
Accrued income taxes...................................... 225,784 448,877
Other accrued expenses.................................... 268,775 200,469
Customer deposits......................................... 316,498 386,233
----------- -----------
Total current liabilities......................... 7,567,874 4,159,860
Notes payable, long-term (Note 5)........................... 4,182,397 3,829,194
Deferred income taxes (Note 6).............................. 163,769 186,000
Stockholders' equity:
Common stock, $1 par value; authorized 30,000 shares;
issued and outstanding 1,000 shares.................... 1,000 1,000
Paid-in capital........................................... 7,392 7,392
Retained earnings......................................... 5,530,943 5,203,106
----------- -----------
Total stockholders' equity........................ 5,539,335 3,211,498
----------- -----------
Total liabilities and stockholders equity......... $17,453,375 $13,386,552
=========== ===========
The accompanying notes are an integral part of the Financial Statements.
F-70
208
SCHATZ UNDERGROUND CABLE, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Revenues, net............................................... $31,254,221 $29,530,683
Direct costs................................................ 21,065,985 2,229,328
----------- -----------
Gross margin.............................................. 10,188,236 7,237,398
General and administrative expenses......................... 9,136,881 4,948,418
----------- -----------
Income from operations.................................... 1,051,355 2,288,980
Other income (expense):
Interest income........................................... 61,373 33,031
Other income.............................................. 34,699 56,104
Gain on sale of equipment................................. 41,249 (4,282)
Interest expense.......................................... (636,850) (582,709)
Total other expense....................................... (499,529) (497,856)
----------- -----------
Income before provision for income taxes.................. 551,826 1,791,124
Provision for income taxes (Note 6):
Current................................................... 1,392,224 728,420
Deferred.................................................. (1,168,235) (20,084)
----------- -----------
223,989 701,336
----------- -----------
Net income................................................ 327,837 1,082,788
Retained earnings, beginning of year........................ 5,203,106 4,120,318
----------- -----------
Retained earnings, end of year............................ $ 5,530,943 $ 5,203,106
=========== ===========
The accompanying notes are an integral part of the Financial Statements.
F-71
209
SCHATZ UNDERGROUND CABLE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998
1998 1997
----------- -----------
Cash flows from operating activities:
Net income................................................ $ 327,837 $ 1,082,788
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on disposal of property, plant and equipment...... (41,249) 4,282
Depreciation and amortization........................ 2,200,018 1,972,539
Deferred taxes....................................... (1,168,235) (20,084)
Changes in assets and liabilities:
Increase in accounts receivable................... (586,546) (43,572)
Increase in inventory............................. (481,401) 468,387
Increase in prepaid expenses...................... (58,817) (11,326)
Increase in prepaid income taxes.................. -- 28,209
Increase in other assets.......................... (5,717) (4,143)
Increase in accounts payable...................... 5,375 1,886
Increase in accrued expenses...................... 3,267,364 (226,840)
Decrease in customer deposits..................... (69,735) 35,895
Decrease in accrued income taxes.................. (223,093) 448,877
----------- -----------
Net cash provided by operating activities......... 3,165,801 4,059,959
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment................. (2,917,848) (2,705,201)
Proceeds from sale of property and equipment.............. 134,124 32,890
----------- -----------
Net cash used by investing activities............. (2,783,724) (2,672,311)
----------- -----------
Cash flows from financing activities:
Payments on and proceeds from line of credit, net......... -- (1,225,000)
Loan proceeds -- long term................................ 2,223,266 4,860,170
Payments on long-term debt................................ (1,251,960) (4,111,675)
Payments to stockholder, net.............................. (190,000) (190,000)
----------- -----------
Net cash provided by (used for) financing
activities...................................... 781,306 (696,505)
----------- -----------
Net increase in cash........................................ 1,163,383 691,143
Cash, beginning of year..................................... 917,337 226,194
----------- -----------
Cash, end of year........................................... $ 2,080,720 $ 917,337
=========== ===========
Schedule of noncash investing and financing transactions:
Cost of property, plant and equipment purchased........... $ 2,944,135 $ 2,807,580
Net book value of trade-ins............................... (26,287) (102,739)
----------- -----------
Cash paid for property, plant and equipment....... $ 2,917,848 $ 2,705,201
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 636,850 $ 583,524
Income taxes........................................... 1,627,615 251,334
The accompanying notes are an integral part of the Financial Statements.
F-72
210
SCHATZ UNDERGROUND CABLE, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a provider of installation, design, engineering and
maintenance services for the telecom industry. The company operates in the St.
Louis metropolitan area, as well as throughout the United States.
REVENUE AND COST RECOGNITION
Revenues from fixed price contracts are recognized on the
percentage-of-completion method for individual contracts. Revenues are
recognized based on fixed prices per contract for amount of work performed.
Changes in job performance, estimated profitability and final contract
settlements may result in revisions to costs and income, and are recognized in
the period in which the revisions are determined.
Contract costs include all direct materials, subcontracts, labor costs and
those indirect costs related to contract performance. General and administrative
costs are charged to expenses as incurred.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less to
be cash equivalents.
ACCOUNTS RECEIVABLE, TRADE
Trade accounts receivable are recorded net of allowance for doubtful
accounts of $40,000 at December 31, 1998 and 1997.
INVENTORY
Materials are valued at cost on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation has been
provided for in the financial statements using accelerated methods over the
estimated useful lives. Repairs and maintenance are charged to expense in the
year incurred. Additions and improvements are capitalized.
OTHER ASSETS
At December 31, 1998 and 1997, other assets consist of the following:
1998 1997
------- -------
Deposits.................................................... $11,715 $13,615
Construction in progress.................................... 7,617 --
------- -------
$19,332 $13,615
======= =======
ACCRUED HEALTH INSURANCE
During 1997 and through May 31, 1998, employees and their dependents were
provided comprehensive health care coverage under a self-funded plan. The
Company pays the first $50,000 in medical expenses per covered individual per
year. Any additional costs are paid by the Plan's underwriters. Premiums due the
underwriters are accrued and paid monthly. The Company's self-funded liability
is accrued based on actual claims filed. The reserve liability for accrued
health insurance benefits payable was $52,466 at December 31, 1997. The Company
ceased to be self-funded on June 1, 1998 and paid all remaining self-funded
liability; therefore, no liability exists at December 31, 1998.
F-73
211
SCHATZ UNDERGROUND CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEASE AGREEMENTS
Annual rentals pertaining to leases which convey merely the right to use
property are charged to current operations. Leases which are in substance
installment purchases of property are recorded as acquisitions with the asset
and the related obligation recorded in the balance sheet.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments have been estimated by
management to approximate fair value.
ADVERTISING
The costs of advertising are expensed as incurred.
2. RESTRICTED CASH
At December 31, 1997, $7,500 of cash has been segregated to fund the
insurance company draws in connection with the health plan benefit discussed in
Note 1.
3. INVENTORY
Inventory consists of the following:
1998 1997
-------- --------
Work-in-process............................................. $865,046 $369,512
Materials................................................... 8,241 22,374
-------- --------
$873,287 $391,886
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
1998 1997
----------- -----------
Trucks, automobiles, equipment and tools.................... $15,217,306 $13,311,204
Office furniture and equipment.............................. 216,662 156,592
Buildings and improvements.................................. 1,661,519 1,489,684
Land........................................................ 350,000 350,000
----------- -----------
17,445,487 15,307,480
Less accumulated depreciation............................... 9,961,842 8,448,790
----------- -----------
$ 7,483,645 $ 6,858,690
=========== ===========
Depreciation expense was $2,200,018 for year ended December 31, 1998.
5. NOTE PAYABLE, LINE-OF-CREDIT
The Company has an annually renewable agreement for a $2,000,000
line-of-credit with Jefferson Bank and Trust Company, which provides for
accounts receivable and inventory financing. Borrowings bear interest at 1/2%
above the Bank's prime rate and are secured by accounts receivable, inventory,
and personal guaranty of the stockholder.
F-74
212
SCHATZ UNDERGROUND CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1997, no amount had been drawn against the
line-of-credit.
6. NOTES PAYABLE
1998 1997
---------- ----------
Note payable, stockholder, payable in quarterly installments
of $47,500 plus interest at 9% Matures December 31,
2005...................................................... $1,330,000 $1,520,000
Note payable, Jefferson Bank and Trust Company, payable in
monthly installments of $8,929 including interest at 8.5%.
Matures March 22, 2001 with outstanding balance due;
secured by real estate and a personal guaranty of the
stockholder............................................... 805,415 842,383
Note payable, Jefferson Bank and Trust Company, payable in
monthly installments of $33,333 plus interest at prime
plus 1/2%. Matures April 22, 2001, secured by equipment
and a personal guaranty of the stockholder................ 933,333 1,353,333
Note payable, Jefferson Bank and Trust Company, payable in
monthly installments of $25,000 plus interest at prime
plus 1/2% Matures April 22, 2001; secured by equipment and
a personal guaranty of the stockholder.................... 700,000 1,000,000
Note payable, Jefferson Bank and Trust Company, payable in
monthly installments of $50,000 plus interest at prime
plus 1/2%. Matures February 20, 2002 Secured by equipment
and personal guarantee of the stockholder................. 1,900,000 --
Note payable, Jefferson Bank and Trust Company, interest
only at prime plus 1/2%. Maximum borrowings of $1,200,000
to finance equipment purchased during 1997. Matures April
22, 1998 secured by equipment and a personal guaranty of
the stockholder. The intent is to refinance the note over
four years commencing March 20, 1998. At December 31,
1997, this note is classified as a current liability...... -- 1,173,423
Note payable, Jefferson Bank and Trust Company, interest
only of prime plus 1/2%. Matures February 20, 1999.
Secured by equipment and personal guarantee of the
stockholders.............................................. 996,689 --
Note payable, individual, payable in monthly installments of
$1,822 including interest at 10.0% 5 year amortization.
Matures March 15, 2002 secured by a freightliner truck.... 60,446 75,438
---------- ----------
6,725,883 5,944,577
Less current portion........................................ 2,543,486 2,115,385
---------- ----------
$4,182,397 $3,829,194
========== ==========
Maturities of debt for 1999 and the succeeding years are as follows:
AMOUNT
----------
1999........................................................ $2,543,486
2000........................................................ 1,552,089
2001........................................................ 1,764,932
2002........................................................ 295,376
2003........................................................ 190,000
Thereafter.................................................. 380,000
----------
$6,725,883
==========
7. INCOME TAXES
The Corporation provides for deferred income taxes for temporary
differences between the financial and income tax reporting of accrued
shareholder bonus, depreciation, accrued vacation and allowance for doubtful
accounts.
F-75
213
SCHATZ UNDERGROUND CABLE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company has a note payable with the stockholder as explained in Note 5.
The Company leases additional facilities and real estate from the
stockholders at $2,550 and $2,000 a month, respectively, under month-to-month
leases.
9. RETIREMENT PLAN
The Company has a retirement plan (401k) which covers all employees meeting
minimum age and service requirements. The Company makes a matching contribution
of 25% of the first 4% of compensation an employee contributes. The Company made
$47,241 in matching contributions for the year ended December 31, 1998.
Under the plan, the Company can make discretionary contributions to the
plan. For the year ended December 31, 1998, no discretionary contributions were
made.
10. LEASE COMMITMENTS
The Company currently leases a facility in Kansas City under a long-term
lease expiring May 30, 1999. Minimum rental commitments under this lease are as
follows:
YEAR ENDED
DECEMBER 31,
- ------------
1999........................................................ $17,500
=======
The Company leases equipment under month-to-month leases. The Company also
leases a facility at Nixa and real estate in Villa Ridge from the stockholder
under month-to-month leases.
11. MAJOR CUSTOMERS
Sales to four major customers were approximately $26,221,856 for the year
ended December 31, 1998, representing 83.7% of total sales for the year.
12. CREDIT RISK
The Company is involved in construction for various levels of government
and therefore issues credit under binding construction contracts to these
agencies. The Company also is engaged in commercial construction and issues
credit under binding construction contracts to various companies.
13. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the organization to credit
risk include cash on deposit with one financial institution amounting to
$2,070,597 at December 31, 1998, which was insured for up to $100,000 by the
U.S. Federal Deposit Insurance Corporation.
F-76
214
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Orius Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, retained earnings and of cash
flows present fairly, in all material respects, the financial position of CATV
Subscriber Services, Inc. and its subsidiary (the "Company") at December 31,
1997 and August 31, 1998, and the results of its operations and its cash flows
for the year ended December 31, 1997 and the eight months ended August 31, 1998,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
April 23, 1999
F-77
215
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
BALANCE SHEETS
AT DECEMBER 31, 1997 AND AUGUST 31, 1998
DECEMBER 31, AUGUST 31,
1997 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 31,100 $ 231,418
Accounts receivable, net.................................. 5,976,705 4,713,417
Deferred billings......................................... 1,364,080 2,975,188
Inventory................................................. -- 138,421
Prepaid expenses & other current assets................... 134,848 493,941
---------- -----------
Total current assets.............................. 7,506,733 8,552,385
---------- -----------
Property and equipment, net................................. 1,837,508 2,154,989
---------- -----------
Other assets................................................ 47,887 24,031
---------- -----------
Total assets...................................... $9,392,128 $10,731,405
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $3,108,447 $ 190,676
Capital lease obligation, current......................... 246,763 347,445
Accounts payable.......................................... 883,702 465,882
Amounts due to -- NATG.................................... -- 3,317,768
Accrued costs in excess of billings....................... 784,000 1,709,503
Accrued payroll and payroll taxes......................... 42,406 120,491
Accrued expenses.......................................... 912,431 1,063,840
---------- -----------
Total current liabilities......................... 5,977,749 7,215,605
---------- -----------
Long-term liabilities:
Notes payable............................................. 582,043 251,060
Capital lease obligation, noncurrent...................... 192,698 319,818
Deferred income tax payable............................... 159,093 188,947
---------- -----------
Total long-term liabilities....................... 933,834 759,825
---------- -----------
Shareholders' equity:
Common stock, par value $10; 10,000 shares authorized;
1,615 (1997) and 1,806 (1998) shares issued and
outstanding............................................ 16,150 18,060
Paid-in capital........................................... 5,015 813,700
Retained earnings......................................... 2,459,380 1,924,215
---------- -----------
Total shareholders' equity........................ 2,480,545 2,755,975
---------- -----------
Total liabilities and shareholders' equity........ $9,392,128 $10,731,405
========== ===========
The accompanying notes are an integral part of the financial statements.
F-78
216
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD ENDED AUGUST 31, 1998
DECEMBER 31, AUGUST 31,
1997 1998
------------ -----------
Revenues.................................................... $21,546,731 $19,411,946
----------- -----------
Cost of revenues:
Materials................................................. 489,937 404,313
Subcontracting fees....................................... 8,302,304 8,333,115
Direct labor.............................................. 6,096,415 4,505,819
Overhead expenses......................................... 4,375,972 3,070,671
----------- -----------
Total cost of revenues............................ 19,264,628 16,313,918
----------- -----------
Gross profit................................................ 2,282,103 3,098,028
General and administrative expenses......................... 1,972,025 3,493,019
----------- -----------
(Loss) income from operations............................... 310,078 (394,991)
----------- -----------
Other (income) expense:
Interest expense, net..................................... 333,332 289,788
Miscellaneous............................................. 31,170 --
----------- -----------
Total other (income) expense...................... 364,502 289,788
----------- -----------
Loss before income taxes.................................... (54,424) (684,779)
Income tax benefit.......................................... (1,725) (247,564)
----------- -----------
Net loss.................................................... $ (52,699) $ (437,215)
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-79
217
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD ENDED AUGUST 31, 1998
1997 1998
----------- -----------
Cash flows from operating activities:
Net (loss).................................................. $ (52,699) $ (437,215)
----------- -----------
Adjustment to reconcile net (loss) to net cash used in
operating activities:
Loss on sale of equipment................................. 31,509 --
Depreciation expense...................................... 505,639 296,369
Provision for bad debt.................................... 385,017 1,014,578
Deferred income tax provision............................. 33,813 (354,734)
Changes in assets and liabilities
Accounts receivable.................................... (2,065,764) 248,710
Deferred billings...................................... (1,364,080) (1,611,108)
Inventory.............................................. -- (138,421)
Prepaid and other current assets....................... (5,387) 25,495
Other assets........................................... (3,164) 23,856
Accounts payable....................................... 844,807 (417,820)
Accrued costs in excess of billings.................... 784,000 925,503
Accrued payroll and payroll taxes...................... 17,437 78,085
Accrued expenses....................................... (12,990) 151,409
Accrued income taxes................................... (359,198) --
----------- -----------
Total adjustment.................................. (1,208,361) 241,922
----------- -----------
Net cash used in operating activities....................... $(1,261,060) $ (195,293)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (254,448) (271,421)
Proceeds from sale of property and equipment.............. 19,920 --
Net (increase) in cash value of life insurance............ (9,993) --
----------- -----------
Net cash (used in) investing activities..................... (244,521) (271,421)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowing on long-term debt................. 9,366,314 257,350
Principal payments on long-term debt...................... (7,913,819) (3,506,104)
Payment of capital lease obligation....................... (320,075) (114,627)
Amounts received from NATG................................ -- 3,317,768
Payment of dividends...................................... -- (97,950)
Proceeds from issuance of stock........................... -- 810,595
----------- -----------
Net cash provided by financing activities................... 1,132,420 667,032
----------- -----------
Net increase (decrease) in cash and cash equivalent......... (373,161) 200,318
Cash and cash equivalent -- Beginning of year............... 404,261 31,100
----------- -----------
Cash and cash equivalent -- End of year..................... $ 31,100 $ 231,418
=========== ===========
Non-Cash Transactions:
Capital lease obligations................................. $ 207,242 $ 342,429
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-80
218
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
PERIOD ENDED AUGUST 31, 1998
NUMBER OF
SHARES ISSUED
AND COMMON RETAINED PAID-IN
OUTSTANDING STOCK EARNINGS CAPITAL
------------- ------- ---------- --------
BALANCE AT DECEMBER 31, 1996...................... 1,615 $16,150 $2,512,079 $ 5,015
Net loss........................................ (52,699)
----- ------- ---------- --------
BALANCE AT DECEMBER 31, 1997...................... 1,615 $16,150 $2,459,380 $ 5,015
Net loss........................................ (437,215)
Dividends paid.................................. (97,950)
Issuance of 191 shares.......................... 191 1,910 808,685
----- ------- ---------- --------
BALANCE AT AUGUST 31, 1998........................ 1,806 $18,060 $1,924,215 $813,700
===== ======= ========== ========
The accompanying notes are an integral part of the financial statements.
F-81
219
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of certain significant accounting policies
followed in the preparation of the financial statements.
COMPANY'S ACTIVITIES
CATV Subscriber Services, Inc. (the Company), incorporated in North
Carolina in March 1972, is a provider of infrastructure services to cable
television system operators.
BASIS OF ACCOUNTING
The Company's policy is to prepare its financial statements on the accrual
basis of accounting. The consolidated financial statements include the accounts
of CATV Subscriber Services, Inc., and its wholly owned inactive subsidiary,
Arizona Cable Concepts, Inc. Intercompany accounts have been eliminated.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Estimates are used in determining the Company's revenue recognition of
work-in-progress, costs associated with the work-in-progress, allowances for
doubtful accounts, depreciation and amortization, and in the estimated useful
lives of assets.
REVENUE RECOGNITION
Revenue is recorded as units and footages are actually installed. If the
unit price of a contract is determined below cost, the entire estimated ultimate
loss is accrued.
DEFERRED BILLINGS
Deferred billings consist of unbilled accounts receivable on work performed
prior to December 31, 1997 and August 31, 1998. All costs associated with the
deferred billings are also recognized as expenses as of the balance sheet date.
ACCRUED COSTS IN EXCESS OF BILLINGS
Accrued costs in excess of billings represents estimated cost required to
complete the current units of production in excess of amounts billed for those
units of production.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments purchased
with original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost, on a first-in, first-out (FIFO)
basis, or market, and consists of materials purchased for installation of cable
television networks.
F-82
220
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using various accelerated and straight-line methods for
income tax and financial statement purposes. Repairs and maintenance charges
which do not increase the useful lives of the assets are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
are eliminated from the respective accounts and resulting gain or loss included
in current income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments approximate their
carrying value due to the short-term maturities of these financial instruments.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the basis of assets and
liabilities for financial statement and income tax purposes. The differences
relate primarily to depreciable assets (use of different depreciation methods
and lives for financial statement and income tax purposes) and certain reserves
recorded for book purposes that are not currently deductible for tax purposes.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
NOTE 2 -- STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
YEAR ENDED EIGHT MONTHS
DECEMBER 31, ENDED AUGUST 31,
1997 1998
------------ ----------------
Cash paid during the year for:
Interest................................................ $333,332 $289,788
======== ========
Income taxes............................................ $359,198 $201,983
======== ========
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1997 and
August 31, 1998:
1997 1998
---------- -----------
Trade receivables........................................... $5,433,509 $ 5,097,585
Retainage................................................... 928,213 745,732
Allowance for doubtful accounts............................. (385,017) (1,129,900)
---------- -----------
Accounts receivable, net.................................... $5,976,705 $ 4,713,417
========== ===========
Retainage consists of amounts that are not due until the completion of a
contract. The allowance for doubtful accounts was increased by $997,374 during
1998 for the write-off of receivables from St. Martin Cable TV, FWI, (SMCTV).
The Company filed a claim against SMCTV in mid-1997 and has received only
insignificant payments since that time. During 1988, the Company elected to not
pursue the collection of the receivable due to costs associated with doing so.
F-83
221
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1997 1998
----------- -----------
Land....................................................... $ 37,018 $ --
Office building............................................ 93,628 --
Leasehold improvements..................................... 2,344 2,344
Automobiles and trucks..................................... 2,315,510 2,820,681
Equipment and tools........................................ 1,684,571 1,847,788
Furniture and fixtures..................................... 147,568 223,676
----------- -----------
4,280,639 4,894,489
Accumulated depreciation................................... (2,443,131) (2,739,500)
----------- -----------
Total............................................ $ 1,837,508 $ 2,154,989
=========== ===========
NOTE 5 -- LONG-TERM DEBT
Long-term debt at December 31, 1997 and August 31, 1998, consists of the
following:
1997 1998
---------- --------
Notes payable to BB&T Bank with monthly installments of
$33,333 plus interest at prime plus 1.5%. Secured by St.
Martin Cable TV system and all Company assets............. $ 987,993 $ --
Note payable to BB&T Bank. Monthly interest payable at prime
plus 2% and a principal due upon demand. Secured by all
Company assets............................................ 2,341,991 --
Notes payable to Ford Motor Credit payable in monthly
installments ranging from $405 to $906 with terms of 36 to
60 months: interest ranges from 8.25% to 10.95%........... 308,970 387,401
Notes payable to GMAC Financial Services with 48 monthly
payments of principal and interest of $795; interest at
9.50%..................................................... 17,726 12,474
Notes payable to Mazda American Credit payable in 36 monthly
installments of $1,198; interest at 8.25%................. -- 37,128
Other equipment loans....................................... 33,810 4,733
---------- --------
Total............................................. 3,690,490 441,736
Less current portion........................................ 3,108,447 190,676
---------- --------
Total............................................. $ 582,043 $251,060
========== ========
F-84
222
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Maturities of long-term debt for each of the 5 years subsequent to August
31, 1998 are as follows:
1999........................................................ $190,676
2000........................................................ 130,655
2001........................................................ 79,940
2002........................................................ 33,770
2003........................................................ 6,695
--------
$441,736
========
On August 30, 1998, NATG loaned the Company $3,317,768 which was used to
repay certain of the Company's indebtedness.
NOTE 6 -- INCOME TAXES
The components of the provision (benefit) for income taxes for the year
ended December 31, 1997 and the period ended August 31, 1998:
1997 1998
-------- ---------
Current:
Federal................................................... $(30,918) $ 93,238
State..................................................... (4,620) 13,932
-------- ---------
(35,538) 107,170
-------- ---------
Deferred:
Federal................................................... 29,417 (308,619)
State..................................................... 4,396 (46,115)
-------- ---------
33,813 (354,734)
-------- ---------
Total tax benefit........................................... $ (1,725) $(247,564)
======== =========
The effective income tax rate for 1997 and 1998 varies from the federal
statutory rate of 34% due primarily to state taxes, as detailed above, and
certain non-deductible entertainment expenses.
Deferred tax assets in the amount of $389,000 due to reserves for the St.
Martin receivable are included in prepaid expenses and other current assets as
of August 31, 1998. The deferred tax liabilities of $159,093 and $188,947 at
December 31, 1997 and August 31, 1998, respectively consist primarily of tax
depreciation in excess of book. There are no other significant deferred tax
amounts recorded as of December 31, 1997 or August 31, 1998.
NOTE 7 -- CONCENTRATION OF CUSTOMERS
The Company's customer base is highly concentrated with customers operating
cable television networks. For the year ended December 31, 1997 and the eight
months ended August 31, 1998 and as of those dates, five customers Media One,
Falcon Communications, Cox Communications, Charter Communications and Time
Warner, accounted for approximately 77% and 87%, respectively, of net revenues
and accounts receivable.
F-85
223
CATV SUBSCRIBER SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- LEASE COMMITMENT
The Company and its subsidiary maintain various capital leases for
equipment. Future minimum lease payments for each of the years subsequent to
August 31, 1998 are as follows:
1999........................................................ $347,445
2000........................................................ 180,425
2001........................................................ 93,469
2002........................................................ 45,924
--------
$667,263
========
NOTE 9 -- SUBSEQUENT EVENT
On August 31, 1998, the company's shareholders entered into an agreement to
exchange all of the common stock of CATV for cash and stock of the Company. The
effect of this stock exchange agreement has not been reflected in these
accounts.
F-86
224
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
TEXEL Corporation and the
Board of Directors of Orius Corp.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in shareholder's equity and of cash flows present fairly,
in all material respects, the financial position of TEXEL Corporation (the
Company) as of December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
May 14, 1999
F-87
225
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
TEXEL Corporation
In our opinion, the accompanying balance sheet and the related statement of
operations, changes in shareholder's equity and of cash flows present fairly, in
all material respects, the financial position of TEXEL Corporation (the
"Company") at May 24, 1999, and the results of its operations and its cash flows
for the period from January 1, 1999 through May 24, 1999, in conformity with
accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
June 11, 1999
F-88
226
TEXEL CORPORATION
BALANCE SHEETS
DECEMBER 31, MAY 24,
------------------------ -----------
1997 1998 1999
---------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................ $1,395,669 $ 3,144,841 $ 798,383
Accounts receivable...................................... 4,725,915 7,172,628 9,303,721
Costs in excess of billings on uncompleted contracts..... 177,080 644,353 616,624
Prepaid expenses......................................... 52,570 -- 5,168
---------- ----------- -----------
Total current assets............................. 6,351,234 10,961,822 10,723,896
Property and equipment, net................................ 195,395 920,046 1,039,447
---------- ----------- -----------
Total assets..................................... $6,546,629 $11,881,868 $11,763,343
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 757,528 $ 2,028,443 $ 1,357,170
Accrued expenses......................................... 414,636 618,298 550,118
Billings in excess of costs on uncompleted contracts..... 40,351 73,153 240,819
---------- ----------- -----------
Total current liabilities........................ 1,212,515 2,719,894 2,148,107
Deferred rent.............................................. -- 198,065 329,284
---------- ----------- -----------
Total liabilities................................ 1,212,515 2,917,959 2,477,391
---------- ----------- -----------
Shareholders' equity:
Common stock, par value $1.00, authorized 1,000 shares;
issued and outstanding 200 shares..................... 200 200 200
Retained earnings........................................ 5,333,914 8,963,709 9,285,752
---------- ----------- -----------
Total shareholders' equity....................... 5,334,114 8,963,909 9,285,952
---------- ----------- -----------
Total liabilities and shareholders' equity....... $6,546,629 $11,881,868 $11,763,343
========== =========== ===========
The accompanying notes are an integral part of these Financial Statements.
F-89
227
TEXEL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 1, 1999
DECEMBER 31, THROUGH
------------------------- MAY 24,
1997 1998 1999
----------- ----------- ---------------
Contract and service revenue........................... $21,832,078 $29,648,953 $11,669,426
Cost of sales.......................................... 14,989,003 20,633,959 7,029,802
----------- ----------- -----------
Gross profit................................. 6,843,075 9,014,994 4,639,624
Selling, general and administrative expenses........... 1,265,074 1,862,802 745,253
----------- ----------- -----------
Income from operations....................... 5,578,001 7,152,192 3,894,371
Other (income) expense
Interest income...................................... (102,617) (127,621) 44,172
Other expense........................................ 101,730 88,145 (3,627)
----------- ----------- -----------
Net Income............................................. $ 5,578,888 $ 7,191,668 $ 3,934,916
=========== =========== ===========
Pro Forma Tax Provision (Unaudited):
Income before income taxes........................... $ 5,578,888 $ 7,191,668 $ 3,934,916
Pro forma provision for income taxes................. 2,120,000 2,732,800 1,495,250
----------- ----------- -----------
Total........................................ $ 3,458,888 $ 4,458,868 $ 2,439,666
=========== =========== ===========
The accompanying notes are an integral part of these Financial Statements.
F-90
228
TEXEL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 1, 1999
DECEMBER 31, THROUGH
------------------------- MAY 24,
1997 1998 1999
----------- ----------- ---------------
Cash flows from operating activities:
Net income........................................... $ 5,578,888 $ 7,191,668 $ 3,934,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 83,767 101,434 51,185
Changes in:
Accounts receivable............................. (735,921) (2,446,713) (2,549)
Prepaid expenses................................ (52,570) 52,570 (2,131,093)
Billings in excess of costs..................... 40,351 32,802 (5,168)
Accounts payable................................ 193,091 1,270,915 167,666
Accrued expenses................................ 30,805 203,662 (671,273)
Costs in excess of billings..................... (97,607) (467,273) (68,180)
Deferred rent................................... -- 198,065 27,729
----------- ----------- -----------
Net cash provided by operating activities.... 5,040,804 6,137,130 131,219
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................. (89,460) (826,085) 1,434,452
----------- ----------- -----------
Net cash used in investing activities........ (89,460) (826,085) (174,162)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to stockholder......................... (4,751,016) (3,561,873) 6,125
----------- ----------- -----------
Net cash used in financing activities........ (4,751,016) (3,561,873) (168,037)
----------- ----------- -----------
Increase in cash and cash equivalents.................. 200,328 1,749,172 (3,612,873)
Cash and cash equivalents, beginning of year........... 1,195,341 1,395,669 (3,612,873)
----------- ----------- -----------
Cash and cash equivalents, end of year................. $ 1,395,669 $ 3,144,841 $(2,346,458)
=========== =========== ===========
The accompanying notes are an integral part of these Financial Statements.
F-91
229
TEXEL CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND THE PERIOD ENDED MAY 24, 1999
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ ------ ----------- -----------
Balance at January 1, 1997......................... 200 $200 $ 4,506,042 $ 4,506,042
Net income....................................... -- -- 5,578,888 5,578,888
Distributions to shareholder..................... -- -- (4,751,016) (4,751,016)
--- ---- ----------- -----------
Balance at January 1, 1998......................... 200 200 5,333,914 5,334,114
Net income....................................... -- -- 7,191,668 7,191,668
Distributions to shareholder..................... -- -- (3,561,873) (3,561,873)
--- ---- ----------- -----------
Balance at December 31, 1998....................... 200 200 8,963,709 8,963,909
Net income....................................... -- -- 3,934,916 3,934,916
Distributions to shareholder..................... -- -- (3,612,873) (3,612,873)
--- ---- ----------- -----------
Balance at May 24, 1999............................ 200 $200 $ 9,285,752 $ 9,285,952
=== ==== =========== ===========
The accompanying notes are an integral part of these Financial Statements.
F-92
230
TEXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Texel Corporation (the "Company") was incorporated in 1983 under the laws
of the Commonwealth of Virginia. The Company is a provider of premise wiring
services, primarily in the Washington, D.C. metropolitan area. The Company's
corporate headquarters are located in Reston, Virginia and as of April 30, 1999,
the Company had two regional field offices in Columbia, Maryland and Richmond,
Virginia.
Effective May 25, 1999 all of the Company's outstanding shares were sold to
Orius Corporation. See subsequent event Note 11.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTRACT REVENUE
The Company recognizes revenue from contracts in process on the percentage
of completion method of accounting based on contract costs incurred to date
compared with total estimated contract costs. Contract costs include all direct
labor, material, subcontract, depreciation, and other direct project costs
related to contract performance. General and administrative costs are charged to
expense as incurred.
Service revenue is recognized when the work is complete. This work is
primarily short term and completed within five days or less.
Revenues recognized in excess of amounts billed are classified as current
assets under costs in excess of billings, and amounts billed in excess of
revenues recognized to date are classified as current liabilities as billings in
excess of costs. Contract retentions are included in accounts receivable.
Included in accounts receivable are unbilled amounts which represent
revenue billable for completed contracts. Such amounts were billed within 60
days of year end.
INCOME TAXES
The Company elected subchapter S-Corporation status effective January 1,
1984. As an S-Corporation, the shareholder reports profits or losses of the
Company, for Federal and State income tax purposes, on his individual income tax
return. As an S-Corporation, the Company was not subject to certain income taxes
at the corporate level. Substantially all payments made to the shareholder are
in the form of S-Corporation shareholder distributions. In conjunction with the
sale of the Company's outstanding stock, the Company's S-Corporation filing
status will be terminated and the Company will begin to be taxed as a
C-Corporation for federal and state income tax purposes. Pro forma income taxes
are calculated at a combined federal and state tax rate of 38%.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid short-term investments readily
convertible into cash. Cash equivalents consist primarily of time deposits and
certificates of deposit with various financial institutions. These investments
are carried at cost, which approximates market and mature within 90 days and
therefore are subject to minimal risk.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. The cost of assets sold or
retired and the related amounts of accumulated depreciation are eliminated from
the accounts and the resulting gain or loss is included in the income. Renewals
and betterments are capitalized. Repairs and maintenance are charged to expense
when incurred.
F-93
231
TEXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed using the straight-line and accelerated methods
over the following estimated useful lives:
Furniture and fixtures...................................... 7.5 years
Machinery and equipment..................................... 5.5 years
Automobiles................................................. 5.5 years
Computer software........................................... 5.5 years
Leasehold improvements are amortized over the shorter of the life of the
lease or the life of the asset. Such periods generally approximate seven years.
Depreciation expense in 1997, 1998 and 1999 was $83,767, $101,434 and
$51,185 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's assets and liabilities approximate
fair value due to the short-term maturity of these financial instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from these estimates.
3. MAJOR CUSTOMERS
Sales to individual customers representing more than 10% of total sales
were approximately $5,933,000, $11,246,000 and $4,159,000 in 1997, 1998 and
1999, respectively. These amounts represent sales to 2 customers in each year.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1997 and
1998 and May 24, 1999:
1997 1998 1999
---------- ---------- --------
Contract billings................................... $4,261,637 $4,924,667 $ 54,984
Unbilled accounts receivable........................ 360,083 1,845,201 334,366
Retainage........................................... 44,012 345,424 19,628
Rebates and other................................... 60,183 57,336 26,549
---------- ---------- --------
Total..................................... $4,725,915 $7,172,628 $930,372
========== ========== ========
The balances billed but not paid by customers pursuant to retainage
provisions in customer contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balances at December 31, 1997 and 1998
and May 24, 1999 are expected to be collected within twelve months of year end.
F-94
232
TEXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at
December 31, 1997 and 1998 and May 24, 1999:
1997 1998 1999
--------- ---------- ----------
Leasehold improvements............................. $ 3,413 $ 687,427 $ 687,427
Automobiles........................................ 345,061 424,502 551,242
Machinery and equipment............................ 292,938 338,392 316,630
Computer software.................................. 83,891 83,891 83,891
Furniture and fixtures............................. 50,598 67,774 87,300
--------- ---------- ----------
775,901 1,601,986 1,726,490
Less accumulated depreciation...................... (580,506) (681,940) (687,043)
--------- ---------- ----------
Property and equipment, net.............. $ 195,395 $ 920,046 $1,039,447
========= ========== ==========
6. COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
1997 1998 1999
--------- ----------- -----------
Costs incurred on uncompleted contracts.................. $ 387,343 $ 2,673,895 $ 2,298,410
Billings on uncompleted contracts........................ (250,614) (2,102,695) (1,922,605)
--------- ----------- -----------
$ 136,729 $ 571,200 $ 375,805
========= =========== ===========
Costs in excess of billings on uncompleted contracts..... 177,080 644,353 616,624
Billings in excess of costs on uncompleted contracts..... (40,351) (73,153) (240,819)
--------- ----------- -----------
$ 136,729 $ 571,200 $ 375,805
========= =========== ===========
7. LEASE COMMITMENTS
The Company leases office space at various locations under noncancelable
operating leases expiring through 2005. Each lease agreement provides for an
annual escalation of 3%.
Certain office space is leased from Trison LLC, a real estate company owned
by the sole shareholder of the Company. The lease requires monthly payments of
approximately $33,000 over a 7-year term, with a 5-year renewal option. Based on
the terms of the lease, the Company received 10-month rent abatement in return
for making necessary leasehold improvements to the office space. The rent
abatement is recognized on a straight line basis over the term of the lease.
Rent expense for office space for the year ended December 31, 1998 was $307,323.
Minimum rental payments due under noncancelable operating leases are as
follows:
RELATED
PARTY OTHER TOTAL
---------- ------- ----------
1999................................................. $ 231,076 $21,456 $ 252,530
2000................................................. 396,130 18,059 414,189
2001................................................. 396,130 16,798 412,928
2002................................................. 396,130 17,303 413,433
2003................................................. 396,130 8,779 404,909
Thereafter........................................... 594,196 -- 594,196
---------- ------- ----------
Total future minimum lease payments........ $2,409,792 $80,935 $2,492,187
========== ======= ==========
F-95
233
TEXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses were comprised of the following at December 31, 1997 and
1998 and May 24, 1999:
1997 1998 1999
-------- -------- -------
Salaries, wages and benefits............................ $196,244 $273,352 $38,570
Profit sharing.......................................... 115,304 177,399 --
Vacation accrual........................................ 49,448 59,012 7,149
Other................................................... 53,640 108,535 9,292
-------- -------- -------
Total......................................... $414,636 $618,298 $55,011
======== ======== =======
9. PROFIT SHARING PLAN
A defined contribution retirement plan is maintained by the Company. All
full-time employees who have attained the age of twenty-one and completed one
year of service are eligible to participate in the plan. The participants may
elect to make a contribution up to 15% of their compensation not exceeding
$9,500 in 1998 as defined by the plan. The Company matches 20% of employee
contributions up to 4% of the employee's compensation. Vesting of Company
contributions occur ratably over a 7-year period. The Company also provides a
discretionary contribution to the profit sharing plan. During 1997, 1998 and
1999 approximately $125,000, $177,000 and 0, respectively, was expensed related
to this contribution.
10. OTHER RELATED PARTY TRANSACTIONS
The president and sole shareholder of the Company is the 30% shareholder of
Texel Systems, Inc., which is a company that performs certain phone and cable
system installation services. The Company occasionally uses Texel Systems, Inc.
as a subcontractor on its projects, and vice-versa. Total revenue and expense
recorded by the Company for services provided to or obtained from Texel Systems,
Inc. was approximately $44,000 and $173,000, respectively in 1998 and $5,000 and
$15,000, respectively in 1999.
11. SUBSEQUENT EVENT
On May 25, 1999, the Company's sole shareholder sold all of the Company's
outstanding stock to Orius Corp. for cash and Orius common stock totaling
approximately $39 million.
F-96
234
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Hattech, Inc.
We have audited the accompanying balance sheets of Hattech, Inc. as of
December 31, 1999, 1998 and 1997, and the related statements of income and
retained earnings and of cash flows for the years then ended. 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 audits 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 Hattech, Inc. as of December
31, 1999, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ OFFUTT CHILDERS & PUTMAN, P.C.
- ---------------------------------------------------------
Vienna, Virginia
August 16, 2000
F-97
235
HATTECH, INC.
BALANCE SHEETS
MARCH 31, 2000 AND 1999
2000 1999
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash...................................................... $ (14,858) $ 3,668
Accounts receivable -- billed, net of allowance........... 3,447,129 5,952,939
Accounts receivable -- unbilled........................... 1,396,401 94,046
Notes receivable.......................................... 11,500 11,583
Notes receivable -- Stockholders.......................... -- 1,012,396
Inventory................................................. 1,520,521 1,031,206
Other current assets...................................... 136,535 12,431
---------- ----------
TOTAL CURRENT ASSETS................................... 6,497,228 8,118,269
INVESTMENT.................................................. -- 40,433
PROPERTY AND EQUIPMENT, net................................. 968,345 517,617
DEPOSITS.................................................... 12,995 11,564
---------- ----------
TOTAL ASSETS........................................... $7,478,568 $8,687,883
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable............................................. $3,165,173 $1,098,364
Notes payable -- stockholders............................. 523,566 244,575
Capital lease obligations, current........................ 65,733 118,741
Accounts payable and accrued expenses..................... 566,899 1,588,486
Accrued salaries and related liabilities.................. 826,870 778,729
Accrued profit sharing contribution....................... 150,477 118,719
Deferred revenue.......................................... -- 785,714
---------- ----------
TOTAL CURRENT LIABILITIES.............................. 5,298,718 4,733,328
LONG TERM LIABILITIES
Capital lease obligations, noncurrent..................... 24,807 62,514
Deferred rent............................................. 41,326 27,649
---------- ----------
TOTAL LIABILITIES................................. 5,364,851 4,823,491
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 9,000 shares authorized, 304
shares issued and outstanding.......................... 3 3
Paid in capital........................................... 1,012,394 1,012,394
Retained earnings......................................... 1,101,320 2,851,995
---------- ----------
TOTAL STOCKHOLDERS' EQUITY............................. 2,113,717 3,864,392
COMMITMENTS
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $7,478,568 $8,687,883
========== ==========
(See notes to financial statements)
F-98
236
HATTECH, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
QUARTERS ENDED MARCH 31, 2000 AND 1999
2000 1999
---------- ----------
(UNAUDITED)
REVENUE..................................................... $7,056,928 $6,931,505
---------- ----------
DIRECT EXPENSES
Labor..................................................... 1,603,921 1,453,067
Subcontractors............................................ 426,200 879,000
Materials................................................. 790,441 741,073
Meals, travel and lodging................................. 1,292,218 802,982
Other..................................................... 457,482 398,206
---------- ----------
TOTAL DIRECT EXPENSES.................................. 4,570,262 4,274,328
---------- ----------
GROSS PROFIT................................................ 2,486,666 2,657,177
---------- ----------
INDIRECT EXPENSES
Other indirect expenses................................... 2,387,997 1,755,417
Depreciation.............................................. 112,318 38,500
---------- ----------
TOTAL INDIRECT EXPENSES................................ 2,500,315 1,793,917
---------- ----------
Operating Income (Loss)..................................... (13,649) 863,260
---------- ----------
OTHER (INCOME) EXPENSES
Interest income........................................... -- --
Gain/loss on investment................................... -- --
Interest expense.......................................... 104,180 25,320
---------- ----------
TOTAL OTHER (INCOME) EXPENSES.......................... 104,180 25,320
---------- ----------
NET INCOME (LOSS)........................................... (117,829) 837,940
RETAINED EARNINGS, beginning of quarter..................... 1,219,149 2,014,055
STOCKHOLDER DISTRIBUTIONS................................... -- --
---------- ----------
RETAINED EARNINGS, end of quarter........................... $1,101,320 $2,851,995
========== ==========
(See notes to financial statements)
F-99
237
HATTECH, INC.
STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 2000 AND 1999
2000 1999
----------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (117,829) $ 837,940
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 112,318 38,500
Changes in assets and liabilities:
Accounts receivable.................................. 1,585,567 (739,956)
Other current assets................................. (112,932) 36,757
Inventory............................................ 114,247 (408,677)
Deposits............................................. -- --
Accounts payable and accrued expenses................ (737,733) 457,407
Accrued salaries and related liabilities............. (479,322) 537,946
Accrued profit sharing contribution.................. 477 37,500
Deferred revenue..................................... (142,857) (214,286)
Deferred rent........................................ 3,417 3,417
----------- ---------
Net cash provided by operating activities......... 225,353 586,548
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable.............................. 4,000 (1,583)
Capital expenditures...................................... (56,169) (53,461)
----------- ---------
Net cash used in investing activities............. (52,169) (55,044)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in note payable -- line of credit................ (1,230,226) (501,223)
Principal payments under capital lease obligations........ (38,961) (27,359)
----------- ---------
Net cash used in financing activities............. (1,269,187) (528,582)
----------- ---------
NET INCREASE (DECREASE) IN CASH............................. (1,096,003) 2,922
CASH, beginning of quarter.................................. 1,081,145 746
----------- ---------
CASH, end of quarter........................................ $ (14,858) $ 3,668
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest................. $ 114,670 $ 43,920
=========== =========
(See notes to financial statements)
F-100
238
HATTECH, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
Company, without audit. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. Accordingly, these unaudited financial statements and
related notes should be read in conjunction with the financial statements and
notes thereto included in this prospectus. Reported interim results of
operations are based in part on estimates, and are not necessarily indicative of
those expected for the year.
2. NOTES RECEIVABLE -- STOCKHOLDERS
The Company issued 154 shares of common stock in March 1999 in exchange for
notes receivable. The notes receivable were collected on December 30, 1999.
3. SUBSEQUENT EVENT
In May, 2000, the Company became a wholly owned subsidiary of Orius Corp.
F-101
239
HATTECH, INC.
BALANCE SHEETS
DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ---------- --------
ASSETS
Current assets:
Cash................................................... $ 1,081,145 $ 746 $124,623
Accounts receivable -- billed, net of allowance........ 4,093,097 2,576,913 174,827
Accounts receivable -- unbilled........................ 2,336,000 2,730,116 112,280
Notes receivable....................................... 15,500 10,000 --
Inventory.............................................. 1,634,768 622,529 --
Other current assets................................... 23,603 49,188 --
----------- ---------- --------
Total current assets........................... 9,184,113 5,989,492 411,730
Investment............................................... -- 40,433 40,433
Property and equipment, net.............................. 1,024,494 502,656 --
Deposits................................................. 12,995 11,564 400
----------- ---------- --------
Total assets................................... $10,221,602 $6,544,145 $452,563
=========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................... $ 4,395,399 $1,599,587 $147,904
Notes payable -- stockholders.......................... 523,566 244,575 --
Capital lease obligations, current..................... 92,957 114,957 --
Accounts payable and accrued expenses.................. 1,304,632 1,131,079 52,519
Accrued salaries and related liabilities............... 1,306,192 240,783 54,818
Accrued profit sharing contribution.................... 150,000 81,219 --
Deferred revenue....................................... 142,857 1,000,000 --
----------- ---------- --------
Total current liabilities...................... 7,915,603 4,412,200 255,241
Long term liabilities:
Capital lease obligations, noncurrent.................. 36,544 93,657 --
Deferred rent.......................................... 37,909 24,232 --
----------- ---------- --------
Total liabilities.............................. 7,990,056 4,530,089 255,241
----------- ---------- --------
Stockholders' equity:
Common stock, $.01 par value, 9,000 shares authorized,
304 and 150 shares issued and outstanding........... 3 1 1
Paid in capital........................................ 1,012,394 -- --
Retained earnings...................................... 1,219,149 2,014,055 197,321
----------- ---------- --------
Total stockholders' equity..................... 2,231,546 2,014,056 197,322
Commitments
----------- ---------- --------
Total liabilities and stockholders' equity..... $10,221,602 $6,544,145 $452,563
=========== ========== ========
(See notes to financial statements)
F-102
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HATTECH, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- ---------
Revenue................................................ $31,847,052 $20,279,804 $ 713,785
----------- ----------- ---------
Direct expenses
Labor................................................ 6,830,519 2,629,488 261,516
Subcontractors....................................... 3,349,390 6,710,977 24,277
Materials............................................ 3,710,892 2,351,472 --
Meals, travel and lodging............................ 5,065,561 1,514,481 152,664
Other................................................ 1,069,644 524,007 --
----------- ----------- ---------
Total direct expenses........................ 20,026,006 13,730,425 438,457
----------- ----------- ---------
Gross profit........................................... 11,821,046 6,549,379 275,328
----------- ----------- ---------
Indirect expenses
Other indirect expenses.............................. 10,622,163 4,482,074 164,415
Depreciation......................................... 274,868 111,475 12,318
----------- ----------- ---------
Total indirect expenses...................... 10,897,031 4,593,549 176,733
----------- ----------- ---------
Operating income....................................... 924,015 1,955,830 98,595
----------- ----------- ---------
Other (income) expenses
Interest income...................................... (50,093) -- --
Gain/loss on investment.............................. (9,567) -- 31,618
Interest expense..................................... 235,846 107,096 5,001
----------- ----------- ---------
Total other (income) expenses................ 176,186 107,096 36,619
----------- ----------- ---------
Net income............................................. 747,829 1,848,734 61,976
Retained earnings, beginning of year................... 2,014,055 197,321 235,345
Stockholder distributions.............................. (1,542,735) (32,000) (100,000)
----------- ----------- ---------
Retained earnings, end of year......................... $ 1,219,149 $ 2,014,055 $ 197,321
=========== =========== =========
(See notes to financial statements)
F-103
241
HATTECH, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- ---------
Cash flows from operating activities:
Net income........................................... $ 747,829 $ 1,848,734 $ 61,976
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization..................... 274,868 111,475 12,318
Bad debt expense.................................. 11,079 --
(Gain) loss on investment......................... (9,567) -- 31,618
Inventory reserve................................. 20,000 --
Changes in assets and liabilities:
Accounts receivable............................. (1,133,147) (5,019,922) (287,107)
Other current assets............................ 25,585 (49,188) --
Inventory....................................... (1,032,239) (622,529) --
Deposits........................................ (1,431) (11,164) (400)
Accounts payable and accrued expenses........... 173,553 1,078,560 42,997
Accrued salaries and related liabilities........ 1,065,409 185,965 54,818
Accrued profit sharing contribution............. 68,781 81,219 --
Deferred revenue................................ (857,143) 1,000,000 --
Deferred rent................................... 13,677 24,232
----------- ----------- ---------
Net cash used in operating activities........ (632,746) (1,372,618) (83,780)
----------- ----------- ---------
Cash flows from investing activities:
Proceeds from investment............................. 50,000 -- 130,000
Increase in notes receivable......................... (5,500) (10,000) --
Capital expenditures................................. (750,649) (334,708) (12,318)
----------- ----------- ---------
Net cash (used in) provided by investing
activities................................. (706,149) (344,708) 117,682
----------- ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock...................... 1,012,396 -- --
Increase in note payable -- line-of-credit........... 2,795,812 1,496,338 153,249
Principal payments of long term debt................. -- (44,655) (5,345)
Principal payments under capital lease obligations... (125,170) (70,809) --
Increase in notes payable -- stockholders............ 278,991 244,575 --
Stockholder distributions............................ (1,542,735) (32,000) (100,000)
----------- ----------- ---------
Net cash provided by financing activities.... 2,419,294 1,593,449 47,904
----------- ----------- ---------
Net increase (decrease) in cash........................ 1,080,399 (123,877) 81,806
Cash, beginning of year................................ 746 124,623 42,817
----------- ----------- ---------
Cash, end of year...................................... $ 1,081,145 $ 746 $ 124,623
=========== =========== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............... $ 215,855 $ 88,496 $ 5,001
=========== =========== =========
(See notes to financial statements)
F-104
242
HATTECH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- ORGANIZATION AND BUSINESS
Hattech, Inc. (the Company) was incorporated in the Commonwealth of
Virginia on January 23, 1995. The Company provides engineering and installation
of telecommunications equipment services to customers throughout the United
States.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
For purposes of the statement of cash flows, cash consists of demand
deposits held in banks.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company believes it is not exposed to
any significant credit risk for amounts in excess of the insured limits.
ACCOUNTS RECEIVABLE
The Company maintains its books and records on the accrual basis of
accounting. Accounts receivable are reported at their gross value, less an
allowance for doubtful accounts as deemed necessary. The allowance for doubtful
accounts was $5,149 at December 31, 1999. There was no allowance for doubtful
accounts at December 31, 1998 and 1997. Unbilled accounts receivable consist
primarily of sales to customers which cannot be billed until the project is
substantially complete.
REVENUE RECOGNITION
Revenue on time and material contracts is recognized on the basis of
billable rates times hours delivered plus materials expense incurred. Revenue on
fixed-price contracts is recognized on the basis of percentage-of-completion
using a method which approximates costs incurred in relation to the estimated
costs. Losses on contracts are provided for in the period in which they are
first determined.
Because of inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change within the near term.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. The Company's inventory is
comprised primarily of materials and cable.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the lower of the present value of minimum lease
payments at the beginning of the lease term or fair value of the property at the
inception of the lease.
Depreciation on property and equipment is calculated using the
straight-line and accelerated methods over the estimated useful lives of the
assets, generally 3 to 10 years. Property and equipment held under capital
leases which contain a bargain purchase option or transfer of ownership are
depreciated in the same manner described above. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
F-105
243
HATTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company elected to be taxed as an "S" Corporation effective January 1,
1996 under the Internal Revenue Code. Consequently, in lieu of corporate income
taxes, the stockholders are taxed on their proportionate share of the Company's
taxable income.
NOTE 3 -- INVESTMENT
The Company had a 42% interest as a general partner in a joint venture that
designed and installed telecommunication equipment for customers overseas. The
joint venture is reflected on the accompanying balance sheets at December 31,
1998 and 1997 using the equity method of accounting.
The Company and its partner in the joint venture were in litigation over
the value of the Company's interest in the joint venture. The litigation was
settled during 1999. As part of the settlement, the Company received $50,000 and
the joint venture was dissolved.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1999 1998 1997
---------- -------- -------
Equipment................................................... $ 605,179 $247,756 $ 7,735
Computer equipment and software............................. 473,689 271,153 10,486
Furniture and fixtures...................................... 180,760 50,703 --
Building improvements....................................... 122,725 62,740 --
Vehicles.................................................... 46,057 -- --
---------- -------- -------
1,428,410 632,352 18,221
Less accumulated depreciation..................... 403,916 129,696 18,221
---------- -------- -------
$1,024,494 $502,656 $ --
========== ======== =======
NOTE 5 -- NOTE PAYABLE
The Company has a line-of-credit with a bank which provides for borrowings
up to $7,500,000 ($5,000,000 at December 31, 1998 and $500,000 at December 31,
1997). Borrowings are limited to eligible accounts receivable and eligible
inventory, as defined in the Loan and Security Agreements. The current
line-of-credit matures on September 30, 2000. Borrowings bear interest at .5%
(1% at December 31, 1998 and 1.375% at December 31, 1997) above the prime rate
as published in the Wall Street Journal and are secured by all of the Company's
assets, assignment of life insurance policies on the stockholders, and deeds of
trust on the stockholders' residences. Borrowings are also guaranteed by the
Company's stockholders and their spouses. At December 31, 1999, 1998 and 1997,
$4,395,399, $1,599,587 and $103,249, respectively, were outstanding.
In addition, the Company had a $50,000 term loan as of December 31, 1997
with the same bank. The loan agreement was dated July 14, 1997 with the loan
maturing on July 14, 2000. The loan was to be
F-106
244
HATTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
repaid in 35 principal payments of $1,380 and one final principal and interest
payment of $1,713.99. Monthly payments of accrued interest were also due at a
rate of 1.375% over the prime rate (initial rate of 9.875%). The loan was
secured by all of the Company's assets, assignment of life insurance policies on
the stockholders and deeds of trust on the stockholders' residences. The term
loan was included in the $5,000,000 line-of-credit agreement executed in 1998.
NOTE 6 -- NOTES PAYABLE -- STOCKHOLDERS
The stockholders' loaned the Company funds during 1999 and 1998. The loans
are evidenced by notes that are unsecured and bear interest at 6% per annum. The
notes are subordinate to the line-of-credit described in Note 5.
The aggregate amount of notes payable to stockholders at December 31, 1999
and 1998 was $523,566 and $244,575, respectively.
Interest expense incurred during 1999 and payable to the stockholders' at
December 31, 1999 was $14,675. There was no interest expense incurred to the
stockholders during 1998.
NOTE 7 -- COMMON STOCK
There were no transactions affecting common stock in 1998. The following is
a summary of transactions affecting common stock during the year ended December
31, 1999:
COMMON STOCK ADDITIONAL
--------------- PAID-IN
SHARES AMOUNT CAPITAL
------ ------ ----------
Balance, January 1, 1999.................................... 150 $1 $ --
Issuance of stock........................................... 154 2 1,012,394
--- -- ----------
Balance, December 31, 1999.................................. 304 $3 $1,012,394
=== == ==========
The Company issued 154 shares of common stock in 1999 in exchange for notes
receivable. The notes receivable were collected on December 30, 1999
The Company issued 68 shares of common stock at par value ($.68) to the
current stockholders during 1997.
NOTE 8 -- LEASES AND COMMITMENTS
The Company is obligated under various capital leases for a vehicle,
computers and equipment that expire throughout the next four years. At December
31, 1999 and 1998, the gross amount of capital leases included in the Company's
property and equipment was as follows:
1999 1998
-------- --------
Equipment................................................... $223,700 $223,700
Computer equipment and software............................. 55,723 55,723
Vehicle..................................................... 46,057 --
-------- --------
325,480 279,423
Less accumulated amortization............................. 146,476 51,419
-------- --------
$179,004 $228,004
======== ========
F-107
245
HATTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has noncancellable operating leases for office and
warehouse facilities that expire over the next three years. Some of the
operating leases include scheduled rent escalations and also require the Company
to pay its proportionate share of building expenses as additional rent. The
aggregate cash payments for leases with rent escalations are being expensed
ratably over the related lease term resulting in deferred rent.
Future minimum lease payments under noncancellable operating leases and the
present value of future minimum capital lease payments as of December 31, 1999
are:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ----------
2000........................................................ $100,495 $ 597,463
2001........................................................ 20,335 473,799
2002........................................................ 10,739 470,544
2003........................................................ 8,055 --
-------- ----------
139,624 $1,541,806
==========
Less interest at rates ranging from 6.21% to 15.31%......... 10,123
--------
Present value of net minimum capital lease payments......... 129,501
Less current portion........................................ 92,957
--------
Obligations under capital leases, noncurrent................ $ 36,544
========
The Company's rental expense for operating leases in 1999 and 1998,
including additional rent of $109,472 and $107,974, was $768,194 and $645,370,
respectively. Amortization of assets recorded under capital leases during 1999
and 1998 was $95,057 and $51,419, respectively, and is included in depreciation
expense.
The Company has the right to terminate its primary lease for office and
facilities space under certain conditions.
NOTE 9 -- CONCENTRATIONS
The Company was the primary provider of field engineering and installation
services for one of its customers. The Company also provided warehouse and
staging facility services for the customer. The services were provided pursuant
to a Services Agreement that commenced February 1, 1998 and terminated February
1, 2000.
Revenue generated from this customer comprised approximately 70%, 97% and
100% of total revenue for the years ended December 31, 1999, 1998 and 1997,
respectively. Approximately 58%, 90% and 100% of billed and unbilled accounts
receivable at December 31, 1999, 1998 and 1997, respectively, are due from this
customer.
Two other customers had balances that approximated 15% and 11% of total
accounts receivable at December 31, 1999.
The Company obtains the majority of its inventory from two suppliers.
Although no formal purchase agreement exists, the Company believes the
relationships will continue.
The Company has an agreement effective July 1, 1997 with a union that
covers approximately 39% of the Company's labor force in 1999. The agreement
terminates on June 30, 2002.
F-108
246
HATTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- PROFIT SHARING
The Company amended its 401(k) Profit Sharing Plan (the Plan) in 1999 and
1998 to eliminate minimum age and length of service requirements. The Plan
allows eligible employees to defer a portion of their annual compensation,
subject to the limits in Section 401(k) of the Internal Revenue Code. The
Company, at its discretion, may make profit sharing contributions to the Plan.
Such contributions vest ratably over a five year period. The Company made profit
sharing contributions of $150,000 and $81,219 in 1999 and 1998, respectively.
NOTE 11 -- EMPLOYEE STOCK BASED COMPENSATION
The Company adopted an Employee Stock Based Compensation Agreement in
December 1999. The agreement entitles participants to receive compensation in
the form of "stock based compensation units," as defined in the agreement. The
board of directors, at its discretion, grants "stock based compensation units."
The agreement provides for ratable vesting over a five-year period.
The value of each "stock based compensation unit" is determined at the end
of each fiscal year through the year ending December 31, 2003, at which time the
final value of the "stock based compensation units" will be determined. The
value of each "stock based compensation unit" is determined by a formula defined
in the agreement.
In the event that there is a change in control transaction, as defined in
the agreement, prior to December 31, 2003, participants will be entitled to
receive their vested portion of the "stock based compensation units" within 60
days of the change in control. Participants that remain with the Company after a
change in control will continue to receive compensation equal to the amount they
would have received, on each vesting date, had there not been a change in
control.
The value of the "stock based compensation units" at December 31, 1999 was
$46,999 and is included in the accompanying financial statements as an expense
and a liability.
NOTE 12 -- 1998 FINANCIAL STATEMENTS RESTATED
Certain errors, resulting in the overstatement of reported net income in
the Company's previously issued 1998 unaudited financial statements, have been
corrected as a result of the audits for the years ended December 31, 1998 and
1997. The changes to retained earnings at December 31, 1997 and to the 1998
statement of income and retained earnings are summarized as follows:
RETAINED
EARNINGS NET INCOME
-------- ----------
As previously reported...................................... $139,850 $1,906,205
Overstatement of revenues................................. 112,280 (112,280)
Overstatement of salaries................................. (54,809) 54,809
-------- ----------
As restated................................................. $197,321 $1,848,734
======== ==========
NOTE 13 -- NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $46,057 and $279,423 were incurred in 1999 and
1998, respectively, when the Company entered into leases for a vehicle and
computer and office equipment.
F-109
247
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of
Copenhagen Utilities & Construction, Inc.
and the Board of Directors of Orius Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, retained earnings and of cash
flows present fairly, in all material respects, the financial position of
Copenhagen Utilities & Construction, Inc. (the "Company") at December 31, 1997
and 1998 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
May 20, 1999
F-110
248
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Orius Corp.:
In our opinion, the accompanying balance sheet and the related statements
of income, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Copenhagen Utilities &
Construction, Inc. (the "Company") at February 26, 1999, and the results of its
operations and its cash flows for the period January 1, 1999 through February
26, 1999, in conformity with accounting principles generally accepted in the
United States. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
September 11, 2000
F-111
249
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998 AND FEBRUARY 26, 1999
1997 1998 1999
----------- ----------- -----------
ASSETS
Current assets:
Cash.................................................. $ 1,100,760 $ 1,638,845 $ 432,586
Short-term investments................................ 750,000 750,000 750,000
Accounts receivable, net.............................. 5,522,908 3,980,602 3,320,332
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. 2,438,416 2,217,739 1,990,349
Deferred income taxes................................. 16,000 21,000 21,000
Prepaid expenses and other current assets............. 76,300 105,938 91,560
Income taxes receivable............................... 94,103 94,103
----------- ----------- -----------
Total current assets.......................... 9,904,384 8,808,227 6,699,930
Vehicles, equipment and leasehold improvements, net..... 2,098,858 1,835,429 1,781,108
----------- ----------- -----------
Total assets.................................. $12,003,242 $10,643,656 $ 8,481,038
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,519,770 $ 1,300,495 $ 1,271,245
Accrued liabilities................................... 2,548,086 3,185,607 650,663
Long-term debt, current portion....................... 61,023 129,364 129,364
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. 780,404 250,437 278,032
----------- ----------- -----------
Total current liabilities..................... 5,909,283 4,865,903 2,329,304
Long-term debt.......................................... 835,277 28,032 2,423
----------- ----------- -----------
Total liabilities............................. 6,744,560 4,893,935 2,331,727
----------- ----------- -----------
Contingencies (Note 12)
Stockholders' equity:
Common stock:
Voting; 10,000 shares authorized, 2,496 issued and
outstanding in 1997 and 1998, par value $.02..... 50 50 50
Nonvoting; 90,000 shares authorized, 59,904 shares
issued and outstanding in 1997 and 1998, par
value $.02....................................... 1,198 1,198 1,198
Additional paid-in capital......................... 651,319 651,319
Retained earnings.................................. 5,257,434 5,097,154 5,496,744
----------- ----------- -----------
Total stockholders' equity.................... 5,258,682 5,749,721 6,149,311
----------- ----------- -----------
Total liabilities and stockholders' equity.... $12,003,242 $10,643,656 $ 8,481,038
=========== =========== ===========
The accompanying notes are an integral part of the Financial Statements.
F-112
250
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND FOR THE PERIOD JANUARY 1, 1999 THROUGH FEBRUARY 26, 1999
1997 1998 1999
----------- ----------- ----------
Contract revenue......................................... $48,377,526 $35,191,894 $3,877,516
Contract costs........................................... 39,166,200 27,092,236 2,639,110
----------- ----------- ----------
Gross profit........................................ 9,211,326 8,099,658 1,238,406
General and administrative expenses...................... 6,888,750 8,541,112 634,467
----------- ----------- ----------
Income (loss) from operations....................... 2,322,576 (441,454) 603,939
----------- ----------- ----------
Other (income) expense:
Interest income........................................ (207,866) (238,701) (19,033)
Interest expense....................................... 43,126 68,882 8,795
(Gain) loss on disposal of assets...................... (3,238) (35,355) --
----------- ----------- ----------
(167,978) (205,174) (10,238)
----------- ----------- ----------
Income (loss) before income tax provision........... 2,490,554 (236,280) 614,177
Income tax provision (benefit)........................... 900,000 (76,000) 214,587
----------- ----------- ----------
Net income (loss)................................... 1,590,554 (160,280) 399,590
Retained earnings, beginning of year..................... 3,816,880 5,257,434 5,097,154
Dividends paid........................................... (150,000) -- --
----------- ----------- ----------
Retained earnings, end of period......................... $ 5,257,434 $ 5,097,154 $5,496,744
=========== =========== ==========
The accompanying notes are an integral part of the Financial Statements.
F-113
251
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND FOR THE PERIOD JANUARY 1, 1999 THROUGH FEBRUARY 26, 1999
1997 1998 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)..................................... $ 1,590,554 $ (160,280) $ 399,590
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 635,084 839,632 160,000
Gain on disposal of assets......................... (3,238) (35,355) --
Net changes in operating assets and liabilities:
Accounts receivables............................. 645,554) 1,542,306 660,280
Prepaid expenses and other current assets........ (21,264) (29,638) 14,378
Costs and estimated earnings in excess of
billings on uncompleted contracts............. (549,642) 220,677 227,390
Deferred income tax.............................. 11,000 (5,000) --
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 180,963 (529,967) 27,595
Accounts payable................................. 2,550 (1,219,275) 29,250
Accrued liabilities.............................. 1,164,688 1,072,971 (2,534,944)
Income taxes payable (receivable)................ (259,754) (529,553) --
----------- ----------- -----------
Total adjustments............................. 514,833 1,326,798 (1,474,551)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 2,105,387 1,166,518 (1,074,961)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposal of assets...................... 23,300 38,500 --
Purchase of vehicles, equipment and leasehold
improvements....................................... (449,190) (464,648) (105,679)
Purchase of short-term investments.................... (750,000) -- --
----------- ----------- -----------
Net cash used in investing activities......... (1,758,190) (426,148) (105,679)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid........................................ (150,000) -- --
Contributions from shareholders....................... -- 109,085 --
Payments on long-term debt............................ (720,223) (311,370) (25,609)
----------- ----------- -----------
Net cash used in financing activities......... (870,223) (202,285) (25,609)
----------- ----------- -----------
Net increase (decrease) in cash............... 59,274 538,085 (1,206,259)
Cash at beginning of year............................... 1,041,486 1,100,760 1,638,845
----------- ----------- -----------
Cash at end of year..................................... $ 1,100,760 $ 1,638,845 $ 432,586
=========== =========== ===========
Supplemental disclosure of noncash investing and
financing transactions:
Notes payable assumed by a related party recorded as
additional paid-in capital......................... $ -- $ 542,234 $ --
=========== =========== ===========
Equipment purchased with notes payable................ $ 405,277 $ 114,700 --
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes............................ $ 1,148,754 $ 458,553 --
=========== =========== ===========
Cash paid for interest................................ $ 72,336 $ 51,290 --
=========== =========== ===========
The accompanying notes are an integral part of the Financial Statements.
F-114
252
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Copenhagen Utilities & Construction, Inc. (the "Company,") an Oregon
corporation since 1975, operates in Oregon, Washington, California and Nevada.
The Company is a provider of installation, design, engineering and maintenance
services for the telecom industry. The Company also provides installation
services for gas and water utilities. The Company is located in Clackamas,
Oregon and Sacramento, California.
These financial statements include the accounts of a special purpose
entity, Excel Equipment LLC, and is owned by the same shareholders as the
Company. On December 31, 1998, in preparation for the sale of the outstanding
shares of stock of the Company as discussed in Note 13, substantially all assets
of Excel were transferred to the Company, and the Company assumed a portion of
the Company's long-term debt. In connection with this transfer amounts owing
related entities by Excel totaling $542,234 was not assumed by the Company and
accordingly, was recorded as a contribution of capital.
Following is a summary of the Company's significant accounting policies:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents. The cost of
these investments approximates fair value. At times, temporary cash investments
may be in excess of the Federal Deposit Insurance Corporation insurance limit.
The Companies deposits in high credit quality investments with reputable
financial institutions.
SHORT-TERM INVESTMENTS
Short-term investments are stated at fair market value as of the balance
sheet date. Unrealized holding gains or losses are reported in the balance sheet
as a separate component of stockholders' equity until realized. Realized gains
and losses are included in operations.
The Company reported no unrealized gains or losses as the market value of
short-term investments approximated their cost at December 31, 1997 and 1998 and
February 26, 1999.
ACCOUNTING FOR LONG-TERM CONTRACTS
The accompanying financial statements have been prepared using the
percentage-of-completion method of accounting for long-term contracts. This
accounting method provides for the recognition of revenue on contracts which are
not yet completed. The amount of revenue recognized is based on the percentage
that contract costs incurred to date bear to estimated total contract costs,
except that anticipated losses are recognized in their entirety without
reference to percentage-of-completion. Contract costs include all subcontracts,
direct labor and benefits, materials and allocated equipment and indirect costs.
The Company allocates equipment and indirect costs to each contract based
on equipment usage and direct labor rates. These rates are reviewed and adjusted
periodically to reflect changes in the Company's total equipment and indirect
costs.
Revisions in estimated costs and earnings are reported in the accounting
period in which the facts requiring revisions become known.
Profits and losses from service and minor installation contracts are
recognized in the period the work is completed.
F-115
253
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING CYCLE
Assets and liabilities related to long-term contracts are included in
current assets and current liabilities in the accompanying balance sheets as
they will be liquidated in the normal course of contract completion, although
this may require more than one year.
VEHICLES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Vehicles, equipment and leasehold improvements are stated at cost.
Maintenance and repairs of a routine nature are charged to operations as
incurred; additions and improvements are capitalized. Gains and losses from
sales or retirements are included in operations.
Depreciation is computed by accelerated methods over the estimated useful
lives of the related assets, which are as follows:
Construction vehicles and equipment......................... 5 years
Office furniture and equipment.............................. 5 to 7 years
Leasehold improvements...................................... 15 years
Amortization of leasehold improvements is classified as depreciation
expense for financial reporting.
INCOME TAXES
Deferred income taxes are provided for the expected future income tax
effect of differences between the tax basis of assets and liabilities and their
financial reporting amounts. At the balance sheet date, based on enacted tax
laws and statutory tax rates applicable to the years in which the differences
are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures 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.
CONCENTRATIONS OF CREDIT RISK
The Company's cash and accounts receivable subject the Company to
concentrations of potential credit risk. The Company limits its risk by
depositing cash only with established financial institutions which maintain high
credit standings. The Company limits its exposure to losses on accounts
receivable by maintaining a broad customer base and performing the majority of
its contracts for public agencies.
The Company has a long-term service contract to provide service for one
major customer. The Company had total revenues of $16,521,016, $15,219,596 and
$1,648,875 for fiscal years 1997 and 1998 and the period January 1, 1999 through
February 26, 1999, which comprises approximately 34.2%, 43.5% and 42.5%,
respectively.
2. SHORT-TERM INVESTMENTS:
Short-term investments at December 31, 1997 and 1998 and February 26, 1999
consist of municipal bonds with an approximately 5.60% effective annual yield.
The market value of these investments approximated cost.
F-116
254
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following at December 31, 1997 and 1998
and February 26, 1999:
1997 1998 1999
---------- ---------- ----------
Construction contracts............................. $4,134,239 $3,533,164 $3,021,724
Retainage on construction contracts................ 1,398,669 457,438 308,608
---------- ---------- ----------
5,532,908 3,990,602 3,330,332
Less allowance for uncollectible accounts.......... 10,000 10,000 10,000
---------- ---------- ----------
$5,522,908 $3,980,602 $3,320,332
========== ========== ==========
Retainage billed but not due until contract completion is $1,398,669,
$457,438 and $308,608 at December 31, 1997 and 1998 and February 26, 1999,
respectively. The Company expects to collect the retainage over the next year
upon contract completion.
4. LONG-TERM CONTRACTS IN PROGRESS:
Following is a summary of long-term contracts in progress for the years
ended December 31, 1997 and 1998 and the period January 1, 1999 to February 26,
1999:
1997 1998 1999
------------------------- -------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
TOTAL CONTRACT TOTAL CONTRACT TOTAL CONTRACT
CONTRACT TO DATE CONTRACT TO DATE CONTRACT TO DATE
----------- ----------- ----------- ------------ ----------- ------------
Contract costs....... $43,967,855 $30,758,952 $45,321,883 $ 42,768,316 $25,697,740 $ 16,293,513
Gross profit......... 6,403,291 3,318,369 9,450,258 9,111,308 4,266,046 3,146,683
----------- ----------- ----------- ------------ ----------- ------------
Contract revenue... $50,371,146 34,077,321 $54,772,141 51,879,624 $29,963,786 19,440,196
=========== =========== ===========
Less billings........ (32,419,309) (49,912,322) (17,727,879)
----------- ------------ ------------
Net
underbillings.... $ 1,658,012 $ 1,967,302 $ 1,712,317
=========== ============ ============
1997 1998 1999
---------- ---------- ----------
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... $2,438,416 $2,217,739 $1,990,349
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (780,404) (250,437) (278,032)
---------- ---------- ----------
$1,658,012 $1,967,302 $1,712,317
========== ========== ==========
F-117
255
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. VEHICLES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Vehicles, equipment and leasehold improvements at December 31, 1997 and
1998 and February 26, 1999:
1997 1998 1999
---------- ---------- ----------
Construction vehicles and equipment.............. $5,633,278 $5,995,829 $6,101,508
Office furniture and equipment................... 338,780 500,407 500,407
Leasehold improvements........................... 126,786 126,786 126,786
---------- ---------- ----------
6,098,844 6,623,022 6,728,701
Less accumulated depreciation.................... 3,999,986 4,787,593 4,947,593
---------- ---------- ----------
$2,098,858 $1,835,429 $1,781,108
========== ========== ==========
6. LINE OF CREDIT:
The Company maintains an operating line of credit agreement with U.S. Bank
which renews annually in May. Funds are available to a maximum of $750,000,
subject to availability of collateral (80% of eligible accounts receivable).
Borrowings under this agreement bear interest at the bank's prime lending rate.
There were no outstanding borrowings under the line of credit agreement at
December 31, 1997 or 1998 or February 26, 1999.
The line of credit agreement contains certain restrictive covenants related
to the Company's current ratio, net worth and debt to equity ratio. The Company
was in compliance with all requirements at February 26, 1999.
The Company maintains a term-financing line of credit agreement with U.S.
Bank for equipment acquisitions. Under this agreement, the Company may borrow up
to $750,000 (not to exceed 80% of the sales price of equipment acquired).
Borrowings bear interest at the bank's prime lending rate plus one-half percent.
Loans are amortized over three to five years. There were no outstanding
borrowings under the equipment line of credit agreement at December 31, 1997 or
1998 or February 26, 1999.
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997 and 1998 and
February 26, 1999:
1997 1998 1999
-------- -------- --------
Contracts payable to Case Credit Corporation (12) and
Western Traction Company (1) in aggregate monthly average
installments of $11,775, including interest ranging from
6% to 7.90%; maturing in November 1999; collateralized by
construction equipment.................................... $284,138 $157,396 $131,787
Related party long-term debt:
Leota Johnson, monthly installments of $3,533, including
interest of 7.5%; maturing in February 2010............ 353,470 -- --
Johnson Family Trust monthly installments of $2,581,
including interest of 7.5%; maturing in February
2010................................................... 258,692 -- --
-------- -------- --------
896,300 157,396 131,787
Less amount due within one year............................. 61,023 129,364 129,364
-------- -------- --------
$835,277 $ 28,032 $ 2,423
======== ======== ========
F-118
256
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
The income tax provision (benefit) reported in the accompanying statements
of operations and retained earnings consist of the following for the years ended
December 31, 1997 and 1998 and the period January 1, 1999 to February 26, 1999:
1997 1998 1999
------------------------------------ ----------------------------------- ------------
CURRENTLY DEFERRED CURRENTLY DEFERRED CURRENTLY
PAYABLE PROVISION PAYABLE PROVISION PAYABLE
(RECEIVABLE) (BENEFIT) TOTAL (RECEIVABLE) (BENEFIT) TOTAL (RECEIVABLE)
------------ ---------- -------- ------------ --------- -------- ------------
Federal....................... $790,000 $ 8,000 $798,000 $(71,000) $ 2,000 $(69,000) $190,982
State......................... 99,000 3,000 102,000 (7,000) (7,000) 23,605
-------- ------- -------- -------- ------- -------- --------
$889,000 $11,000 $900,000 $(71,000) $(5,000) $(76,000) $214,587
======== ======= ======== ======== ======= ======== ========
Effective tax rate............ 36.1% (32.2)%
======== ========
1999
--------------------
DEFERRED
PROVISION
BENEFIT TOTAL
--------- --------
Federal....................... $-- $190,982
State......................... -- 23,605
-- --------
$-- $214,587
== ========
Effective tax rate............ 34.9%
========
The income tax provision (benefit) result in effective rates which differ
from the statutory rate primarily due to the effect of state income taxes.
Deferred income taxes are recognized for the expected future income tax
effect of differences between the tax bases of assets and liabilities and their
financial reporting amounts (temporary differences). Following is a summary of
temporary differences and the related deferred income tax effect as of December
31, 1997 and 1998 and February 26, 1999:
1997 1998 1999
------------------------ ------------------------ ------------------------
AMOUNT OF DEFERRED AMOUNT OF DEFERRED AMOUNT OF DEFERRED
TEMPORARY INCOME TAX TEMPORARY INCOME TAX TEMPORARY INCOME TAX
SOURCES OF TEMPORARY DIFFERENCES DIFFERENCES EFFECT DIFFERENCES EFFECT DIFFERENCES EFFECT
- -------------------------------- ----------- ---------- ----------- ---------- ----------- ----------
Accrued insurance reserves...... $35,000 $12,000 $25,000 $10,000 $ 25,000 $10,000
Allowance for uncollectible
accounts receivable........... 10,000 4,000 10,000 4,000 10,000 4,000
State tax net operating losses
net of federal provision...... 165,000 7,000 165,000 7,000
------- ------- -------
Deferred income tax benefit..... $16,000 $21,000 $21,000
======= ======= =======
Recoverable income taxes totaling $94,103 reported in the accompanying
December 31, 1998 and February 26, 1999 balance sheets result from federal and
state estimated tax payments which exceeded the Company's current income tax
obligations.
9. OPERATING LEASE COMMITMENTS:
The Company leases office and shop facilities in Clackamas, Oregon and
Sacramento, California from its stockholders under lease agreements which
require the Company to pay certain operating costs such as property taxes,
insurance and utilities in addition to the basic rent.
The combined rent commitment under these leases is $19,000 per month
through February 2004, exclusive of operating costs.
Rent expense charged to operations under all operating leases, including
the leases with the Company's stockholders described above, totaled
approximately, $1,719,100, $1,085,000 and $180,300 for 1997 and 1998 and for the
period January 1, 1999 through February 26, 1999, respectively. Rent expense
paid to a related party was $168,000 for each of the years ended 1997 and 1998
and $28,650 for the period January 1, 1999 to February 26, 1999.
F-119
257
COPENHAGEN UTILITIES & CONSTRUCTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS:
RETIREMENT PLANS:
The Company's hourly field employees and certain salaried employees
participate in a multi-employer money purchase pension plan sponsored by the
Associated General Contractors of America, Inc. Contributions charged to
operations under this plan totaled approximately $683,000, $604,000 and $34,000
for 1997 and 1998 and the period January 1, 1999 through February 26, 1999,
respectively.
The Company maintains a defined contribution retirement plan under
provisions of Internal Revenue Code Section 401(k) for its eligible employees
not covered by the money purchase pension plan described above. The plan
requires the Company to match 50% of employee contributions, to a maximum
Company contribution of 3% of the employee's annual compensation (up to
specified limits set by law). The plan also allows for discretionary
contributions to be determined annually by the Company's Board of Directors.
Contributions charged to operations under this plan totaled approximately,
$64,000, $54,000, and $7,000 for the years ended December 31, 1997 and 1998 and
the period January 1, 1999 through February 26, 1999, respectively.
INCENTIVE BONUS PLAN:
The Company has an incentive bonus plan for certain key employees under
which the employees can share in profits which the Company earns in excess of
predetermined norms. Bonuses earned under this formula have been paid or accrued
as of year-end. Bonuses paid by the Company were $4,035,000 and $5,218,500
during fiscal years 1997 and 1998, respectively. No bonuses were paid or accrued
for the period January 1, 1999 through February 26, 1999.
11. RECAPITALIZATION:
In July 1997 the Company's stockholders recapitalized the Company by
creating a second class of (nonvoting) capital stock to facilitate business
succession plans. The stockholders exchanged 1,248 shares of $1 par value voting
common stock for 2,496 of voting common stock and 59,904 shares of nonvoting
common stock.
12. CONTINGENCIES:
The Company is a party to certain claims and suits arising out of the
conduct of its business. While there can be no assurance as to their ultimate
outcome, management does not believe these matters will have a material adverse
effect on its consolidated financial condition or operating results.
13. SUBSEQUENT EVENT:
On February 26, 1999, the stockholders of the Company sold all outstanding
shares of stock to the Orius Corporation of West Palm Beach, Florida for cash
and common stock.
F-120
258
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WE HAVE NOT AUTHORIZED ANY ONE TO GIVE ANY INFORMATION OR REPRESENT
ANYTHING TO YOU OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS. YOU
MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS.
UNTIL DECEMBER 13, 2000, ALL DEALERS THAT, BUY, SELL OR TRADE THE EXCHANGE
NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS AND SUBSCRIPTIONS.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................ 1
Risk Factors.............................. 10
Forward-Looking Statements May Prove
Inaccurate.............................. 20
LISN Acquisition.......................... 21
Exchange Offer; Registration Rights....... 24
Use of Proceeds........................... 34
Capitalization............................ 34
Unaudited Pro Forma Financial
Statements.............................. 35
Supplemental Unaudited Pro Forma Financial
Data.................................... 40
Selected Historical Financial Data........ 45
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 46
Business.................................. 56
Management................................ 69
Certain Relationships and Related Party
Transactions............................ 75
Principal Stockholders.................... 78
Description of Parent's Securities........ 79
Description of Senior Credit Facilities... 81
Description of the Notes.................. 84
Book Entry; Delivery and Form............. 125
United States Federal Income Tax
Consequences............................ 129
Plan of Distribution...................... 132
Legal Matters............................. 133
Independent Accountants................... 134
Available Information..................... 135
Index to Financial Statements............. F-1
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--------------------
PROSPECTUS
--------------------
[ORIUS LOGO]
NATG HOLDINGS, LLC
ORIUS CAPITAL CORP.
EXCHANGE OFFER FOR $150,000,000
12 3/4% SENIOR SUBORDINATED NOTES DUE 2010
September 14, 2000
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