<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PREFERRED STOCK EXCHANGE ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CONCENTRIC NETWORK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 65-0257497
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HENRY R. NOTHHAFT
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
CONCENTRIC NETWORK CORPORATION
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID J. SEGRE, ESQ.
PAUL B. SHINN, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM
AMOUNT PRICE AGGREGATE AMOUNT OF
TITLE OF CLASS OF TO BE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2)(3) PRICE(2)(3) FEE(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13 1/2% Series B Senior Redeemable
Exchangeable Preferred Stock due 295,000
2010................................ shares $1,000 $150,000,000 $44,250
=============================================================================================
</TABLE>
(1) Includes 145,000 shares of 13 1/2% Series B Senior Redeemable Exchangeable
Preferred Stock due 2010 that may be issued as dividends on the 13 1/2%
Series B Senior Redeemable Exchangeable Preferred Stock due 2010. The
additional registration fee is payable in respect thereof.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended, as
the market value of securities to be cancelled in the exchange.
(3) Based on bid price of $1,000 per share of Series A Preferred (as defined)
at close of business on June 30, 1998. There was no ask price for the
Series A Preferred on such date.
----------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. NEITHER THIS PROSPECTUS NOR THE LETTER OF TRANSMITTAL +
+SHALL CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR +
+SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 7, 1998
PROSPECTUS
$150,000,000
[CONCENTRIC LOGO]
OFFER TO EXCHANGE
13 1/2% SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OUTSTANDING
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2010
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , UNLESS EXTENDED.
Concentric Network Corporation, a Delaware corporation ("Concentric" or the
"Company") hereby offers upon the terms and subject to the conditions set forth
in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") (the offering pursuant to the
Prospectus together with the Letter of Transmittal are herein referred to as
the "Exchange Offer") to exchange up to an aggregate of 150,000 shares of its
13 1/2% Series B Senior Redeemable Exchangeable Preferred Stock due 2010 (as
defined in Company's Certificate of Designation as filed with the Delaware
Secretary of State) (herein the "Series B Preferred") (capitalized terms
followed by the parenthetical remark "(as defined)" and not otherwise defined
herein shall have the meanings given to them in the Certificate of Designation)
for up to 150,000 shares of the Company's outstanding 13 1/2% Series A Senior
Redeemable Exchangeable Preferred Stock, due 2010 (herein the "Series A
Preferred"). The terms of the Series B Preferred are substantially identical in
all material respects to those of the Series A Preferred, except that the
Series B Preferred (i) will have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not be subject to
certain restrictions on transfer applicable to the Series A Preferred and (ii)
will not be entitled to registration or other rights under the Registration
Rights Agreement (as defined) including the provision in the Registration
Rights Agreement for payment of Liquidated Damages (as defined) upon failure by
the Company to consummate the Exchange Offer or the occurrence of certain other
events. See "Description of Preferred Stock." The Series B Preferred will be
issued pursuant to and the holders thereof (herein the "New Holders") will be
entitled to the rights, preferences and privileges inuring to the Series B
Preferred as set forth in the Certificate of Designation. In the event that the
Exchange Offer is consummated, any Series A Preferred which remain outstanding
after consummation of the Exchange Offer and the Series B Preferred issued in
the Exchange Offer will vote together as a single class for purposes of
determining whether Holders of the requisite percentage of shares of Preferred
Stock (as defined below) have taken certain actions or exercised certain rights
under the Certificate of Designation. See "Description of Series B Preferred"
and "The Exchange Offer." Holders of Series A Preferred are referred to herein
as "Existing Holders" and Existing Holders together with New Holders are
referred to herein collectively as "Holders". The Series B Preferred together
with the Series A Preferred are referred to herein collectively as the
"Preferred Stock".
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED
TO EXISTING HOLDERS ON OR ABOUT , 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH EXISTING HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE LETTER OF TRANSMITTAL. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
, 1998
<PAGE>
(continuation of cover page)
On June 8, 1998, the Company issued 150,000 shares of Series A Preferred
(the "Offering"). The Series A Preferred were issued pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Series B Preferred
are being offered hereunder in order to satisfy certain obligations of the
Company under the Registration Rights Agreement by and among the Company and
Bear, Stearns & Co., Inc., First Union Capital Markets, CIBC Oppenheimer, UBS
Securities LLC and Libra Investments, Inc. as the initial purchasers (the
"Initial Purchasers") of the Series A Preferred. The Exchange Offer is
intended to satisfy the Company's obligations under the Registration Rights
Agreement. Once the Exchange Offer is consummated, the Company generally will
have no further obligations to register any of the Series A Preferred not
tendered by Existing Holders for exchange. See "Risk Factors--Consequences to
Non-Tendering Holders of Series A Preferred."
Each share of Preferred Stock will have a liquidation preference of $1,000
per share. Dividends on the Preferred Stock will accrue at a rate of 13 1/2%
per annum of the liquidation preference thereof and will be payable quarterly
in arrears on March 1, June 1, September 1, and December 1 of each year (each
a "Dividend Payment Date"), commencing on September 1, 1998. Dividends will be
payable in cash, except that on each Dividend Payment Date occurring on or
prior to June 1, 2003, dividends may be paid, at the Company's option, by the
issuance of additional shares of Preferred Stock (including fractional shares)
having an aggregate liquidation preference equal to the amount of such
dividends. The Preferred Stock will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accumulated and unpaid dividends and
Liquidated Damages (as defined), if any, to the date of redemption. In
addition, prior to June 1, 2001, the Company may, at its option, redeem up to
a maximum of 35% of the initially issued Preferred Stock from the net proceeds
of one or more Public Equity Offerings (as defined) or one or more sales of
its Common Stock (as defined) (other than Disqualified Stock (as defined)) to
one or more Strategic Investors (as defined). The Preferred Stock is subject
to mandatory redemption at its liquidation preference, plus accumulated and
unpaid dividends and Liquidated Damages, if any, on June 1, 2010 out of any
funds legally available therefor. Upon a Change of Control (as defined), the
Company will be required, subject to certain conditions and after the Existing
Senior Notes Maturity Date (as defined), to offer to purchase all outstanding
shares of the Preferred Stock at a price equal to 101% of the Liquidation
Preference thereof plus accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of purchase, or, if such offer to purchase cannot
be made, to reset the dividend rate on the Preferred Stock so that, after such
reset, the Preferred Stock would have a market value of 101% of the
Liquidation Preference thereof. See "Description of the Preferred Stock."
The Preferred Stock will rank (i) senior to all Junior Securities (as
defined); (ii) on a parity with any Parity Securities (as defined); and (iii)
junior to each class of Senior Securities (as defined). In addition, the
Preferred Stock will rank junior in right of payment to all indebtedness and
other obligations of the Company and its subsidiaries. As of March 31, 1998,
the Preferred Stock would have been junior in right of payment to
approximately $195.0 million of total indebtedness and other obligations of
the Company and its subsidiaries. Following the Offering, the Company will
have the ability to issue additional shares of Preferred Stock in lieu of
paying cash dividends through June 1, 2003. See "Description of Preferred
Stock--Ranking."
On any scheduled Dividend Payment Date, subject to certain conditions, the
Company may, at its option, exchange, in whole but not in part, all of the
shares of Preferred Stock then outstanding for the Company's 13 1/2% Senior
Subordinated Debentures due 2010 (the "Exchange Debentures"). See "Description
of Preferred Stock--Exchange."
Interest on the Exchange Debentures will accrue at a rate of 13 1/2% per
annum and will be payable semi-annually in arrears on June 1 and December 1 of
each year, commencing on the first such date after the issuance date of the
Exchange Debentures. Interest on the Exchange Debentures payable on or prior
to June 1, 2003 may be paid in the form of additional Exchange Debentures
valued at the principal amount thereof. The Exchange Debentures will be
redeemable at the option of the Company, in whole or in part, at any time on
or after June 1,
i
<PAGE>
2003 at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of redemption. In
addition, prior to June 1, 2001, the Company may, at its option, redeem up to
a maximum of 35% of the aggregate principal amount of Exchange Debentures
originally issued from the net proceeds of one or more underwritten public
offerings of its Common Stock or one or more sales of its Capital Stock (other
than Disqualified Stock) to one or more Strategic Investors. Upon a Change of
Control, the Company will be required, subject to certain conditions and after
the Existing Senior Notes Maturity Date, to offer to each holder of Exchange
Debentures to purchase all or any part of such holder's Exchange Debentures at
a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any to the date of purchase,
or, if such offer to purchase cannot be made, to reset the interest rate on
the Exchange Debentures so that, after such reset, the Exchange Debentures
would have a market value of 101% of the aggregate principal amount thereof.
See "Description of the Exchange Debentures." The Preferred Stock and the
Exchange Debentures are sometimes referred to herein as the "Securities."
If the date of an Event of Default (as defined) occurs on or prior to the
Existing Senior Notes Maturity Date, the remedies of holders of the Exchange
Debentures will be limited as set forth in this paragraph. Upon the
acceleration of any Designated Senior Debt by the holders thereof, the
interest rate payable with respect to the Exchange Debentures will be
increased by one-half of one percent per annum for the 90-day period following
such Event of Default, which rate will further increase by one-half of one
percent per annum with respect to each subsequent 90-day period during which
such Event of Default is continuing (or any other Event of Default is
occurring while such initial Event of Default is continuing), up to a maximum
aggregate increase in interest rate of two percent (2%) per annum. Any
interest rate increase effected pursuant to the foregoing shall only be
effective during such time that an Event of Default is continuing and prior to
the Existing Senior Note Maturity Date. Subsequent to the Existing Senior
Notes Maturity Date, the Trustee and holders of the Exchange Debentures will
have customary remedies upon the occurrence of an Event of Default. See
"Description of the Exchange Debentures--Events of Default."
The Series B Preferred generally will be issued in the form of Global Notes
(as defined) which will be deposited with, or on behalf of, the Depositary (as
defined) and registered in its name or in the name of a nominee of the
Depositary. Beneficial interests in the Global Notes representing the Series B
Preferred will be shown on, and transfers thereof will be effected through,
records maintained by DTC and its participants. See "Book-Entry; Delivery and
Form."
The Company will accept for exchange any and all Series A Preferred which
are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on , 1998 (the "Exchange Offer Registration Statement", which
term shall encompass all amendments, exhibits, annexes and schedules thereto),
unless extended by the Company in its sole discretion (the "Expiration Date").
The Expiration Date will not in any event be extended to a date later than
, 1998 (30 business days after effectiveness of the Exchange Offer
Registration Statement). Tenders of Series A Preferred may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for
exchange any Series A Preferred with respect to the Exchange Offer, the
Company will promptly return the Series A Preferred to the Existing Holders.
The Exchange Offer is not conditioned upon any minimum principal amount of
Series A Preferred being tendered for exchange, but is subject to certain
events and conditions that may be waived by the Company and to the terms and
provisions of the Registration Rights Agreement.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance (the "Staff") of the Securities
and Exchange Commission (the "Commission") as set forth in the Staff's Exxon
Capital Holdings Corporation no-action letter (available May 13, 1988) (the
"Exxon Capital No-Action Letter"), Morgan Stanley & Co. Incorporated no-action
letter (available June 5, 1991) (the "Morgan Stanley No-Action Letter"),
Shearman & Sterling no-action letter (available July 2, 1993) (the "Shearman &
Sterling No-Action Letter"), and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange
Offer as it has in such
ii
<PAGE>
interpretive letters to third parties. Based on these interpretations by the
Staff, and subject to the two immediately following sentences, the Company
believes that Series B Preferred issued pursuant to this Exchange Offer in
exchange for Series A Preferred may be offered for resale, resold and
otherwise transferred by such New Holder (other than a New Holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Series B
Preferred are acquired in the ordinary course of such New Holder's business
and that such New Holder is not participating, and has no arrangement or
understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such Series B Preferred. However, any
Existing Holder who (i) is an "affiliate" of the Company (within the meaning
of Rule 405 under the Securities Act), (ii) does not acquire such Series B
Preferred in the ordinary course of its business, (iii) intends to participate
in the Exchange Offer for the purpose of distributing Series B Preferred, or
(iv) is a broker-dealer who purchased such Series A Preferred directly from
the Company, (a) will not be able to rely on the interpretations of the Staff
set forth in the above-mentioned interpretive letters, (b) will not be
permitted or entitled to tender such Series A Preferred in the Exchange Offer
and (c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
Series A Preferred unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Series A Preferred acquired for its own account as a result of market-making
or other trading activities and exchanges such Series A Preferred for Series B
Preferred (a "Participating Broker-Dealer"), then such Participating Broker-
Dealer may be deemed a statutory "underwriter" within the meaning of the
Securities Act and must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Series B Preferred. See
"Plan of Distribution".
Each Existing Holder who wishes to exchange Series A Preferred for Series B
Preferred in the Exchange Offer will be required to represent that (i) it is
not an affiliate of the Company, (ii) any Series B Preferred to be received by
it are being acquired in the ordinary course of its business, and (iii) it has
no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such Series B
Preferred. Each broker-dealer that receives Series B Preferred for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Series A Preferred for its own account as a result of market-making activities
or other trading activities (and not directly from the Company) and must agree
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Series B Preferred. The Letter of
Transmittal states that by so acknowledging 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. Based on the position
taken by the Staff in the interpretive letters referred to above, the Company
believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Series B Preferred received upon
exchange of such Series A Preferred with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such Series B Preferred. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer during the period referred to below in
connection with resales of Series B Preferred received in exchange for Series
A Preferred where such Series A Preferred were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other
trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company shall use its best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended to the extent necessary to ensure that it is available for sales
of Series B Preferred by Participating Broker-Dealers, and to ensure that the
Exchange Offer Registration Statement conforms with the requirements of the
Act and the policies, rules and regulations of the Commission as announced
from time to time, for a period expiring approximately 180 days from the date
on which the Exchange Offer Registration Statement is declared effective. See
"Plan of Distribution." Any Participating Broker-Dealer who is an affiliate of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
Series B Preferred."
Each Participating Broker-Dealer who surrenders Series A Preferred pursuant
to the Exchange Offer will be deemed to have agreed, by execution of the
Letter of Transmittal, that, upon receipt of notice from the Company
iii
<PAGE>
of the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in this Prospectus untrue in
any material respect or which causes this Prospectus to omit to state a
material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-
Dealer will suspend the sale of Series B Preferred pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the Series B Preferred may be resumed, as the
case may be.
The Series B Preferred will be a new issue of securities for which there
currently is no established trading market. Although the Initial Purchasers
have informed the Company that they currently intend to make a market in the
Series B Preferred, they are not obligated to do so, and any such market
making may be discontinued at any time without notice. As the Series A
Preferred were issued and the Series B Preferred are being issued to a limited
number of institutions who typically hold similar securities for investment,
the Company does not expect that an active public market for the Series B
Preferred will develop. Accordingly, there can be no assurance as to the
development, liquidity or maintenance of any market for the Series B
Preferred. The Series A Preferred have been approved for trading in The Portal
Market. The Company does not currently intend to apply for listing of the
Series B Preferred on any securities exchange or for quotation through the
Nasdaq Stock Market. See "Risk Factors--Restrictions on Resale; Absence of
Public Market for the Series A Preferred."
Any Series A Preferred not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Certificate of
Designation (except for those rights which terminate upon consummation of the
Exchange Offer). Following consummation of the Exchange Offer, the Existing
Holders will continue to be subject to the existing restrictions upon transfer
thereof and the Company will have no further obligation to such Existing
Holders (except for limited instances involving Existing Holders that are not
eligible to participate in the Exchange Offer) to provide for registration
under the Securities Act of the Series A Preferred held by them. To the extent
that Series A Preferred are tendered and accepted in the Exchange Offer, an
Existing Holder's ability to sell untendered Series A Preferred could be
adversely affected. See "Summary--Certain Consequences of a Failure to
Exchange Series A Preferred" and "Risk Factors".
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SERIES A PREFERRED ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR SERIES A PREFERRED PURSUANT TO THE EXCHANGE OFFER.
The Company has agreed to pay all expenses of the Exchange Offer. See "The
Exchange Offer--Fees and Expenses."
The Company will not receive any cash proceeds from the issuance of the
Series B Preferred offered hereby. No dealer-manager is being used in
connection with this Exchange Offer. See "Use of Proceeds" and "Plan of
Distribution."
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SERIES B PREFERRED OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE
EXCHANGE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY
iv
<PAGE>
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS
IN CONNECTION WITH SUCH TRANSACTION.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the Series B Preferred offered hereby (the "Exchange
Offer Registration Statement"). This Prospectus does not contain all the
information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are necessarily incomplete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange
Offer Registration Statement, reference is made to the exhibit for a more
complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such reports, proxy and information statements and other
information can be inspected and copied at the public reference facility
referenced above and at the SEC's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a
web site (http:www.sec.gov) that contains reports, proxy and information
statements and other information regarding Company, such as the Company, that
file electronically with the Commission. In addition, for so long as any of
the Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owners of the Notes, in
connection with the sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act. The Common Stock of the Company is traded on the
Nasdaq National Market. Reports of the Company may also be inspected at the
offices of the Nasdaq National Market, Nasdaq Operations, 1735 K Street, N.W.
Washington, D.C. 20006. Any such request and requests for the agreements
summarized herein should be directed to Peter Bergeron, Secretary, at the
Company's principal executive offices, 10590 N. Tantau Road, Cupertino,
California 95014, telephone number (408) 342-2800.
v
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. Certain terms used in this Prospectus are defined in the Glossary
of Terms beginning on page G-1.
THE COMPANY
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs"), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high performance,
reliability and security of private networks. Among the current enterprise
customers are Acer America Corporation, Inc. ("Acer"), Intuit, Inc. ("Intuit"),
Netscape Communications Corporation ("Netscape"), Microsoft Corporation
("Microsoft") and WebTV Networks, Inc., a subsidiary of Microsoft ("WebTV").
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access and applications hosting
services.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to industry analyst Forrester Research, Inc., the total
market for these services is projected to grow from $6.2 billion in 1997 to
approximately $49.7 billion in the year 2002, with approximately $27.9 billion
in the enterprise market segment and $21.8 billion in the consumer market
segment.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 170 customer
service personnel; and (iv) the Company's technical expertise in devising cost-
effective network solutions for customers.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 16 major metropolitan areas and 138
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for DAFs to enterprise customers, and targets performance
benchmarks for connection success rates, latency levels and throughput for all
of its service offerings.
The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed its
name to Concentric Network Corporation and reincorporated into Delaware in
1997. Unless the context otherwise requires, "Concentric" and the "Company"
refer to Concentric Network Corporation. The address of the Company's principal
executive offices is 10590 N. Tantau Avenue, Cupertino, CA 95014, and its
telephone number at that address is (408) 342-2800.
Concentric Network Corporation, The Concentric Network, Concentric
RemoteLink, ConcentricView, ConcentricHost, FlexChannel, FullChannel, Powered
by Concentric Network, and PremierConnect are among the trademarks of the
Company. This Offering Memorandum contains other product names, trade names and
trademarks of the Company and of other organizations.
1
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... 150,000 shares of 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010,
par value $1.00 per share, plus any additional
shares issued from time to time in lieu of cash
dividends (the "Series B Preferred").
The Exchange Offer.......... One share of Series B Preferred in exchange for
each share of 13 1/2% Series A Preferred Senior
Redeemable Exchangeable Preferred Stock due 2010,
par value $1.00 per share issued by the Company
in June 1998 (the "Series A Preferred"). As of
the date hereof, 150,000 shares of Series A
Preferred are outstanding. The Company will issue
the Series B Preferred to New Holders on or
promptly after the Expiration Date.
Based on an interpretation by the Staff set forth
in no-action letters issued to third parties, the
Company believes that Series B Preferred issued
pursuant to the Exchange Offer in exchange for
Series A Preferred may be offered for resale,
resold and otherwise transferred by such New
Holder (other than any such New Holder which is
an affiliate of the Company or is a broker-dealer
which acquired such Series A Preferred directly
from the Company) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such Series
B Preferred are acquired in the ordinary course
of such New Holder's business and that such New
Holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such Series B
Preferred. Each Participating Broker-Dealer that
acquired such Series A Preferred as a result of
market making or other trading activity and that
receives Series B Preferred for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Series B Preferred. See
"Plan of Distribution."
Any Existing Holder who (i) is an affiliate of
the Company, (ii) does not acquire such Series B
Preferred in the ordinary course of its business,
(iii) tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Series B
Preferred, or (iv) is a broker-dealer which
acquired such Series A Preferred directly from
the Company, could not rely on the position of
the Staff enunciated in the Exxon Capital No-
Action Letter, the Morgan Stanley No-Action
Letter or similar no-action letters and, in the
absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with the resale of the Series B Preferred.
Failure to comply with such requirements in such
instance may result in such Holder incurring
liability under the Securities Act for which the
Holder is not indemnified by the Company.
No federal or state regulatory requirements must
be complied with or approval obtained in
connection with the Exchange Offer, other than
registration requirements under the Securities
Act.
2
<PAGE>
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998 (20 business
days after effectiveness of the Exchange Offer
Registration Statement), unless the Exchange
Offer is extended by the Company in its sole
discretion, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended.
Accumulated Dividends on
the Series B Preferred and
the Series A Preferred...... Each share of Series B Preferred will be entitled
to dividends from the most recent date to which
dividends have been paid on the Series A
Preferred or, if no such payment has been made,
from September 1, 1998. Holders of the Series A
Preferred whose Series A Preferred are accepted
for exchange will not receive accumulated
dividends on such Series A Preferred for any
period from and after the last Dividend Payment
Date to which interest has been paid or duly
provided for on such Series A Preferred prior to
the original issue date of the Series B Preferred
or, if no such interest has been paid or duly
provided for, will not receive any accumulated
dividends on such Series A Preferred, and will be
deemed to have waived the right to receive any
dividends on such Series A Preferred accrued from
and after such Dividend Payment Date or, if no
such interest has been paid or duly provided for,
from and after June 8, 1998.
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
Procedures for Tendering
Series A Preferred......... Each Existing Holder wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver the Letter of
Transmittal, or such facsimile, together with the
Series A Preferred and any other required
documentation to the Exchange Agent (as defined)
at the address set forth in the Letter of
Transmittal. Persons holding Series A Preferred
through the Depositary (initially the Depository
Trust Company ("DTC")) and wishing to accept the
Exchange Offer must do so pursuant to DTC's
Automated Tender Offer Program ("ATOP"), by which
each tendering participant will agree to be bound
by the Letter of Transmittal. By executing or
agreeing to be bound by the Letter of
Transmittal, each Existing Holder will represent
to the Company that, among other things, the
Existing Holder or the person receiving such
Series B Preferred, whether or not such person is
the Existing Holder, is acquiring the Series B
Preferred in the ordinary course of business and
that neither the Existing Holder nor any such
other person has any arrangement or understanding
with any person to participate in the
distribution of such Series B Preferred within
the meaning of the Securities Act.
3
<PAGE>
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Series A Preferred are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered Existing Holder promptly and instruct
such registered Existing Holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and
executing the Letter of Transmittal and
delivering its Series A Preferred, either make
appropriate arrangements to register ownership of
the Series A Preferred in such owner's name or
obtain a properly completed bond power from the
registered Existing Holder. The transfer of
registered ownership may take considerable time.
Guaranteed Delivery
Procedures.................. Existing Holders who wish to tender their Series
A Preferred and whose Series A Preferred are not
immediately available or who cannot deliver their
Series A Preferred, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Series A
Preferred according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date pursuant to the procedures described under
"The Exchange Offer--Withdrawals of Tenders."
Acceptance of Series A
Preferred and Delivery of
Series B Preferred.......... The Company will accept for exchange any and all
Series A Preferred that are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Series B
Preferred issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Certain Federal Income Tax
Considerations............. The exchange of the Series A Preferred for the
Series B Preferred pursuant to the Exchange Offer
should not constitute a taxable exchange to the
Holders thereof for U.S. Federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Effect on Holders of Series
A Preferred................. As a result of the making of this Exchange Offer,
the Company will have fulfilled certain of its
obligations under the Registration Rights
Agreement, and Existing Holders who do not tender
their Series A Preferred, except for limited
instances involving the Existing Holders that are
not eligible to participate in the Exchange
Offer, will not have any further registration
rights under the Registration Rights Agreement or
otherwise. See "The Exchange Offer--Purposes and
Effect of Exchange Offer." Such Existing Holders
will continue to hold the untendered Series A
Preferred and will be entitled to all the rights
and subject to all the limitations applicable
4
<PAGE>
thereto under the Certificate of Designation,
except to the extent such rights or limitations,
by their terms, terminate or cease to have
further effectiveness as a result of the Exchange
Offer. All untendered Series A Preferred will
continue to be subject to certain restrictions on
transfer. Accordingly, if any Series A Preferred
are tendered and accepted in the Exchange Offer,
the trading market for the untendered Series A
Preferred could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
Use of Proceeds............. There will be no proceeds to the Company from
exchange of Series A Preferred for Series B
Preferred pursuant to the Exchange Offer.
Exchange Agent.............. ChaseMellon Shareholder Services LLC.
5
<PAGE>
SUMMARY OF TERMS OF EXCHANGEABLE PREFERRED STOCK
AND EXCHANGE DEBENTURES
The rights, preferences and privileges of the Series B Preferred are the same
as the rights, preferences and privileges of the Series A Preferred (which they
replace) except that (i) the Series B Preferred have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof and (ii) the New Holders, except for limited instances involving the
Initial Purchasers and certain Existing Holders that are not eligible to
participate in the Exchange Offer, will not be entitled to further registration
rights under the Registration Rights Agreement, which rights will be satisfied
when the Exchange Offer is consummated, and will not be entitled to any
payments of Liquidated Damages (as defined) for failure to satisfy such rights.
From time to time in this Prospectus, the Series B Preferred and the Series A
Preferred are collectively referred to as the "Preferred Stock". See
"Description of Notes".
PREFERRED STOCK
Securities Offered.......... 150,000 shares of 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010,
par value $1.00 per share, plus any additional
shares issued from time to time in lieu of cash
dividends.
Mandatory Redemption........ The Preferred Stock is subject to mandatory
redemption at their Liquidation Preference, plus
accumulated and unpaid dividends and Liquidated
Damages (as defined), if any, on June 1, 2010 out
of any funds legally available therefor.
Dividends................... Dividends on the Preferred Stock will accumulate
at a rate of 13 1/2% per annum of the Liquidation
Preference thereof and will be payable quarterly
in arrears on March 1, June 1, September 1 and
December 1 of each year (each a "Dividend Payment
Date") commencing September 1, 1998. Dividends
will be payable in cash, except that on each
Dividend Payment Date occurring on or prior to
June 1, 2003, dividends may be paid, at the
Company's option, by the issuance of additional
shares of Preferred Stock (including fractional
shares) having an aggregate Liquidation
Preference equal to the amount of such dividends.
Liquidation Preference...... $1,000 per share.
Ranking..................... The Preferred Stock will rank (i) senior to all
Junior Securities (as defined herein); (ii) on a
parity with any Parity Securities (as defined
herein); and (iii) junior to each class of Senior
Securities (as defined herein). In addition, the
Preferred Stock will rank junior in right of
payment to all indebtedness and other obligations
of the Company and its subsidiaries. As of March
31, 1998, the Preferred Shares would have been
junior in right of payment to approximately
$195.0 million of total indebtedness and other
obligations of the Company and its subsidiaries.
See "Description of Preferred Stock--Ranking."
Optional Redemption......... The Preferred Stock will be redeemable at the
option of the Company, in whole or in part, at
any time on or after June 1, 2003 at the
redemption prices set forth herein, plus
accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of
6
<PAGE>
redemption. In addition, prior to June 1, 2001,
the Company may, at its option, redeem up to a
maximum of 35% of the initially issued Preferred
Stock from the net proceeds of one or more Public
Equity Offerings or one or more sales of its
Common Stock (other than Disqualified Stock) to
one or more Strategic Investors. See "Description
of Preferred Shares--Redemption--Optional
Redemption."
Change of Control........... Following the occurrence of a Change of Control
(as defined below), the Company will be required
to make an offer to purchase all outstanding
shares of the Preferred Stock (a "Change of
Control Offer") at a purchase price equal to 101%
of Liquidated Preference thereof, plus
accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of purchase;
provided, however, that no such Change of Control
Offer shall be required to be made on or prior to
the Existing Senior Notes Maturity Date (as
defined). If the Change of Control Offer would
not be permitted by reason of the foregoing
proviso, then, in lieu thereof, the holders of
two-thirds of the Preferred Stock will be
entitled to designate an Independent Financial
Advisor (as defined) to determine, within 20 days
of such designation, in the opinion of such firm,
the appropriate dividend rate that the Preferred
Stock should bear so that, after such reset, the
Preferred Stock would have a market value of 101%
of the Liquidation Preference. If, for any reason
and within 15 days of the designation of an
Independent Financial Advisor by the holders,
such Independent Financial Advisor is
unacceptable to the Company, the Company shall
designate a second Independent Financial Advisor
to determine, within 15 days of such designation,
in its opinion, such an appropriate reset
dividend rate for the Preferred Stock. In the
event that the two Independent Financial Advisors
cannot agree, within 25 days of the designation
of an Independent Financial Advisor by the
holders of two-thirds of the Preferred Stock, on
the appropriate reset dividend rate, the two
Independent Financial Advisors shall, within 10
days of such 25th day, designate a third
Independent Financial Advisor, which, within 15
days of designation, will determine, in its
opinion, such an appropriate reset rate which is
between the two rates selected by the first two
Independent Financial Advisors; provided,
however, that the reset rate shall in no event be
less than 13 1/2% per annum nor greater than 15
1/2% per annum. The reasonable fees and expenses,
including reasonable fees and expenses of legal
counsel, if any, and customary indemnification,
of each of the three above-referenced Independent
Financial Advisors shall be borne by the Company.
Upon the determination of the reset rate, the
Preferred Stock shall accumulate dividends at the
reset rate as of the date of occurrence of the
Change of Control. The Company may not have
available sufficient funds or the financial
resources necessary to satisfy its obligations to
repurchase the Preferred Stock and other
securities that may become repayable upon a
Change of Control. See "Risk Factors--Change of
Control" and "Description of Preferred Stock--
Change of Control."
7
<PAGE>
Certain Covenants........... The Certificate of Designation (as defined) will
contain certain covenants, including, among
others, covenants with respect to the following
matters: (i) limitation on indebtedness, (ii)
limitation on restricted payments, (iii)
limitation on dividends and other payment
restrictions affecting Restricted Subsidiaries
(as defined), (iv) consolidation, merger and sale
of assets, (v) limitation on transactions with
affiliates, and (vi) provision of financial
statements. These covenants are subject to
important exceptions and qualifications. See
"Description of Preferred Stock--Certain
Covenants."
Exchange.................... On any Dividend Payment Date, the Company may, at
its option, exchange, in whole but not in part,
all of the shares of the Preferred Stock then
outstanding for the Company's 13 1/2% Senior
Subordinated Debentures due 2010. See
"Description of Preferred Stock--Exchange."
EXCHANGE DEBENTURES
Securities Offered.......... 13 1/2% Debentures due 2010.
Maturity Date............... June 1, 2010
Interest.................... The Exchange Debentures will accrue interest at a
rate of 13 1/2% per annum payable semi-annually
in arrears on June 1, and December 1, commencing
the first such date after the issuance date of
the Exchange Debentures. Interest payable on or
prior to June 1, 2003 may be paid in the form of
additional Exchange Debentures valued at the
principal amount thereof.
Optional Redemption......... The Exchange Debentures will be redeemable at the
option of the Company, in whole or in part, at
any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of redemption. In addition,
prior to June 1, 2001, the Company may, at its
option, redeem up to a maximum of 35% of the
aggregate principal amount of Exchange Debentures
originally issued from the net proceeds of one or
more Public Equity Offerings or one or more sales
of its Common Stock (other than Disqualified
Stock) to one or more Strategic Investors. See
"Description of the Exchange Debentures--Optional
Redemption."
Change of Control........... Following the occurrence of a Change of Control
(as defined below), the Company will be required
to make an offer to purchase the Exchange
Debentures (a "Change of Control Offer") at a
purchase price equal to 101% of the aggregate of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of purchase; provided, however that
no such Change of Control Offer shall be required
to be made on or prior to the Existing Senior
Notes Maturity Date. If the Change of Control
Offer would not be permitted by reason of the
foregoing proviso, then, in lieu of any such
Change of Control Offer, holders of two-thirds of
the Exchange Debentures will be entitled to
designate an
8
<PAGE>
Independent Financial Advisor to determine,
within 20 days of such designation, in the
opinion of such firm, the appropriate interest
rate that the Exchange Debentures should bear so
that, after such reset, the Exchange Debentures
would have a market value of 101% of the
aggregate principal amount thereof. If, for any
reason and within 15 days of the designation of
an Independent Financial Advisor by the holder,
such Independent Financial Advisor is
unacceptable to the Company, the Company shall
designate a second Independent Financial Advisor
to determine, within 15 days of such designation,
in its opinion, such an appropriate reset
interest rate for the Exchange Debentures. In the
event that the two Independent Financial Advisors
cannot agree, within 25 days of the designation
of an Independent Financial Advisor by the
holders of two-thirds of the Exchange Debentures,
on the appropriate reset interest rate, the two
Independent Financial Advisors shall, within 10
days of such 25th day, designate a third
Independent Financial Advisor, which, within 15
days of designation, will determine, in its
opinion, such an appropriate reset rate which is
between the two rates selected by the first two
Independent Financial Advisors; provided,
however, that the reset rate shall in no event be
less than 13 1/2% per annum nor greater than 15
1/2% per annum. The reasonable fees and expenses,
including reasonable fees and expenses of legal
counsel, if any, and customary indemnification,
of each of the three above- referenced
Independent Financial Advisors shall be borne by
the Company. Upon the determination of the reset
rate, the Exchange Debentures shall accrue and
cumulate interest at the reset rate as of the
date of occurrence of the Change of Control. See
"Risk Factors--Change of Control" and
"Description of Exchange Debentures--Change of
Control."
Ranking..................... The Exchange Debentures will be general unsecured
obligations of the Company, subordinated in right
of payment to all existing and future Senior Debt
of the Company and to all indebtedness and other
liabilities and commitments of the Company's
subsidiaries. As of March 31, 1998, the Exchange
Debentures would have been subordinated in right
of payment to approximately $195.0 million of
Senior Debt of the Company. See "Description of
the Exchange Debentures--Ranking" and "--
Subordination."
Event of Default............ If the date of an Event of Default occurs on or
prior to the Existing Senior Notes Maturity Date,
the remedies of holders of the Exchange
Debentures will be limited as set forth in this
paragraph. Upon the acceleration of any
Designated Senior Debt by the holders thereof,
the interest rate payable with respect to the
Exchange Debentures will be increased by one-half
of one percent per annum for the 90-day period
following such Event of Default, which rate will
further increase by one-half of one-percent per
annum with respect to each subsequent 90-day
period during which such Event of Default is
continuing (or any other Event of Default is
occurring while such Event of Default is
continuing), up to a maximum aggregate increase
in interest rate of two percent (2%) per annum.
9
<PAGE>
Any interest rate increase effected pursuant to
the foregoing shall only be effective during such
time that an Event of Default is continuing and
prior to the Existing Senior Notes Maturity Date.
Subsequent to the Existing Senior Notes Maturity
Date, the Trustee and holders of the Exchange
Debentures will have customary remedies upon the
occurrence of an Event of Default. See
"Description of the Exchange Debentures--Events
of Default."
Certain Covenants........... The indenture under which the Exchange Debentures
will be issued (the "Indenture") will contain
certain covenants, including, among others,
covenants with respect to the following matters:
(i) limitation on indebtedness, (ii) limitation
on restricted payments, (iii) limitation on
transactions with affiliates, (iv) limitation on
liens, (v) limitation on sale of assets, (vi)
limitation on issuances of guarantees of
indebtedness, (vii) limitation on sale and
leaseback transactions, (viii) limitation on
Subsidiary capital stock, (ix) limitation on
dividends and other payment restrictions
affecting Subsidiaries, (x) limitations on
unrestricted Subsidiaries, (xi) provision of
financial statements, and (xii) limitation on
business. In addition, under certain
circumstances, the Company will be required to
offer to purchase Exchange Debentures (an "Excess
Proceeds Offer") at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of purchase with the proceeds of certain
asset sales; provided, however that no such
Excess Proceeds Offer shall be required to be
made on or prior to the Existing Senior Notes
Maturity Date. See "Description of Exchange
Debentures--Offer to Purchase With Excess Asset
Sale Proceeds." These covenants are subject to
important exceptions and qualifications. See
"Description of the Exchange Debentures--Certain
Covenants."
Exchange Offer;
Registration Rights......... Pursuant to a registration rights agreement (the
"Registration Rights Agreement") between the
Company and the Initial Purchasers, the Company
has agreed to file a registration statement (the
"Exchange Offer Registration Statement") with
respect to an offer to exchange (the "Exchange
Offer") (i) the Series A Preferred Stock for the
Series B Preferred Stock offered hereby, with
terms substantially identical to those of the
Series A Preferred Stock or (ii) if the Preferred
Stock has been converted into Exchange
Debentures, the Exchange Debentures for a new
issue of debentures of the Company (the "New
Exchange Debentures") registered under the
Securities Act, with terms substantially
identical to those of the Exchange Debentures. If
(1) the Exchange Offer is not permitted by
applicable law or (2) any holder of Transfer
Restricted Securities (as defined) notifies the
Company that (A) it is prohibited by law or
Commission policy from participating in the
Exchange Offer, (B) it may not resell the New
Preferred Stock or New Exchange Debentures
acquired by it in the Exchange Offer to the
public without delivering a prospectus and the
prospectus contained in the Exchange Offer
Registration Statement is not appropriate or
available for such resales or (C) it is a broker-
dealer and holds New Preferred Stock
10
<PAGE>
or new Exchange Debentures acquired directly from
the Company or an affiliate of the Company, the
Company will be required to provide a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of such Transfer
Restricted Securities by the holders thereof. If
the Company fails to satisfy these registration
obligations, it will be required to pay
liquidated damages ("Liquidated Damages") to the
affected holders of Preferred Stock or Exchange
Debentures under certain circumstances. See
"Description of the Exchange Debentures--
Registration Rights; Liquidated Damages."
11
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- --------------------
PRO FORMA
YEAR ENDED
DECEMBER 31,
1993 1994 1995 1996 1997 1997(1)(2) 1997 1998(2)(3)
------- ------- -------- -------- -------- ------------ -------- ----------
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 23 $ 442 $ 2,483 $ 15,648 $ 45,457 $ 55,411 $ 9,154 $ 16,484
Cost of revenue......... 130 2,891 16,168 47,945 61,439 70,635 15,744 17,724
Network equipment write-
off(4)................. -- -- -- 8,321 -- -- -- --
Development, marketing
and sales and general
and administrative
operating expenses..... 1,114 1,784 7,602 22,503 34,262 41,931 7,021 11,853
Amortization of goodwill
and other intangible
assets................. -- -- -- -- -- 3,239 -- 506
Write-off of in-process
technology............. -- -- -- -- -- -- -- 5,200
------- ------- -------- -------- -------- -------- -------- --------
Total costs and operat-
ing expenses........... 1,244 4,675 23,770 78,769 95,701 115,805 22,765 35,283
------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,221) (4,233) (21,287) (63,121) (50,244) (60,394) (13,611) (18,799)
Other income, net....... -- -- -- -- 1,233 1,278 -- --
Net interest expense.... (24) (57) (721) (3,260) (6,571) (24,962) (1,070) (4,470)
------- ------- -------- -------- -------- -------- -------- --------
Loss before extraordi-
nary item.............. (1,245) (4,290) (22,008) (66,381) (55,582) (84,078) (14,681) (23,269)
Extraordinary gain on
early retirement of
debt................... -- -- -- -- -- -- -- 3,042
------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(20,227)
======= ======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amorti-
zation................. $ 46 $ 169 $ 2,196 $ 9,470 $ 19,230 $ 24,348 $ 3,840 $ 6,763
EBITDA(5)............... (1,175) (4,064) (19,091) (53,651) (31,014) (36,046) (9,771) (6,836)
Capital expendi-
tures(6)............... 817 718 17,176 39,093 22,798 25,938 8,930 2,847
Ratio of earnings to
fixed charges(7)....... N/A N/A N/A N/A N/A N/A N/A N/A
Deficiency of earnings
available to cover
fixed charges(2)(7).... $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
AS
ACTUAL ADJUSTED(8)
-------- -----------
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents................................ $ 63,707 $207,957
Restricted cash(9)....................................... 53,273 53,273
Property and equipment, net.............................. 53,916 53,916
Total assets............................................. 202,870 347,120
Long term debt and capital lease obligations, net of cur-
rent portion............................................ 154,567 154,567
Senior redeemable exchangeable preferred stock........... -- 144,250
Total stockholders' equity............................... 12,146 12,146
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998(2)(3)
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 9,154 $ 10,814 $ 11,824 $ 13,665 $ 16,484
Cost of revenue......... 15,744 14,913 14,838 15,944 17,724
Development, marketing
and sales and general
and administrative op-
erating expenses....... 7,021 8,421 8,954 9,866 11,853
Amortization of goodwill
and other intangible
assets................. -- -- -- -- 506
Write-off of in-process
technology............. -- -- -- -- 5,200
-------- -------- -------- -------- --------
Total costs and operat-
ing expenses........... 22,765 23,334 23,792 25,810 35,283
-------- -------- -------- -------- --------
Loss from operations.... (13,611) (12,520) (11,968) (12,145) (18,799)
Other income (expense),
net.................... -- 1,395 (162) -- --
Net interest expense.... (1,070) (1,779) (2,088) (1,634) (4,470)
-------- -------- -------- -------- --------
Loss before extraordi-
nary item.............. (14,681) (12,904) (14,218) (13,779) (23,269)
Extraordinary gain on
early retirement of
debt................... -- -- -- -- 3,042
-------- -------- -------- -------- --------
Net loss................ $(14,681) $(12,904) $(14,218) $(13,779) $(20,227)
======== ======== ======== ======== ========
</TABLE>
- --------
(1) The pro forma statement of operations data gives effect to the InterNex
acquisition which occurred effective on February 5, 1998 as if it occurred
on January 1, 1997. In addition, the pro forma statement of operations data
includes pro forma adjustments reflecting the interest that would have been
incurred had the Company's 12 3/4% Senior Notes due 2007 (the "Existing
Senior Notes") been outstanding as of January 1, 1997. See Selected
Unaudited Pro Forma Condensed Combined Financial Information.
(2) Statement of operations data and deficiency of earnings to cover fixed
charges do not reflect the Offering. Preferred Stock dividends and
accretion on a pro forma basis, assuming the Offering occurred on January
1, 1997 would have been $21.8 million for the year ended December 31, 1997.
Assuming the Offering occurred on January 1, 1998, dividends and accretion
on a pro forma basis for the three months ended March 31, 1998 would have
been $5.2 million.
(3) Includes the results of InterNex's operations from February 5, 1998 (the
date of acquisition) through the end of the period. See Note 12 of Notes to
Financial Statements.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(5) EBITDA is loss from operations before interest, taxes, depreciation and
amortization and, for the three months ended March 31, 1998, also excludes
the write off of in-process technology. EBITDA is included herein because
management believes that certain investors find it to be a useful tool for
measuring a company's ability to service its debt; however, EBITDA does not
represent cash flow from operations, as defined by generally accepted
accounting principles, should not be considered as a substitute for net
loss as an indicator of the Company's operating performance or cash flow as
a measure of liquidity, and should be examined in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere in
this Offering Memorandum.
(6) Capital expenditures includes assets acquired through capital lease
financing and other debt.
(7) For purposes of this computation, the ratio of earnings to fixed charges
has been calculated by dividing fixed charges into loss before income
taxes, fixed charges, other income and extraordinary items. Fixed charges
consist of interest expense and a portion of lease rental charges
considered to represent interest cost.
(8) The as adjusted data gives effect to the sale by the Company of the
Preferred Stock offered hereby as of March 31, 1998, after deduction of
estimated offering expenses and the estimated discount to the Initial
Purchasers. See "Use of Proceeds" and "Capitalization."
(9) Restricted cash of $53.3 million consists of funds held in escrow to pay
interest relating to the Company's Existing Senior Notes. See "Description
of Certain Indebtedness" and Note 4 of Notes to Financial Statements.
For a discussion of certain factors that should be considered in connection
with a decision to exchange Series A Preferred for Series B Preferred, see
"Risk Factors."
13
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the Securities offered hereby. The Prospectus
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Those
statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company
or its directors or officers with respect to, among other things: (i) trends
affecting the Company's financial condition or results of operation; and (ii)
the Company's business and growth strategies. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected, expressed or implied, in
the forward-looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
Prospectus, and the Company cautions potential investors not to place undue
reliance on such statements.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
The Company is and will continue to be highly leveraged, with significant
debt service requirements. At March 31, 1998 the Company's total debt was
$195.0 million and stockholders' equity was $12.1 million. The degree to which
the Company is leveraged has important consequences to the Company, including
the following: (i) the Company's ability to obtain additional financing in the
future, whether for working capital, capital expenditures, acquisitions or
other purposes, may be impaired; (ii) a substantial portion of the Company's
cash flow from operations is required to be dedicated to the payment of
interest on its debt, thereby reducing funds available to the Company for
other purposes; (iii) the Company's flexibility in planning for or reacting to
changes in market conditions may be limited; and (iv) the Company may be more
vulnerable in the event of a downturn in its business.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company,
which will be subject in part to factors beyond the control of the Company.
Although the Company believes that its cash flow will be adequate to meet its
interest payments, there can be no assurance that the Company will continue to
generate sufficient cash flow in the future to meet its debt service
requirements including those with respect to the Existing Senior Notes. If the
Company is unable to generate cash flow in the future sufficient to cover its
fixed charges and is unable to borrow sufficient funds from other sources, it
may be required to refinance all or a portion of its existing debt or to sell
all or a portion of its assets. There can be no assurance that a refinancing
would be possible, nor can there be any assurance as to the timing of any
asset sales or the proceeds which the Company could realize therefrom. In
addition, the terms of certain of the Company's debt restrict its ability to
sell assets and the Company's use of the proceeds therefrom.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was incorporated in 1991, commenced network operations in 1994
and completed initial deployment of its current network architecture and use
of an advanced ATM backbone network in late 1996. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company and its
prospects can be based. In addition, a majority of the Company's senior
management team have been working together at the Company for less than two
years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and
rapidly evolving markets. To address these risks, the Company must, among
other things, respond to competitive developments, continue to attract, retain
and motivate qualified persons, and continue to upgrade its technologies and
commercialize its
14
<PAGE>
network services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks and the failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has incurred net
losses and experienced negative cash flow from operations since inception and
expects to continue to operate at a net loss and experience negative cash flow
at least through 1998, although the Company's ability to achieve profitability
and positive cash flow from operations is dependent upon the Company's ability
to substantially grow its revenue base and achieve other operating
efficiencies. The Company experienced net losses of approximately $22.0
million, $66.4 million and $55.6 million for the years ended December 31,
1995, 1996 and 1997, respectively and $20.2 million for the three months ended
March 31, 1998. At March 31, 1998, the Company had an accumulated deficit of
approximately $169.8 million. There can be no assurance that the Company will
be able to achieve or sustain revenue growth, profitability or positive cash
flow on either a quarterly or an annual basis. At December 31, 1997, the
Company had approximately $60.0 million of gross deferred tax assets comprised
primarily of net operating loss carryforwards. The Company believes that,
based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
the Company's history of net losses since its inception and the fact that the
market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that, based
on the current available evidence, it is more likely than not that the Company
will not generate taxable income through 1999, and possibly beyond, and
accordingly will not realize the Company's deferred tax assets through 1999
and possibly beyond. The Company will continue to assess the realizability of
the deferred tax assets based on actual and forecasted operating results. In
addition, the utilization of net operating losses may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization. The Company's above estimates of the periods of time in which the
Company expects to continue to operate at a net loss, experience negative cash
flow and not generate taxable income are forward-looking statements that
involves risks and uncertainties, and actual results could vary materially as
a result of a number of factors, including those set forth above in this
paragraph. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 9 of Notes to Financial Statements.
RISKS RELATING TO PAYMENTS ON AND SUBORDINATION OF THE PREFERRED STOCK AND
EXCHANGE DEBENTURES
Restrictions on the Company's Ability to Accelerate Payment upon an Event of
Default Under the Exchange Debentures. If the date of an Event of Default
occurs on or prior to the Existing Senior Notes Maturity Date, the remedies of
holders of the Exchange Debentures will be limited as set forth in this
paragraph. Upon the acceleration of any Designated Senior Debt by the holders
thereof, the interest rate payable with respect to the Exchange Debentures
will be increased by one-half of one percent per annum for the 90-day period
following such Event of Default, which rate will further increase by one-half
of one percent per annum with respect to each subsequent 90-day period during
which such Event of Default is continuing (or any other Event of Default is
occurring while such initial Event of Default is occurring), up to a maximum
aggregate increase in interest rate of two percent (2%) per annum. Any
interest rate increase effected pursuant to the foregoing shall only be
effective during such time that an Event of Default is continuing and prior to
the Existing Senior Notes Maturity Date. In the Event that an Event of Default
occurs prior to the Existing Senior Notes Maturity Date and the holders of
Designated Senior Debt do not accelerate such Designated Senior Debt, no
remedy will exist for the Event of Default (unless such Event of Default
continues through the Existing Senior Note Maturity Date, in which case the
Trustee and the holders of the Exchange Debentures will have the remedies
described elsewhere herein and as otherwise provided in the Indenture
effective upon the Existing Senior Notes Maturity Date). After the Existing
Senior Notes Maturity Date, an Event of Default will entitle the holders of
the Exchange Debentures to accelerate the obligations owing under the Exchange
Debentures prior to its express maturity. See "Description of the Exchange
Debentures--Events of Default."
Restrictions on the Company's Ability to Pay Dividends on the Preferred
Stock. To date, the Company has not paid dividends on its shares of capital
stock. The ability of the Company to pay cash dividends is
15
<PAGE>
substantially restricted under various covenants and conditions contained in
the Existing Senior Notes Indenture (as defined). In addition to the
limitations imposed on the payment of dividends by the Existing Senior Notes
Indenture, under Delaware law the Company is permitted to pay dividends on its
capital stock, including the Preferred Stock, only out of its surplus, or in
the event that it has no surplus, out of its net profits for the year in which
a dividend is declared or for the immediately preceding fiscal year. Surplus
is defined as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. At March 31,
1998, the Company had surplus of $12.2 million. In order to pay dividends in
cash, the Company must have a surplus or net profits equal to the full amount
of the cash dividend at the time such dividend is declared. The Company cannot
predict what the value of its assets or the amount of its liabilities will be
in the future and, accordingly, there can be no assurance that the Company
will be able to pay cash dividends on the Preferred Stock.
Subordination of the Preferred Stock and Exchange Debentures. The Company's
obligations with respect to the Preferred Stock are subordinate and junior in
right of payment to all present and future indebtedness of the Company and its
subsidiaries, including the Existing Senior Notes and to all subsequent series
of preferred stock of the Company which by their terms rank senior to the
Preferred Stock. See "Description of Certain Indebtedness." In addition to the
substantial dividend and redemption restrictions set forth in the Existing
Senior Notes Indenture, no mandatory redemption payments may be made with
respect to the Preferred Stock on or prior to the Existing Senior Notes
Maturity Date. The Existing Senior Notes Indenture also contains certain
restrictions on the ability of the Company to pay cash dividends on the
Preferred Stock. As of March 31, 1998, the Preferred Stock would have been
junior in right of payment to $195.0 million of indebtedness and other
liabilities and commitments of the Company and its subsidiaries. In the event
of bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Preferred Stock only after
all Senior Securities (as defined) and all indebtedness of the Company has
been paid, and there may not be sufficient assets remaining to pay amounts due
on any or all of the Preferred Stock then outstanding. See "Description of
Preferred Stock--Ranking."
Similarly, the payment of principal, premium, if any, and interest on and
any other amounts owing in respect of, the Exchange Debentures, if issued,
will be subordinated to the prior payment in full of all existing and future
Senior Debt (as defined), including indebtedness represented by the Existing
Senior Notes, and will be effectively subordinated to all indebtedness and
other liabilities and commitments of the Company's subsidiaries. As of March
31, 1998, the Exchange Debentures would have been subordinated to $195.0
million of Senior Debt of the Company. The Existing Senior Notes Indenture and
the Indenture pursuant to which the Exchange Debentures would be issued permit
the incurrence by the Company and its subsidiaries of additional indebtedness,
all of which may constitute Senior Debt, under certain circumstances. In the
event of bankruptcy, liquidation or reorganization of the Company, the assets
of the Company will be available to pay obligations on the Exchange Debentures
only after all Senior Debt has been paid, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Exchange Debentures
then outstanding. See "Description of Exchange Debentures--Ranking" and "--
Subordination."
Effect of Substantial Additional Indebtedness on the Company's Ability to
Make Payments on the Preferred Stock and the Exchange Debentures. The Existing
Senior Notes Indenture, the Certificate of Designation and the Indenture
limit, but do not prohibit, the incurrence of additional indebtedness during
the next few years. All additional indebtedness of the Company will rank
senior in right of payment to any payment obligations with respect to the
Preferred Stock and Exchange Debentures (to the extent that such additional
indebtedness represents Senior Debt). The debt service requirements of any
additional indebtedness would make it more difficult for the Company to pay
cash obligations with respect to the Preferred Stock and the Exchange
Debentures.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly, depending upon a variety of factors, including
the timely deployment and expansion of the Concentric network
16
<PAGE>
and new network architectures, the incurrence of related capital costs, the
receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced
versions of the Company's services; changes in pricing policies by the
Company's competitors; the Company's ability to obtain sufficient supplies of
sole- or limited-source components; user demand for network and Internet
access services; balancing of network usage over a 24-hour period; general
access services; the ability to identify, acquire and integrate successfully
suitable acquisition candidates; and charges related to acquisitions. In
response to competitive pressures, the Company may take certain pricing or
marketing actions that could have a material adverse effect on the Company's
business. As a result, variations in the timing and amounts of revenues could
have a material adverse effect on the Company's quarterly operating results.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance. In
the event that the Company's operating results in any future period fall below
the expectations of securities analysts and investors, the trading price of
the Company's securities would likely be materially and adversely affected.
CUSTOMER CONCENTRATION
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1996 and 1997,
revenue from WebTV represented approximately 10.1% and 33.4%, respectively, of
the Company's revenue and approximately 32.7% and 30.8% of revenue for the
three months ended March 31, 1997 and 1998, respectively. The Company's
current agreement to provide services to WebTV is terminable at will after
October 1, 1999. While the Company expects revenue from WebTV to decrease as a
percentage of revenue in future periods, the Company believes that revenue
derived from a limited number of current and future customers may continue to
represent a significant portion of its revenue. As a result, the loss of one
or more of the Company's major customers could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, there can be no assurance that revenue from customers that have
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
future period. See Note 1 of Notes to Financial Statements.
MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION
As of December 31, 1995, the Company had 96 employees and 47 independent
contractors, as of December 31, 1996, the Company had 246 employees and 46
independent contractors, and as of April 30, 1998, the Company had 402
employees and 56 independent contractors. The growth and expansion of the
Company's business and its service offerings have placed, and are expected to
continue to place, a significant strain on the Company's management,
operational and financial resources. The Company has recently expanded and
upgraded its network to use an ATM backbone. The Company plans to continue to
substantially expand its network in the future. There can be no assurance that
the Company will be able to add services at the rate or according to the
schedule presently planned by the Company. To manage its growth, the Company
must, among other things, (i) continue to implement and improve its
operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; (ii) hire and train additional qualified
personnel; and (iii) continue to expand and upgrade its network
infrastructure. Demands on the Company's network infrastructure and technical
support resources have grown rapidly with the Company's expanding customer
base, and the Company may in the future experience difficulties meeting the
demand for its access services and technical support. There can be no
assurance that the Company's technical support or other resources will be
sufficient to facilitate the Company's growth. As the Company strives to
increase total network utilization and to optimize this utilization by
targeting both business and consumer users to balance the network's usage
throughout a 24-hour period, there will be additional demands on the Company's
customer support, sales and marketing resources. Any failure of the Company to
manage its growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
17
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS
The Company completed the InterNex acquisition in February 1998 and may seek
to acquire additional assets or businesses complementary to its operations.
The InterNex acquisition has been and any subsequent acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies.
Such risks include, among other things, the difficulty of assimilating the
operations and personnel of InterNex or such other acquired companies, the
additional financial resources that may need to be applied to fund the
operations of InterNex or such other acquired companies, the potential
disruption of the Company's business, the inability of the Company's
management to maximize the financial and strategic position of the Company by
the incorporation of acquired technology or business such as the InterNex
network into the Company's service offerings, the difficulty of maintaining
uniform standards, controls, procedures and policies, the potential loss of
key employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that InterNex will be successfully integrated in the Company's
Operations. Likewise, no assurance can be given that any other acquisitions by
the Company will or will not occur, that if an acquisition does occur it will
not materially and adversely affect the Company or that any such acquisition
will be successful in enhancing the Company's business. If the Company
proceeds with additional significant acquisitions in which the consideration
consists of cash, a substantial portion of the Company's available cash could
be used to consummate the acquisitions. If the Company were to consummate one
or more acquisitions in which the consideration consisted of stock,
stockholders of the Company could suffer significant dilution of their
interests in the Company. In addition, the InterNex acquisition has been
accounted for using the purchase method of accounting. Because the
acquisitions of companies of the type that the Company is targeting, including
InterNex, typically involve the purchase of significant amounts of intangible
assets, acquisitions of such businesses also result in goodwill and possibly
significant amortization charges for acquired technology. For example, as a
result of the InterNex acquisition, the Company incurred charges relating to
in-process technology of $5.2 million for the three months ended March 31,
1998 and has recorded an aggregate of $12.5 million in goodwill and other
intangible assets, which will be amortized on a straight line basis over their
useful lives ranging from two to five years (see Note 12 of Notes to Financial
Statements). If the Company were to incur additional charges for acquired in-
process technology and amortization of goodwill with respect to future
acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Business--The
Concentric Network."
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS
The markets for tailored, value-added network services for businesses and
consumers offered by the Company, including Internet access, are in the early
stages of development. Since these markets are relatively new and because
current and future competitors are likely to introduce competing services or
products, it is difficult to predict the rate at which the market will grow,
if at all, or whether new or increased competition will result in market
saturation. Certain critical issues concerning commercial use of tailored
value-added services and Internet services, including security, reliability,
ease and cost of access and quality of service, remain unresolved and may
impact the growth of such services. If the markets for the services offered by
the Company, including Internet access, fail to grow, grow more slowly than
anticipated, or become saturated with competitors, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "--Competition," "--Dependence Upon New and Enhanced Services,"
and "--Risks of Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NEW AND ENHANCED SERVICES
The Company has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises and a new line of DSL services in limited areas. The failure of
these services to gain market acceptance in a timely manner or at all, or the
failure of the DSL service in particular, to achieve significant market
coverage could have a material adverse effect on the business, financial
condition and results of operations of the Company. Introduction by the
Company of new or enhanced services with reliability, quality or compatibility
problems could significantly delay or hinder market acceptance
18
<PAGE>
of such services, which could adversely affect the Company's ability to
attract new customers and subscribers. The Company's services may contain
undetected errors or defects when first introduced or as enhancements are
introduced. There can be no assurance that, despite testing by the Company or
its customers, errors will not be found in new services after commencement of
commercial deployment, resulting in additional development costs, loss of, or
delays in, market acceptance, diversion of technical and other resources from
the Company's other development efforts and the loss of credibility with the
Company's customers and subscribers. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to achieve balanced network
utilization over a 24-hour period, the Concentric network could become
overburdened at certain periods during the day, which could adversely affect
the quality of service provided by the Company. Conversely, due to the high
fixed cost nature of Concentric's infrastructure, under-utilization of the
Concentric network during certain periods of the day could adversely affect
the Company's ability to provide cost-efficient services at other times. The
failure of the Company to achieve balanced network utilization, because of
either over- or under-utilization could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Services."
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment, which, in the quantities and quality demanded by the
Company, are available only from sole or limited sources. AT&T Corp. ("AT&T"),
WorldCom, Inc. ("WorldCom"), MCI Telecommunications, Inc. ("MCI"), which is
being acquired by WorldCom, and PacWest Telecomm, Inc. are the primary
providers to the Company of data communications facilities and capacity. AT&T
is currently the sole provider of the frame relay backbone of the Concentric
network, and MCI is currently the sole provider of the ATM backbone of the
Concentric network. The Company is also dependent upon local exchange carriers
("LECs") to provide telecommunications services to the Company and its
customers. The Company from time to time has experienced delays in receiving
telecommunications services, and there can be no assurance that the Company
will be able to obtain such services on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any failure to
obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The routers, switches and modems the Company uses are supplied by Bay
Networks, Inc. through Racal. In addition, Racal acts as a systems integrator.
The servers primarily used in the Company's network infrastructure are
supplied solely by Sun Microsystems, Inc. The Company purchases these
components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components and has no guaranteed supply
arrangements for such components. The Company's suppliers also sell products
to the Company's competitors and may in the future themselves become
competitors of the Company. There can be no assurance that the Company's
suppliers will not enter into exclusive arrangements with the Company's
competitors or stop selling their products or components to the Company at
commercially reasonable prices or at all.
Expansion of network infrastructures by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. In addition,
certain of the Company's suppliers, in turn, rely on sole or limited sources
of supply of components included in their products. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. The Company's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources if required could result in delays and increased
costs in expanding, and overburdening of, the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards and that interoperate with products and
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components from other vendors. Any failure of the Company's sole- or limited-
source suppliers to provide products or components that comply with Internet
standards or that interoperate with other products or components used by the
Company in its network infrastructure could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and other LECs, currently are subject to tariff controls
and other price constraints that in the future may be changed. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other LECs to the Company. Any such regulatory changes could result
in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence Upon New and Enhanced Services" and "--Risks of
Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently derives a
significant portion of its revenue from customer subscriptions. The Company
expects that a substantial portion of its future revenues will be derived from
the provision of tailored value-added network services to its customers. The
Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase,
and as customer requirements change. The Company's current projections of
utilization of the Concentric network require rapid expansion of the capacity
of the network to avoid capacity constraints that would adversely affect the
performance of the system. The expansion and adaptation of the Company's
network infrastructure will require substantial financial, operational and
management resources. There can be no assurance that the Company will be able
to expand or adapt its network infrastructure to meet additional demand of its
customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all. In addition, if demand for usage of the Concentric
network were to increase faster than projected or were to exceed the Company's
current forecasts, the network could experience capacity constraints, which
would adversely affect the performance of the system. Any failure of the
Company to expand its network infrastructure on a timely basis or adapt it to
either changing customer requirements or evolving industry standards, or
capacity constraints experienced by the Concentric network for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Currently, the Company has a transit
agreement with network MCI, Inc. to support the exchange of traffic between
the Concentric network and the Internet. With the acquisition of InterNex, the
Company is expanding its Internet connectivity to include not only private
transit with MCI, Sprint and UUNet, but also private peering with other
network providers as well as public peering with multiple smaller internet
service providers. The Company is still in the process of integrating the
InterNex network resources, including the Sprint and UUNet private transit and
public peering arrangements, and has yet to determine if it can successfully
execute its private/public Internet connection strategy. The failure of the
networks with which Concentric has public peering, private peering or private
transit, or the failure of any of the Company's data centers, or any other
link in the delivery chain, or the inability of the Company to successfully
integrate the InterNex network resources into the Company's existing
infrastructure, and resulting interruption in the Company's operations would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--Risks Associated with Acquisition," "--Risks
Associated with Acquisitions," "--Risk of System Failure" and "Business--The
Concentric Network."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources,
combined with the net proceeds from the issuance of the Preferred Stock and
financing available under a network equipment lease agreement (that currently
has no maximum borrowing limit) will be sufficient to meet its anticipated
working capital and capital expenditure requirements through 1999. However,
there can be no assurance that such resources will be sufficient for its
anticipated working capital and capital expenditure requirements. The Company
may need to raise additional funds through public or private debt or equity
financings in order to take advantage of unanticipated
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opportunities, including more rapid international expansion or acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. The Company may also
raise additional funds through public or private debt or equity financings if
such financings become available on favorable terms. If additional funds are
raised, there can be no assurance that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be
able to take advantage of unanticipated opportunities, develop new products or
otherwise respond to unanticipated competitive pressures. Such inability could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's forecast of the period of
time through which its financial resources will be adequate to support its
operations is a forward looking statement that involves risks and
uncertainties, and actual results could vary materially as a result of a
number of factors, including those set forth above in this paragraph. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of its network infrastructure; technical expertise and functionality,
performance and quality of services; customization; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the variety of services; the timing of introductions of new
services by the Company and its competitors; customer support; the Company's
ability to support industry standards; and industry and general economic
trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc. ("Sprint"), WorldCom, the RBOCs and other LEC's and
various cable companies; (ii) online services providers, such as America
Online, Inc. ("America Online"), CompuServe Incorporated ("CompuServe"), the
Microsoft Network ("MSN") of Microsoft, and Prodigy Services Company
("Prodigy"); (iii) Internet service providers ("ISPs"), such as BBN
Corporation ("BBN"), a subsidiary of GTE, NETCOM On-Line Communications
Services, Inc. ("NETCOM"), a subsidiary of ICG Communications, Inc., PSINet,
Inc. ("PSI"), and other national and regional providers; (iv) nonprofit or
educational Internet connectivity providers; and (v) Web server farms such as
Internet Direct and Exodus. Many of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to the Company. As a result, they
may be able to develop and expand their communications and network
infrastructures 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 can the Company.
In addition to the companies named above, various organizations have entered
into or are forming joint ventures or consortiums to provide services similar
to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the tailored value-added network services market,
resulting in even greater competition for the Company. Certain of such
telecommunications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. Certain companies, including America Online,
BBN and PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with
virtual private network services or Internet access services could place the
Company at a competitive disadvantage. Certain companies are also exploring
the possibility of providing or are currently providing high-speed data
services using alternative
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delivery methods such as over the cable television infrastructure, through
direct broadcast satellites and over wireless cable.
As a result of increased competition and vertical and horizontal integration
in the industry, the Company could encounter significant pricing pressure,
which in turn could result in significant reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or private network services, reducing the overall cost of
their solutions and significantly increasing price pressures on the Company.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the Internet access and online services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition in these industries and,
potentially, the virtual private networks industry. Increased price or other
competition could result in erosion of the Company's market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully. See "--Management of
Potential Growth and Expansion" and "Business--Competition."
DEPENDENCE UPON THIRD-PARTY MARKETING, DISTRIBUTION AND ENGINEERING
RELATIONSHIPS
An important element of the Company's strategy is to develop relationships
with leading companies to enhance Concentric's engineering, marketing and
distribution efforts. The Company has OEM agreements with Netscape and
Microsoft pursuant to which the Company is entitled to distribute and modify
these companies' browsers. The customization of browsers by the Company is an
integral part of its current tailored VPN offerings. The Netscape agreement
expires in December 1998 and the Microsoft agreement expires in March 1999.
The Company has an agreement with Intuit for the development, operation and
maintenance of a VPN that is the integrated access, dial-up network and
infrastructure used by purchasers of Quicken, Turbo Tax and other Intuit
software products to access the Quicken Financial Network Website and upgrade
to full Internet access. The Intuit contract may be terminated at the election
of Intuit upon six months prior notice of an election to terminate. The
Company relies on these relationships for acquisition of consumer customers.
The termination of or failure to renew any of these agreements or the
inability of the Company to enter into similar relationships with others could
have a material adverse effect on the Company's business, financial condition
and results of operation. The Company has an outsourcing agreement with
Critical Technologies Incorporated ("CTI"), a subsidiary of Williams
Communications Group, Inc., that enables the Company to use CTI employees for
the operational support of the Concentric network. The Company's use of CTI
employees and CTI engineering expertise were integral to its development of
the Concentric network and continue to be integral to ongoing operation of the
Company's network operations center. Pursuant to the agreement with CTI, all
of the CTI employees currently working for Concentric will become employees of
Concentric at the termination of the agreement in December 2000. Termination
of any of these agreements or the failure of the Company to renew any of the
agreements upon termination on terms acceptable to the Company could result in
a material adverse affect on the Company's business, financial condition and
results of operations. See "Business--Key Business Alliances."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing
customer needs; to advertise and market its services; and to influence and
respond to emerging industry standards and other technological changes in a
timely and cost-effective basis. There can be no assurance that the Company
will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis, or that such
new technologies or enhancements
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will achieve market acceptance. The Company's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its network service
business to alternate access devices and conduits. An integral part of the
Company's strategy is to design its network in order to meet the requirements
of emerging standards such as 56.6 Kbps modems and applications such as IP-
based interactive video and voice conferencing communications. Failure of the
Company, for technological or other reasons, to develop and introduce new or
enhanced services that are compatible with industry standards and that satisfy
customer requirements would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--The
Concentric Network."
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Specifically, the Company's services rely on the continued
widespread commercial use of TCP/IP. Alternative open protocol and proprietary
protocol standards have been or are being developed. If any of these
alternative protocols become widely adopted, there may be a reduction in the
use of TCP/IP, which could render the Company's services obsolete and
unmarketable. Additionally, two of the leading modem manufacturers, Rockwell
and US Robotics, a subsidiary of 3Com Incorporated, have proposed different,
incompatible standards for 56.6 Kbps modems and cable modems. The Company
currently plans to accommodate both standards to the extent it can do so cost
effectively. The failure of the Company to anticipate the prevailing standard,
or the failure of a common standard to emerge could have a material adverse
effect on the Company's business and results of operations. In addition, there
can be no assurance that services or technologies developed by others will not
render the Company's services or technology uncompetitive or obsolete.
The Company faces the risk of fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Recently, several companies announced the
development and planned sale of cable television modems, wireless modems and
satellite modems to provide access to the Internet. Cable television,
satellite and wireless modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. In addition, wireless modems have the potential to reduce the
cost of network services. As the Internet becomes accessible through these
cable television, wireless and satellite modems and by screen-based
telephones, television or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, the Company will have
to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of these technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet access business to alternate
access devices and conduits.
RISK OF SYSTEM FAILURE
As the Company expands its network and usage grows, increased stress will be
placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures relating to individual network points of presence ("POPs")
or even catastrophic failure of the entire network. Moreover, the Company's
operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, mudslides, power
loss, telecommunications failures and similar events. A significant portion of
the Company's computer equipment, including critical equipment dedicated to
its Internet access services, is located at its facilities in Bay City,
Michigan, and Cupertino, California. In addition, the Company's modems and
routers that serve large areas of the United States are located in such
cities. The Company's network operations center, which manages the entire
network, is in St. Louis, Missouri. Despite precautions taken by the Company,
the occurrence of a natural disaster or other unanticipated problems at the
Company's network operations center, at its hubs (sites at which the Company
has located routers, switches and other computer equipment that make up the
backbone of the Company's network infrastructure) or at a number
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of the Company's POPs has from time to time in the past caused, and in the
future could cause, interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity in the time frame required by the Company as a
result of a natural disaster or operational disruption or for any other reason
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--The Concentric Network."
SYSTEM SECURITY RISKS
Despite the implementation of network security measures, the core of the
Company's network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
customers, which may result in liability to the Company and also may deter
potential subscribers. Although the Company intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. The costs
and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service
to the Company's customers that could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and Expansion," "--Dependence upon New and
Enhanced Services," "--Risks of Technological Change and Evolving Industry
Standards," "Use of Proceeds" and "Business--Services."
DEPENDENCE UPON KEY PERSONNEL; ABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Henry R. Nothhaft,
the Company's Chairman, President and Chief Executive Officer, and John K.
Peters, the Company's Executive Vice President and General Manager, Network
Services Division. The loss of the services of Messrs. Nothhaft or Peters
could have a material adverse effect on the Company. The Company does not have
employment agreements with any of its senior officers, including Messrs.
Nothhaft or Peters. Nor does the Company carry key man life insurance on the
life of any such persons. The Company's success will also depend upon the
continued service of the other members of its senior management team and
technical, marketing and sales personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time, and
competition for qualified employees is intense. The Company's success also
depends upon its ability to attract and retain additional highly qualified
management, technical, sales and marketing and customer support personnel. The
process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategy is often lengthy. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect upon the Company's
results of operations, development efforts and ability to complete the
expansion of its network infrastructure. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Management of Potential Growth and Expansion" and
"Management."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. In particular, the Company has entered into an
agreement with TMI, to establish an international network based on
Concentric's network technology and expertise and TMI's existing
telecommunications infrastructure to deliver a range of compatible network
services worldwide. If the companies are not able to successfully deploy
Concentric's technology over TMI's infrastructure, or if Concentric is
unsuccessful in transferring its knowledge to TMI employees, the Company's
international strategy may be delayed and the Company's business, results of
operation or financial condition could be materially adversely affected. To
date, the Company has only limited experience in working with TMI to develop
versions of its products and marketing and distributing its products
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internationally. Additionally, the Company entered into a roaming services
agreement in June 1997 with NTT PC. The roaming services agreement allows
Concentric customers to use the NTT PC network to access their internet
accounts in Japan and allows members of the NTT PC network to access their
internet accounts in the United States and Canada. Additionally, the Company
acquired Web hosting facilities in Stockholm, Sweden, Tokyo, Japan and Hong
Kong in February 1998. There can be no assurance that the Company will be able
to successfully market, sell and deliver its products in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export restrictions, export controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world and potentially adverse tax consequences
that could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
The FCC currently does not regulate value-added network software or computer
equipment related services that transport data or voice messages over
telecommunication facilities. The Company provides value-added IP-based
network services, in part, through data transmissions over public telephone
lines. These transmissions are governed by regulatory policies establishing
charges and terms for wireline communications. Operators of these types of
value-added networks that provide access to regulated transmission facilities
only as part of a data services package currently are excluded from
regulations that applies to "telecommunications carrier" and as such the
Company is not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to
regulation by the FCC or another regulatory agency as a provider of basic
telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the
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Company's proprietary technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. The Company operates a material portion
of its business over the Internet, which is subject to a variety of risks.
Such risks include but are not limited to the substantial uncertainties that
exist regarding the system for assigning domain names and the status of
private rules for resolution of disputes regarding rights to domain names.
There can be no assurance that the Company will continue to be able to employ
its current domain names in the future or that the loss of rights to one or
more domain names will not have a material adverse effect on the Company's
business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event the Company is required to indemnify
parties under these agreements, it could have a material adverse effect on the
business, financial condition and results of operations of the Company. In the
event a claim relating to proprietary technology or information is asserted
against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that licenses could be obtained
on commercially reasonable terms, if at all, or that the terms of any offered
licenses would be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is currently unsettled.
Several lawsuits seeking a judgment of such liability are pending. In one case
brought against an Internet service provider, Religious Technology Center v.
Netcom On-Line Communication Services, Inc., the United States District Court
for the Northern District of California ruled in a preliminary phase that
under certain circumstances Internet service providers could be held liable
for copyright infringement. The case has not reached final judgment. Such
claims have been asserted against the Company in the past, and there can be no
assurance that such claims will not be asserted in the future, or if asserted,
will not be successful. The Telecommunications Act of 1996 prohibits and
imposes criminal penalties and civil liability for using an interactive
computer service for transmitting certain types of information and content,
such as obscene communications. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon the Company,
Internet service providers or Web server hosts of potential liability for
materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings. Further, the costs incurred in defending
against any such claims and potential adverse outcomes of such claims could
have a material adverse effect on the Company's financial condition and
results of operations. The Company believes that it is currently unsettled
whether the Telecommunications Act of 1996 prohibits and imposes liability for
any services provided by the Company should the content of information
transmitted be subject to the statute.
LEGAL PROCEEDINGS
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana, the parent corporation of Sattel, alleging
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securities fraud related to plaintiffs' purchase of shares of Diana Common
Stock in reliance upon allegedly misleading statements made by defendants,
Diana, Sattel and certain of their respective affiliates, officers and
directors. Concentric was named as a defendant in the complaint in connection
with certain statements made by Diana and officers of Diana related to
Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The plaintiffs seek unspecified compensatory damages. A motion by
the Company to dismiss the complaint was denied, and the court has allowed the
action to proceed against the Company. A trial date has not yet been
determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcome is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations. See "Business--Legal Proceedings" and Note 11
of Notes to Financial Statements.
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
As of the date of this Offering Memorandum, the Company has no specific
allocations for the net proceeds of this Offering. Consequently, management
will retain a significant amount of discretion over the application of the
Offering. Because of the number and variability of factors that determine the
Company's use of the net proceeds of the Offering, there can be no assurance
that such applications will not vary substantially from the Company's current
intentions. Pending such uses, the Company intends to invest the net proceeds
of the Offering in short-term U.S. investment grade and government securities.
See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED STOCK
The Preferred Stock has not been registered under the Securities Act or any
state securities laws, and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws. However, the Company is required to commence a registered
exchange offer for the Preferred Stock or register resales of the Preferred
Stock under the Act. See "Notice to Investors."
The Preferred Stock is a new security for which there is currently no
market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Preferred Stock, they are not
obligated to do so and any such market making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development
or liquidity of any market for the Preferred Stock. The Preferred Stock is
expected to be eligible for trading in The Portal Market. The Company does not
intend to apply for listing of the Preferred Stock on any securities exchange
or for quotation through the Nasdaq National Market. If a market for the
Preferred Stock were to develop, the Preferred Stock could trade at prices
that may be higher or lower than its initial offering price depending upon
many factors, including prevailing interest rates, the Company's operating
results, and the market for similar securities. Historically, the market for
high-yield securities, such as the Preferred Stock, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that, if a market for the Preferred
Stock were to develop, such market will not be subject to similar disruptions.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Series A Preferred tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of Series A Preferred outstanding.
Following the consummation of the Exchange Offer, Existing Holders who did not
tender their Series A Preferred generally will not have any further
registration rights under the Registration Rights Agreement, and such Series A
Preferred will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Series A Preferred could be
adversely affected. The Series A Preferred are currently eligible for sale
pursuant to Rule 144A through The Portal Market. Because the Company
anticipates that most Existing Holders will elect to exchange such Series A
Preferred for Series B
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Preferred due to the absence of restrictions on the resale of Series B
Preferred (except for applicable restrictions on any New Holder who is an
affiliate of the Company or is a broker-dealer which acquired the Series A
Preferred directly from the Company) under the Securities Act, the Company
anticipates that the liquidity of the market for any Series A Preferred
remaining after the consummation of the Exchange Offer may be substantially
limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Series A Preferred, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Series A
Preferred for Series B Preferred will continue to hold the untendered Series A
Preferred and will be entitled to all the rights and subject to all the
limitations applicable thereto under the Certificate of Designation, except to
the extent that such rights or limitations, by their terms, terminate or cease
to have further effectiveness as a result of the Exchange Offer.
The Series A Preferred that are not exchanged for Series B Preferred
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Series A Preferred may be resold only (i) to the Company or any of its
subsidiaries, (ii) inside the United States to a QIB in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) an "Accredited Investor" that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Securities (the form of which
letter can be obtained from such Trustee), (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. Each Accredited Investor that is not a QIB and that is an
original purchaser of any of the Securities from the Initial Purchasers will
be required to sign a letter confirming that such person is an Accredited
Investor under the Securities Act and that such person acknowledges the
transfer restrictions summarized herein.
IMPACT OF THE YEAR 2000 ISSUE
Many installed computer systems and software products are coded to accept
only two digit entries in the date code field. Beginning in the year 2000,
these code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century or earlier dates. As a result, in less than
two years, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. The
Company is currently expending sufficient resources to review its products and
services, as well as its internal management information systems in order to
identify and modify those products, services and systems that are not year
2000 compliant. The Company expects such modifications will be made on a
timely basis and does not believe that the cost of such modifications will
have a material effect on the Company's operating results. There can be no
assurance, however, that the Company will be able to modify timely and
successfully such products, services and systems to comply with year 2000
requirements, which could have a material adverse effect on the Company's
operating results. Based on the Company's assessment to date, most newly
introduced products and services of the Company are year 2000 compliant,
however some of the Company's customers are running product versions that are
not year 2000 compliant. The Company has been encouraging such customers to
migrate to current product versions. In addition, the Company faces risks to
the extent that suppliers of products, services and systems purchased by the
Company and others with whom the Company transacts business on a worldwide
basis do not have business systems or products that comply with the year 2000
requirements. In the event any such third parties cannot timely provide the
Company with products, services or systems that meet the year 2000
requirements, the Company's operating results could be materially adversely
affected. Furthermore, there can be no assurance that these or other factors
relating to the year 2000 compliance issues, including litigation, will not
have a material adverse effect on the Company's business, operating results or
financial condition.
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USE OF PROCEEDS
SERIES A PREFERRED OFFERING
The net proceeds from the Offering, after deducting the Initial Purchasers'
discount and estimated offering expenses, was approximately $144.3 million.
The Company currently plans to use the net proceeds from the Offering to fund
operating losses and for working capital requirements or for other general
corporate purposes. Proceeds from the Offering also may be used to acquire
assets, technologies, or businesses complementary to the Company's value-added
enterprise network service strategy. Pending such uses, the proceeds will be
invested in short-term U.S. investment grade and government securities.
EXCHANGE OFFER
The Company will not receive any cash proceeds from the Exchange Offer. In
consideration for issuing the Series B Preferred in exchange for Series A
Preferred as described in this Prospectus, the Company will receive Series A
Preferred in like principal amount. The Series A Preferred surrendered in
exchange for the Series B Preferred will be retired and canceled.
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. The Company intends to retain
its earnings, if any, for use in the Company's growth and ongoing operations.
In addition, the terms of the Certificate of Designation will restrict the
ability of the Company to pay dividends on the Common Stock. See "Description
of Preferred Stock--Certain Covenants; Restricted Payments."
Dividends on the Preferred Stock will accumulate at a rate of 13 1/2% per
annum of the Liquidation Preference thereof and will be payable quarterly in
arrears on March 1, June 1, September 1 and December 1 of each year (each a
"Dividend Payment Date") commencing September 1, 1998. Dividends will be
payable in cash, except that on each Dividend Payment Date occurring on or
prior to June 1, 2003, dividends may be paid, at the Company's option, by the
issuance of additional shares of Preferred Stock (including fractional shares)
having an aggregate Liquidation Preference equal to the amount of such
dividends.
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THE EXCHANGE OFFER
The following discussion summarizes the material terms of the Exchange
Offer, including those set forth in the Letter of Transmittal distributed with
this Prospectus. This summary is qualified in its entirety by reference to the
full text of the documents underlying the Exchange Offer (including the
Registration Rights Agreement), which are exhibits to the Exchange Offer
Registration Statement.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Series A Preferred were sold by the Company to the Initial Purchasers on
June 8, 1998, and were subsequently resold to qualified institutional buyers
pursuant to Rule 144A under the Securities Act. In connection with the Series
A Preferred Offering, the Company entered into the Registration Rights
Agreement, which requires, among other things, that within 30 days following
June 8, 1998 (the "Issue Date") (i.e. on or before July 8, 1998) the Company
(i) file with the Commission a registration statement under the Securities Act
with respect to an issue of Series B Preferred of the Company identical in all
material respects (other than transfer restrictions, registration rights and
the requirement, under certain circumstances, to pay Liquidated Damages) to
the Series A Preferred (which obligation has been satisfied by the filing of
the Exchange Offer Registration Statement), (ii) use their best efforts to
cause such registration statement to become effective under the Securities Act
by the date which is 120 days after the Issue Date (the "Target Effectiveness
Date") and (iii) to consummate the Exchange Offer within 30 days after the
Target Effectiveness Date, and offer to the Existing Holders the opportunity
to exchange their Series A Preferred for a like principal amount of Series B
Preferred, which would be issued without a restrictive legend and may
generally be reoffered and resold by the New Holder without restrictions or
limitations under the Securities Act, subject to the terms and conditions of
the Exxon Capital, Morgan Stanley and Shearman & Sterling No-Action Letters.
See Outside Front Cover, "Prospectus Summary--The Exchange Offer", and "--
Resale of Series B Preferred."
Any Series A Preferred tendered and exchanged in the Exchange Offer will
reduce the number of shares of Series A Preferred outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Series A Preferred generally will not have any further registration rights
under the Registration Rights Agreement, and such Series A Preferred will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for such Series A Preferred could be adversely
affected. The Series A Preferred are currently eligible for sale pursuant to
Rule 144A through The Portal Market. Because the Company anticipates that most
Existing Holders will elect to exchange such Series A Preferred for Series B
Preferred due to the absence of restrictions on the resale of Series B
Preferred under the Securities Act, the Company anticipates that the liquidity
of the market for any Series A Preferred remaining after the consummation of
the Exchange Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender such Series A Preferred, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages for failure to register. Accordingly, any
Existing Holder that does not exchange that Holder's Series A Preferred for
Series B Preferred will continue to hold the untendered Series A Preferred and
will be entitled to all the rights and subject to all the limitations
applicable thereto under the Certificate of Designation, except to the extent
that such rights or limitations, by their terms, terminate or cease to have
further effectiveness as a result of the Exchange Offer.
The Series A Preferred that are not exchanged for Series B Preferred
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Series A Preferred may be resold only (i) to the Company or any of its
subsidiaries, (ii) inside the United States to a QIB in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) an "Accredited Investor" that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to
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the restrictions on transfer of the Securities (the form of which letter can
be obtained from such Trustee), (iv) outside the United States in compliance
with Rule 904 under the Securities Act, (v) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available), or
(vi) pursuant to an effective registration statement under the Securities Act.
Each Accredited Investor that is not a QIB and that is an original purchaser
of any of the Securities from the Initial Purchasers will be required to sign
a letter confirming that such person is an Accredited Investor under the
Securities Act and that such person acknowledges the transfer restrictions
summarized herein.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all shares
of Series A Preferred validly tendered and not withdrawn prior to 5:00 p.m.,
New York City time on the Expiration Date. The Company will issue one share of
Series B Preferred in exchange for each share of issued and outstanding Series
A Preferred accepted in the Exchange Offer. Existing Holders may tender some
or all of their shares of Series A Preferred pursuant to the Exchange Offer.
The rights, preference and privileges of the Series B Preferred are the same
as the rights, preferences and privileges of the Series A Preferred except
that (i) the Series B Preferred have been registered under the Securities Act
and hence will not bear legends restricting the transfer thereof and (ii) New
Holders generally will not be entitled to certain rights under the
Registration Rights Agreement or Liquidated Damages, which rights generally
will terminate upon consummation of the Exchange Offer.
Existing Holders do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Series A
Preferred when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
Existing Holders for the purpose of receiving the Series B Preferred from the
Company.
If any tendered Series A Preferred are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Series A Preferred will be
returned, without expense, to the tendering Existing Holder thereof as
promptly as practicable after the Expiration Date.
Existing Holders who tender Series A Preferred 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 Series A Preferred pursuant to the Exchange Offer. The Company
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" shall mean 5:00 p.m., New York City time, on ,
1998 unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date. In no event will the
Expiration Date be extended to a date more than 30 business days after
effectiveness of the Exchange Offer Registration Statement.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Series A Preferred, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under
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"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof.
ACCUMULATED DIVIDENDS ON SERIES B PREFERRED
Each share of Series B Preferred will be entitled to dividends from the most
recent date to which dividends have been paid or duly provided for on the
Series A surrendered in exchange for such Series A Preferred or, if no such
dividends have been paid or duly provided for on such Series A Preferred, from
June 8, 1998. Holders of the Series A Preferred whose Series A Preferred are
accepted for exchange will not receive accumulated dividends on such Series A
Preferred for any period from and after the last Dividend Payment Date to
which interest has been paid or duly provided for on such Series A Preferred
prior to the original issue date of the Series B Preferred or, if no such
interest has been paid or duly provided for, will not receive any accumulated
dividends on such Series A Preferred, and will be deemed to have waived the
right to receive any interest on such Series A Preferred which have
accumulated from and after such Dividend Payment Date or, if no such dividends
have been paid or duly provided for, from and after June 3, 1998. Dividends on
the Preferred Stock will be payable quarterly in arrears on March 1, June 1,
September 1 and December 1 commencing on September 1, 1998.
PROCEDURES FOR TENDERING
Only Existing Holders may tender such Series A Preferred in the Exchange
Offer. To tender in the Exchange Offer, an Existing Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Series A Preferred and any other required documents, to the
Exchange Agent so as to be received by the Exchange Agent at the address set
forth below prior to 5:00 p.m., New York City time, on the Expiration Date.
Delivery of the Series A Preferred may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-
entry transfer must be received by the Exchange Agent prior to the Expiration
Date.
By executing the Letter of Transmittal, each Existing Holder will make to
the Company the representation set forth below in the second paragraph under
the heading "--Resale of Series B Preferred."
The tender by an Existing Holder and the acceptance thereof by the Company
will constitute an agreement between such Existing Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF SERIES A PREFERRED AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SHARES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Series A Preferred 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 Existing Holder promptly and
instruct such registered Existing Holder to tender on such beneficial owner's
behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Preferred tendered pursuant thereto (i) are signed
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by the registered Existing Holder, unless such Existing Holder has completed
the box entitled "Special Exchange Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) are tendered for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
Existing Holder of any Series A Preferred listed therein, such Series A
Preferred must be endorsed or accompanied by a properly completed bond power,
signed by such registered Existing Holder as such registered Existing Holder's
name appears on such Series A Preferred, with the signature thereon guaranteed
by an Eligible Institution.
If the Letter of Transmittal or any Series A Preferred or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Series A Preferred and withdrawal of tendered
Series A Preferred will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the
absolute right to reject any and all Series A Preferred not properly tendered
or any Series A Preferred the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Series A Preferred. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Series A Preferred
must be cured within such time as the Company shall determine. Although the
Company intends to notify Existing Holders of defects or irregularities with
respect to tenders of Series A Preferred, none of the Company, the Exchange
Agent or any other person shall incur any liability for failure to give such
notification. Tenders of Series A Preferred will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any
Series A Preferred 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 Existing
Holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
TENDER OF SERIES A PREFERRED HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Series A Preferred to the Exchange Agent in accordance with DTC's ATOP
procedures for transfer. DTC will then send an Agent's Message to the Exchange
Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that DTC has received an expressed acknowledgment from a participant in
DTC that is tendering Series A Preferred which are the subject of such Book-
Entry Confirmation, that such participant has received and agrees to be bound
by the terms of the applicable Letter of Transmittal (or, in the case of an
Agent's Message relating to guaranteed delivery, that such participant has
received and agrees to be bound by the applicable Notice of Guaranteed
Delivery), and that the Company may enforce such agreement against such
participant.
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BOOK-ENTRY DELIVERY PROCEDURES
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Series A Preferred at DTC (the "Book-
Entry Transfer Facility") for purposes of the Exchange Offer. Any financial
institution that is a participant in the Book-Entry Transfer Facility systems
may make book-entry delivery of the Series A Preferred by causing DTC to
transfer such Series A Preferred into the Exchange Agent's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. Timely book-entry delivery of Series
A Preferred pursuant to the Exchange Offer, however, requires receipt of a
Book-Entry Confirmation prior to the Expiration Date. In addition, although
delivery of Series A Preferred may be effected through book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility, the
Letter of Transmittal (or a manually signed facsimile thereof), together with
any required signature guarantees and any other required documents, or an
Agent's Message in connection with a book-entry transfer, must, in any case,
be delivered or transmitted to and received by the Exchange Agent at its
address set forth on the back cover page of this Prospectus prior to the
Expiration Date to receive Series B Preferred for tendered Series A Preferred,
or the guaranteed delivery procedure described below must be complied with.
Tender will not be deemed made until such documents are received by the
Exchange Agent. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Existing Holders who wish to tender their Series A Preferred and (i) whose
Series A Preferred are not immediately available, (ii) who cannot deliver
their Series A Preferred, the Letter of Transmittal or any other required
documents to the Exchange Agent or (iii) who cannot complete the procedures
for book-entry transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Existing Holder, the certificate
number(s) of such Series A Preferred and the principal amount of Series A
Preferred tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Series A Preferred (or a
confirmation of book-entry transfer of such Series A Preferred into the
Exchange Agent's account at DTC) and any other documents required by the
Letter of Transmittal, will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Preferred in proper form for transfer (or a confirmation of book-
entry transfer of such Series A Preferred 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 Existing Holders who wish to tender their Series A Preferred according
to the guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Series A Preferred may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Series A Preferred in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at the address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Series A Preferred to be
withdrawn (the "Depositor"), (ii) identify the Series A Preferred to be
withdrawn (including the certificate number(s) and principal amount of such
Series A Preferred, or, in the
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case of Series A Preferred transferred by book-entry transfer, the name and
number of the account at DTC to be credited), (iii) be signed by the Existing
Holder in the same manner as the original signature on the Letter of
Transmittal by which such Series A Preferred were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee register the transfer of such Series A
Preferred into the name of the person withdrawing the tender and (iv) specify
the name in which any such Series A Preferred are to be registered, if
different from that of the Depositor. All questions as to the validity, form
and eligibility (including time or receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Series A Preferred so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Series B Preferred will be
issued with respect thereto unless the Series A Preferred so withdrawn are
validly retendered. Any Series A Preferred which have been tendered but which
are not accepted for exchange will be returned to such Existing Holder without
cost to such Existing Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Series A Preferred 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, the Company shall not
be required to accept for exchange Series A Preferred for any Series B
Preferred, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Series A Preferred, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or any
part thereof contemplated herein violates any applicable law or
interpretation of the Staff;
(b) any action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development shall have occurred in any existing action or
proceeding with respect to the Company;
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on the Nasdaq Stock Market or any exchange,
or any banking moratorium, shall have occurred, as a result of which the
Company is unable to proceed with the Exchange Offer; or
(e) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
foregoing conditions are not satisfied, the Company may (i) refuse to accept
any Series A Preferred and return all tendered Series A Preferred to the
tendering Existing Holders, (ii) extend the Exchange Offer and retain all
Series A Preferred tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Existing Holders to withdraw such Series A
Preferred (see "--Withdrawals of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Series A Preferred which have not been withdrawn.
EXCHANGE AGENT
ChaseMellon Shareholder Services, LLC will act as Exchange Agent for the
Exchange Offer with respect to the Series A Preferred.
35
<PAGE>
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Series A Preferred and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
<TABLE>
<C> <S>
By Hand, Overnight Courier
or Mail: 275 Montgomery Street, 23rd Floor
San Francisco, California 94104
Attention: Duane Kenetson
By Facsimile: (415) 489-5241
Confirm by Telephone: (415) 743-1426
</TABLE>
FEES AND EXPENSES
The expenses of soliciting Series A Preferred for exchange will be borne by
the Company. The principal solicitation is being made by mail by the Exchange
Agent. However, additional solicitation may be made by telephone, facsimile or
in person by officers and regular employees of the Company and its affiliates
and by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith and pay other registration expenses, including fees
and expenses of the Trustee (as defined), filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Series A Preferred pursuant to the Exchange Offer. If, however,
certificates representing the Series B Preferred or the Series A Preferred for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the registered
Holder of the Series A Preferred tendered, or if tendered Series A Preferred
are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of the Series A Preferred pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Existing Holder or any other person) will be payable by the tendering Existing
Holder.
ACCOUNTING TREATMENT
The Series B Preferred will be recorded at the same carrying value as the
Series A Preferred. Accordingly, no gain or loss for accounting purposes will
be recognized in connection with the Exchange Offer. The expenses of the
Exchange Offer will be amortized over the term of the Series B Preferred.
RESALE OF SERIES B PREFERRED
The Company is making the Exchange Offer in reliance on the position of the
staff of the Staff of the Commission as set forth in the Staff's Exxon Capital
No-Action Letter, Morgan Stanley & Co. Incorporated No-Action Letter, Shearman
& Sterling No-Action Letter, and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Series B Preferred issued pursuant to
this Exchange Offer in exchange for Series A Preferred may be offered for
resale, resold and otherwise transferred by a such New Holder (other than a
New Holder who is a broker-dealer) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Series B Preferred are acquired in the ordinary course of
such New Holder's business and that such New Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Series B
Preferred. However, any Existing Holder who (i) is an "affiliate" of the
36
<PAGE>
Company (within the meaning of Rule 405 under the Securities Act), (ii) does
not acquire such Series B Preferred in the ordinary course of its business,
(iii) intends to participate in the Exchange Offer for the purpose of
distributing Series B Preferred, or (iv) is a broker-dealer who purchased such
Series A Preferred directly from the Company, (a) will not be able to rely on
the interpretations of the Staff set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to tender such Series A
Preferred in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Series A Preferred unless such sale is made
pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Series A Preferred acquired for its own
account a Participating Broker-Dealer, then such Participating Broker-Dealer
may be deemed a statutory "underwriter" within the meaning of the Securities
Act and must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales of such Series B Preferred.
Each Existing Holder who wishes to exchange Series A Preferred for Series B
Preferred in the Exchange Offer will be required to represent that (i) it is
not an affiliate of the Company, (ii) any Series B Preferred to be received by
it are being acquired in the ordinary course of its business, and (iii) it has
no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such Series B
Preferred. Each broker-dealer that receives Series B Preferred for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Series A Preferred for its own account as a result of market-making activities
or other trading activities (and not directly from the Company) and must agree
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Series B Preferred. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus,
such a Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff in the interpretive letters referred to above, the Company
believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Series B Preferred received upon
exchange of such Series A Preferred with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such Series B Preferred. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer during the period referred to below in
connection with resales of Series B Preferred received in exchange for Series
A Preferred where such Series A Preferred were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other
trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company shall use its best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended to the extent necessary to ensure that it is available for sales
of Series B Preferred by Participating Broker-Dealers, and to ensure that the
Exchange Offer Registration Statement conforms with the requirements of the
Act and the policies, rules and regulations of the Commission as announced
from time to time, for a period expiring approximately 180 days from the date
on which the Exchange Offer Registration Statement is declared effective. See
"Plan of Distribution." Any Participating Broker-Dealer who is an affiliate of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
Series B Preferred."
In that regard, each Participating Broker-Dealer who surrenders Series A
Preferred pursuant to the Exchange Offer will be deemed to have agreed, by
execution of the Letter of Transmittal, that, upon receipt of notice from the
Company of the occurrence of any event or the discovery of any fact which
makes any statement contained or incorporated by reference in this Prospectus
untrue in any material respect or which causes this Prospectus to omit to
state a material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-
Dealer will suspend the sale of Series B Preferred pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented
37
<PAGE>
Prospectus to such Participating Broker-Dealer or the Company has given notice
that the sale of the Series B Preferred may be resumed, as the case may be.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Series A Preferred tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of Series A Preferred outstanding.
Following the consummation of the Exchange Offer, Existing Holders who did not
tender their Series A Preferred generally will not have any further
registration rights under the Registration Rights Agreement, and such Series A
Preferred will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Series A Preferred could be
adversely affected. The Series A Preferred are currently eligible for sale
pursuant to Rule 144A through The Portal Market. Because the Company
anticipates that most Existing Holders will elect to exchange such Series A
Preferred for Series B Preferred due to the absence of restrictions on the
resale of Series B Preferred (except for applicable restrictions on any New
Holder who is an affiliate of the Company or is a broker-dealer which acquired
the Series A Preferred directly from the Company) under the Securities Act,
the Company anticipates that the liquidity of the market for any Series A
Preferred remaining after the consummation of the Exchange Offer may be
substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Series A Preferred, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Series A
Preferred for Series B Preferred will continue to hold the untendered Series A
Preferred and will be entitled to all the rights and subject to all the
limitations applicable thereto under the Certificate of Designation, except to
the extent that such rights or limitations, by their terms, terminate or cease
to have further effectiveness as a result of the Exchange Offer.
The Series A Preferred that are not exchanged for Series B Preferred
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Series A Preferred may be resold only (i) to the Company or any of its
subsidiaries, (ii) inside the United States to a QIB in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) an "Accredited Investor" that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Securities (the form of which
letter can be obtained from such Trustee), (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. Each Accredited Investor that is not a QIB and that is an
original purchaser of any of the Securities from the Initial Purchasers will
be required to sign a letter confirming that such person is an Accredited
Investor under the Securities Act and that such person acknowledges the
transfer restrictions summarized herein.
OTHER
Participation in the Exchange Offer is voluntary and Existing Holders should
carefully consider whether to accept. Existing Holders are urged to consult
their financial and tax advisors in making their own decision on what action
to take.
The Company may in the future seek to acquire untendered Series A Preferred
in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company has no present plans to acquire any
Series A Preferred that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Series A Preferred.
38
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual cash and cash equivalents and
capitalization of the Company derived from its financial statements as of
March 31, 1998, and (ii) such amounts as adjusted to reflect the sale by the
Company of an aggregate of 150,000 shares of the Series A Preferred Stock
having net proceeds to the Company of $144.3 million after deducting the
estimated discount and offering expenses. The capitalization information set
forth in the table below is qualified by the more detailed Financial
Statements and Notes thereto included elsewhere in this Offering Memorandum
and should be read in conjunction with such Financial Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
AS
ACTUAL ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(1)......................... $ 63,707 $ 207,957
=========== ===========
Long-term debt:
Capital lease obligations, net of current por-
tion(2)........................................... $ 8,879 $ 8,879
12 3/4% Senior Notes due 2007(3)................... 145,688 145,688
----------- -----------
Total long-term debt, net of current portion..... 154,567 154,567
13 1/2% Senior Redeemable Exchangeable Preferred
Stock due 2010...................................... -- 144,250
Stockholders' equity:
Common Stock, $0.001 par value; 100,000,000 shares
authorized;
14,176,633 shares outstanding(4).................. 183,083 183,083
Accumulated deficit................................ (169,761) (169,761)
Deferred compensation.............................. (1,176) (1,176)
----------- -----------
Total stockholders' equity....................... 12,146 12,146
----------- -----------
Total capitalization............................. $ 166,713 $ 310,963
=========== ===========
</TABLE>
- --------
(1) Excludes restricted cash of $53.3 million held in an escrow account in
connection with the Company's Existing Senior Notes. See "Description of
Certain Indebtedness" and Note 4 of Notes to Financial Statements.
(2) See Note 3 of Notes to Financial Statements.
(3) Includes the unamortized discount of $4.3 million relating to the Warrants
which were issued in connection with the Existing Senior Notes. See Note 4
of Notes to Financial Statements.
(4) Excludes options and warrants to purchase approximately 5.1 million shares
of Common Stock of the Company outstanding at March 31, 1998.
39
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The statement of operations data for each of the
three years ended December 31, 1997 and balance sheet data as of December 31,
1996 and 1997 are derived from financial statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere herein. The statement of operations for the three month periods
ended March 31, 1997 and March 31, 1998 and balance sheet data as of March 31,
1998 are derived from unaudited financial statements included elsewhere
herein. The pro forma statement of operations data for the year ended December
31, 1997 has been derived from selected unaudited pro forma condensed combined
financial information which is included elsewhere in this Offering Memorandum.
The unaudited financial statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. The operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
PRO FORMA ENDED
YEAR ENDED DECEMBER 31 YEAR ENDED MARCH 31,
---------------------------------------------- DECEMBER 31, --------------------
1993 1994 1995 1996 1997 1997(1)(2) 1997 1998(2)(3)
------- ------- -------- -------- -------- ------------ -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 23 $ 442 $ 2,483 $ 15,648 $ 45,457 $ 55,411 $ 9,154 $ 16,484
Cost of revenue......... 130 2,891 16,168 47,945 61,439 70,635 15,744 17,724
Network equipment write-
off(4)................. -- -- -- 8,321 -- -- -- --
Development............. 349 534 837 2,449 4,850 5,665 1,025 1,507
Marketing and sales..... 131 639 3,899 16,609 24,622 28,613 4,936 8,494
General and
administrative......... 634 611 2,866 3,445 4,790 7,653 1,060 1,852
Amortization of goodwill
and other intangible
assets................. -- -- -- -- -- 3,239 -- 506
Write-off of in-process
technology............. -- -- -- -- -- -- -- 5,200
------- ------- -------- -------- -------- -------- -------- --------
Total costs and
operating expenses..... 1,244 4,675 23,770 78,769 95,701 115,805 22,765 35,283
------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,221) (4,233) (21,287) (63,121) (50,244) (60,394) (13,611) (18,799)
Other income, net....... -- -- -- -- 1,233 1,278 -- --
Net interest expense.... (24) (57) (721) (3,260) (6,571) (24,962) (1,070) (4,470)
------- ------- -------- -------- -------- -------- -------- --------
Loss before
extraordinary item..... (1,245) (4,290) (22,008) (66,381) (55,582) (84,078) (14,681) (23,269)
Extraordinary gain on
early retirement of
debt................... -- -- -- -- -- -- -- 3,042
------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(20,227)
======= ======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 46 $ 169 $ 2,196 $ 9,470 $ 19,230 $ 24,348 $ 3,840 $ 6,763
EBITDA(5)............... (1,175) (4,064) (19,091) (53,651) (31,014) (36,046) (9,771) (6,836)
Capital
expenditures(6)........ 817 718 17,176 39,093 22,798 25,938 8,930 2,847
Ratio of earnings to
fixed charges(7)....... N/A N/A N/A N/A N/A N/A N/A N/A
Deficiency of earnings
available to cover
fixed charges(2)(7).... $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 55 $ 63 $19,054 $17,657 $119,959 $ 63,707
Restricted cash(8)...... -- -- -- -- 52,525 53,273
Property and equipment,
net.................... 675 1,303 16,289 47,927 53,710 53,916
Total assets............ 783 1,798 37,235 70,722 244,489 202,870
Long-term debt and
capital lease
obligations, net of
current portion........ 1,251 1,648 11,047 30,551 179,172 154,567
Total stockholders' eq-
uity (deficit)......... (1,172) (4,202) 9,763 2,925 31,918 12,146
</TABLE>
(Footnotes appear on the next page.)
40
<PAGE>
- --------
(1) The pro forma statement of operations data gives effect to the InterNex
acquisition which occurred effective on February 5, 1998 as if it occurred
on January 1, 1997. In addition, the pro forma statement of operations
data includes pro forma adjustments reflecting the interest that would
have been incurred had the Existing Senior Notes been outstanding as of
January 1, 1997. See Selected Unaudited Pro Forma Condensed Combined
Financial Information.
(2) Statement of operations data does not reflect the Offering. Preferred
Stock dividends and accretion on a pro forma basis, assuming the Offering
occurred on January 1, 1997, would have been $21.8 million for the year
ended December 31, 1997. Assuming the Offering occurred on January 1,
1998, dividends and accretion on a pro forma basis for the three months
ended March 31, 1998 would have been $5.2 million.
(3) Includes the results of InterNex's operations from February 5, 1998 (the
date of acquisition) through the end of the period. See Note 12 of Notes
to Financial Statements.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(5) EBITDA is loss from operations before interest, taxes, depreciation and
amortization and, for the three months ended March 31, 1998, also excludes
the write-off of in-process technology. EBITDA is included herein because
management believes that certain investors find it to be a useful tool for
measuring a company's ability to service its debt; however, EBITDA does
not represent cash flow from operations, as defined by generally accepted
accounting principles, should not be considered as a substitute for net
loss as an indicator of the Company's operating performance or cash flow
as a measure of liquidity, and should be examined in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere
in this Offering Memorandum.
(6) Capital expenditures includes assets acquired through capital lease
financing and other debt.
(7) For purposes of this computation, the ratio of earnings to fixed charges
has been calculated by dividing fixed charges into loss before income
taxes, fixed charges, other income and extraordinary items. Fixed charges
consist of interest expense and a portion of lease rental charges
considered to represent interest cost.
(8) Restricted cash of $53.3 million consists of funds held in escrow to pay
interest relating to the Company's Existing Senior Notes. See "Description
of Certain Indebtedness" and Note 4 of Notes to Financial Statements.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this Prospectus. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in the section entitled "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was founded in 1991. From 1991 to mid-1993, the Company
conducted development and network services planning activities and realized no
revenues. Initially, the Company was focused on providing consumers with
direct dial-up connectivity to bulletin board services. On-line gaming and
entertainment services for consumers were commenced in July 1993 through the
utilization of a third party network infrastructure. The Company commenced
operation of its own network in late 1994. In May 1995, new management led by
Henry R. Nothhaft redefined and broadened the Company's strategy to provide a
range of Internet and tailored, value-added Internet Protocol-based network
services to consumers and businesses.
The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying Virtual Private Networks and providing dedicated
network access and Web hosting services for enterprise customers. Contracts
with enterprise customers typically have a term ranging from one to three
years. The Company expects enterprise-related revenue to represent an
increasing portion of total revenue in future periods. The foregoing
expectation is a forward-looking statement that involves risks and
uncertainties, and actual results could vary as a result of a number of
factors including the Company's operating results, the results and timing of
the Company's launch of new products and services, governmental or regulatory
changes, the ability of the Company to meet product and project demands, the
success of the Company's marketing efforts, competition and acquisitions of
complementary businesses, technologies or products.
In February 1998, the Company acquired InterNex pursuant to a Share
Acquisition Agreement between the Company, InterNex and the sole shareholder
of InterNex. This acquisition was accounted for using the purchase method of
accounting. Accordingly, the Company's historical financial statements do not
include results of operations, financial position or cash flows of InterNex
prior to its acquisition in February 1998. In addition, as a result of the
acquisition, the Company has incurred charges relating to the cost of acquired
in-process technology of $5.2 million and recorded an aggregate of $12.5
million of goodwill and other intangible assets, which will be amortized on a
straight-line basis over their useful lives ranging from two to five years.
See Note 12 of Notes to Financial Statements. If the Company were to incur
additional charges for acquired in-process technology and amortization of
goodwill with respect to any future acquisitions, the Company's business,
operating results and financial condition could be materially and adversely
affected. See "Liquidity and Capital Resources" and "Risk Factors--Risks
Associated with Acquisitions."
The Company has incurred net losses and experienced negative cash flow from
operations since inception and expects to continue to operate at a net loss
and experience negative cash flow at least through the remainder of 1998. The
Company's ability to achieve profitability and positive cash flow from
operations is dependent upon the Company's ability to substantially grow its
revenue base and achieve other operating efficiencies. The Company experienced
net losses of approximately $22.0 million, $66.4 million and $55.6 million for
the years ended December 31, 1995, 1996 and 1997, respectively and $20.2
million for the three months ended March 31, 1998. There can be no assurance
that the Company will be able to achieve or sustain revenue growth,
profitability or positive cash flow on either a quarterly or an annual basis.
At December 31, 1997, the Company had approximately $60.0 million of gross
deferred tax assets comprised primarily of net operating loss carryforwards.
42
<PAGE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999, and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization. See Note 9 of Notes to Financial
Statements.
The Company expects to focus in the near term on building and increasing its
revenue base, which will require it to significantly increase its expenses for
personnel, marketing, network infrastructure and the development of new
services, and may adversely impact short term operating results. As a result,
the Company believes that it will incur losses in the near term and there can
be no assurance that the Company will be profitable on a quarterly basis in
the future.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997.
Revenue. Revenue totaled approximately $16.5 million for the three months
ended March 31, 1998, a $7.3 million increase over revenue of approximately
$9.2 million for the three months ended March 31, 1997. This increased revenue
reflects growth in revenue from the Company's broadened product offerings to
its enterprise customers and through the Company's leveraged marketing
arrangements with its strategic partners, continued growth in revenue derived
from Internet access customers and two months of revenue generated from
InterNex which was acquired in February 1998. For the three months ended March
31, 1998, revenue from WebTV Networks, Inc. ("WNI") declined to 30.8% of the
Company's net revenue from 32.7% for the three months ended March 31, 1997.
The Company expects revenue from WNI to decrease as a percentage of revenue.
The foregoing expectation is a forward looking statement that involves risks
and uncertainties and the actual results could vary materially as a result of
a number of factors including those set forth below under the caption "Risk
Factors--Customer Concentration."
Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the three
month period ended March 31, 1998 was approximately $17.7 million, an increase
of $2.0 million from cost of revenue of $15.7 million in the first quarter of
1997. This increase is attributable to the overall growth in the size of the
network. As a percentage of revenue, such costs declined to 107.5% of revenue
in the three months ended March 31, 1998, down from 172.0% of revenue in the
year earlier period, due to increased network utilization associated with the
Company's revenue growth and lower per port costs of the Company's network
architecture. The Company expects its cost of revenue to continue to increase
in dollar amount, while declining as a percentage of revenue as the Company
expands its customer base. The foregoing expectation is a forward looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors, including those set forth
below under the caption "Risk Factors--Limited Operating History; Continuing
Operating Losses," "--Management of Potential Growth and Expansion" and "--
Dependence Upon New and Uncertain Markets."
Development. Development expense consists primarily of personnel and
equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $1.5 million
and $1.0 million for the three months ended March 31, 1998 and 1997,
respectively.
43
<PAGE>
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings and to manage the overall growth in
the network. Development expense as a percentage of revenue declined to 9.1%
for the three months ended March 31, 1998 from 11.2% in the year earlier
period as a result of the Company's increased revenue. The Company expects its
development spending to continue to increase in dollar amount, but to decline
as a percentage of revenue. The foregoing expectation is a forward looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors, including those set forth
below under the caption "Risk Factors--Limited Operating History; Continuing
Operating Losses" and "--Dependence Upon New and Enhanced Services."
Marketing and Sales. Marketing and sales expense consists primarily of
personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately $8.5
million and $4.9 million for the three months ended March 31, 1998 and 1997,
respectively. The $3.6 million increase in 1998 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects marketing efforts related to the
introduction and expansion of enterprise products and services. Marketing and
sales expense as a percentage of revenue declined to 51.5% for the three
months ended March 31, 1998 from 53.9% in the year earlier period as a result
of the Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue. The foregoing expectation is a forward looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
under "Risk Factors--Dependence on New and Uncertain Markets," "--Management
of Potential Growth and Expansion."
General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and
administrative expense was approximately $1.9 million and $1.1 million for the
three months ended March 31, 1998 and 1997, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business.
General and administrative expense as a percentage of revenue declined to
11.2% for the three months ended March 31, 1998 from 11.6% in the year earlier
period as a result of the Company's increased revenue. The Company expects
general and administrative expense to increase in dollar amount, reflecting
its growth in operations and costs associated with being a publicly held
entity, but to decline as a percentage of revenue. The foregoing expectation
is a forward looking statement that involves risks and uncertainties and the
actual results could vary materially as a result of a number of factors
including those set forth under "Risk Factors--Dependence on New and Uncertain
Markets" and "--Management of Potential Growth and Expansion."
Amortization of Goodwill and Other Intangible Assets. During the three
months ended March 31, 1998 the Company recorded amortization of goodwill and
other intangible assets of $506,000 resulting from the acquisition of InterNex
in February 1998 (see Note 12 of Notes to Financial Statements).
Write-off of In-Process Technology. In the quarter ended March 31, 1998 the
Company wrote-off $5.2 million in-process technology related to the InterNex
acquisition (see Note 12 of Notes to Financial Statements).
Net Interest Expense. Net interest expense was approximately $4.5 million
and $1.1 million for the quarters ending March 31, 1998 and 1997,
respectively. The increase is primarily due to interest related to $150.0
million principal amount of Existing Senior Notes.
Extraordinary Gain. During the three months ended March 31, 1998 the Company
realized an extraordinary gain of $3.0 million related to the early retirement
of debt in the form of capital lease obligations (see Note 12 of Notes to
Financial Statements).
44
<PAGE>
Net Loss. The Company's net loss increased to approximately $20.2 million
for the quarter ended March 31, 1998 as compared to approximately $14.7
million for the same quarter of 1997. The loss in 1998 included a one-time
charge for $5.2 million for the write-off of in process technology and an
extraordinary gain of $3.0 million for the early retirement of debt (see Note
12 of Notes to Financial Statements).
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenue. Revenue for the year ended December 31, 1997 totaled approximately
$45.5 million, an increase of $29.9 million over revenue of $15.6 million for
the year ended December 31, 1996. This increased revenue reflects growth in
revenue from the Company's broadened product offerings to its enterprise
customers and through the Company's leveraged marketing arrangements with its
strategic partners, as well as continued growth in revenue derived from
Internet access customers. WebTV accounted for approximately 33.4% of total
revenue for the year ended December 31, 1997.
Cost of Revenue. Cost of revenue for the year ended December 31, 1997
totaled approximately $61.4 million compared with $47.9 million for the year
ended December 31, 1996. This increase is attributable to the overall growth
in the size of the network. As a percentage of revenue, costs declined to
135.2% of revenue in the year ended December 31, 1997 from 306.4% of revenue
in the year earlier period due to increased network utilization associated
with the Company's revenue growth and lower per port costs of the Company's
SuperPOP network architecture deployed in the second half of 1996.
Development. Development expense for the year ended December 31, 1997 and
1996 was approximately $4.9 million and $2.4 million, respectively. This
higher level of development expense reflects an overall increase in personnel
to develop new product offerings and to manage the overall growth in the
network. As a percent of revenue, development expense declined to 10.7% for
the year ended December 31, 1997 from 15.7% for the year ended December 31,
1996, as a result of the Company's increased revenue.
Marketing and Sales. For the year ended December 31, 1997 and 1996,
marketing and sales expense was approximately $24.6 million and $16.6 million,
respectively. The $8.0 million increase in 1997 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects the ramp-up of marketing efforts related
to the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 54.2% for the year ended
December 31, 1997 from 106.1% in the year earlier period as a result of the
Company's increased revenue.
General and Administrative. For the year ended December 31, 1997 and 1996,
general and administrative expenses were approximately $4.8 million and $3.4
million, respectively. This higher level of expense reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business. For the year ended December 31, 1997,
general and administrative expense declined to 10.5% from 22.0% for the year
ended December 31, 1996 as a result of the Company's increased revenue.
Net Interest Expense. Net interest expense was approximately $6.6 million
and $3.3 million for the years ended December 31, 1997 and 1996, respectively.
The increase for the year ended December 31, 1997 was primarily due to a cost
of financing charge of $930,000 associated with the value of warrants issued
in connection with $5.0 million of bridge loans received in June 1997 and
$744,000 associated with the issuance of the Existing Senior Notes.
Additionally, the principal amount of capitalized lease obligations increased
$7.0 million from December 31, 1996 to December 31, 1997. The year ended
December 31, 1996 included approximately $330,000 associated with the value of
warrants issued in connection with bridge loan financing.
Other (Income) Expense. During the year ended December 31, 1997, upon
settlement of the Sattel litigation, the Company recorded $970,000 of other
income related to the reversal of previously established reserves.
Additionally, the Company recorded $425,000 of other income related to the re-
negotiation of a third party services agreement.
45
<PAGE>
Net Loss. For the year ended December 31, 1997 the net loss totaled $55.6
million as compared to $66.4 million for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue totaled approximately $15.6 million for the year ended
December 31, 1996, an increase of $13.1 million over 1995 revenue of
approximately $2.5 million. This increase reflects continued growth in revenue
derived from Internet access customers, as well as revenue from the Company's
broadened enterprise product offerings and through the Company's leveraged
marketing arrangements with its strategic partners. The average selling prices
of the Company's offerings for consumer Internet access services decreased by
approximately 33% beginning in April 1996 due to industry-wide adoption of
flat monthly rates for unlimited Internet access.
Cost of Revenue. Cost of revenue for the year ended December 31, 1996 was
approximately $47.9 million, an increase of $31.7 million from 1995 cost of
revenue of approximately $16.2 million. The largest component of this increase
was the cost of providing virtual local access ("VLA") service over 800
circuits. VLA service was an interim solution for providing nationwide
coverage, while the Company's SuperPOP network architecture was being
deployed. This deployment was substantially completed in December 1996. Costs
associated with VLA service are expected to be immaterial in amount in 1997.
The remainder of the increase in 1996 cost of revenue is primarily
attributable to the overall growth in the size of the network.
Network Equipment Write-off. In 1996, the Company took a charge of
approximately $8.3 million related to the cost of certain network equipment.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. See Note 2 of Notes
to Financial Statements.
Development. Development expense for the year ended December 31, 1996 was
approximately $2.4 million, an increase of $1.6 million over 1995 expenditures
of approximately $837,000. This higher level of development expense in 1996
primarily reflects an overall increase in personnel to develop new product
offerings and to manage the overall growth in the network.
Marketing and Sales. Marketing and sales expense for 1996 was approximately
$16.6 million, an increase of $12.7 million over 1995 expenditures of
approximately $3.9 million. This increase in marketing and sales expense
reflects a substantial investment in the customer support, marketing and sales
organizations required to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Additionally, the increase reflects the ramp-up of
marketing efforts related to the introduction of enterprise products and
services.
General and Administrative. General and administrative expense for 1996 was
approximately $3.4 million, an increase of $500,000 over 1995 expenditures of
approximately $2.9 million. This increase reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1996 was approximately $3.3
million as compared to approximately $721,000 for 1995. The increase of $2.6
million is primarily due to an increase of $27.6 million in principal amount
of the capitalized lease obligations from December 31, 1995 to December 31,
1996. This increase in interest expense was partially offset by greater
interest income from higher average cash balances resulting from equity
financings completed in late 1995 and in August 1996. See Notes 3 and 6 of
Notes to Financial Statements.
Net Loss. The Company's net loss increased to approximately $66.4 million in
1996 from approximately $22.0 million in 1995.
46
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue totaled approximately $2.5 million for 1995, an increase of
$2.1 million, over 1994 revenue of approximately $400,000. The Company's
revenue in 1995 reflects its first full year of providing network services.
The Company's revenue in both of these years was derived entirely from the
sale of Internet access services to consumers.
Cost of Revenue. Cost of revenue for 1995 was approximately $16.2 million,
an increase of $13.3 million over 1994 cost of revenue of approximately $2.9
million. The increase in cost of revenue from 1994 to 1995 reflected overall
higher costs associated with deploying and managing the Company's own network
infrastructure. Prior to late 1994, the Company had leased third party network
facilities and thus had not incurred significant network deployment and
maintenance expenses.
Development. Development expense for 1995 was approximately $837,000, an
increase of $303,000 over 1994 expenditures of approximately $534,000. This
higher level of development expense primarily reflected an overall increase in
personnel required to develop new products and support network growth.
Marketing and Sales. Marketing and sales expense for 1995 was approximately
$3.9 million, an increase of $3.3 million over 1994 expenditures of
approximately $639,000. This higher level of spending in 1995 reflected the
Company's new market focus on providing IP-based network services. In
connection with this new focus, the Company incurred increased expenses
related to direct subscriber acquisition, formation of a telesales group,
development of strategic relationships and marketing communications. With the
growth in subscribers, the Company added personnel to its customer support
organization.
General and Administrative. General and administrative expense for 1995 was
$2.9 million, an increase of $2.3 million over 1994 expenditures of
approximately $600,000. This increase generally reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1995 was approximately
$721,000 as compared with approximately $57,000 for 1994. This increase in net
interest expense resulted from the Company's deployment of network equipment
for its own network infrastructure beginning in late 1994 which equipment
purchases were primarily financed under capital leases. Capital lease
obligations at December 31, 1995 were $14.2 million, compared with no such
obligations at December 31, 1994.
Net Loss. The Company's net loss increased to approximately $22.0 million in
1995 from a net loss of $4.3 million in 1994.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results can fluctuate from period-to-
period depending upon factors such as the success of the Company's efforts to
expand its subscriber and third party partnership base, changes in, and the
timing of, expenses relating to development and sales and marketing and
changes in pricing policies by the Company or its competitors. Management
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance. The Company may
experience significant period-to-period fluctuations in operating results.
47
<PAGE>
The following tables set forth the statement of operations data for each of
the five quarters through March 31, 1998, as well as the percentage of the
Company's revenue. This information has been derived from the Company's
unaudited financial statements. In the opinion of management, the unaudited
information set forth below has been prepared on the same basis as the audited
financial statements contained herein and includes all adjustments, consisting
only of normal recurring adjustments necessary to present fairly the
information set forth herein. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEP. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue...................... $ 9,154 $ 10,814 $ 11,824 $ 13,665 $ 16,484
Costs and operating expenses:
Cost of revenue............. 15,744 14,913 14,838 15,944 17,724
Development................. 1,025 1,200 1,313 1,312 1,507
Marketing and sales......... 4,936 6,094 6,459 7,133 8,494
General and administrative.. 1,060 1,127 1,182 1,421 1,852
Amortization and goodwill
and other tangible assets.. -- -- -- -- 506
Write-off of in-process
technology................. -- -- -- -- 5,200
-------- -------- -------- -------- --------
Total costs and operating
expenses.................. 22,765 23,334 23,792 25,810 35,283
-------- -------- -------- -------- --------
Loss from operations......... (13,611) (12,520) (11,968) (12,145) (18,799)
Other income (expense), net.. -- 1,395 (162) -- --
Net interest expense......... (1,070) (1,779) (2,088) (1,634) (4,470)
-------- -------- -------- -------- --------
Loss before extraordinary
item........................ (14,681) (12,904) (14,218) (13,779) (23,269)
Extraordinary gain on early
retirement of debt.......... -- -- -- -- 3,042
-------- -------- -------- -------- --------
Net loss..................... $(14,681) $(12,904) $(14,218) $(13,779) $(20,227)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEP. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of revenue............. 172.0 137.9 125.5 116.7 107.5
Development................. 11.2 11.1 11.1 9.6 9.1
Marketing and sales......... 53.9 56.4 54.6 52.2 51.5
General and administrative.. 11.6 10.4 10.0 10.4 11.2
Amortization of goodwill and
other intangible assets.... -- -- -- -- 3.1
Write off of in-process
technology................. -- -- -- -- 31.6
------ ------ ------ ------ ------
Total operating costs and
expenses.................. 248.7 215.8 201.2 188.9 214.0
------ ------ ------ ------ ------
Loss from operations......... (148.7) (115.8) (101.2) (88.9) (114.0)
Other income (expense), net.. -- 12.9 (1.4) -- --
Net interest expense......... (11.7) (16.4) (17.7) (11.9) (27.1)
------ ------ ------ ------ ------
Loss before extraordinary
item........................ (160.4) (119.3) (120.3) (100.8) (141.1)
Extraordinary gain on early
retirement of debt.......... -- -- -- -- 18.4
------ ------ ------ ------ ------
Net loss..................... (160.4)% (119.3)% (120.3)% (100.8)% (122.7)%
====== ====== ====== ====== ======
</TABLE>
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly, depending upon a variety of factors, including
the timely deployment and expansion of the Concentric network
48
<PAGE>
and new network architectures, the incurrence of related capital costs, the
receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced
versions of the Company's services; changes in pricing policies by the
Company's competitors; the Company's ability to obtain sufficient supplies of
sole- or limited-source components; user demand for network and Internet
access services; balancing of network usage over a 24-hour period; general
access services; the ability to identify, acquire and integrate successfully
suitable acquisition candidates; and charges related to acquisitions. In
response to competitive pressures, the Company may take certain pricing or
marketing actions that could have a material adverse effect on the Company's
business. As a result, variations in the timing and amounts of revenues could
have a material adverse effect on the Company's quarterly operating results.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance. In
the event that the Company's operating results in any future period fall below
the expectations of securities analysts and investors, the trading price of
the Company's securities would likely be materially and adversely affected.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience in the future significant period-to-period fluctuations in
operating results. The Company expects to focus in the near term on building
and increasing its revenue base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services, and may adversely impact short term operating
results. As a result, there can be no assurance that the Company will be
profitable on a quarterly basis in the future and the Company believes that it
will incur losses in the near term.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings, the sale of capital stock and debt financings.
The Company's principal uses of cash are to fund working capital requirements
and capital expenditures, to service its capital lease financing obligations,
to finance and fund the InterNex acquisition and to provide for the early
retirement of debt. Net cash used in operating activities for the years ended
December 31, 1997 and 1996 was approximately $45.9 million and $42.1 million,
respectively. Included in the amount for the year ended December 31, 1997 is
$4.4 million of cash paid in settlement of a dispute with Sattel. Cash used in
operating activities in both periods was primarily affected by the net losses,
caused by increased costs relating to the expansion of the Company's network
and organizational infrastructure. Net cash used in operating activities for
the three months ended March 31, 1998 and 1997 was approximately $8.4 million
and $11.1 million, respectively. Cash used in operating activities in both
periods was primarily affected by the net losses, caused by increased costs
relating to the expansion of the Company's network and organizational
infrastructure.
Net cash used in investing activities for the years ended December 31, 1997
and 1996 was approximately $6.5 million and $7.3 million, respectively.
Investing activities consisted primarily of purchases of capital equipment to
support the growing infrastructure. Net cash used in investing activities for
the three months ended March 31, 1998 and 1997 was approximately $17.7 million
and $2.5 million, respectively. Investing activities primarily consisted of a
cash payment of $15.5 million for the InterNex acquisition in the first
quarter of 1998 and purchases of capital equipment in both periods.
For the year ended December 31, 1997 net cash of approximately $154.7
million was generated from financing activities, of which $74.0 million, net
of issuance costs, was derived from the issuance of stocks and warrants and
$145.0 million, net of issuance costs, was derived from the issuances of the
Existing Senior Notes, net of $52.5 million investment in U.S. Government
treasury strips held as restricted cash in accordance with the terms of the
Existing Senior Notes. The Company also received $5.0 million in debt
financing in June 1997, of which $2.0 million was repaid and $3.0 million was
converted into Common Stock, respectively, upon closing
49
<PAGE>
of the Company's IPO. Concurrent with the closing of the IPO, the Company
repurchased $2.2 million of Common Stock from certain stockholders. The
remainder of financing activities for the year ended December 31, 1997 is
comprised of $11.6 million used for repayment of capital lease obligations.
For the year ended December 31, 1996, cash of approximately $48.1 million was
generated from financing activities, which reflects receipt of $48.5 million,
net of issuance costs, for Series D Convertible Preferred Stock. Also
reflected is a $5.0 million bridge loan which was later converted into Series
D Convertible Preferred Stock. Repayment of capital lease obligations for the
year ended December 31, 1996 was approximately $5.4 million. For the three
months ended March 31, 1998 net cash of approximately $30.1 million was used
in financing activities, of which $24.8 million was used for the early
retirement of capital lease obligations. For the three months ended March 31,
1997, net cash used in financing activities was $1.2 million relating to
principal payments on lease obligations.
The net cash increase for the year ended December 31, 1997 was $102.3
million as compared to a net cash decrease for the year ended December 31,
1996 of $1.4 million. At December 31, 1997, the Company had cash and cash
equivalents of approximately $120.0 million, restricted cash of $52.5 million
and working capital of $115.4 million. The net cash decrease for the three
month period ended March 31, 1998 was $56.3 million. This included a cash
payment of approximately $15.5 million associated with the acquisition of
InterNex and the related payment of $3.5 million for certain assumed
liabilities and $24.8 million used for the early retirement of debt. The net
cash decrease for the three months ended March 31, 1997 was $14.8 million. At
March 31, 1998 the Company had cash and cash equivalents of approximately
$63.7 million and working capital of $61.6 million.
The Company expects to incur additional operating losses and will rely
primarily on its available cash resources, the net proceeds from the issuance
of the Preferred Stock and financing available under a network equipment lease
agreement (that currently has no maximum borrowing limit) to meet its
anticipated cash needs for working capital and for the acquisition of capital
equipment through at least the end of 1999. However, there can be no assurance
that the Company will not require additional financing within this time frame.
The Company's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary
materially as a result of a number of factors, including those set forth below
under the caption "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing." The Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms attractive to the Company, or at all.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the FAS 128
requirements and the SEC's SAB 98 related thereto.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). The Company is required to adopt these Statements in fiscal 1998. FAS
130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to
have no impact on the Company's financial position, results of operations or
cash flows.
50
<PAGE>
BUSINESS
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company utilizes its
low/fixed latency, high-throughput network, employing its advanced network
architecture and the Internet. Concentric's service offerings for enterprises
include VPNs, DAFs, remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks. Among the current
enterprise customers are Acer, Intuit, Netscape, Microsoft and WebTV.
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access and applications hosting
services.
INDUSTRY BACKGROUND
Development of Private Networks
Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private wide-area networks ("WANs") to provide
network-based services, such as transaction processing, to their customers and
to coordinate operations between employees, suppliers and business partners.
Such private WANs were frequently customized to specific applications,
business practices and user communities. As a result, these private WANs had
the capability of providing organizations and users with tailored performance
and features, security, reliability and private-label branding.
The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.
Despite the attractive capabilities of private networks, limitations of many
private WANs have impeded or reduced the effectiveness of their use. These
networks, which traditionally have required the use of leased telephone lines
with bandwidth dedicated solely to this purpose and the purchase of vendor-
specific networking equipment, are inherently expensive to set up, operate and
maintain. Private WANs often require the development and maintenance of
proprietary software and lack cost-effective access. These aspects of
developing, deploying and maintaining such private WANs have conflicted with
the increased focus of many businesses on their core competencies, which has
prompted the outsourcing of many noncore functions. The Company believes that
many businesses have viewed as unacceptable the costs of maintaining a private
WAN infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.
Emergence of the Internet
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These
trends have led businesses increasingly to explore opportunities to provide
IP-based applications and services within their organization, and to customers
and business partners outside the enterprise.
51
<PAGE>
Need for IP-Based Private Networks
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
e-mail. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet.
Additionally, emerging applications such as IP-based voice and video
applications, multiplayer gaming and certain multimedia applications require a
network that has high performance characteristics, including low and/or fixed
latency (response time) and high throughput, as well as the ability to
customize features for specific user requirements. On the Internet, latency is
frequently relatively high and variable, making it suboptimal for these
emerging applications. Although private networks are capable of offering lower
and more stable latency levels, providers of these emerging applications also
desire a network that will offer their customers full access to the Internet.
As a result, these businesses and applications providers require a network
that combines the best features of the Internet, such as openness, ease of
access and low cost made possible by the IP standard, with the advantages of a
private network, such as high security, low/fixed latency and customized
features.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to industry analyst Forrester Research, Inc., the total
market for these services is projected to grow from $6.2 billion in 1997 to
approximately $49.7 billion in the year 2002, with approximately $27.9 billion
in the enterprise market segment and $21.8 billion in the consumer market
segment.
THE CONCENTRIC SOLUTION
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency, high-throughput network based on its advanced,
geographically dispersed ATM and frame relay backbone and the Internet.
Concentric allows enterprises to create virtual private networks providing
tailored network access, content and services to enterprise-defined end users
with higher reliability and more security than is available over the Internet.
Concentric's VPN solutions also provide the ease of access and flexibility of
public networks at a lower cost than private WANs without sacrificing
reliability or security.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 16 major metropolitan areas and 138
secondary and tertiary POPs in other cities, allowing dial-up network access
in the U.S. and Canada. In addition, the Company can provide analog dial-up,
frame relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for dedicated access facilities to enterprise customers, and
targets performance benchmarks for connection success rates, latency levels
and throughput for all of its service offerings.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 170 customer
service personnel; and (iv) the Company's technical expertise in devising
cost-effective network solutions for customers.
BUSINESS STRATEGY
The Company's objective is to become the leading supplier of value-added,
IP-based network services worldwide. In order to achieve this goal, the
Company is implementing a business strategy focused on the following key
principles:
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Rapidly Provide Cost-Effective, Tailored Network Solutions. The Company
intends to capitalize on its expertise in developing tailored VPNs to
establish a leadership position in rapidly developing, deploying and
maintaining a range of value-added network services to meet the specific needs
of its customers. The Company utilizes a set of software and hardware
technology modules as "building blocks" to offer a variety of tailored network
services on an IP-based network architecture with minimal additional
investment in engineering and rapid time to market for businesses and
consumers. These building blocks include modules for client and system
software, dedicated and remote network connectivity, tracking and billing, Web
hosting, customer support and security.
Optimize Network Utilization. Given the fixed cost nature of Concentric's
network infrastructure, the Company strives to increase total network
utilization and to optimize this utilization by targeting both daytime
business and evening-intensive consumer users to balance the network's usage
throughout a 24-hour period. Accordingly, while the Company's current
strategic focus is on providing value-added IP-based communications services
to enterprises, the Company intends to continue partnering with multichannel
distributors to acquire and maintain a base of consumer subscribers who access
the Concentric network predominantly during non-business hours.
Acquire Complementary Assets or Businesses. The Company is actively seeking
to identify and acquire assets, technologies or businesses complementary to
the Company's value-added enterprise network service strategy. Such
acquisition efforts are targeted at businesses that offer the potential to
expand the Company's revenue base, increase the scalability of the Company's
network infrastructure and value-added service offerings, as well as optimize
the utilization of the Company's network. As part of this strategy, in
February 1998 the Company acquired InterNex, a provider of network services,
colocation services and Web-hosting facilities to enterprise customers.
Employ Leveraged Marketing Through Strategic Partners. The Company actively
seeks to form alliances with certain software developers and
telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company and
that have a large installed customer base. These alliances facilitate the
cost-effective acquisition of consumer and business customers and increase
Concentric's network utilization. These marketing relationships are developed
and enhanced through the bundling of Concentric's IP-based network services
with the products and services offered by the strategic partners. These
relationships may involve customized browsers, registration services and
specialized pricing, commissions and billing programs. To date, Concentric has
established such strategic relationships with a number of companies, including
Acer, Bay Networks, Inc., Intuit, Microsoft, Netscape, PictureTel, Racal, TMI
and WebTV. See "Sales and Marketing."
Offer Next Generation Network Services. In addition to its core VPN service
offerings, the Company is continuing to expand the value-added network
services that it makes available to its customers. Towards this end, the
Company has recently introduced video conferencing and is in early stage
trials of IP-based telephony services that require the low/fixed latency
characteristics afforded by the Concentric network.
Deploy Network Services Internationally. The Company believes that its
enterprise customers increasingly will require their network solutions
providers to offer network services on a global basis. Pursuant to an
agreement with TMI, entered into in August 1996, the Company is working to
establish an international network based on Concentric's network technology
and expertise and TMIs existing telecommunications infrastructure to deliver a
range of compatible network services worldwide. TMI currently has a
telecommunications network deployed in over 40 countries worldwide. In April
1998, the Company and TMI launched Mondonet, the first international IP
network designed and built expressly to support VPN services with coverage in
more than 30 cities in 24 countries. Additionally, the Company entered into a
roaming services agreement in June 1997 with NTT PC, a leading provider of IP
services in Japan. The roaming services agreement allows Concentric customers
to use the NTT PC network to access their internet accounts in Japan and
allows members of the NTT PC network to access their internet accounts in the
United States and Canada. Additionally, the Company acquired Web- hosting
facilities in Stockholm, Sweden, Tokyo, Japan and Hong Kong in February 1998.
While
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the Company does not expect to generate significant revenue from deployment of
international network services until at least 1999, the Company believes that
the ability to deliver network solutions globally will be a key competitive
factor in its industry. The foregoing expectation is a forward-looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
in "Risk Factors--Risks Associated with International Expansion."
SERVICES
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency high-throughput network based on an advanced, geographically
dispersed ATM and frame relay backbone and the Internet.
Enterprise Solutions
For businesses, the Company has developed a set of enterprise services
including VPNs, dedicated access facilities ("DAF"), digital subscriber line
("DSL") services and Web hosting services.
Virtual Private Network Services. Concentric's custom VPN solutions enable
its customers to deploy tailored, IP-based mission-critical business
applications for internal enterprise, business-to-business and business-to-
customer data communications on the Concentric network while also affording
high-speed access to the Internet. Concentric offers its customers a secure
network on which to communicate and access information between an
organization's geographically dispersed locations; collaborate with external
groups or individuals, including customers, suppliers, and other business
partners and use the Web to access information on the Internet and communicate
with other Web users.
The Company's VPN solutions allow the enterprise customer to tailor the type
of access, services and information that various users of the VPN are afforded
according to the specific needs of the enterprise. Key benefits include rapid
implementation time, lower operating and maintenance costs, minimal capital
investment, higher quality of service overall and 24-hour network and customer
support. For example, starting in October 1995 the Company created and now
maintains the VPN used by Intuit customers using a customized version of the
Netscape Navigator browser bundled with Quicken for Windows, Quickbooks,
ProTax and TurboTax. The bundled software allows a Quicken customer to click
on an icon that launches Netscape, and takes the user directly to Quicken
Financial Network Website. On the Web page Quicken customers will find useful
financial advice, information from Intuit's bank and financial institution
partners, answers to commonly asked technical questions and tips on how to tap
the full potential of Intuit's financial products. See "--Key Customer
Applications."
In addition to the custom VPNs that Concentric has developed and delivered,
the following three distinct VPN products are now offered by the Company:
Concentric CustomLink. Concentric CustomLink provides a complete,
private-labeled dial-up VPN service for customers. In addition, CustomLink
permits the customer to segment its users, and apply various levels of
services, such as Web access, e-mail, and file transfer protocol ("FTP") to
each customer group. CustomLink includes dial-up network access, customized
and customer-branded client software, and private labeled help desk
services. The dial-up network access offerings include local access, toll-
free 800 number access, and a unique connection service, PremierConnect,
which provides important customers with connectivity to the VPN, even if
local access numbers are busy.
Enterprise VPN. The Company's Enterprise VPN service includes security
hardware and software, high speed network access, network connectivity,
customer premise routing equipment and customer support services. The
Enterprise VPN service is targeted at customers seeking to create a secure,
outsourced WAN for intranet and extranet applications. Installation support
for the customer premise located routing and security equipment is also
provided. Concentric can also optionally provide management services for
firewall and packet encryption equipment if desired by the customer.
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Concentric RemoteLink. The Company's remote access service, marketed as
Concentric RemoteLink, is targeted at businesses that have employees in
remote locations. RemoteLink offers customers the potential to
significantly reduce the high costs of telecommunications charges and user
support associated with building, deploying, and maintaining an internal
remote access infrastructure. RemoteLink enables an enterprise's
salespeople and other mobile employees, telecommuters and business partners
to dial into an enterprise's corporate network resources and use them as if
they were connected locally, thus increasing potential productivity and
allowing for information to be available on a real- time basis across the
enterprise. Concentric's RemoteLink is designed to be highly customizable
and provides the ability to interface with existing company network
infrastructure.
Concentric also performs around-the-clock monitoring of network performance
and enables its customers to monitor their network as well through the
Company's proprietary ConcentricView software. ConcentricView is a Web-based
network management tool which allows a customer to monitor usage on a call-by-
call basis and performance of that portion of the Concentric network bandwidth
supporting the customer's applications.
Dedicated Access Facilities. In January 1997, the Company began offering
DAFs as a stand-alone product targeted at businesses that desire single or
multipoint high-speed, dial-up and/or dedicated connections to distributed
locations such as regional offices, warehouses, manufacturing facilities
and/or to the Internet. DAF products are primarily targeted at providing
intranet connectivity amongst distributed enterprise locations with the
additional benefit of Internet access if desired by the customer. The Company
provides a full range of connectivity options, allowing the customer to order
the appropriate amount of bandwidth to meet its networking requirements. In
addition, Concentric offers its DAF customers a guarantee on the quality of
service and performance of these facilities. Furthermore, Concentric believes
it is the only network service provider to bill customers based on average
usage levels rather than peak usage levels.
Concentric has six offerings in its dedicated access product line:
FullChannel T-1, FullChannel T-1 Protected, FlexChannel and LECFrame Relay, as
well as FullChannel and FlexChannel offerings at DS3 (T-3) bandwidth options
which support up to 45 Mbps.
FullChannel T-1 and DS3 (T-3) pricing is based on a one time set-up fee and
average utilization pricing. The customer's usage is measured at five-minute
intervals throughout the month, and the average of all of those measurements
is used to determine the customer's bill at the end of the month. The one time
set-up fee for FullChannel T-1 service is $3,000 and the monthly fee ranges
from $1,095 to $2,695 depending on usage. The one time set-up fee for
FullChannel T-3 service is $5,000 and the monthly fee ranges from $6,000 to
$40,500 depending on usage. FullChannel T-1 and T-3 pricing is the appropriate
choice for those customers who have fluctuating and/or uncertain bandwidth
consumption patterns.
FullChannel T-1 Protected gives a customer a fixed price for a full 1.5
megabits of bandwidth. The one time set-up fee is $3,000 and the and the
monthly fee is set at $2,095. This is an economical choice for those customers
who recognize in advance that their bandwidth throughput requirements will
equal T-1 levels.
FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 or T-3 for a fixed monthly fee. The set up fee is the same as
for FullChannel pricing but the monthly fee ranges from $895 to $1,895 for
FlexChannel T-1 service and from $6,000 to 25,500 for FlexChannel T-3 pricing.
FlexChannel T-1 and T-3 pricing is the appropriate choice for the customers
who know that their bandwidth requirements are going to be consistently less
than a full T-1 or T-3.
LECFrame Relay is based on various LECs' Frame Relay facilities. Although
Concentric does not offer service level guarantees over LECFrame Relay,
Concentric does guarantee the committed information rate. This offering gives
a lower cost, lower performance network service for those customers for whom
performance is less imperative. Concentric charges a one time set-up fee of
$2,000 LECFrame Relay services and monthly fees ranging from $395 to $1,095
depending on usage.
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Digital Subscriber Lines. In December 1997, Concentric began offering
Internet and intranet connectivity using DSL technology. DSL and its variants
are a new dedicated access technology being deployed by telephone companies
that allows high speed digital service over regular telephone lines. The
Company has formed relationships with a number of Competitive Local Exchange
Carriers ("CLECs"), including Covad Communications Company and Northpoint
Communications, to expand its DSL service area. Concentric's DSL service
offerings are currently available in Northern California through such CLEC
relationships. The Company's DSL service offerings include a wide range of
dedicated access speeds, from 144Kbps to 1.1Mbps symmetric DSL, as well as
1.5Mbps/38Kbps asymmetric DSL.
Concentric DSL services are targeted at the consumer, telecommuter, and
small-to-medium sized business markets. The "dedicated access feature" of DSL
services combined with its high speed and low flat rate pricing are designed
to appeal to the large installed base of ISDN users. Pricing for the service
is low relative to traditional dedicated access services, making it attractive
to medium sized businesses, while at the same time broadening the market to
reach small businesses who previously could not justify the expense of
dedicated Internet service.
Pricing is based on the bandwidth of the DSL circuit, and is a flat rate
monthly fee ranging from $149 to $399 depending on the service speed.
Concentric provides complete installation services including all the customer
premise equipment necessary to provide the DSL service at fees ranging from
$325 to $725.
Web Hosting Services. The Company's Web hosting services were introduced in
March 1997, and are targeted at businesses that are implementing high-
performance intranet, streaming video, Web, e-mail, gaming, chat or other
types of services. Concentric offers a wide range of hosting solutions
structured to meet the needs of small businesses to very large enterprises.
The Company's high-end hosting capabilities were enhanced by the acquisition
of five domestic data centers and three international hosting facilities. By
outsourcing its Web hosting requirements to Concentric, an enterprise can
reduce costs while increasing reliability and performance of its servers.
Web hosting consists of providing and/or managing the necessary equipment to
allow companies to operate Web sites. The components of Web hosting are the
server; a workstation or PC that runs the Website; the facility to host the
server; high speed Internet access for hosted servers; server and power backup
to ensure 24 hour functionality; and maintenance to ensure ongoing operation
of the server. Concentric also bundles Web hosting software and network
services to provide businesses with complete Internet presence solutions.
In February 1998 Concentric announced the availability of ConcentricHost
Server Solutions, a line of Web hosting services designed for companies who
require outsourced maintenance, management, bandwidth and housing for their
internet or extranet Web servers. Unlike colocation services that simply
supply rack space and bandwidth, ConcentricHost Server Solutions provide high-
performance Internet access from state-of-the-art data centers, skilled
technicians and maintenance programs that monitor servers 24 hours a day,
seven days a week, and scalability to address the growing networking needs of
businesses of all sizes.
For reliable, high-performance flow of traffic between customer's Web
servers and worldwide networks, Concentric has combined public peering and
private peering arrangements to provide improved performance to users.
Concentric Network currently operates data centers in Santa Clara, Cupertino,
San Francisco and Los Angeles, California, Chicago, Illinois and Washington,
D.C., along with hosting facilities in Stockholm, Hong Kong and Tokyo. Each
Concentric Network data center is connected via multiple DS3 (45Mbps) or OC3
(155Mbps) high-speed links to geographically dispersed points in its private
ATM backbone. This network architecture provides diversity and redundancy to
user's network systems while minimizing user cost. See""--The Concentric
Network."
In addition to state-of-the-art hosting facilities, Concentric provides
industry-leading server management tools. ConcentricHost Server Solutions
offer a suite of advanced server support and management services, called
Remote Hands, to monitor performance of user's business-critical applications.
Remote Hands features include: power cycling equipment; running diagnostic
equipment; providing diagnostic displays; upgrading equipment; file system
back-up; and upgrading drive capacity.
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ConcentricHost Server Solutions range in price from $550 to $4,400 a month,
depending on required bandwidth and rack space. Remote Hands options range in
price from basic services included at no cost with colocation service to more
advanced services ranging in price from $195 to $250 an hour. A range of
Remote Hands fixed-fee service packages, based on specific customer needs, are
also available with pricing options starting at $1,250 a month.
In February 1998, Concentric announced an extension of its ConcentricHost
line of hosting products, adding four new service packages that offer small
and mid-sized businesses flexible, tailored solutions to meet their Web
hosting needs. ConcentricHost Internet Suite(TM) is a complete, easy-to-use
service designed to cost effectively provide for all of the Internet needs of
a business in one account. Packages range from $59.95 to $199.95 a month
depending on the range of e-mail accounts, disk space and bandwidth provided
to the customer. These packages also offer the user shared security and full
domain names and are managed from a user-friendly Web interface. Other
features include 24 hours a day, seven days a week customer support and built-
in self-administration tools that allow the user to change options and analyze
activity on-line in near real time. For instance, users can increase bandwidth
allotments, create and delete e-mail accounts, and add Web space on-line. The
administration system also notifies users via e-mail of potential resource
consumption problems, such as being low on disk space or near the monthly
allocation of Internet bandwidth, allowing modifications to be made on-demand.
ConcentricHost at Netscape. Effective April 1998, the Company modified its
strategic relationship with Netscape to market the ConcentricHost shared
server product within the Small Business Source area of Netscape's Website.
Through this relationship, Netscape exclusively markets ConcentricHost as the
preferred Small Business Source hosting service on the Netscape site. The
Netscape Small Business Source is an online service launched in April 1998
that brings a wide variety of small business products, services and
information into one location on the Internet, the Netscape site. The current
agreement between Netscape and Concentric supersedes the June 1997 agreements
which were entered into to market an online virtual office product. The new
agreement is intended to leverage Concentric's focus on public and private web
hosting services through its ConcentricHost line of hosting products.
ConcentricHost at Netscape is a co-branded suite of Internet services which
combines Internet access, multiple e-mail accounts and public/private web
hosting. ConcentricHost at Netscape broadens the distribution opportunity for
Concentric's web hosting services and provides flexible and scalable Internet
services for the small business market segment.
Concentric IP Video Services. Concentric offers enterprise-quality IP-based
video-conferencing services. Created in partnership with PictureTel,
Concentric Video IP services offer high quality video transport and value-
added services along with the flexibility and cost-effectiveness expected of
IP networks. Concentric's network offers the performance and security required
to run H.323-native desktop and room system video-conferencing over a WAN.
Concentric IP Voice Services. Concentric offers IP-based international long-
distance telephone services to businesses and consumers through the Interline
consortium. The Interline consortium is creating a global network of service
providers who will offer international long-distance phone services over IP-
based private networks and the Internet using regular telephones.
Consumer Services
Concentric provides its individual and small office/home office ("SOHO")
customers with a broad range of Internet access options and Web hosting e-
mail, chat, File Transfer Protocol ("FTP"), Gopher and online shareware
services. Users can choose from local and long distance direct dial 800-number
and telnet services. Concentric offers the Microsoft Internet Explorer or
browser to its users when they sign up for dial-up or 800-number service.
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INTERNET ACCESS PRICING
<TABLE>
<CAPTION>
PLAN MONTHLY FEE ADDITIONAL TIME
---- ----------- ---------------
<S> <C> <C>
Starter Plan............ $ 7.95 $1.95/hour after 5 hours
Standard Plan........... $19.95 No charges for additional time. Unlimited
active access for one monthly fee.
800-number Plan......... $10.00 $5/hour after 2 hours
Inbound Internet Plan... $10.00 No charges for additional time. Unlimited
active access for one monthly fee.
</TABLE>
The Company also offers consumers value-added services, including a
collection of premium products targeted to vertical segments such as the
family and SOHO market. This includes the upselling of discounted products and
services in such areas as retail products, software, hardware, telephony
services with such partners as Amazon.com, Inc., QuadraCom, LLC, TuneUp.com,
Connected OnLine Backup and Classifieds 2000. Such arrangements not only
provide an additional monthly revenue stream but also increase customer
satisfaction and retention. Additional value-added products and services being
reviewed by the Company for potential introduction include premium service,
customer support, education research, virus protection, and faxing services.
CUSTOMERS
The following is a representative list of the Company's customers during the
last 12 months.
Acer America Corporation Netscape Communications Corporation
Ameritech Services, Inc. Network Associates, Inc.
AT&T Corporation NTT PC Communications, Inc.
Bascom Global Internet OnCommand Corporation
Services, Inc. Oracle Corporation
Bay Networks, Inc. OzeMail Interline Pty, Ltd.
Bloomberg, L.P. Peapod L.P.
Connected Corporation Philips Mobile Computing
Corel Corporation PictureTel Corporation
Electronic Data Systems PointCast, Inc.
Corporation Rosemount Inc.
Excite, Inc. SCP Communications
Fiberlane Communications, SMC Communications LLC
Inc. Scopus Technology, Inc.
First Data Corporation Sega of America, Incorporated
Fishking Processors, Inc. Tachyon Technology Corporation
Graybar Electric Company, 3Com, Inc.
Inc. Toshiba America Information Systems
Hewlett-Packard Company USWeb Corporation
Imagesoft Technologies, Inc. WebTV Networks, Inc.
Infogear Technology WorldCom, Inc.
Corporation You Bet! On-Line Entertainment
Intuit, Inc. Ziff-Davis Publishing Co.
Investools, Inc.
Iomega Corporation
Kleiner, Perkins Caufield, &
Byers
Lycos, Inc.
McAfee Associates Inc.
Microsoft Corporation
During the year ended December 31, 1996 and 1997, revenue from WebTV
accounted for 10.1% and 33.4%, respectively, of the Company's revenue and
approximately 32.7% and 30.8% of revenue for the three months ended March 31,
1997 and 1998, respectively. See "Risk Factors--Customer Concentration."
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The Company aggressively pursues business alliances with a variety of
companies. Through these partners, the Company seeks to expand its enterprise
and consumer customer base and increase the 24 hour utilization of the
Concentric network. The following is a summary of selected strategic
relationships:
Intuit. Intuit, a financial software and Web-based services company, is a
market leader in personal and small business financial software. Intuit views
its Websites as a key channel for communicating with its customers, and as a
vehicle to provide personal finance, investment and tax related financial
information. Concentric and Intuit partnered in October 1995 to launch
integrated Internet access to the Quicken Financial Network and the Internet.
The Internet access capability included both a virtual private network service
designed to provide Intuit customers subsidized access to select Intuit Web
sites and the ability to upgrade to full access to the Internet. Intuit has
bundled tailored versions of the Netscape Navigator browser in its fiscal year
1996 and 1997 releases and the Microsoft Explorer browser in its 1998 releases
of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed and
implemented tailored registration and network access software to provide
Intuit customers with seamless, subsidized access to select Intuit Web sites.
Concentric provides an easy, Web- based upgrade process for customers desiring
full Internet access and e-mail services. Customers are billed for network
time through Concentric's billing systems. In addition, Concentric provides
private-labeled customer service to Intuit customers with full network access
on a twenty-four hour a day, seven day a week basis. Most recently, Intuit
provided subsidized full access Internet accounts in the 1998 releases of
Quicken, Quickbooks, TurboTax and ProTax, along with the option for customers
to upgrade to other full Internet access plans. Intuit uses Concentric's high
performance network to enable customers to send electronic tax filings and
software product registration.
WebTV Networks Inc. WebTV provides the world's first high-quality Internet
solution for television. In the fall of 1996, WebTV's licensees, Sony
Electronics, Inc. and Philips Electronics introduced a plug-and-play set-top
box that enables Internet browsing from a television. As part of the WebTV
service, Concentric and WebTV jointly designed and implemented a national
virtual private dial-up network solution to connect WebTV Network(TM) users to
the Internet, utilizing Concentric's network. The WebTV Internet terminal,
combined with the virtual private network, allows anyone to browse the
Internet from the comfort of their living room.
PictureTel Corporation. PictureTel, a leading provider of video conferencing
products, and Concentric have signed a joint development agreement which
specifies both parties' intent to jointly develop products and services to
enable PictureTel desktop and room video conferencing systems to communicate
over the Concentric network. Both Concentric and PictureTel currently have
trial systems installed and operating over the Concentric network. Preliminary
results demonstrate that the low/fixed latency and high throughput of the
Concentric network deliver superior quality for both desktop and room video
conferencing over IP-routed networks.
OnCommand Corp. OnCommand provides in-room TV services to guests at hotels
worldwide. OnCommand replaced its low-speed private-line network with a
Concentric Enterprise Virtual Private Network ("EVPN") that links its 12
regional offices with the San Jose, California headquarters. The EVPN allows
OnCommand to provide faster service to hotels, enabling agents to have instant
access to technical data, database information, contracts and customer
inquiries.
THE CONCENTRIC NETWORK
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, 16 SuperPOPs in many major metropolitan areas plus a
total of 138 secondary and tertiary POPs in other cities, allowing local dial-
up access to the network to users in the U.S. and Canada. In addition, the
Company can provide analog dial-up, frame relay, fractional T-1, T-1 and DS3
access to the network. The Concentric network supports 28.8 Kbps (V.34) modems
and Concentric currently plans to complete development of 56.6 Kbps modem
access in 1998. This planned deployment is a forward looking statement and is
subject to a number of risks and uncertainties and the actual results could
differ materially as a result of a number of factors including those set forth
under the caption "Factors Affecting Operating Results--Dependence on New an
Enhanced Services" and "--Dependence on Network Infrastructure."
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The Concentric network is managed via a centralized network control center
in St. Louis, Missouri. Two data centers (located in Bay City, Michigan and
Cupertino, California) house the servers that support log on/authentication,
billing, e-mail, Internet access, Web services and other network services. In
February 1998, the Company acquired InterNex, a provider of network services,
colocation services and Web-hosting facilities to enterprise customers. With
the acquisition of InterNex, the Company has expanded its Internet
connectivity strategy to include not only private transit with MCI, Sprint and
UUNet, but also private peering with other network providers as well as public
peering with multiple smaller internet service providers. The Company's new
hybrid private/public Internet connectivity strategy is designed to allow
Concentric to offer superior Internet connectivity performance by avoiding
congestion (packet loss) when connecting to certain network providers at many
public peering points. In connection with the InterNex transaction, the
Company acquired new data centers in Santa Clara, California, San Francisco,
California, Los Angeles, California, Chicago, Illinois and Washington, D.C.,
and new hosting facilities in Stockholm, Sweden, Tokyo, Japan and Hong Kong.
See "Factors Affecting Operating Results--Risks Associated With Acquisitions"
and "--Dependence on Network Infrastructure."
The Concentric SuperPOPs are designed to support both dial-up and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.
DAFs and DSLs from customer locations in a region are terminated in the
SuperPOP as well. Typically, Fractional T-1, T-1, and T-3 circuits are
terminated directly into SuperPOP router equipment (via CSU/DSUs) or via a
channelized DS3 connected to a competitive access provider. Frame access is
terminated via aggregated LEC Frame Access circuit(s). DSL is terminated via a
multiplexed DS-3 connection to a LEC/CLEC metropolitan area DSL network. Both
dial-up and dedicated traffic is then aggregated by the routers/switches in
the SuperPOP and directed to the Concentric ATM backbone via one or more T-3
ATM links.
Some applications, such as Web browsing and file transfer require high
throughput, but can tolerate moderate and variable latency, while others, such
as mission-critical business applications and voice and video conferencing,
require low/fixed latency. Still others, such as transaction processing may
require high levels of security and are indifferent to latency levels.
Traditional static network access technologies and backbone architectures
cannot cost-effectively manage these varied requirements in a single network.
The Concentric network has been designed to solve this problem by
incorporating software intelligence in both its access and backbone
technologies to adapt the network's connection setup, security and data
transfer properties to the nature of the user's application requirements on a
call-by-call or service-by-service basis.
The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features colocation of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient ATM/frame relay backbone, dual data processing centers, and
redundancy within data centers to substantially enhance its uptime
performance.
Network managers, customer service, and technical support staff require near
real-time access to information about the performance and quality of their
networks. In traditional private networks, this information is provided by
network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
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customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to enterprise customers to allow a customer's network manager to
monitor network performance and quality and to adequately support inquiries
for help from their users. Web browsers and file transfer tools are used to
provide access to much of this information. In some cases, custom integration
of Concentric's network management and trouble tracking/reporting systems will
be provided to customers.
RELATIONSHIP WITH WILLIAMS COMMUNICATIONS, INC.
Concurrent with the closing of the Company's initial public offering of
common stock in August 1997 (the "IPO"), the Company entered into a strategic
relationship with Williams Communications Group, Inc., a subsidiary of the
Williams Companies, Inc. (together, "Williams"). Williams provides a full
range of enterprise network solutions, communications services and advanced
applications to businesses, including equipment and services for data, voice
and video; international satellite and fiber-optic transmission services;
telemarketing services; and, multipoint video- and audio-conferencing. The
relationship with Williams includes an equity investment in the Company by
Williams of approximately $15.0 million which closed in August 1997, and the
execution of a number of strategic business agreements. In exchange for the
approximately $15.0 million investment by Williams, the Company issued and
sold 1,249,236 shares of common stock to Williams at the initial per share
price of $12.00 in the Company's IPO.
As part of the strategic business relationship, Williams has made available,
and the Company has agreed to purchase from Williams, a total of $21.2 million
in telecommunications equipment and services through the five year period
ending in 2002. At the election of Williams, $2.0 million of the minimum
purchase commitment may be paid by the issuance of Common Stock by the Company
at the then-current fair market value. Additionally, Williams and the Company
have entered into a reseller agreement and an agency agreement through which
Williams is able to sell the Company's products and services for an initial
term of two years. The agreements with Williams provide that, in the event of
a change of control of the Company, Williams will have a right to purchase a
nonexclusive, perpetual license to use, distribute and modify all of the
intellectual property of the Company, including any copyright, patent,
license, trademark or trade secret which the Company has or obtains the right
to transfer. Finally, the parties also agreed to amend and restate the
Employee Services and Staffing Agreement between the Company and CTI, a
wholly-owned subsidiary of Williams, and to amend the Co-location Services
Agreement between the Company and CTI, to among other things, extend the terms
of such agreements to December 31, 2000 and to forego a $1.1 million
acquisition fee to be paid by CTI to the Company as a result of the
acquisition of CTI by Williams in 1996. In exchange for the waiver of the
acquisition fee, Williams agreed to issue $1.1 million in telecommunications
services credits to the Company.
SALES AND MARKETING
The Company focuses on marketing its services to two distinct market
segments: enterprise and consumer. By attracting enterprise customers who use
the network primarily during the daytime, and consumer customers who use the
network primarily at night, the Company is able to more fully utilize its
network infrastructure by having some customers online during the day and the
others, using the same modem pools, online during the night. The Company has
developed a multi-tiered sales strategy consisting of leveraged third party
distribution channels, inbound and outbound telesales, value-added resellers
and direct sales. As of April 30, 1998, the Company employed 106 persons in
sales and marketing.
Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's network service is
bundled with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft
Office 97 and with WebTV and Sega Saturn Internet access devices.
Additionally, the Company is one of the Internet services providers listed on
the Netscape Navigator and Microsoft Internet Explorer browser registration
servers.
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Telesales. The Company uses an inbound telesales group to answer calls from
potential consumers/ subscribers and to sign up customers. Inbound telesales
representatives also proactively upsell premium products and services. The
Company also uses an outbound telesales group to sell DAFs and high-end
hosting products to small and medium-sized businesses. Both the inbound and
outbound telesales groups forward leads to the direct sales force when
appropriate.
Value-Added Resellers. The Company has also begun to establish sales
channels through value-added resellers. These resellers are companies that
sell equipment or other components for full-service network solutions to
medium and large businesses. Value-added resellers such as Racal, which
employs more than 500 direct sales, sales-support and network services people,
are compensated for selling Concentric's enterprise service offerings in
conjunction with their other products. These relationships enable the VARs to
provide more comprehensive solutions to their customers while affording the
Company the benefit of the VAR's large sales force without incurring the costs
of maintaining a large sales force of its own.
Direct Sales Force. For large and complex enterprise solutions and to
acquire, support and retain distribution channel partners, the Company employs
20 direct sales people located in Cupertino and Orange County, California,
Dallas, Texas, Washington, D.C., the New York metropolitan area, Atlanta,
Georgia, Chicago, Illinois and Boston, Massachusetts to provide national
direct sales coverage. The Company's direct sales force is supported by inside
sales/account managers and systems engineers.
Concentric markets its enterprise services to information service ("IS")
professionals. In addition, the Company uses print advertising in targeted
industry publications to build awareness and acquire leads for its VARs and
its direct sales team.
In the consumer market, the Company focuses on direct mail to targeted
audiences; establishment of customer referral programs; and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented on-line programs, such as a Website
"home" where they can learn how to use the service, how to use the Internet,
and how to find information quickly, designed to increase customer retention.
The Company is also implementing programs to sell additional products and
services to its consumer customers. Additionally, the Company is generating
advertising revenue on its growing Website traffic in direct ad banner
placements as well as in shared revenue relationships with content partners
such as Excite, Inc., Lycos, Inc., and Classifieds 2000, Inc.
The Company employs public relations personnel in-house and works with an
outside public relations agency to provide broad coverage in network computer
and vertical industry publications. The Company participates in industry trade
shows based on the size and vertical makeup of the trade show audience. Shows
attended in 1997 include E3 and NetWorld + InterOp. The Company also
participates in trade shows with its strategic marketing partners to promote
the sale of Concentric products and services.
CUSTOMER SUPPORT
Concentric believes that a high level of customer support is critical to
attracting and retaining its enterprise and consumer customers. The Company
maintains a customer support call center at its Saginaw, Michigan facility.
Concentric offers several levels of customer support all of which are
available 24 hours per day, seven days per week. The basic level of customer
support includes support for customers on installing and using their software,
customer communications and customer training. Premier level service programs
guarantee an exceptional performance standard, offer supplemental support
training, and provide monthly reports on operations. Private label support
gives businesses a premier level of support provided by their own customer
service team who answer calls with that customer's company name. Customer
support is provided by e-mail, telephone, Website and online chat. As of April
30, 1998, the Company employed 170 persons in customer support.
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COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of network infrastructure; technical expertise and functionality, performance
and quality of services; customization; ease of access to and navigation of
the Internet; the pricing policies of its competitors; the variety of
services; the timing of introductions of new services by the Company and its
competitors; customer support; the Company's ability to support industry
standards; and industry and general economic trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, Sprint, WorldCom, MCI, RBOCs and various cable companies; (ii) online
services providers, such as America Online, CompuServe, Microsoft's MSN, and
Prodigy; (iii) ISPs, such as BBN, which has been acquired by GTE, NETCOM, PSI
Net, and other national and regional providers; (iv) nonprofit or education
Internet connectivity providers; and (v) Web server farms such as Internet
Direct and Exodus. Many of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
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 than can the Company. In addition, various
organizations, including certain of those identified above, have entered into
or are forming joint ventures or consortiums to provide services similar to
those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online, BBN and
PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with VPN
and consumer network services could place the Company at a competitive
disadvantage. Certain companies are also exploring the possibility of
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellite
technology and by wireless cable.
As a result of increased competition in the industry and vertical and
horizontal integration in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For
example, certain of the Company's competitors that are telecommunications
companies may be able to provide customers with reduced communications costs
in connection with their Internet access services or private network services,
reducing the overall cost of their solutions and significantly increasing
price pressures on the Company. There can be no assurance that the Company
will be able to offset the effects of any such price reductions with an
increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. In addition, the Company believes that
the Internet access and online services businesses are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in these industries and, potentially, the virtual private
networks industry. Increased price or other competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully. See "Risk Factors--Competition,"
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"--Risks of Growth and Expansion," "--Future Capital Needs; Uncertainty of
Additional Financing" and""--Competition."
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") currently does not regulate
value-added network software or computer equipment related services that
transport data or voice messages over telecommunication facilities. The
Company provides value-added IP-based network services, in part, through data
transmissions over public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for wireline
communications. Operators of these types of value-added networks that provide
access to regulated transmission facilities only as part of a data services
package are currently excluded from regulations that apply to
"telecommunications carrier" and as such the Company is not currently subject
to direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, in the future the
Company could become subject to regulation by the FCC or another regulatory
agency as a provider of basic telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. The Company operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
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will not be successful. In addition, participants in the Company's industry
also rely upon trade secret law. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that licenses could be obtained on commercially reasonable terms, if
at all, or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain the necessary licenses or other rights could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
As of April 30, 1998, Concentric had 402 employees and 56 independent
contractors, including 106 persons in sales and marketing, 142 persons in
network operations and development, 170 in customer support and 40 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, and retain
such personnel in the future. None of the Company's employees is represented
by a labor union, and management believes its employee relations are good.
LEGAL PROCEEDINGS
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana, the parent corporation of Sattel, alleging
securities fraud related to plaintiffs' purchase of shares of Diana Common
Stock in reliance upon allegedly misleading statements made by defendants,
Diana, Sattel and certain of their respective affiliates, officers and
directors. Concentric was named as a defendant in the complaint in connection
with certain statements made by Diana and officers of Diana related to
Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The plaintiffs seek unspecified compensatory damages. A motion by
the Company to dismiss the complaint was denied, and the court has allowed the
action to proceed against the Company. A trial date has not yet been
determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcome is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations. See "Risk Factors--Legal Proceedings" and
Note 11 of Notes to Financial Statements.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information as of March 31, 1998,
with respect to the executive officers and directors of the Company, as well
as certain members of its senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry R. Nothhaft..... 54 Chairman, President, Chief Executive Officer and
Director
John K. Peters........ 50 Executive Vice President and General Manager,
Network Services Division
Michael F. Anthofer... 46 Senior Vice President and Chief Financial Officer
Mark W. Fisher........ 38 Vice President of Corporate Marketing
William C. Etheredge.. 51 Senior Vice President of Sales
Eileen A. Curtis...... 49 Vice President of Customer Relations
George D. Carr........ 53 Vice President of Field Sales
James L. Isaacs....... 37 Vice President of Business Development
Warren A. Smith....... 47 Vice President of Software Engineering
Scott G. Eagle........ 39 Vice President of Consumer Marketing
Donald C. Schutt...... 53 Vice President of International Services
Vinod Khosla(2)....... 43 Director
Gordon Martin(1)...... 38 Director
Franco Regis(1)....... 42 Director
Gary E. Rieschel(2)... 42 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and was appointed a Director of the Company in August 1995
and Chairman of the Board in January 1998. From 1989 to August 1994, Mr.
Nothhaft was President, Chief Executive Officer and a Director of David
Systems, Inc. ("David Systems"), a networking company. From 1983 to 1989, Mr.
Nothhaft held various positions with DSC Communications Corporation ("DSC"),
including President of the Business Network Systems Group, President of the
Digital Switch Corporation subsidiary, Senior Vice President of Marketing and
a Corporate Director of DSC. From 1979 to 1983, Mr. Nothhaft was Vice
President of Domestic Marketing and Vice President of Sales for GTE Telenet
Communications Corporation (now Sprint). Mr. Nothhaft has an M.B.A. in
Information Systems Technology from George Washington University and a B.S.
from the U.S. Naval Academy, and is a former officer in the U.S. Marine Corps.
John K. Peters was named Executive Vice President and General Manager,
Network Services Division in June 1995. From 1993 to August 1995, Mr. Peters
served as President of Venture Development Consulting, a consulting firm
specializing in new communications and information services. From 1988 to
1993, Mr. Peters was Vice President and Chief Operating Officer of Pacific
Bell Information Services, Inc. Prior to that, Mr. Peters spent three years as
Vice President of Application Services for Telestream Corporation. In 1981,
Mr. Peters co-founded Integrated Office Systems, Inc., a communications and
information systems company. From 1976 to 1980, Mr. Peters was Vice President
of Advanced Network Services for GTE Telenet Communications
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Corporation. Mr. Peters has an M.B.A. from Stanford Graduate School of
Business and a B.S. in Statistics from Stanford University.
Michael F. Anthofer joined the Company in January 1996 as Vice President and
Chief Financial Officer and became a Senior Vice President in November 1996.
From January 1991 to December 1995, Mr. Anthofer served as an Executive Vice
President and Chief Financial Officer, as well as a member of the Board of
Directors, of Shared Resource Exchange, Inc., a privately held digital
switching platform and PBX supplier. Prior to 1991, Mr. Anthofer held various
executive positions at DSC including Vice President, Corporate Business
Planning, Vice President, Business Network Group and Vice President, Network
Products Group. Mr. Anthofer has an M.B.A. and a B.S. from the University of
California, Berkeley.
Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing. From July 1996 to June 1997, Mr. Fisher was General
Manager and Vice President, Marketing of Pacific Bell Internet Services, a
wholly owned subsidiary of Pacific Bell. From June 1995 to August 1996, Mr.
Fisher was Vice President, Marketing of Pacific Bell Internet Services. From
1989 to May 1995, Mr. Fisher held various data product marketing and data
center operations positions at Pacific Bell. Mr. Fisher has an M.B.A. from the
University of California, Berkeley and a B.S. in mechanical engineering from
the U.S. Naval Academy.
William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. from Bowling Green University and a B.A. from
Westminster College.
Eileen A. Curtis became Customer Relations Manager in January 1995, Director
of Customer Relations in September 1995 and Vice President, Customer Relations
in November 1996. From August 1987 to July 1993, Ms. Curtis was employed by
Cox Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has an MBA and a B.S. from Central Michigan
University.
George D. Carr became Vice President of Sales in September 1995. From June
1993 to June 1995, Mr. Carr was Vice President of Sales and Marketing of David
Systems/ChipCom. From June 1989 to June 1993, Mr. Carr was VP of Operations
and International Sales of David Systems. From December 1983 to June 1989,
Mr. Carr was VP of Operations and Service of David Systems. Mr. Carr has a
B.A. from Loyola Marymount.
James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management and in November 1997 he was appointed Vice President of Business
Development. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. from the University of California, Berkeley
and an A.B. from Stanford University.
Warren A. Smith joined the Company in April 1996 as Vice President, Software
Engineering. From October 1992 to April 1996, Mr. Smith was the Director of
Engineering at NetManage, Inc., a software company. From July 1987 to July
1992, Mr. Smith was the Director of Distributed Computing Technology for Sun
Microsystems, Inc. From March 1983 to July 1987, Mr. Smith was the Western
Regional Manager of SEI Information Technology an engineering consulting firm.
Mr. Smith has a B.S. from California State University, Sacramento.
Scott G. Eagle joined the Company in March 1996 as Vice President of
Consumer Marketing. From November 1993 to February 1996, Mr. Eagle was the
Vice President, Strategic Marketing Development for MFS
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Intelenet, Inc., a start-up division of MFS Communications Company, Inc. From
February 1989 to November 1993, Mr. Eagle was the Vice President of Marketing
for the Woodbridge Group, a marketer of consumer package goods. Prior to
February 1989, Mr. Eagle served in various marketing management positions with
The Procter & Gamble Company. Mr. Eagle has a B.S. from the University of
Pennsylvania, Wharton School of Business.
Donald C. Schutt joined the Company in February 1994 as Vice President of
Sales and Marketing and was appointed Chief Operations Officer later that
year. Mr. Schutt was named Vice President and General Manager, Bay City
Operations in August 1995. His title was changed to Vice President of Michigan
Operations in March 1996 and to Vice President of International Services in
November 1997. From 1964 to 1985, Mr. Schutt held various management positions
with General Motors, after which Mr. Schutt served until 1989 as Vice
President for Sales and Marketing for Gentex Corporation. From 1989 to 1993,
Mr. Schutt was President and Chief Executive Officer of AMPM, Inc., a full-
service advertising agency, and retains a 54 percent interest in such entity.
Mr. Schutt has a B.S. in Marketing from Ferris University.
Vinod Khosla has been a Director of the Company since April 1995. Mr. Khosla
has been a General Partner with the venture capital firm of Kleiner Perkins
Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-
founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Excite, Inc.,
PictureTel, The 3DO Company, and Spectrum Holobyte. He has a B.S.E. from the
Indian Institute of Technology in New Delhi, an M.S.E. from Carnegie Mellon
University, and an M.B.A. from the Stanford Graduate School of Business.
Gordon Martin has been a director of the Company since October 1997. Mr.
Martin is vice president of strategic marketing for Williams Communications
Group, Inc. Williams, a subsidiary of the Williams Companies, Inc. Mr. Martin
joined Williams Communications Group, Inc. in October 1987 as manager of
interexchange carrier sales for the network division. He was promoted to
director of product marketing in January 1993. From February 1995 to May 1995,
he served as General Manager of Digital Frontiers LLC, a division of Williams.
In June 1995, he returned to Williams as Vice President, Marketing until he
was promoted to his current position in January 1997. Mr. Martin has a
bachelor's degree in accounting and an M.B.A. from Oral Roberts University.
Franco Regis has been a Director of the Company since October 1996. Since
1994, Mr. Regis has been a Director of Business Development and Strategic
Planning at Telecom Italia, SpA, the telephone operating company of Italy.
From 1992 to 1994, Mr. Regis was a Director of Budget and Control for the
business division of Telecom Italia. Mr. Regis has an engineering degree from
the Rome State University.
Gary E. Rieschel has been a Director of the Company since October 1996. Mr.
Rieschel is a Senior Vice President at SOFTBANK Holdings, having joined that
company in January 1996. Mr. Rieschel was Vice President for N-Cube
Corporation from August 1994 through December 1995. He was Sales Director at
Cisco Systems, Inc. from July 1993 through October 1994. Prior to this, Mr.
Rieschel was a General Manager and Sales Director at Sequent Computer for over
nine years. Mr. Rieschel has an M.B.A. from Harvard Graduate School of
Business and a B.A. in biology from Reed College.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
Director Compensation
Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion.
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The Company has entered into indemnification agreements with each member of
the Board of Directors and certain of its officers providing for the
indemnification of such person to the fullest extent authorized, permitted or
allowed by law.
Compensation Committee
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, and Amended and Restated 1996 Stock Plan, and will
administer the 1997 Stock Plan and 1997 Employee Stock Purchase Plan. The
Compensation Committee currently consists of Messrs. Khosla and Rieschel.
Audit Committee
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the external audits of the
Company, reviews and approves material accounting policy changes, monitors
internal accounting controls, recommends engagement of independent auditors,
reviews related-party transactions and performs other duties as prescribed by
the Board of Directors. The Audit Committee currently consists of Messrs.
Martin and Regis.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1998, by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) each director of the Company, the Chief Executive Officer
and the four most highly compensated officers in 1997; and (iii) all directors
and executive officers of the Company as a group. Except as otherwise noted,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAMES AND ADDRESSES OWNED OWNED(1)
- ------------------- ------------ ------------
<S> <C> <C>
Williams Communications, Inc.(2).................... 1,604,254 11.0%
One Williams Center
Tulsa, OK 74172
TMI Telemedia International, Ltd.(3)................ 1,580,966 10.9
Viale del Campo, Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group, L.P.(4).................... 1,089,642 7.7
85 Broad Street
New York, NY 10004
SOFTBANK Ventures, Inc. ............................ 1,026,179 7.2
c/o SOFTBANK Holdings Inc.
10 Langley Road, Suite 403
Newton Center, MA 02159
Racal-Datacom, Inc.(5).............................. 1,025,347 7.2
1601 North Harrison Parkway
Sunrise, FL 333233-2899
Kleiner Perkins Caufield & Byers Entities(6)........ 1,006,873 7.0
2750 Sand Hill Road
Menlo Park, CA 94025
Denver Investment Advisors LLC...................... 909,500 6.4
1225 17th Street, 26th Floor
Denver, CO 80202
Henry R. Nothhaft(7)................................ 155,533 1.1
John K. Peters(8)................................... 129,186 *
Michael F. Anthofer(9).............................. 39,898 *
Warren A. Smith(10)................................. 27,274 *
George D. Carr(11).................................. 15,763 *
Vinod Khosla(12).................................... 1,006,873 7.1
Gordon Martin(13)................................... -- --
Franco Regis(14).................................... 1,580,966 10.9
Gary E. Rieschel(15)................................ -- --
All current executive officers and directors as a
group (16 persons)(16)............................. 3,091,321 20.4
</TABLE>
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<PAGE>
- --------
*Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares, subject to the applicable
community property laws. Shares of Common Stock subject to options or
warrants currently exercisable, or exercisable by October 31, 1997, are
deemed outstanding for the purpose of computing the percentage ownership
of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage ownership of any other person.
(2) Includes warrants to purchase 355,018 shares of Common Stock.
(3) Includes warrants to purchase 341,001 shares of Common Stock.
(4) Consists of securities held of record by GS Capital Partners, L.P., an
investment partnership, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner or investment manager. GS Group
disclaims beneficial ownership of the shares owned by GS Capital
Partners, L.P. to the extent attributable to partnership interests
therein held by persons other than GS Group and its affiliates. GS
Capital Partners, L.P. shares voting and investment power with certain of
its affiliates. Includes warrants to purchase 58,523 shares of Common
Stock.
(5) Includes warrants to purchase 512,259 shares of Common Stock.
(6) Includes shares held by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II (collectively, the "KPCB
Entities"). Also includes warrants to purchase 141,854 shares of Common
Stock held by the KPCB Entities.
(7) Includes 155,533 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 128,011 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(9) Includes 39,236 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 26,389 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 15,763 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Represents shares beneficially owned by the KPCB Entities. Mr. Khosla is
an affiliate of such entities. See note (5). Mr. Khosla disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(13) Excludes 1,604,254 shares held by Williams Communications, Inc. Mr.
Martin, a Director of the Company, is a vice president of Williams
Communications Group, Inc., an affiliate of Williams Communications, Inc.
Mr. Martin disclaims beneficial ownership of such shares.
(14) Includes 1,580,966 shares and exercisable warrants held by TMI Telemedia
International, Ltd. Mr. Regis is the Director of Business Development and
Strategic Planning of Telecom Italia, S.p.A., the parent of TMI Telemedia
International, Ltd. See note (3). Mr. Regis disclaims beneficial
ownership of such shares.
(15) Excludes 1,026,179 shares held by SOFTBANK Ventures Inc. Mr. Rieschel, a
director of the Company, is a Senior Vice President at SOFTBANK Holdings
Inc., an affiliate of SOFTBANK Ventures Inc. Mr. Rieschel disclaims
beneficial ownership of such shares.
(16) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis and Khosla, as to which they disclaim
beneficial ownership. See Notes (6)-(14).
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<PAGE>
DESCRIPTION OF THE PREFERRED STOCK
GENERAL
The following is a summary of certain terms of the Series B Preferred
offered hereby. The Series B Preferred, like the Series A Preferred, will be
issued pursuant to the Certificate of Designation of Voting Power, Designation
Preferences and Relative, Participating, Optional or Other Special Rights and
Qualifications, Limitations and Restrictions (the "Certificate of
Designation"). The terms of the Series B Preferred are substantially identical
in all material respects to those of the Series A Preferred except that the
Series B Preferred (i) will have been registered under the Securities Act, and
therefore will not be subject to certain restrictions on transfer applicable
to the Series A Preferred and (ii) will not be entitled to registration or
other rights under the Registration Rights Agreement including the provision
in the Registration Rights Agreement for payment of Liquidated Damages upon
failure by the Company to consummate the Exchange Offer or the occurrence of
certain other events. The following summary of the Preferred Stock, the
Certificate of Designation and the Registration Rights Agreement is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, the Company's Certificate of Incorporation, the Certificate of
Designation and the Registration Rights Agreement, including the definitions
therein of certain terms used below. Copies of the proposed form of
Certificate of Designation and Registration Rights Agreement are available as
set forth under "Description of Exchange Debentures--Additional Information."
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." As used in this Description of Preferred
Stock, the term "Company" refers to Concentric Network Corporation, excluding
its Subsidiaries and references to the Preferred Stock shall be deemed to
include the Series B Preferred.
Pursuant to the Certificate of Designation, 295,000 shares of Series B
Preferred with a liquidation preference of $1,000 per share (the "Liquidation
Preference") will be authorized for issuance in the Exchange Offer. The Series
B Preferred will, when issued and paid for in accordance with the terms of the
Exchange Offer, be fully paid and nonassessable, and holders thereof will have
no preemptive rights in connection therewith.
The transfer agent for the Preferred Stock is ChaseMellon Shareholder
Services LLC unless and until a successor is selected by the Company (the
"Transfer Agent").
RANKING
The Preferred Stock, with respect to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of the Company,
ranks (i) senior to all classes of common stock of the Company and to each
other class of capital stock or series of preferred stock established after
the date of this Prospectus by the Board of Directors, the terms of which do
not expressly provide that it ranks senior to or on a parity with the
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company (collectively referred
to with the common stock of the Company as "Junior Securities"); (ii) on a
parity with any additional Preferred Stock issued by the Company in the future
and any other class of capital stock or series of preferred stock issued by
the Company in the future and any other class of capital stock or series of
preferred stock issued by the Company established after the date of this
Prospectus by the Board of Directors, the terms of which expressly provide
that such class or series will rank on a parity with the Preferred Stock as to
dividend distributions and distributions upon the liquidation, winding-up and
dissolution of the Company (collectively referred to as "Parity Securities");
and (iii) junior to each class of capital stock or series of preferred stock
issued by the Company established after the date of this Prospectus by the
Board of Directors, the terms of which expressly provide that such class or
series will rank senior to the Preferred Stock as to dividend distributions
and distributions upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Securities").
All claims of the holders of the Preferred Stock, including without
limitation, claims with respect to dividend payments, redemption payments,
mandatory repurchase payments or rights upon liquidation, winding-up or
dissolution, shall rank junior to the claims of the holders of any debt of the
Company and all other creditors of the Company. As of March 31, 1998, the
Preferred Stock would have been junior in right of payment to
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<PAGE>
approximately $195.0 million of total indebtedness of the Company. In
addition, following the Offering, the Company will have the ability to issue
additional shares of Preferred Stock to the holders of Preferred Stock in lieu
of paying dividends. The Certificate of Designation provides that the Company
may not, without the consent of the holders of at least a majority of the then
outstanding shares of Preferred Stock, authorize, create (by way of
reclassification or otherwise) or issue any Senior Securities (as defined) or
any Obligation or security convertible or exchangeable into or evidencing a
right to purchase, shares of any class or series of Senior Securities. See "--
Voting Rights."
In addition, certain of the Company's operations are conducted through its
Subsidiaries and, therefore, the Company may be dependent upon the cash flow
of its Subsidiaries to meet its obligations, including its obligations under
the Preferred Stock. Any right of the Company to receive assets of any of its
Subsidiaries will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations)
of the Company's Subsidiaries. As of March 31, 1998, the aggregate amount of
Indebtedness and other obligations of the Company and its Subsidiaries that
would effectively rank senior in right of payment to the obligations of the
Company under the Preferred Stock would have been approximately $195.0
million. See "Risk Factors--Substantial Indebtedness; Ability to Service
Debt."
DIVIDENDS
The holders of the Preferred Stock are entitled to receive, when, as and if
dividends are declared by the Board of Directors out of funds of the Company
legally available therefor, cumulative preferential dividends from the Issue
Date accumulating at the rate per share of 13 1/2% of the Liquidation
Preference per share per annum, payable quarterly in arrears on each March 1,
June 1, September 1, and December 1 of each year or, if any such date is not a
business day, on the next succeeding business day (each, a "Dividend Payment
Date"), to the holders of record as of the next preceding February 15, May 15,
August 15 and November 15 (each, a "Record Date"). Dividends may be paid, at
the Company's option, by the issuance of additional shares of Preferred Stock
(including fractional shares provided, that the Company may, at its option,
pay cash in lieu of issuing fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends; provided that after June 1,
2003, to the extent and so long as the Company is not precluded from paying
dividends on the Preferred Stock by the terms of any agreement or instruments
governing and of its then outstanding, the Company shall pay dividends in
cash. The issuance of such additional shares of Preferred Stock constitutes
"payment" of the related dividend for all purposes of the Certificate of
Designation. The first dividend payment on the Preferred Stock will be payable
on September 1, 1998. Dividends payable on the Preferred Stock will be
computed on the basis of a 360-day year consisting of twelve 30-day months and
are deemed to accumulate on a daily basis on the Liquidation Preference of the
Preferred Stock. For a discussion of certain federal income tax considerations
relevant to the payment of dividends on the Preferred Stock, see "Certain
Federal Income Tax Considerations--Preferred Stock Distributions on the
Preferred Stock."
Dividends on the Preferred Stock will accrue whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Dividends
accumulate to the extent they are not paid on the Dividend Payment Date for
the period to which they relate. The Certificate of Designation provides that
the Company will take all actions required or permitted under the Delaware
General Corporation Law (the "DGCL") to permit the payment of dividends on the
Preferred Stock, including, without limitation, through the revaluation of its
assets in accordance with the DGCL, to make or keep funds legally available
for the payment of dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Preferred
Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all
outstanding shares of Preferred Stock. Unless full cumulative dividends on all
outstanding shares of Preferred Stock for all past dividend periods shall have
been declared and paid, or declared and a sufficient sum for the payment
thereof set apart, then: (i) no dividend (other than a dividend payable solely
in shares of any Junior Securities) shall be declared or paid upon, or any sum
set apart for the
73
<PAGE>
payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of any distribution upon, any shares of Junior Securities, other than
a distribution consisting solely of Junior Securities; (iii) no shares of
Junior Securities shall be purchased, redeemed or otherwise acquired or
retired for value (excluding an exchange for shares of other Junior
Securities) by the Company or any of its Subsidiaries; and (iv) no monies
shall be paid into or set apart or made available for a sinking or other like
fund for the purchase, redemption or other acquisition or retirement for value
of any shares of Junior Securities by the Company or any of its Subsidiaries.
Holders of the Preferred Stock are not entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
as herein described.
The Existing Senior Notes Indenture contains, any future credit agreements
or other agreements relating to Indebtedness to which the Company becomes a
party may contain, restrictions on the ability of the Company to pay dividends
on the Preferred Stock.
VOTING RIGHTS
Holders of record of the Preferred Stock will have no voting rights, except
as required by law and as provided in the Certificate of Designation. The
Certificate of Designation will provide that upon (a) the accumulation of
dividends remaining unpaid either in cash or by the issuance of additional
shares of Preferred Stock on the outstanding Preferred Stock in an amount
equal to six quarterly dividends (whether or not consecutive); (b) the failure
of the Company to satisfy any mandatory redemption or repurchase obligation
(including, without limitation, pursuant to any required Change of Control
Offer) with respect to the Preferred Stock; (c) the Company fails to comply
with the Change of Control covenant contained in the Certificate of
Designation; (d) the failure of the Company to comply with any of the other
covenants or agreements set forth in the Certificate of Designation and the
continuance of such failure for 60 consecutive days or more after notice from
the holders of at least 25% of the Preferred Stock; or (e) any (i) default by
the Company or any Subsidiary in the payment of the principal, premium, if
any, or interest has occurred with respect to amounts in excess of $5.0
million under any agreement, indenture or instrument evidencing Indebtedness
when the same shall become due and payable in full and such default shall have
continued after any applicable grace period and shall not have been cured or
waived and, if not already matured at its final maturity in accordance with
its terms, the holder of such Indebtedness shall have the right to accelerate
such Indebtedness or (ii) event of default as defined in any agreement,
indenture or instrument of the Company evidencing Indebtedness in excess of
$5.0 million shall have occurred and the Indebtedness thereunder, if not
already matured at its final maturity in accordance with its terms, shall have
been accelerated (each of the events described in clauses (a), (b), (c), (d)
and (e) being referred to herein as a "Voting Rights Triggering Event"), then
the holders of a majority of the outstanding Preferred Stock, voting as a
separate single class, are entitled to elect two members to the Board of
Directors of the Company and the number of members of the Company's Board of
Directors will be immediately and automatically increased by two. Voting
rights arising as a result of a Voting Rights Triggering Event will continue
until such time as all dividends in arrears on the Preferred Stock are paid in
full and all other Voting Rights Triggering Events have been cured or waived,
at which time the term of office of any such members of the Board of Directors
so elected shall terminate and such directors shall be deemed to have
resigned. The voting rights provided for in the Certificate of Designation
will be the holder's exclusive remedy at law or in equity.
In addition, the Certificate of Designation provides that the Company will
not authorize any class of Senior Securities or any Obligation or security
convertible or exchangeable into or evidencing a right to purchase shares of
any class or series of Senior Securities, without the approval of holders of
at least a majority of the shares of the Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class. The Certificate of
Designation also provides that the Company may not amend the Certificate of
Designation so as to affect adversely the specified rights, preferences,
privileges or voting rights of holders of shares of Preferred Stock without
the approval of the holders of at least a majority of the then outstanding
shares of Preferred Stock, voting or consenting, as the case may be, as one
class; provided, however, that the Company may not amend the Change of Control
provisions of the Certificate of Designation (including the related
definitions) without the approval of
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<PAGE>
all of the holders of the then outstanding shares of Preferred Stock, voting
or consenting, as the case may be, as one class. The Certificate of
Designation also provides that, except as set forth above, the creation,
authorization or issuance of, or the increase or decrease in the authorized
amount of, capital stock of any class, including any preferred stock, shall
not require the consent of the holders of Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges, special rights
or voting rights of holders of Preferred Stock.
AMENDMENT
The Certificate of Designation shall not be amended, either directly or
indirectly, or through merger or consolidation with another entity, in any
manner that would alter or change the powers, preferences or special rights of
the Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of a majority or more of the outstanding Preferred Stock,
voting separately as a class.
EXCHANGE
The Company may, at its option, on any Dividend Payment Date, exchange, in
whole, but not in part, the then outstanding shares of Preferred Stock for
Exchange Debentures with a principal amount equal to the aggregate Liquidation
Preference of the Preferred Stock; provided that on the date of such exchange
(i) there are no accumulated and unpaid dividends and Liquidated Damages (as
defined), if any, on the Preferred Stock (including the dividends payable on
such date) or any contractual impediments to such exchange; (ii) there shall
be legally available funds sufficient therefor; (iii) immediately after giving
effect to such exchange, no Default or Event of Default (each as defined in
the Indenture) would exist under the Indenture or would be caused thereby;
(iv) the Indenture has been qualified under the Trust Indenture Act if such
qualification is required at the time of exchange; and (v) the Company shall
have delivered a written opinion to the Trustee (as defined herein) to the
effect that all conditions to be satisfied prior to such exchange have been
satisfied.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding Preferred Stock will be entitled to receive, subject to the second
succeeding sentence of this paragraph, $1.00 principal amount of Exchange
Debentures for each $1.00 of the aggregate Liquidation Preference of Preferred
Stock held by them. The Exchange Debentures will be issued in registered form,
without coupons. The Exchange Debentures will be issued in principal amounts
of $1,000 and integral multiples thereof to the extent possible, and will also
be issuable in principal amounts less than $1,000 so that each holder of
Preferred Stock will receive certificates representing the entire amount of
Exchange Debentures to which such holder's shares of Preferred Stock entitle
such holder. Notice of the intention to exchange will be sent by or on behalf
of the Company not more than 60 days nor less than 30 days prior to the date
of exchange ("Exchange Date"), by first class mail, postage prepaid, to each
holder of record of Preferred Stock at its registered address. In addition to
any information required by law or by the applicable rules of any exchange
upon which Preferred Stock may be listed or admitted to trading, such notice
will state: (i) the Exchange Date; (ii) the place or places where certificates
for such shares are to be surrendered for exchange, including any procedures
applicable to exchanges to be accomplished through book-entry transfers; and
(iii) that dividends on the shares of Preferred Stock to be exchanged will
cease to accumulate on the Exchange Date. If notice of any exchange has been
properly given, and if on or before the Exchange Date the Exchange Debentures
have been duly executed and authenticated and deposited with the Transfer
Agent, then on and after the close of business on the Exchange Date, the
shares of Preferred Stock to be exchanged will no longer be deemed to be
outstanding and may thereafter be issued in the same manner as the other
authorized but unissued preferred stock, but not as Preferred Stock, and all
rights of the holders thereof as stockholders of the Company will cease,
except the right of the holders to receive upon surrender of their
certificates the Exchange Debentures and all accrued interest, if any,
thereon.
REDEMPTION
Mandatory Redemption
On June 1, 2010 (the "Mandatory Redemption Date"), the Company will be
required to redeem (subject to the legal availability of funds therefor) all
outstanding shares of Preferred Stock at a price in cash equal to the
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<PAGE>
Liquidation Preference thereof, plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period) and Liquidated Damages, if any, to the date of redemption.
The Company will not be required to make sinking fund payments with respect to
the Preferred Stock. The Certificate of Designation will provide that the
Company will take all actions required or permitted under Delaware law to
permit such redemption.
Optional Redemption
Except as set forth below, the Preferred Stock may not be redeemed at the
option of the Company prior to June 1, 2003. The Preferred Stock will be
subject to redemption at any time on or after June 1, 2003, at the option of
the Company, in whole or in part, on not less than 30 nor more than 60 days'
prior notice in amounts of $1,000 or an integral multiple thereof at the
following redemption prices (expressed as percentages of the Liquidation
Preference thereof), if redeemed during the 12-month period beginning June 1
of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................... 106.75%
2004........................................................... 105.40%
2005........................................................... 104.05%
2006........................................................... 102.70%
2007........................................................... 101.35%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend) and Liquidated Damages, if any, to
the date of redemption.
In addition, at any time prior to June 1, 2001, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or the
sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or a series of related
transactions, to redeem up to an aggregate of 35% of the shares of Preferred
Stock then outstanding (whether initially issued or issued in lieu of cash
dividends) at a redemption price equal to 113 1/2% of the Liquidation
Preference per share, plus accumulated and unpaid dividends thereon and
Liquidated Damages, if any, to the redemption date; provided that at least 65%
of the shares of Preferred Stock initially issued remains outstanding
immediately after the occurrence of such redemption. In order to effect the
foregoing redemption, the Company must mail a notice of redemption no later
than 45 days after the related Public Equity Offering and must consummate such
redemption within 60 days of the closing of the Public Equity Offering.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of the Company's
capital stock, each holder of shares of the Preferred Stock will be entitled
to payment out of the assets of the Company available for distribution of an
amount equal to the Liquidation Preference per share of Preferred Stock held
by such holder, plus accumulated and unpaid dividends and Liquidated Damages,
if any, to the date fixed for liquidation, dissolution, winding-up or
reduction or decrease in capital stock, before any distribution is made on any
Junior Securities, including, without limitation, common stock of the Company.
After payment in full of the Liquidation Preference and all accrued dividends
and Liquidated Damages, if any, to which holders of Preferred Stock are
entitled, such holders will not be entitled to any further participation in
any distribution of assets of the Company. If, upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, the amounts
payable with respect to the Preferred Stock and all other Parity Securities
are not paid in full, the holders of the Preferred Stock and the Parity
Securities will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference and accumulated and
unpaid
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dividends and Liquidated Damages to which each is entitled. However, neither
the voluntary sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Company nor the consolidation or merger of the
Company with or into one or more corporations will be deemed to be a voluntary
or involuntary liquidation, dissolution or winding-up of the Company or
reduction or decrease in capital stock, unless such sale, conveyance, exchange
or transfer shall be in connection with a liquidation, dissolution or winding-
up of the business of the Company or reduction or decrease in capital stock.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Preferred
Stock, although such Liquidation Preference will be substantially in excess of
the par value of the shares of the Preferred Stock, and there can be no
assurance that, upon any such voluntary or involuntary liquidation,
dissolution or winding-up of the Company that there will be funds available in
amount sufficient to pay such Liquidation Preference in full, in part or at
all.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of
Preferred Stock shall have the right to require that the Company purchase such
holder's Preferred Stock in whole or in part in integral multiples of $1,000,
at a purchase price (the "Change of Control Purchase Price") in cash, in an
amount equal to 101% of the principal amount of such Preferred Stock or
portion thereof, plus accumulated and unpaid dividends and Liquidated Damages,
if any, to the date of purchase (the "Change of Control Purchase Date"),
pursuant to the offer described below (the "Change of Control Offer").
Within 30 days of any Change of Control, the Company shall give written
notice of such Change of Control to each holder of Preferred Stock, by first-
class mail, postage prepaid, at his address appearing in the security
register, stating: that a Change of Control has occurred and the date of such
event, the circumstances and relevant facts regarding such Change of Control;
that the purchase price and the purchase date which shall be fixed by the
Company on a business day no earlier than 30 days nor later than 60 days from
the date such notice is mailed, or such later date as is necessary to comply
with requirements under the Exchange Act; that any Preferred Stock not
tendered will continue to accrue dividends; that, unless the Company defaults
in the payment of the Change of Control Purchase Price, any Preferred Stock
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue dividends after the Change of Control Purchase Date; and that certain
other procedures that a holder of Preferred Stock must follow to accept a
Change of Control Offer or to withdraw such acceptance.
The Company will not be required to make a Change of Control Offer to the
holders of Preferred Stock upon a Change of Control if either (a) a third
party makes the Change of Control Offer described above in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Certificate of Designation, and purchases all shares of Preferred Stock
validly tendered and not withdrawn under such Change of Control Offer or (b)
the date on which such Change of Control Offer would otherwise be required to
be made is on or prior to the Existing Senior Notes Maturity Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Preferred Stock that might be delivered by
holders of the Preferred Stock seeking to accept the Change of Control Offer.
See "Risk Factors--Change of Control." The failure of the Company to make or
consummate the Change of Control Offer or pay the Change of Control Purchase
Price when due will give the holders of the Preferred Stock the rights
described under "--Voting Rights; Amendment."
If the date on which a Change of Control Offer otherwise would be required
to be made is on or prior to the Existing Senior Notes Maturity Date, then, in
lieu of any such Change of Control Offer, holders of two-thirds of the
Preferred Stock will be entitled to designate an Independent Financial Advisor
(as defined below) to determine, within 20 days of such designation, in the
opinion of such firm, the appropriate dividend rate that the Preferred Stock
should bear so that, after such reset, the Preferred Stock would have a market
value of 101% of
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the Liquidation Preference. If, for any reason and within 15 days of the
designation of an Independent Financial Advisor by the holders, such
Independent Financial Advisor is unacceptable to the Company, the Company may
designate a second Independent Financial Advisor to determine, within 15 days
of such designation, in its opinion, such an appropriate reset dividend rate
for the Preferred Stock. In the event that the two Independent Financial
Advisors cannot agree, within 25 days of the designation of an Independent
Financial Advisor by the holders of two-thirds of the Preferred Stock, on the
appropriate reset dividend rate, the two Independent Financial Advisors shall,
within 10 days of such 25th day, designate a third Independent Financial
Advisor, which, within 15 days of designation, will determine, in its opinion,
such an appropriate reset rate which is between the two rates selected by the
first two Independent Financial Advisors; provided, however, that the reset
rate shall in no event be less than 13 1/2% per annum nor greater than 15 1/2%
per annum. The reasonable fees and expenses, including reasonable fees and
expenses of legal counsel, if any, and customary indemnification, of each of
the three above-referenced Independent Financial Advisors shall be borne by
the Company. Upon the determination of the reset rate, the Preferred Stock
shall accrue and cumulate dividends at the reset rate as of the date of
occurrence of the Change of Control. "Independent Financial Advisor" means a
United States investment banking firm of national standing in the United
States which does not, and whose directors, officers and employees or
affiliates do not, have a direct or indirect financial interest in the
Company.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Certificate of Designation are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designation does not contain provisions that permit the holders of the
Preferred Stock to require that the Company repurchase or redeem the Preferred
Stock in the event of a takeover, recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Preferred Stock to require the Company to repurchase such Preferred
Stock as a result of a sale, lease, transfer, conveyance or other disposition
of less than all of the assets of the Company to another Person may be
uncertain.
The existence of a holder's right to require the Company to repurchase such
holder's Preferred Stock upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
CERTAIN COVENANTS
The sole remedy to holders of Preferred Stock in the event of a breach of
any of the covenants described below and the continuation of such failure for
60 days following receipt of written notice thereof from the holders of 25% of
the Preferred Stock outstanding will be the voting rights arising from a
Voting Rights Triggering Event, and such breach by the Company will not cause
any action taken by the Company to be invalid or unauthorized under its
charter documents. The Certificate of Designation will contain, among others,
the following covenants:
Limitation on Indebtedness.
(a) The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, directly or indirectly, Incur any Indebtedness (other than the
Preferred Stock); provided, however, that the Company may Incur Indebtedness,
and the Company or any Restricted Subsidiary may Incur Acquired Indebtedness,
if, at the time of such Incurrence, the Debt to Annualized Operating Cash Flow
Ratio would be less than or equal to 5.5 to 1.0 prior to December 15, 2000, or
less than or equal to 5.0 to 1.0 after December 15, 2000.
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(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to Incurrence of Indebtedness permitted under any of the following
("Permitted Indebtedness"), each of which shall be given independent effect:
(i) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than Acquired Indebtedness) consisting of Capital
Lease Obligations, Purchase Money Obligations, mortgage financings or other
obligations incurred for the purpose of financing all or any part of the
purchase price, cost of construction or improvement of property, plant or
equipment used in connection with the Telecommunications Business or a
credit facility or a master lease arrangement entered into for the purpose
of providing such financing, provided that such Indebtedness does not
exceed the lesser of the Fair Market Value (determined at the time of the
consummation of the purchase, construction or improvement of such property,
plant or equipment), or the purchase price of such property, plant or
equipment;
(ii) Indebtedness of the Company or any of its Restricted Subsidiaries,
and any renewals, extensions, substitutions, refinancings or replacements
of such Indebtedness, so long as the aggregate principal amount of such
Indebtedness shall not exceed $50.0 million outstanding at any one time in
the aggregate;
(iii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than secured Acquired Indebtedness) in an aggregate
principal amount not to exceed, at any one time outstanding, 2.0 times the
Net Cash Proceeds received by the Company from the issuance and sale of any
class or series of its Capital Stock (other than Disqualified Stock) on and
after the Issue Date plus the Fair Market Value of any of its Capital Stock
(other than Disqualified Stock) issued on and after the Issue Date in
connection with the acquisition of an equity interest in a
Telecommunications Business or assets used in a Telecommunications
Business; provided that such Indebtedness does not mature prior to the
Mandatory Redemption Date or have an Average Life to Stated Maturity that
is shorter than the period then remaining prior to the Mandatory Redemption
Date;
(iv) Indebtedness of the Company or any Restricted Subsidiary entered
into in the ordinary course of business (a) pursuant to Interest Rate
Agreements designed to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of the
Company or any Restricted Subsidiary as long as the notional principal
amount of such Interest Rate Agreements do not exceed the aggregate
principal amount of such Indebtedness then outstanding, (b) under any
Currency Hedging Arrangements designed to protect the Company or any
Restricted Subsidiary against fluctuations in the value of any currency or
(c) under any Commodity Price Protection Agreements designed to protect the
Company or any Restricted Subsidiary against fluctuations in the price of
any commodity;
(v) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in respect of bid, performance or advance payment bonds and
appeal or surety bonds;
(vi) Indebtedness existing on the Issue Date;
(vii) the Incurrence of (a) Indebtedness of any Restricted Subsidiary
owed to and held by the Company or another Restricted Subsidiary and (b)
Indebtedness of the Company owed to and held by any Restricted Subsidiary;
and
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi) and (vii) of this paragraph (b)
of this covenant including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby is not increased by
such refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included.
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(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred through the first paragraph of
this covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable, (ii) may classify
and divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such
paragraphs (or definitions), as applicable, in any order.
Limitation on Restricted Payments.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on any
shares of the Company's Capital Stock that are Junior Securities (other
than dividends or distributions payable solely in shares of its Qualified
Capital Stock that are Junior Securities or in options, warrants or other
rights to acquire shares of such Qualified Capital Stock that are Junior
Securities);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock that are Junior Securities;
(iii) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Subsidiaries or (b) to all holders of Capital Stock
of such Restricted Subsidiary on a pro rata basis); or
(iv) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Voting Rights Triggering Event
shall have occurred and be continuing; (2) immediately before and immediately
after giving effect to such Restricted Payment on a pro forma basis, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "--Limitation on
Indebtedness;" and (3) after giving effect to the proposed Restricted Payment,
the aggregate amount of all such Restricted Payments declared or made after
the Issue Date, does not exceed the sum of the following (the "Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the time of such
Restricted Payment less (ii) 150% of cumulative Consolidated Interest
Expense determined for the period (treated as one accounting period)
commencing on the Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of such Restricted Payment
for which consolidated financial information of the Company is required to
be available;
(B) the sum of (i) (x) capital contributions to the Company after the
Issue Date or (y) the aggregate Net Cash Proceeds received after the Issue
Date by the Company from the issuance or sale (other than to any of its
Restricted Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock of the
Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b)
below);
(C) the aggregate Net Cash Proceeds received after the Issue Date by the
Company (other than from any of its Restricted Subsidiaries) upon the
exercise of any options, warrants or rights to purchase Qualified Capital
Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the conversion or exchange, if any, of debt securities or
Disqualified Stock of the Company or its Restricted
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Subsidiaries into or for Qualified Capital Stock of the Company plus, to
the extent such debt securities or Disqualified Stock were issued after the
Issue Date, the aggregate of Net Cash Proceeds from their original
issuance; and
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the return of capital
with respect to such Investment and the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) and (iii)
below, so long as there is no Voting Rights Triggering Event continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (iii) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a Permitted Payment for purposes
of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company that are
Junior Securities in exchange for (including any such exchange pursuant to
the exercise of a conversion right or privilege in connection with which
cash is paid in lieu of the issuance of fractional shares or scrip), or out
of the Net Cash Proceeds of a substantially concurrent issuance and sale
for cash (other than to a Restricted Subsidiary) of, other shares of
Qualified Capital Stock of the Company that are Junior Securities; provided
that the Net Cash Proceeds from the issuance of such shares of Qualified
Capital Stock are excluded from clause (3)(B) of paragraph (a) of this
Section;
(iii) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Restricted Subsidiaries from
employees, former employees, directors or former directors of the Company
or any of its Restricted Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases in any calendar year shall not exceed $1.0 million and
$5.0 million in the aggregate.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Restricted Subsidiary, (iii) make any Investment in the
Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction, with respect to a Restricted
Subsidiary that is not a Restricted Subsidiary of the Company on the Issue
Date, in existence at the time such Person becomes a Restricted Subsidiary of
the Company and not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary; (b) encumbrances or restrictions (I)
by reason of applicable law, or (II) under the Certificate of Designation; (c)
customary non-assignment provisions of any contract or lease of any Restricted
Subsidiary entered into in the ordinary course of business; (d) encumbrances
or restrictions imposed pursuant to contracts entered into in connection with
Permitted Liens; (e) any encumbrance or restriction imposed pursuant to
contracts for the sale of assets with respect to the assets to be sold
pursuant to such contract; and (f) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing
clauses (a) through (e), or in this clause (f), provided that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced.
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Consolidation, Merger, Sale of Assets.
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons, unless
at the time and after giving effect thereto (i) either (a) the Company will be
the continuing corporation in the case of a consolidation or merger involving
the Company or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity") will
be a corporation duly organized and validly existing under the laws of the
United States of America, any state thereof or the District of Columbia and
such Person expressly assumes all the obligations of the Company under the
Preferred Stock and New Preferred Stock; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or any
of its Restricted Subsidiaries which becomes the obligation of the Company or
any of its Restricted Subsidiaries as a result of such transaction as having
been incurred at the time of such transaction), no Voting Rights Triggering
Event will have occurred and be continuing; and (iii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of "--Certain Covenants--Limitation on
Indebtedness." Notwithstanding the foregoing, the Company (i) may merge or
consolidate with any of its Restricted Subsidiaries, and (ii) the Company may
merge or consolidate into any Person in a transaction designed solely for the
purpose of effecting a change in the jurisdiction of incorporation of the
Company within the United States of America.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Entity, such Surviving Entity shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Preferred Stock and New Preferred Stock.
Limitation on Transactions with Affiliates.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with or for the benefit of any
Affiliate of the Company (other than the Company or a Wholly Owned Subsidiary)
unless such transaction or series of related transactions is entered into in
good faith and in writing and (a) such transaction or series of related
transactions is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that would be reasonably
expected to be available in a comparable transaction in arm's-length dealings
with an unrelated third party, (b) with respect to any transaction or series
of related transactions involving aggregate value in excess of $5.0 million,
the Company delivers an officers' certificate to the Transfer Agent certifying
that such transaction or series of related transactions complies with clause
(a) above, and (c) with respect to any transaction or series of related
transactions involving aggregate value in excess of $10.0 million, either (A)
such transaction or series of related transactions has been approved by a
majority of the Disinterested Directors of the Company, or in the event there
is only one Disinterested Director, by such Disinterested Director, or (B) the
Company delivers to the Transfer Agent a written opinion of an investment
banking firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction or
series of related transactions for which an opinion is required stating that
the transactions or series of related transactions is fair to the Company or
such Restricted Subsidiary from a financial point of view; provided, however,
that this provision shall not apply to: (a) compensation and employee benefit
arrangements with any officer, director or
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employee of the Company, including under any stock option or stock incentive
plans, in the ordinary course of business; (b) any transaction solely between
or among the Company and/or any Restricted Subsidiaries, if such transaction
is otherwise in compliance with the Certificate of Designation and is on fair
and reasonable terms; (c) any transaction otherwise permitted by the terms of
the section of the Certificate of Designation described under "Certain
Covenants--Limitations on Restricted Payments;" (d) the execution and delivery
of or payments made under any tax sharing agreement between or among any of
the Company and any Restricted Subsidiary; (e) licensing or sublicensing of
use of any intellectual property by the Company or any Restricted Subsidiary
to any Restricted Subsidiary of the Company; provided that the licensor shall
continue to have access to such intellectual property to the extent necessary
for the conduct of its respective business; (f) arrangements between the
Company and any Restricted Subsidiary of the Company for the purpose of
providing services or employees to such Restricted Subsidiary; (g) any
transaction entered into for the purpose of granting or altering registration
rights with respect to the Capital Stock of the Company; and (h) any
transaction or series of related transactions entered into prior to the Issue
Date.
Provision of Financial Statements.
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange
Act, file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) if the Company were so subject,
such documents to be filed with the Commission on or prior to the date (the
"Required Filing Date") by which the Company would have been required so to
file such documents if the Company were so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date transmit by mail to
all holders, as their names and addresses appear in the security register,
without cost to such holders copies of the annual reports, quarterly reports
and other documents which the Company would have been required to file with
the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the
Company were subject to either of such Sections and (y) if filing such
documents by the Company with the Commission is not permitted under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any
prospective holder at the Company's cost. The Certificate of Designation also
provides that, so long as any of the Preferred Stock remain outstanding, the
Company will make available to any prospective purchaser of Preferred Stock or
beneficial owner of Preferred Stock in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act, until such
time as the Company has either exchanged the Preferred Stock for securities
identical in all material respects which have been registered under the
Securities Act or until such time as the holders thereof have disposed of such
Preferred Stock pursuant to an effective registration statement under the
Securities Act.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation. Reference is made to the Certificate of Designation for a full
disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be,
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Person becomes a Restricted Subsidiary or such
asset acquisition shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
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"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Capital
Stock of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Subsidiary or shall
be consolidated, merged with or into the Company or any Restricted Subsidiary
or (ii) any acquisition by the Company or any Restricted Subsidiary of the
assets of any Person which constitute substantially all of an operating unit
or line of business of such Person or which is otherwise outside of the
ordinary course of business of the Company or such Restricted Subsidiary.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" means (i) with respect to any Person that is a corporation,
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 such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership, membership or
other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more
than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than $500 million, whose short
term debt has a rating, at the time as of which any investment therein is
made, of "P-1" (or higher) according to Moody's Investors Service, Inc.
("Moody's") or any successor rating agency or "A-1" (or higher) according to
Standard & Poor's Corporation ("S&P") or any successor rating agency, (iii)
commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate or Restricted
Subsidiary of the Company) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P and (iv) any money market deposit accounts issued or
offered by a domestic commercial bank having capital and surplus in excess of
$500 million; provided that the short term debt of such commercial bank has a
rating, at the time of Investment, of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner"
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(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
Person shall be deemed to have beneficial ownership of all shares that such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50%
of the total outstanding Voting Stock of the Company; (ii) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the board of directors of the Company (together with any new
directors whose election to such board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved), cease for any reason to constitute a majority of such board of
directors then in office; (iii) the Company consolidates with or merges with
or into any Person or conveys, transfers or leases all or substantially all of
its assets to any Person, or any corporation consolidates with or merges into
or with the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is changed into or exchanged for cash,
securities or other property, other than any such transaction where the
outstanding Voting Stock of the Company is not changed or exchanged at all
(except to the extent necessary to reflect a change in the jurisdiction of
incorporation of the Company or where no "person" or "group" owns, immediately
after such transaction, directly or indirectly, more than 50% of the total
outstanding Voting Stock of the surviving corporation); or (iv) the Company is
liquidated or dissolved or adopts a plan of liquidation or dissolution other
than in a transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
Issue Date such Commission is not existing and performing the duties now
assigned to it under the Trust Indenture Act then the body performing such
duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value which is dependent upon, fluctuations in commodity
prices.
"Consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price
Protection Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b) (i) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such
Person and its subsidiaries plus (c) the interest expense actually paid by
such Person under any Guaranteed Debt of such Person and any Subsidiary to the
extent not included under clause (a)(iv) above, plus (d) the aggregate amount
for such period of cash or non-cash dividends on any Disqualified Stock or
preferred stock of the Company and its Restricted Subsidiaries, in each case
as determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and any Restricted Subsidiary for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included
in calculating such net income, by excluding, without duplication: (a) other
than for purposes of calculating the Basket, all extraordinary gains or losses
for such period; (b) other than for purposes of calculating the Basket, all
gains or losses from the sales or other dispositions of assets out of the
ordinary course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period; (c) that portion of such net
income derived from or in respect of investments in Persons other than
Restricted Subsidiaries, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject,
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in the case of any Restricted Subsidiary, to the provisions of clause (f) of
this definition); (d) the portion of such net income (or loss) allocable to
minority interests in any Person (other than a Restricted Subsidiary) for such
period, except to the extent the Company's allocation portion of such Person's
net income for such period is actually received in cash by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to
the provisions of clause (f) of this definition); (e) the net income (or loss)
or any other Person combined with the Company or any Restricted Subsidiary on
a "pooling of interests" basis attributable to any period prior to the date of
combination; and (f) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to
the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other non-
cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the
Company and any Restricted Subsidiary, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus
non-cash items to the extent they increase Consolidated Net Income (including
the partial or entire reversal of reserves taken in prior periods) for such
period.
"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow
for the latest two fiscal quarters for which financial information is
available immediately preceding such Determination Date (the "Measurement
Period"). For purposes of calculating Consolidated Operating Cash Flow for the
Measurement Period immediately prior to the relevant Determination Date, (i)
any Person that is a Restricted Subsidiary on the Determination Date (or would
become a Restricted Subsidiary on such Determination Date in connection with
the transaction that requires the determination of such Consolidated Operating
Cash Flow) will be deemed to have been a Restricted Subsidiary at all times
during such Measurement Period, (ii) any Person that is not a Restricted
Subsidiary on such Determination Date (or would cease to be a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period, and (iii) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired (through an Acquisition or the
commencement of activities constituting such operating business) or (y)
disposed of (by of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to
such Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement
of activities constituting such operating business, all such transactions had
been consummated prior to the first day of such Measurement Period (it being
understood that in calculating Consolidated Operating Cash Flow the exclusions
set forth in clauses
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(a) through (f) of the definition of Consolidated Net Income shall apply to an
Acquired Person as if it were a Restricted Subsidiary).
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
(excluding the Preferred Stock) which, by its terms (or by the terms of any
security into which it is convertible at the option of the holder thereof or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event, matures or becomes mandatorily redeemable, pursuant to
a sinking fund obligation or otherwise, or becomes exchangeable for
Indebtedness at the option of the holder thereof, or becomes redeemable at the
option of the holder thereof, in whole or in part, on or prior to the earlier
of the Mandatory Redemption Date or the date the Preferred Stock is no longer
outstanding; provided such Capital Stock shall only constitute Disqualified
Stock to the extent it so matures or becomes so redeemable or exchangeable on
or prior to the earlier of the Mandatory Redemption Date or the date the
Preferred Stock is no longer outstanding; provided, further, that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the earlier of the Mandatory Redemption Date or
the date the Preferred Stock is no longer outstanding shall not constitute
Disqualified Stock so long as, in the case of any "change of control"
provisions applicable to such Capital Stock, such provisions are no more
favorable to the holders of such Capital Stock than the provisions contained
in "Change of Control" described above and such Capital Stock specifically
provides that such person will not repurchase or redeem any such stock
pursuant to such provision prior to the Issuer's repurchase of such shares of
Preferred Stock as is required to be repurchased pursuant to the "Change of
Control" provision described above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Existing Senior Notes" means the Company's 12 3/4% Senior Notes due 2007.
"Existing Senior Notes Indenture" means the Indenture governing the
Company's 12 3/4% Senior Notes due 2007, as may be amended from time to time.
"Existing Senior Notes Maturity Date" means the earlier of: (i) the "Stated
Maturity" of the principal of the Existing Senior Notes as such term is used
for the purpose of determining whether "Capital Stock" constitutes
"Indebtedness" (as such terms are defined in the Existing Senior Notes
Indenture) under the Existing Senior Notes Indenture or (ii) December 15,
2007.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market
Value shall be determined by the board of directors of the Company acting in
good faith and shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the Issue Date.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest
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in, the debtor (including any agreement to pay for property or services
without requiring that such property be received or such services be
rendered), (iv) to maintain working capital or equity capital of the debtor,
or otherwise to maintain the net worth, solvency or other financial condition
of the debtor or (v) otherwise to assure a creditor against loss; provided
that the term "guarantee" shall not include endorsements for collection or
deposit, in either case in the ordinary course of business.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of a Person existing at
the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary shall be
deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii)
all obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends of other Persons, the payment of which is secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness, (vii) all Disqualified Stock issued by such
Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accumulated and unpaid dividends, and (viii) any
amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (i)
through (vii) above. For purposes hereof, the "maximum fixed repurchase price"
of any Disqualified Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Stock as if
such Disqualified Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Certificate of Designation, and
if such price is based upon, or measured by, the Fair Market Value of such
Disqualified Stock, such Fair Market Value to be determined in good faith by
the board of directors of the issuer of such Disqualified Stock. In no event
shall "Indebtedness" include any trade payable or other current liabilities
arising in the ordinary course of business. The amount of any item of
Indebtedness shall be the amount of such Indebtedness properly classified as a
liability on a balance sheet prepared in accordance with GAAP.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit 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 or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities issued or owned by any other
Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
"Issue Date" means the date on which shares of Preferred Stock are first
issued.
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"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease
properly classified as an operating lease under GAAP and intellectual property
licensing arrangements.
"Net Cash Proceeds" means with respect to any issuance or sale of Capital
Stock or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock as referred to under "--Certain Covenants--Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of
cash or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale (or conversion in the case
of debt securities or Capital Stock that have been converted) and net of taxes
paid or payable as a result thereof.
"New Preferred Stock" means the Preferred Stock authorized by the
Certificate of Designation that may be issued in exchange for Preferred Stock
pursuant to the Exchange Offer pursuant to the Registration Rights Agreement.
"Obligation" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investment" means: (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly
Owned Subsidiary or (b) is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, or is liquidated into,
the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company
or a Restricted Subsidiary described under clauses (iv) and (vii) of paragraph
(b) under "--Certain Covenants--Limitation on Indebtedness"; (iii) Investments
in any of the Preferred Stock; (iv) Investments in Cash Equivalents; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale to the extent such Investments are non-cash proceeds; (vi)
Investments in existence on the Issue Date; (vii) guarantees of Indebtedness
of a Wholly Owned Subsidiary given by the Company or another Wholly Owned
Subsidiary and guarantees of Indebtedness of the Company given by any
Restricted Subsidiary, in each case, in accordance with the terms of the
Certificate of Designation; (viii) advances to employees or officers of the
Company in the ordinary course of business so long as the aggregate amount of
such advances shall not exceed $1 million outstanding at any one time; (ix)
any Investment in the Company by any Restricted Subsidiary of the Company; (x)
accounts receivable created or acquired in the ordinary course of business of
the Company or any Restricted Subsidiary and Investments arising from
transactions by the Company or any Restricted Subsidiary with trade creditors
or customers in the ordinary course of business (including any such Investment
received pursuant to any plan of reorganization or similar arrangement
pursuant to the bankruptcy or insolvency of such trade creditors or customers
or otherwise in settlement of a claim); (xi) loans in the ordinary course of
business to employees of the Company or a Restricted Subsidiary to purchase
Capital Stock of the Company pursuant to the terms of employee stock benefit
plans; (xii) Investments the consideration of which is Capital Stock of the
Company; (xiii) stock obligations or securities received in satisfaction of
judgments; (xiv) Investments in prepaid expenses, negotiable instruments held
for collection, and lease, utility and workers' compensation, performance and
other similar deposits; and (xv) any other Investments in an aggregate amount
not to exceed $20 million at any one time outstanding. In connection with any
assets or property contributed or transferred to any Person as an Investment,
such property and assets shall be equal to the Fair Market Value (as
determined by the Company's Board of Directors) at the time of such
Investment.
"Permitted Lien" means:
(a) any Lien existing as of the Issue Date;
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(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other insurance
or arising under worker's compensation laws or similar legislation; (4)
good faith deposits in connection with bids, tenders, leases, contracts
(other than contracts evidencing Indebtedness); (5) zoning restrictions,
easements, licenses, reservations, title defects, rights of others for
rights of way, utilities, sewers, electric lines, telephone or telegraph
lines, and other similar purposes, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of
title (and with respect to leasehold interests, mortgages, obligations,
liens and other encumbrances incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Restricted Subsidiary or the value of such
property for the purpose of such business; (6) deposits to secure public or
statutory obligations, or in lieu of surety or appeal bonds; or
(7) operation of law in favor of landlords, carriers, warehousemen,
bankers, mechanics, materialmen, laborers, employees or suppliers, incurred
in the ordinary course of business for sums which are not yet delinquent or
are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of
business of the Company or any Restricted Subsidiary;
(d) any Lien securing Indebtedness permitted under that section of the
Certificate of Designation described in clause (i) of paragraph (b) of "--
Limitation of Indebtedness" on the cash proceeds of such Indebtedness or on
the property, plant or equipment that is purchased, constructed or improved
with the direct or indirect proceeds of such Indebtedness (including any
attachments, accessions, additions to, or replacements or proceeds of such
property, plant or equipment); provided that the aggregate principal amount
of such Indebtedness does not exceed the sum of (i) the cost of purchasing,
constructing or improving such property, plant or equipment and (ii) the
remaining proceeds of such Indebtedness;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting a Voting Rights Triggering Event;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Certificate of Designation described in
clause (ii) or (iii) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of the Company or any Restricted Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries
other than the property or assets of the Acquired Person covered thereby or
the property assets so acquired;
(i) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any Restricted Subsidiary if and to the extent arising in the ordinary
course of business, including rights of offset and set-off;
(j) any Lien in favor of customs or revenue authorities to secure payment
of customs duties in connection with the importation of goods in the
ordinary course of business;
(k) leases or subleases granted to third Persons not interfering with the
ordinary course of business of the Company or its Restricted Subsidiaries;
and
(l) any Lien securing any extension, renewal, refinancing or replacement,
in whole or in part, of any obligation or Indebtedness described in the
foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"preferred stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of common stock of
the Company with gross proceeds to the Company of at least $25 million
pursuant to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than a registration statement
on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased at any time after the Issue Date; provided that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively, a
"Purchase Money Security Agreement") shall be entered into within 180 days
after the purchase or substantial completion of the construction of such
assets and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom,
(ii) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with the
purchase of additions and accessions thereto and except in respect of fees and
other obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Purchase Money Security Agreement is entered into exceed 100% of the
purchase price to the Company of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled Affiliate of
any Person which is or a controlled Affiliate of which is) engaged principally
in the Telecommunications Business and which has a Total Market Capitalization
of at least $1.0 billion.
"Subsidiary" means, with respect to any Person, an corporation, association
or other business entity (i) of which outstanding Capital Stock having at
least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of
voting interest is owned, directly or indirectly, by such Person and/or one or
more subsidiaries of such Person.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in (i) the business of transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) the business of
creating, developing or marketing
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communications related network equipment, software and other devices for use
in a Telecommunications Business or (iii) businesses reasonably related or
incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and
any Restricted Subsidiary, on a Consolidated basis, outstanding as of such
date of determination, after giving effect to any Incurrence of Indebtedness
and the application of the proceeds therefrom giving rise to such
determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for
purposes of clause (b) of the preceding sentence shall be determined by the
Board in good faith and evidenced by a resolution of the Board to be made
available to the holders of Preferred Stock through the Transfer Agent.
Notwithstanding the foregoing, unless the Person's Common Stock is listed on
any national securities exchange or on the Nasdaq National Market, the "Total
Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and
any subsidiaries (including the fair market value of their debt and equity),
as determined by an independent banking firm of national standing with
experience in such valuations and evidenced by a written opinion in customary
form to be made available to the holders of Preferred Stock through the
Transfer Agent; provided that for purposes of any such determination, the
enterprise value of the Person shall be calculated as if the Person were a
publicly held corporation without a controlling stockholder. For purposes of
any such determination, such banking firm's written opinion may state that
such fair market value is no less than a specified amount and such opinion may
be as of a date no earlier than 90 days prior to the date of such
determination.
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Restricted Subsidiaries provides credit support for Indebtedness of such
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness,
(c) such Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; and (v) such Unrestricted
Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the
Company which is not simultaneously being designated an Unrestricted
Subsidiary. Any such designation by the Board of Directors of the Company
shall be made available to the holders of Preferred Stock through the Transfer
Agent a board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
conditions and shall be deemed a Restricted Payment on the date of designation
in an amount equal to the greater of (1) the net book value of such Investment
or (2) the fair market value of such Investment as determined in good faith by
the Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted
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Subsidiary as a Restricted Subsidiary; provided that (i) immediately after
giving effect to such designation, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the restrictions
under "--Certain Covenants--Limitation on Indebtedness" and (ii) all
Indebtedness of such Subsidiary shall be deemed to be incurred on the date
such Subsidiary becomes a Restricted Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence)
the Company shall be deemed to have made a Restricted Payment equal to the
principal amount of any such Indebtedness to the extent guaranteed at the time
such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon
the occurrence of a default with respect thereto, does not result in, or
permit any holder of any Indebtedness of the Company or any Restricted
Subsidiary to declare, a default on such Indebtedness of the Company or any
Restricted Subsidiary or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of a corporation (irrespective of whether or not at the time Capital Stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which is owned by the Company or another Wholly Owned Subsidiary. For
the purposes of this definition, any director qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Preferred Stock to be resold
as set forth herein will initially be issued in the form of one Global
Security (the "Global Security"). The Global Security will be deposited on the
date of the closing of the sale of the Preferred Stock offered hereby (the
"Closing Date") with or on behalf of The Depositary Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Security
Holder").
Shares of Preferred Stock that are issued as described below under "--
Certificated Securities" will be issued in the form of registered definitive
certificates (the "Certificated Securities"). Upon the transfer of
Certificated Securities, such Certificated Securities may, unless the Global
Security has previously been exchanged for Certificated Securities, be
exchanged for an interest in the Global Security representing the shares of
Preferred Stock being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with
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the appropriate number of shares of the Global Security and (ii) ownership of
the Preferred Stock evidenced by the Global Security will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
Preferred Stock evidenced by the Global Security will be limited to such
extent. For certain other restrictions on the transferability of the Preferred
Stock see "Notice to Investors."
So long as the Global Security holder is the registered owner of any
Preferred Stock the Global Security Holder will be considered the sole holder
under the Certificate of Designation of any Preferred Stock evidenced by the
Global Security. Beneficial owners of Preferred Stock evidenced by the Global
Security will not be considered the owners or holders thereof under the
Certificate of Designation for any purpose. Neither the Company nor the
Transfer Agent will have any responsibility or liability for any aspect of the
records of the Depositary or for maintaining, supervising or reviewing any
records of the Depositary relating to the Preferred Stock.
Payments in respect of dividends and redemption payments and Liquidated
Damages, if any, on any Preferred Stock registered in the name of the Global
Security holder on the applicable record date will be payable by the Company
to or at the direction of the Global Security holder in its capacity as the
registered holder under the Certificate of Designation. Under the terms of the
Certificate of Designation, the Company and the Transfer Agent may treat the
persons in whose names Preferred Stock, including the Global Security, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Transfer Agent has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Preferred Stock. The Company believes, however, that it is currently
the policy of the Depositary to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown
on the records of the Depositary. Payments by the Depositary's Participants
and the Depositary's Indirect Participants to the beneficial owners of
Preferred Stock will be governed by standing instructions and customary
practice and will be the responsibility of the Depositary's Participants or
the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Security may, upon request to the Transfer Agent, exchange such
beneficial interest for Preferred Stock in the form of Certificated
Securities. Upon any such issuance, the Transfer Agent is required to register
such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). All such
certificated Preferred Stock would be subject to the legend requirements
described herein under "Notice to Investors." In addition, if (i) the Company
notifies the Transfer Agent in writing that the Depositary is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Transfer Agent in writing that it elects to cause the issuance of
Preferred Stock in the form of Certificated Securities under the Certificate
of Designation, then, upon surrender by the Global Security Holder of its
Global Security, Preferred Stock in such form will be issued to each person
that the Global Security Holder and the Depositary identify as being the
beneficial owner of the related Preferred Stock.
Neither the Company nor the Transfer Agent will be liable for any delay by
the Global Security Holder or the Depositary in identifying the beneficial
owners of Preferred Stock and the Company and the Transfer Agent may
conclusively rely on, and will be protected in relying on, instructions from
the Global Security Holder or the Depositary for all purposes.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The 13 1/2% Subordinated Debentures due 2010 (the "Exchange Debentures")
will be issued pursuant to an Indenture (the "Indenture") between the Company
and a trustee to be selected by the Company (the "Trustee"). The terms of the
Exchange Debentures include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act. The Exchange
Debentures are subject to all such terms, and holders of Exchange Debentures
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." However, under certain circumstances, the
Company will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture. As used in this
Description of the Exchange Debentures, the term "Company" refers to
Concentric Network Corporation, excluding its Subsidiaries.
RANKING
The Exchange Debentures will be general unsecured obligations of the Company
and will be subordinated in right of payment to all current and future Senior
Debt. As of March 31, 1998, on a pro forma basis giving effect to issuance of
the Series A Preferred, the Company would have had Senior Debt of
approximately $195.0 million. The Indenture will permit the incurrence of
additional Senior Debt in the future.
Certain of the Company's operations are conducted through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its
Subsidiaries to meet its obligations, including its obligations under the
Exchange Debentures. The Exchange Debentures will be effectively subordinated
to all indebtedness and other liabilities and commitments (including trade
payables and lease obligations) of the Company's Subsidiaries. Any right of
the Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the holders of the
Exchange Debentures to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the
extent that the Company is itself recognized as a creditor of such Subsidiary,
in which case the claims of the Company would still be subordinate to any
security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Debentures will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the holders of Exchange
Debentures will be entitled to receive any payment with respect to the
Exchange Debentures and until all Obligations with respect to Senior Debt are
paid in full, any distribution to which the holders of Exchange Debentures
would be entitled shall be made to the holders of Senior Debt.
The Company also may not make any payment upon or in respect of the Exchange
Debentures if (i) a default in the payment of the principal of, premium, if
any, or interest on Designated Senior Debt occurs and is continuing beyond any
applicable period of grace or (ii) any other default occurs and is continuing
with respect
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to Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the
Company or the holders of any Designated Senior Debt. Payments on the Exchange
Debentures may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default
is cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior Debt
has been accelerated. No new period of payment blockage may be commenced
unless and until (i) 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice and (ii) all scheduled payments of
principal, premium, if any, and interest on the Exchange Debentures that have
come due have been paid in full in cash. No more than one Payment Blockage
Notice to the Trustee may be given in any 360 day period. No nonpayment
default with respect to Designated Senior Debt that existed or was continuing
on the date of the commencement of any period of any payment blockage with
respect to the Designated Senior Debt initiating such period of payment
blockage will be, or can be, made the basis of the commencement of a second
period of payment blockage, unless such default has been cured for a period of
not less than 30 consecutive days.
The Indenture will further require that the Company promptly notify holders
of Designated Senior Debt if payment of the Exchange Debentures is accelerated
because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, holders of Exchange Debentures may recover less
ratably than creditors of the Company who are holders of Senior Debt. On a pro
forma basis, after giving effect to the Offering and the application of the
proceeds therefrom, the principal amount of Senior Debt outstanding at March
31, 1998, would have been approximately $195.0 million. The Indenture will
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Restricted
Subsidiaries can incur. See "--Certain Covenants--Limitation on Indebtedness."
PRINCIPAL, MATURITY AND INTEREST
The Exchange Debentures will be issued with an aggregate principal amount
limited to the aggregate liquidation preference of the Series A Preferred or
Series B Preferred, as the case may be, plus accumulated and unpaid dividends
on the date of exchange of the Series A Preferred Stock or Series B Preferred,
as the case may be, into Exchange Debentures (plus any additional Exchange
Debentures issued in lieu of cash interest as described herein) and will
mature on June 1, 2010. Interest will accrue at a rate of 13 1/2% per annum
and will be payable semi-annually on June 1 and December 1 of each year,
commencing on the first such date after the issuance date of the Exchange
Debentures, to holders of record on the immediately preceding May 15 and
November 15. Interest payable on or prior to June 1, 2003 may be paid in the
form of additional Exchange Debentures valued at the principal amount thereof.
Interest on the Exchange Debentures will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date
of issuance of the Exchange Debentures. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. The Exchange Debentures
will be payable both as to principal, premium, if any, interest and Liquidated
Damages (as defined), if any, at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest and Liquidated Damages may be made
by check mailed to the holders of the Exchange Debentures at their respective
addresses set forth in the register of holders of the Exchange Debentures.
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
Exchange Debentures will be issued in registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as set forth below, the Exchange Debentures may not be redeemed at
the option of the Company prior to June 1, 2003. The Exchange Debentures will
be subject to redemption at any time on or after June 1, 2003, at the option
of the Company, in whole or in part, on not less than 30 nor more than 60
days' prior notice
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in amounts of $1,000 or an integral multiple thereof at the following
redemption prices (expressed as percentages of the principal amount), if
redeemed during the 12-month period beginning of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................... 106.75%
2004........................................................... 105.40%
2005........................................................... 104.05%
2006........................................................... 102.70%
2007........................................................... 101.35%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due
on an interest payment date).
In addition, at any time prior to June 1, 2001, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or the
sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Exchange Debentures originally issued under the Indenture at a
redemption price equal to 113 1/2% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date;
provided that at least 65% of the initial aggregate principal amount of
Exchange Debentures remains outstanding immediately after the occurrence of
such redemption. In order to effect the foregoing redemption, the Company must
mail a notice of redemption no later than 45 days after the related Public
Equity Offering and must consummate such redemption within 60 days of the
closing of the Public Equity Offering.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Exchange Debentures.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Exchange
Debentures shall have the right to require that the Company purchase such
holder's Exchange Debentures in whole or in part in integral multiples of
$1,000, at a purchase price (the "Change of Control Purchase Price") in cash,
in an amount equal to 101% of the principal amount of such Exchange Debentures
or portion thereof, plus accrued and unpaid interest and Liquidated Damages,
if any, to the date of purchase (the "Change of Control Purchase Date"),
pursuant to the offer described below (the "Change of Control Offer") and in
accordance with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall give written
notice of such Change of Control to each holder of Exchange Debentures, by
first-class mail, postage prepaid, at his address appearing in the security
register, stating that a Change of Control has occurred and the date of such
event, the circumstances and relevant facts regarding such Change of Control;
the purchase price and the purchase date which shall be fixed by the Company
on a business day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act; that any Exchange Debentures not tendered
will continue to accrue interest; that, unless the Company defaults in the
payment of the Change of Control Purchase Price, any Exchange Debentures
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest after the Change of Control Purchase Date; and certain other
procedures that a holder of Exchange Debentures must follow to accept a Change
of Control Offer or to withdraw such acceptance.
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The Company will not be required to make a Change of Control Offer to the
holders of Exchange Debentures upon a Change of Control if either (a) a third
party makes the Change of Control Offer described above in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture, and purchases all Exchange Debentures validly tendered and not
withdrawn under such Change of Control Offer or (b) the date on which such
Change of Control Offer would otherwise be required to be made is on or prior
to the Existing Senior Notes Maturity Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Exchange Debentures that might be delivered by
holders of the Exchange Debentures seeking to accept the Change of Control
Offer. See "Risk Factors--Change of Control." The failure of the Company to
make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due will give the Trustee and the holders of the Exchange
Debentures the rights described under "Events of Default."
If the date on which a Change of Control Offer otherwise would be required
to be made is on or prior to the Existing Senior Notes Maturity Date, then, in
lieu of any such Change of Control Offer, holders of two-thirds of the
Exchange Debentures will be entitled to designate an Independent Financial
Advisor (as defined below) to determine, within 20 days of such designation,
in the opinion of such firm, the appropriate interest rate that the Exchange
Debentures should bear so that, after such reset, the Exchange Debentures
would have a market value of 101% of the aggregate principal amount thereof.
If, for any reason and within 15 days of the designation of an Independent
Financial Advisor by the holder, such Independent Financial Advisor is
unacceptable to the Company, the Company shall designate a second Independent
Financial Advisor to determine, within 15 days of such designation, in its
opinion, such an appropriate reset interest rate for the Exchange Debentures.
In the event that the two Independent Financial Advisors cannot agree, within
25 days of the designation of an Independent Financial Advisor by the holders
of two-thirds of the Exchange Debentures, on the appropriate reset interest
rate, the two Independent Financial Advisors shall, within 10 days of such
25th day, designate a third Independent Financial Advisor, which, within 15
days of designation, will determine, in its opinion, such an appropriate reset
rate which is between the two rates selected by the first two Independent
Financial Advisors; provided, however, that the reset rate shall in no event
be less than 13 1/2% per annum nor greater than 15 1/2% per annum. The
reasonable fees and expenses, including reasonable fees and expenses of legal
counsel, if any, and customary indemnification, of each of the three above-
referenced Independent Financial Advisors shall be borne by the Company. Upon
the determination of the reset rate, the Exchange Debentures shall accrue and
cumulate interest at the reset rate as of the date of occurrence of the Change
of Control. "Independent Financial Advisor" means a United States investment
banking firm of national standing in the United States which does not, and
whose directors, officers and employees or affiliates do not, have a direct or
indirect financial interest in the Company.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Exchange Debentures
to require that the Company repurchase or redeem the Exchange Debentures in
the event of a takeover, recapitalization or similar transaction.
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Exchange Debentures elected to
exercise their rights under the Indenture and the Company elected to contest
such election, there could be no assurance as to how a court interpreting New
York law would interpret the phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Exchange Debentures upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
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SELECTION OF EXCHANGE DEBENTURES FOR REDEMPTION OR OFFERS TO PURCHASE
If less than all of the Exchange Debentures are to be redeemed or to be
purchased pursuant to any purchase offer required under the Indenture at any
time, selection of Exchange Debentures for redemption or purchase will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Exchange Debentures are listed, or,
if the Exchange Debentures are not so listed, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate, provided that
no Exchange Debentures with a principal amount of $1,000 or less shall be
redeemed or purchased in part. A new Exchange Debenture in principal amount
equal to the unredeemed or unpurchased portion will be issued in the name of
the holder thereof upon cancellation of the original Exchange Debenture. On
and after the redemption or purchase date, interest will cease to accrue on
the Exchange Debentures or portions of them called for redemption or purchase.
NOTICE OF REDEMPTION
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of Exchange
Debentures to be redeemed at its registered address. If any Exchange Debenture
is to be redeemed in part only, the notice of redemption that relates to such
Exchange Debenture shall state the portion of the principal amount to be
redeemed.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness.
(a) The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, directly or indirectly, Incur any Indebtedness (other than the
Exchange Debentures); provided, however, that the Company may Incur
Indebtedness, and the Company or any Restricted Subsidiary may Incur Acquired
Indebtedness, if, at the time of such Incurrence, the Debt to Annualized
Operating Cash Flow Ratio would be less than or equal to 5.5 to 1.0 prior to
December 15, 2000, or less than or equal to 5.0 to 1.0 after December 15,
2000.
(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to Incurrence of Indebtedness permitted under any of the following
("Permitted Indebtedness"), each of which shall be given independent effect:
(i) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than Acquired Indebtedness) consisting of Capital
Lease Obligations, Purchase Money Obligations, mortgage financings or other
obligations incurred for the purpose of financing all or any part of the
purchase price, cost of construction or improvement of property, plant or
equipment used in connection with the Telecommunications Business or a
credit facility or a master lease arrangement entered into for the purpose
of providing such financing, provided that such Indebtedness does not
exceed the lesser of the Fair Market Value (determined at the time of the
consummation of the purchase, construction or improvement of such property,
plant or equipment) or the purchase price of such property, plant or
equipment;
(ii) Indebtedness of the Company or any of its Restricted Subsidiaries,
and any renewals, extensions, substitutions, refinancings or replacements
of such Indebtedness, so long as the aggregate principal amount of such
Indebtedness shall not exceed $50.0 million outstanding at any one time in
the aggregate;
(iii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than secured Acquired Indebtedness) in an aggregate
principal amount not to exceed, at any one time outstanding, 2.0 times the
Net Cash Proceeds received by the Company from the issuance and sale of any
class or series of its Capital Stock (other than Disqualified Stock) on and
after the Exchange Preferred Stock Issue Date plus the Fair Market Value of
any of its Capital Stock (other than Disqualified Stock) issued on and
after the Exchange Preferred Stock Issue Date in connection with the
acquisition of an equity interest
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in a Telecommunications Business or assets used in a Telecommunications
Business; provided that such Indebtedness does not mature prior to the
Stated Maturity of the Exchange Debentures or have an Average Life to
Stated Maturity that is shorter than the period then remaining prior to the
Stated Maturity of the Exchange Debentures;
(iv) Indebtedness of the Company or any Restricted Subsidiary entered
into in the ordinary course of business (a) pursuant to Interest Rate
Agreements designed to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of the
Company or any Restricted Subsidiary as long as the notional principal
amount of such Interest Rate Agreements do not exceed the aggregate
principal amount of such Indebtedness then outstanding, (b) under any
Currency Hedging Arrangements designed to protect the Company or any
Restricted Subsidiary against fluctuations in the value of any currency or
(c) under any Commodity Price Protection Agreements designed to protect the
Company or any Restricted Subsidiary against fluctuations in the price of
any commodity;
(v) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in respect of bid, performance or advance payment bonds and
appeal or surety bonds;
(vi) Indebtedness existing on the Exchange Preferred Stock Issue Date;
(vii) the Incurrence of (a) Indebtedness of any Restricted Subsidiary
owed to and held by the Company or another Restricted Subsidiary and (b)
Indebtedness of the Company owed to and held by any Restricted Subsidiary;
and
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi) and (vii) of this paragraph (b)
of this covenant including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby is not increased by
such refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing and, in the case of
any refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Exchange Debentures at least to
the same extent as the Indebtedness being refinanced and such refinancing
does not reduce the Average Life to Stated Maturity or the Stated Maturity
of such Subordinated Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred through the first paragraph of
this covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable, (ii) may classify
and divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such
paragraphs (or definitions), as applicable, in any order. (Section 1008)
Limitation on Restricted Payments.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on any
shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
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(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Subsidiaries or (b) to all holders of Capital Stock
of such Restricted Subsidiary on a pro rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Default or Event of Default shall
have occurred and be continuing; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "--Limitation on
Indebtedness"; and (3) after giving effect to the proposed Restricted Payment,
the aggregate amount of all such Restricted Payments declared or made after
the date of the Indenture, does not exceed the sum of the following (the
"Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the time of such
Restricted Payment less (ii) 150% of cumulative Consolidated Interest
Expense determined for the period (treated as one accounting period)
commencing on the date of the original issue of the Exchange Debentures and
ending on the last day of the most recent fiscal quarter immediately
preceding the date of such Restricted Payment for which consolidated
financial information of the Company is required to be available;
(B) the sum of (i)(x) capital contributions to the Company after the date
of the Indenture or (y) the aggregate Net Cash Proceeds received after the
date of the Indenture by the Company from the issuance or sale (other than
to any of its Restricted Subsidiaries) of Qualified Capital Stock of the
Company or any options, warrants or rights to purchase such Qualified
Capital Stock of the Company (except, in each case, to the extent such
proceeds are used to purchase, redeem or otherwise retire Capital Stock or
Subordinated Indebtedness as set forth below in clause (ii) or (iii) of
paragraph (b) below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase Qualified Capital Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Disqualified Stock of the Company or its Restricted
Subsidiaries into or for Qualified Capital Stock of the Company plus, to
the extent such debt securities or Disqualified Stock were issued after the
date of the Indenture, the aggregate of Net Cash Proceeds from their
original issuance; and
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the return of capital
with respect to such Investment and the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vi) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (vi) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment
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shall have been deemed to have been paid on such date of declaration and
shall not have been deemed a Permitted Payment for purposes of the
calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issuance and sale for cash (other
than to a Restricted Subsidiary) of, other shares of Qualified Capital
Stock of the Company; provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (3)(B)
of paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness or
Disqualified Stock in exchange for, or in an amount not in excess of the
Net Cash Proceeds of, a substantially concurrent issuance and sale for cash
(other than to any Restricted Subsidiary of the Company) of any Qualified
Capital Stock of the Company, provided that the Net Cash Proceeds from the
issuance of such shares of Qualified Capital Stock are excluded from clause
(3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Disqualified Stock) (a "refinancing") through the
substantially concurrent issuance of new Subordinated Indebtedness of the
Company, provided that any such new Subordinated Indebtedness (1) shall be
in a principal amount that does not exceed the principal amount so
refinanced (or, if such Subordinated Indebtedness provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, then such lesser amount as of the date
of determination), plus the lesser of (I) the stated amount of any premium
or other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing; (2) has an Average
Life to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Exchange Debentures; (3) has a Stated Maturity later than
the Stated Maturity of the Exchange Debentures; and (4) is expressly
subordinated in right of payment to the Exchange Debentures at least to the
same extent as the Subordinated Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Disqualified Stock through the
substantially concurrent issuance of new Disqualified Stock of the Company,
provided that any such new Disqualified Stock (1) shall have an aggregate
liquidation preference that does not exceed the aggregate liquidation
preference of the amount so refinanced; (2) has an Average Life to Stated
Maturity greater than the remaining Average Life to Stated Maturity of the
Exchange Debentures; and (3) has a Stated Maturity later than the Stated
Maturity of the Exchange Debentures; and
(vi) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Restricted Subsidiaries from
employees, former employees, directors or former directors of the Company
or any of its Restricted Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases in any calendar year shall not exceed $1.0 million and
$5.0 million in the aggregate. (Section 1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property
or services) with or for the benefit of any Affiliate of the Company (other
than the Company or a Wholly Owned Subsidiary) unless such transaction or
series of related transactions is entered into in good faith and in writing
and (a) such transaction or series of related transactions is on terms that
are no less favorable to the Company or such Restricted Subsidiary, as the
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case may be, than those that would be reasonably expected to be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
(b) with respect to any transaction or series of related transactions
involving aggregate value in excess of $3.0 million, the Company delivers an
officers' certificate to the Trustee certifying that such transaction or
series of related transactions complies with clause (a) above, and (c) with
respect to any transaction or series of related transactions involving
aggregate value in excess of $7.0 million, either (A) such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the Company, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (B) the Company
delivers to the Trustee a written opinion of an investment banking firm of
national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series of
related transactions for which an opinion is required stating that the
transactions or series of related transactions is fair to the Company or such
Restricted Subsidiary from a financial point of view; provided, however, that
this provision shall not apply to: (a) compensation and employee benefit
arrangements with any officer, director or employee of the Company, including
under any stock option or stock incentive plans, in the ordinary course of
business; (b) any transaction solely between or among the Company and/or any
Restricted Subsidiaries, if such transaction is otherwise in compliance with
the Indenture and is on fair and reasonable terms; (c) any transaction
otherwise permitted by the terms of the section of the Indenture described
under "Certain Covenants--Limitations on Restricted Payments;" (d) the
execution and delivery of or payments made under any tax sharing agreement
between or among any of the Company and any Restricted Subsidiary; (e)
licensing or sublicensing of use of any intellectual property by the Company
or any Restricted Subsidiary to any Restricted Subsidiary of the Company;
provided that the licensor shall continue to have access to such intellectual
property to the extent necessary for the conduct of its respective business;
(f) arrangements between the Company and any Restricted Subsidiary of the
Company for the purpose of providing services or employees to such Restricted
Subsidiary; (g) any transaction entered into for the purpose of granting or
altering registration rights with respect to the Capital Stock of the Company;
and (h) any transaction or series of related transactions entered into prior
to the date of the Indenture. (Section 1010)
Limitation on Liens.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur or affirm any Lien of any kind upon any
property or assets (including any intercompany notes) of the Company or any
Restricted Subsidiary owned on the date of the Indenture or acquired after the
date of the Indenture, or any income or profits therefrom, unless the Exchange
Debentures are directly secured equally and ratably with (or, in the case of
Subordinated Indebtedness, prior or senior thereto, with the same relative
priority as the Exchange Debentures shall have with respect to such
Subordinated Indebtedness) the obligation or liability secured by such Lien
except for any Permitted Liens. (Section 1011)
Limitation on Sale of Assets.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i)
at least 75% of the consideration from such Asset Sale is received in cash or
other comparable consideration (as described below), and (ii) the Company or
such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets subject
to such Asset Sale (as determined by the board of directors of the Company and
evidenced in a board resolution). The following types of consideration shall
be deemed "comparable consideration" for the purposes of this covenant: (A)
Cash Equivalents, (B) liabilities (contingent or otherwise) of the Company or
a Restricted Subsidiary assumed by the transferee (or its designee) such that
the Company or such Restricted Subsidiary has no further liability therefor,
and (C) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are immediately
converted by the Company or such Restricted Subsidiary into cash.
(b) The Company or a Restricted Subsidiary may, within 365 days of the Asset
Sale invest the Net Cash Proceeds in properties and other assets that will be
used in Telecommunications Businesses or to repay any Senior Indebtedness of
the Company or any Restricted Subsidiary (including the repurchase of the
Exchange
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Debentures). The amount of such Net Cash Proceeds not used or invested within
365 days of the Asset Sale as set forth in this paragraph constitutes "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an Excess Proceeds Offer in accordance
with the terms set forth under "Offer to Purchase with Excess Asset Sale
Proceeds." Notwithstanding the foregoing, the Company shall have no obligation
to make an Excess Proceeds Offer until after the Existing Senior Notes
Maturity Date.
(c) When the aggregate amount of Excess Proceeds exceeds $10.0 million or
more, the Company will apply the Excess Proceeds to the repayment of the
Exchange Debentures and any other Pari Passu Indebtedness outstanding with
similar provisions requiring the Company to make an offer to purchase such
Indebtedness with the proceeds from any Asset Sale as follows: (A) the Company
will make an offer to purchase (an "Offer") from all holders of the Exchange
Debentures in accordance with the procedures set forth in the Indenture in the
maximum principal amount (expressed as a multiple of $1,000) of Exchange
Debentures that may be purchased out of an amount (the "Debenture Amount")
equal to the product of such Excess Proceeds multiplied by a fraction, the
numerator of which is the outstanding principal amount of the Exchange
Debentures, and the denominator of which is the sum of the outstanding
principal amount of the Exchange Debentures and such Pari Passu Indebtedness
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined herein) of all Exchange Debentures tendered) and (B)
to the extent required by such Pari Passu Indebtedness to permanently reduce
the principal amount of such Pari Passu Indebtedness, the Company will make an
offer to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a
"Pari Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the
excess of the Excess Proceeds over the Debenture Amount; provided that in no
event will the Company be required to make a Pari Passu Offer in a Pari Passu
Debt Amount exceeding the principal amount of such Pari Passu Indebtedness.
The offer price for the Exchange Debentures will be payable in cash in an
amount equal to 100% of the principal amount of the Exchange Debentures plus
accrued and unpaid interest, if any, to the date (the "Offer Date") such Offer
is consummated (the "Offered Price"), in accordance with the procedures set
forth in the Indenture. To the extent that the aggregate Offered Price of the
Exchange Debentures tendered pursuant to the Offer is less than the Debenture
Amount relating thereto or the aggregate amount of Pari Passu Indebtedness
that is purchased in a Pari Passu Offer is less than the Pari Passu Debt
Amount, the Company will use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Exchange Debentures
and Pari Passu Indebtedness surrendered by holders thereof exceeds the amount
of Excess Proceeds, the Trustee shall select the Exchange Debentures to be
purchased on a pro rata basis. Upon the completion of the purchase of all the
Exchange Debentures tendered pursuant to an Offer and the completion of a Pari
Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
Notwithstanding the foregoing, if the date on which any Offer otherwise would
be required to be made is on or prior to the Existing Senior Notes Maturity
Date, the Company shall not be required to make an Offer until the first date
after the Existing Senior Notes Maturity Date.
(d) The Indenture will provide that, if the Company becomes obligated to
make an Offer pursuant to clause (c) above, the Exchange Debentures and the
Pari Passu Indebtedness shall be purchased by the Company, at the option of
the holders thereof, in whole or in part, in integral multiples of $1,000, on
a date that is not earlier than 30 days and not later than 60 days from the
date the notice of the Offer is given to holders, or such later date as may be
necessary for the Company to comply with the requirements under the Exchange
Act.
(e) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act,
and any other applicable securities laws or regulations in connection with an
Offer. (Section 1012)
Limitation on Issuances of Guarantees of Indebtedness
(a) The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Pari Passu Indebtedness or Subordinated Indebtedness of
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the Company unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a Guarantee
of the Exchange Debentures on the same terms as the guarantee of such
Indebtedness; provided, however, that (A) such guarantee need not be secured
unless required pursuant to "--Limitation on Liens" and (B) if such
Indebtedness is by its terms expressly subordinated to the Exchange
Debentures, any such assumption, guarantee or other liability of such
Restricted Subsidiary with respect to such Indebtedness shall be subordinated
to such Restricted Subsidiary's Guarantee of the Exchange Debentures at least
to the same extent as such Indebtedness is subordinated to the Exchange
Debentures; provided that this paragraph shall not apply to any guarantee or
assumption of liability of Indebtedness permitted under Indenture described in
clauses (i), (ii), (iv), (v), (vii) and (viii) of paragraph (b) of "Certain
Covenants--Limitation on Indebtedness."
(b) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
of the Exchange Debentures shall provide by its terms that it (and all Liens
securing the same) shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which transaction
is in compliance with the terms of the Indenture and such Restricted
Subsidiary is released from its guarantees of other Indebtedness of the
Company or any Restricted Subsidiaries. (Section 1013)
Limitation on Sale and Leaseback Transactions.
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, directly or indirectly, enter into any sale and leaseback
transaction with respect to any property or assets (whether now owned or
hereafter acquired) unless (i) the sale or transfer of such property or assets
to be leased is treated as an Asset Sale and complies with the "--Limitation
on Sale of Assets" covenant and (ii) the Company or such Restricted Subsidiary
would be entitled under the "Limitation on Indebtedness" covenant to incur any
Indebtedness (with the lease obligations being treated as Indebtedness for
purposes of ascertaining compliance with this covenant unless such lease is
properly classified as an operating lease under GAAP) in respect of such sale
and leaseback transaction. (Section 1015)
The foregoing restriction does not apply to any sale-leaseback transaction
if: (i) the lease is for a period, including renewal rights, not in excess of
three years; (ii) the transaction is solely between the Company and any Wholly
Owned Subsidiary or any Wholly Owned Subsidiary and any other Wholly Owned
Subsidiary; or (iii) the transaction is consummated within 180 days of the
acquisition by the Company or its Restricted Subsidiary of the property or
assets subject to such sale-leaseback or entered into within 180 days after
the purchase or substantial completion of the construction of such property or
assets.
Limitation on Restricted Subsidiary Capital Stock.
The Company will not permit (a) any Restricted Subsidiary of the Company to
issue any Capital Stock, except for (i) Capital Stock issued or sold to, held
by or transferred to the Company or a Wholly Owned Subsidiary, and (ii)
Capital Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary, (B) such Person merges with or into a Restricted
Subsidiary or (C) a Restricted Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) or (b) any Person (other than the Company or a Wholly Owned Subsidiary) to
acquire Capital Stock of any Restricted Subsidiary from the Company or any
Restricted Subsidiary, except, in the case of clause (a) or (b), (1) upon the
acquisition of all the outstanding Capital Stock of such Restricted Subsidiary
in accordance with the terms of the Indenture, (2) if, immediately after
giving effect to such issuance or sale, such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary, and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the provisions of the Indenture described in
"Certain Covenants--Limitations on Restricted Payments" if made on the date of
such issuance or sale, (3) issuances of director's qualifying shares, or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (4) issuances or sales
of common stock of a Restricted Subsidiary,
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provided that the Company or such Restricted Subsidiary applies the Net Cash
Proceeds, if any, in accordance with the provisions of the Indenture to the
extent applicable, (5) issuances after which the Company maintains its direct
or indirect percentage of beneficial and economic ownership of such Restricted
Subsidiary, or (6) issuances in connection with Acquisitions for the primary
purpose of minimizing tax liability to the Company, any of its Restricted
Subsidiaries, the Acquired Person or any shareholders of the Acquired Person.
(Section 1016)
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Restricted Subsidiary, (iii) make any Investment in the
Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction, with respect to a Restricted
Subsidiary that is not a Restricted Subsidiary of the Company on the date of
the Indenture, in existence at the time such Person becomes a Restricted
Subsidiary of the Company and not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary; (b)
encumbrances or restrictions (I) by reason of applicable law, or (II) under
the Indenture; (c) customary non-assignment provisions of any contract or
lease of any Restricted Subsidiary entered into in the ordinary course of
business; (d) encumbrances or restrictions imposed pursuant to contracts
entered into in connection with Permitted Liens, but solely to the extent such
encumbrances or restrictions affect property or assets subject to such
Permitted Lien; (e) any encumbrance or restriction imposed pursuant to
contracts for the sale of assets with respect to the assets to be sold
pursuant to such contract; and (f) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing
clauses (a) through (e), or in this clause (f), provided that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced. (Section 1017)
Limitations on Unrestricted Subsidiaries.
The Company will not make, and will not permit its Restricted Subsidiaries
to make, any Investment in Unrestricted Subsidiaries if, at the time thereof,
the aggregate amount of such Investments would exceed the amount of Restricted
Payments then permitted to be made pursuant to the "--Limitation on Restricted
Payments" covenant. Any Investments in Unrestricted Subsidiaries permitted to
be made pursuant to this covenant will be treated as a Restricted Payment in
calculating the amount of Restricted Payments made by the Company. (Section
1018)
Provision of Financial Statements.
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange
Act, file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to Sections 13(a) or 15(d) if the Company were so subject,
such documents to be filed with the Commission on or prior to the date (the
"Required Filing Date") by which the Company would have been required so to
file such documents if the Company were so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date (i) transmit by mail
to all holders, as their names and addresses appear in the security register,
without cost to such holders and (ii) file with the Trustee copies of the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to Sections 13(a) or
15(d) of the Exchange Act if the Company were subject to either of such
Sections and (y) if filing such documents by the Company with the Commission
is not permitted under the Exchange Act, promptly upon written request and
payment of the reasonable cost of duplication and delivery, supply copies of
such documents to any prospective holder at the Company's cost. If any
Guarantor's financial statements would be
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required to be included in the financial statements filed or delivered
pursuant to the Indenture if the Company were subject to Section 13(a) or
15(d) of the Exchange Act, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to the Indenture. The
Indenture also provides that, so long as any of the Exchange Debentures remain
outstanding, the Company will make available to any prospective purchaser of
Exchange Debentures or beneficial owner of Exchange Debentures in connection
with any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act, until such time as the Company has either exchanged the
Exchange Debentures for securities identical in all material respects which
have been registered under the Securities Act or until such time as the
holders thereof have disposed of such Exchange Debentures pursuant to an
effective registration statement under the Securities Act. (Section 1019)
Limitation on Business.
The Company will not, and will not permit any of the Restricted Subsidiaries
to, engage in a business which is not substantially a Telecommunications
Business. (Section 1022)
Additional Covenants.
The Indenture also contains covenants with respect to the following matters:
(i) payment of principal, premium and interest; (ii) maintenance of an office
or agency in The City of New York; (iii) arrangements regarding the handling
of money held in trust; (iv) maintenance of corporate existence; (v) payment
of taxes and other claims; (vi) maintenance of properties; and (vii)
maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons, unless
at the time and after giving effect thereto (i) either (a) the Company will be
the continuing corporation in the case of a consolidation or merger involving
the Company or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity") will
be a corporation duly organized and validly existing under the laws of the
United States of America, any state thereof or the District of Columbia and
such Person expressly assumes, by a supplemental indenture, in a form
reasonably satisfactory to the Trustee, all the obligations of the Company
under the Exchange Debentures, the Indenture and the Registration Rights
Agreement, as the case may be, and the Exchange Debentures, the Indenture and
the Registration Rights Agreement will remain in full force and effect as so
supplemented; (ii) immediately before and immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness not
previously an obligation of the Company or any of its Restricted Subsidiaries
which becomes the obligation of the Company or any of its Restricted
Subsidiaries as a result of such transaction as having been incurred at the
time of such transaction), no Default or Event of Default will have occurred
and be continuing; (iii) immediately after giving effect to such transaction
on a pro forma basis, the Company (or the Surviving Entity if the Company is
not the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the
provisions of "--Certain Covenants--Limitation on Indebtedness;" (iv) at the
time of the transaction, each Guarantor, if any, unless it is the other party
to the transactions described above, will have by supplemental indenture
confirmed that its Guarantee shall apply to such Person's obligations under
the Indenture and the Exchange Debentures; (v) at the time of the transaction
if any of the property or assets of the Company or any of its Restricted
Subsidiaries would thereupon become subject to any Lien, the provisions of "--
Certain Covenants--Limitation on Liens" are complied with; and (vi) at the
time of the transaction the Company or the Surviving Entity will have
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delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an
opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, transfer, lease or other transaction
and the supplemental indenture in respect thereof comply with the Indenture.
Notwithstanding the foregoing, the Company (i) may merge or consolidate with
any of its Restricted Subsidiaries, and (ii) the Company may merge or
consolidate into any Person in a transaction designed solely for the purpose
of effecting a change in the jurisdiction of incorporation of the Company
within the United States of America. (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Entity, such Surviving Entity shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Indenture, the Exchange Debentures and the Registration
Rights Agreement. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any
Exchange Debenture when it becomes due and payable, and such default shall
continue for a period of 60 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Exchange Debenture at its Maturity (upon
acceleration, optional or mandatory redemption, required repurchase or
otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture,
the Registration Rights Agreement or any Guarantee (other than a default in
the performance, or breach, of a covenant or agreement which is
specifically dealt with in clause (i), (ii) or in clause (b), (c) or (d) of
this clause (iii)) and such default or breach shall continue for a period
of 30 days after written notice has been given, by certified mail, (x) to
the Company by the Trustee or (y) to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount of the outstanding
Exchange Debentures; (b) there shall be a default in the performance or
breach of the provisions described in "--Consolidation, Merger, Sale of
Assets;" (c) the Company shall have failed to make or consummate an Offer
in accordance with the provision described in "--Certain Covenants--
Limitation on Sale of Assets;" or (d) the Company shall have failed to make
or consummate a Change of Control Offer in accordance with the provisions
of "--Change of Control;"
(iv) (a) any default by the Company or any Restricted Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $5.0 million under any agreement, indenture
or instrument evidencing Indebtedness when the same shall become due and
payable in full and such default shall have continued after any applicable
grace period and shall not have been cured or waived and, if not already
matured at its final maturity in accordance with its terms, the holder of
such Indebtedness shall have the right to accelerate such Indebtedness or
(b) any event of default as defined in any agreement, indenture or
instrument of the Company evidencing Indebtedness in excess of $5.0 million
shall have occurred and the Indebtedness thereunder, if not already matured
at its final maturity in accordance with its terms, shall have been
accelerated;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in
full force and effect and enforceable in accordance with its terms, except
to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments or orders for the payment of money in excess
of $5.0 million, either individually or in the aggregate, shall be rendered
against the Company not paid or covered by financially sound third-party
insurers, or any Restricted Subsidiary or any of their respective
properties and there shall not be discharged and there shall have been a
period of 60 consecutive days during which a stay of enforcement of such
judgment or order, by reason of an appeal or otherwise, shall not be in
effect;
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(vii) any holder or holders of at least $5.0 million in aggregate
principal amount of Indebtedness of the Company or any Restricted
Subsidiary after a default under such Indebtedness shall notify the Trustee
of its commencement of proceedings to foreclose on any assets of the
Company or any Restricted Subsidiary that have been pledged to or for the
benefit of such holder or holders to secure such Indebtedness or shall
commence proceedings, or take any action (including by way of set-off), to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of Indebtedness, assets of the Company
or any Restricted Subsidiary (including funds on deposit or held pursuant
to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Restricted Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (b) a decree or order adjudging the Company or
any Restricted Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Restricted Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or any Restricted
Subsidiary or of any substantial part of their respective properties, or
ordering the winding up or liquidation of their respective affairs, and any
such decree or order for relief shall continue to be in effect, or any such
other decree or order shall be unstayed and in effect, for a period of 60
consecutive days; or
(ix) (a) the Company or any Restricted Subsidiary commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any
Restricted Subsidiary consents to the entry of a decree or order for relief
in respect of the Company or such Restricted Subsidiary in an involuntary
case or proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or proceeding against it,
(c) the Company or any Restricted Subsidiary files a petition or answer or
consent seeking reorganization or relief under any applicable federal or
state law, (d) the Company or any Restricted Subsidiary (I) consents to the
filing of such petition or the appointment of, or taking possession by, a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or such Restricted Subsidiary or of any substantial
part of the Company's Consolidated properties, (II) makes an assignment for
the benefit of creditors or (III) admits in writing its inability to pay
its debts generally as they become due or (e) the Company or any Restricted
Subsidiary takes any corporate action in furtherance of any such actions in
this paragraph (ix). (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Exchange Debentures then outstanding may, and the
Trustee at the request of such holders shall, declare all unpaid principal of,
premium, if any, and accrued interest on all Exchange Debentures to be due and
payable, by a notice in writing to the Company (and to the Trustee if given by
the holders of the Exchange Debentures) and upon any such declaration, such
principal, premium, if any, and interest shall become due and payable
immediately. If an Event of Default specified in clause (viii) or (ix) of the
prior paragraph occurs with respect to the Company and is continuing, then all
the Exchange Debentures shall ipso facto become and be due and payable
immediately in an amount equal to the principal amount of the Exchange
Debentures, together with accrued and unpaid interest, if any, to the date the
Exchange Debentures become due and payable, without any declaration or other
act on the part of the Trustee or any holder. Thereupon, the Trustee may, at
its discretion, proceed to protect and enforce the rights of the holders of
Exchange Debentures by appropriate judicial proceedings. Notwithstanding the
foregoing provisions of this paragraph, the obligations under Exchange
Debentures shall not be accelerated or otherwise become due and payable under
this paragraph prior to the Existing Senior Notes Maturity Date.
If the date on which an Event of Default occurs is on or prior to the
Existing Senior Notes Maturity Date, then the remedy for such Event of Default
will be limited as set forth in this paragraph. Upon the acceleration of any
Designated Senior Debt by the holders thereof while any such Event of Default
is continuing, the interest rate payable with respect to the Exchange
Debentures will be increased by one-half of one percent per annum
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for the 90-day period following such Event of Default, which rate will further
increase by one-half of one percent per annum with respect to each subsequent
90-day period during which an Event of Default is continuing, up to a maximum
aggregate increase in interest rate of two percent (2%) per annum. Any
interest rate increase effected pursuant to the foregoing shall only be
effective during such time that such Event of Default is continuing (or any
other Event of Default is occurring while such initial Event of Default is
continuing) and prior to the Existing Senior Note Maturity Date. If an Event
of Default occurs prior to the Existing Senior Note Maturity Date but is
continuing past such date, then, upon the Existing Senior Note Maturity Date,
the interest rate will return to the stated rate and the Trustee and holders
of the Exchange Debentures will have the remedies described in the preceding
paragraph and as otherwise provided in the Indenture. In the event that an
Event of Default occurs prior to the Existing Senior Note Maturity Date and
the holders of Designated Senior Debt do not accelerate such Designated Senior
Debt, no remedy will exist for the Event of Default (unless such Event of
Default continues through the Existing Senior Note Maturity Date, in which
case the Trustee and holders of the Exchange Debentures will have the remedies
described in the preceding paragraph and as otherwise provided in the
Indenture effective upon the Existing Senior Note Maturity Date).
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Exchange Debentures outstanding by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Exchange Debentures then outstanding, (iii) the
principal of and premium, if any, on any Exchange Debentures then outstanding
which have become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Exchange Debentures and (iv) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate borne by the Exchange Debentures; and (b) all Events of Default,
other than the non-payment of principal of the Exchange Debentures which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture. No such rescission shall affect any
subsequent default or impair any right consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Exchange Debentures outstanding may on behalf of the holders of all
outstanding Exchange Debentures waive any past default under the Indenture and
its consequences, except a default in the payment of the principal of,
premium, if any, or interest on any Exchange Debenture or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Exchange Debenture affected by such
modification or amendment. (Section 513)
The Company is also required to notify the Trustee within thirty business
days of the occurrence of any Default unless such Default shall have been
cured. (Section 602) The Company is required to deliver to the Trustee, on or
before a date not more than 60 days after the end of each fiscal quarter and
not more than 120 days after the end of each fiscal year, a written statement
as to compliance with the Indenture, including whether or not any Default has
occurred that is not cured. (Section 1020)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the
Exchange Debentures discharged with respect to the outstanding Exchange
Debentures ("defeasance"). Such defeasance means that the Company, any such
Guarantor and any
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other obligor under the Indenture shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Exchange Debentures,
except for (i) the rights of holders of such outstanding Exchange Debentures
to receive payments in respect of the principal of, premium, if any, and
interest on such Exchange Debentures when such payments are due, (ii) the
Company's obligations with respect to the Exchange Debentures concerning
issuing temporary Exchange Debentures, registration of Exchange Debentures,
mutilated, destroyed, lost or stolen Exchange Debentures, and the maintenance
of an office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee
and (iv) the defeasance provisions of the Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations of the
Company and any Guarantor released with respect to certain covenants that are
described in the Indenture ("covenant defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Exchange Debentures. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Exchange Debentures.
(Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Exchange Debentures cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants or a nationally recognized
investment banking firm, to pay and discharge the principal of, premium, if
any, and interest on the outstanding Exchange Debentures on the Stated
Maturity thereof (or on any date after June 1, 2003 (such date being referred
to as the "Defeasance Redemption Date"), if at or prior to electing either
defeasance or covenant defeasance, the Company has delivered to the Trustee an
irrevocable notice to redeem all of the outstanding Exchange Debentures on the
Defeasance Redemption Date); (ii) in the case of defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States stating that (A) the Company has 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 based thereon such opinion of
independent counsel in the United States shall confirm that, the holders of
the outstanding Exchange Debentures will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred; (iii) in the case of covenant defeasance, the Company shall have
delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the holders of the outstanding Exchange Debentures
will not recognize income, gain or loss for federal income tax purposes as a
result of such 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 such covenant defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as clauses (viii) or (ix) under the first paragraph under--
"Events of Default" are concerned, at any time during the period ending on the
91st day after the date of deposit; (v) such defeasance or covenant defeasance
shall not cause the Trustee for the Exchange Debentures to have a conflicting
interest for purposes of the Trust Indenture Act with respect to any
securities of the Company or any Guarantor; (vi) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
Default under, the Indenture or any other material agreement or instrument to
which the Company, any Guarantor or any Restricted Subsidiary is a party or by
which it is bound; (vii) such defeasance or covenant defeasance shall not
result in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as amended,
unless such trust shall be registered under such Act or exempt from
registration thereunder; (viii) the Company will have delivered to the Trustee
an opinion of independent counsel in the United States to the effect that
after the 91st day following the deposit, the trust funds will not be subject
to the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally; (ix) the Company shall
have delivered to the Trustee an officers' certificate stating that the
deposit was not made by the Company with the intent of preferring the holders
of the Exchange Debentures or any Guarantee over the other creditors of the
Company or any Guarantor with the intent of defeating, hindering, delaying or
defrauding creditors of the Company, any Guarantor or others; (x) no event or
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condition shall exist that would prevent the Company from making payments of
the principal of, premium, if any, and interest on the Exchange Debentures on
the date of such deposit or at any time ending on the 91st day after the date
of such deposit; and (xi) the Company will have delivered to the Trustee an
officers' certificate and an opinion of independent counsel, each stating that
all conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with. (Section
404)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Exchange Debentures as expressly provided for in the Indenture) as to all
outstanding Exchange Debentures under the Indenture when (a) either (i) all
such Exchange Debentures theretofore authenticated and delivered (except lost,
stolen or destroyed Exchange Debentures which have been replaced or paid or
Exchange Debentures whose payment has been deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Company or
discharged from such trust as provided for in the Indenture) have been
delivered to the Trustee for cancellation or (ii) all Exchange Debentures not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under
arrangements reasonably satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company;
and the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount in United States
dollars sufficient to pay and discharge the entire indebtedness on the
Exchange Debentures not theretofore delivered to the Trustee for cancellation,
including principal of, premium, if any, and accrued interest at such
Maturity, Stated Maturity or redemption date; (b) the Company or any Guarantor
has paid or caused to be paid all other sums payable under the Indenture by
the Company and any Guarantor; and (c) the Company has delivered to the
Trustee an officers' certificate and an opinion of independent counsel each
stating that (i) all conditions precedent under the Indenture relating to the
satisfaction and discharge of such Indenture have been complied with and (ii)
such satisfaction and discharge will not result in a breach or violation of,
or constitute a default under, the Indenture or any other material agreement
or instrument to which the Company, any Guarantor or any Restricted Subsidiary
is a party or by which the Company, any Guarantor or any Restricted Subsidiary
is bound. (Section 1301)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority in aggregate principal amount of the Exchange Debentures then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Exchange Debenture
affected thereby: (i) change the Stated Maturity of the principal of, or any
installment of interest on, or change to an earlier date any redemption date
of, or waive a default in the payment of the principal or interest on, any
such Exchange Debenture or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which the principal of any such Exchange Debenture or
any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof (or, in the case of redemption, on or after the redemption
date); (ii) amend, change or modify the obligation of the Company to make and
consummate an Offer with respect to any Asset Sale or Asset Sales in
accordance with "Certain Covenants--Limitation on Sale of Assets" or the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control in accordance with "--Change of Control,"
including, in each case, amending, changing or modifying any definitions
relating thereto; (iii) reduce the percentage in principal amount of such
outstanding Exchange Debentures, the consent of whose holders is required for
any such supplemental indenture, or the consent of whose holders is required
for any waiver or compliance with certain provisions of the Indenture; (iv)
modify any of the provisions relating to supplemental indentures requiring the
consent of holders or relating to the waiver of past defaults or relating to
the waiver of certain covenants, except to increase the percentage of such
outstanding Exchange Debentures required for such actions or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the holder of each such Exchange Debenture affected thereby;
(v) except as otherwise
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permitted under "Consolidation, Merger, Sale of Assets," consent to the
assignment or transfer by the Company or any Guarantor of any of its rights
and obligations under the Indenture; or (vi) amend or modify any of the
provisions of the Indenture in any manner which subordinates the Exchange
Debentures issued thereunder in right of payment to any other Indebtedness of
the Company or which subordinates any Guarantee in right of payment to any
other Indebtedness of the Guarantor issuing any such Guarantee. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Exchange Debentures, the Company, any Guarantor and the Trustee may modify or
amend the Indenture: (a) to evidence the succession of another Person to the
Company or a Guarantor, and the assumption by any such successor of the
covenants of the Company or such Guarantor in the Indenture, the Exchange
Debentures, the Registration Rights Agreement and in any Guarantee in
accordance with "--Consolidation, Merger, Sale of Assets"; (b) to add to the
covenants of the Company, any Guarantor or any other obligor upon the Exchange
Debentures for the benefit of the holders of the Exchange Debentures or to
surrender any right or power conferred upon the Company or any Guarantor or
any other obligor upon the Exchange Debentures, as applicable, in the
Indenture, in the Exchange Debentures or in any Guarantee; (c) to cure any
ambiguity, or to correct or supplement any provision in the Indenture, the
Exchange Debentures or any Guarantee which may be defective or inconsistent
with any other provision in the Indenture, the Exchange Debentures or any
Guarantee or make any other provisions with respect to matters or questions
arising under the Indenture, the Exchange Debentures or any Guarantee;
provided that, in each case, such provisions shall not adversely affect the
interest of the holders of the Exchange Debentures; (d) to comply with the
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act; (e) to add a
Guarantor under the Indenture; (f) to evidence and provide the acceptance of
the appointment of a successor Trustee under the Indenture; or (g) to
mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the holders of the Exchange Debentures as
additional security for the payment and performance of the Company's and any
Guarantor's obligations under the Indenture, in any property, or assets,
including any of which are required to be mortgaged, pledged or hypothecated,
or in which a security interest is required to be granted to the Trustee
pursuant to the Indenture or otherwise. (Section 901)
The holders of a majority in aggregate principal amount of the Exchange
Debentures outstanding may waive compliance with certain restrictive covenants
and provisions of the Indenture. (Section 1021)
GOVERNING LAW
The Indenture, the Exchange Debentures and any Guarantee will be governed
by, and construed in accordance with, the laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue as Trustee with such conflict or resign as Trustee.
(Sections 608 and 610)
The holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default occurs (which has not been cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
at the request of any holder of Exchange Debentures unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense. (Sections 601 and 603)
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Certificate of
Designation, the Indenture or the Registration Rights Agreement without charge
by writing to Concentric Network Corporation, 10590 N. Tantau Road, Cupertino,
California 95014, Attention: Peter Bergeron, Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Debentures to be
resold as set forth herein will initially be issued in the form of one Global
Security (the "Global Security"). The Global Security and the Global Warrant
Certificate are sometimes each referred to herein as a "Global Security." Each
Global Security will be deposited on the date of the closing of the sale of
the Exchange Debentures offered hereby (the "Closing Date") with, or on behalf
of, The Depositary Trust Company ( the "Depositary") and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred
to herein as the "Global Security Holder").
Exchange Debentures that were (i) transferred to institutional "accredited
investors" who are not "qualified institutional buyers" (as such terms are
defined under "Notice to Investors" elsewhere herein (the "Non-Global
Purchasers")) or (ii) issued as described below under "Certificated
Securities" will be issued in registered, definitive, certificated form (the
"Certificated Securities"). Upon the transfer to a qualified institutional
buyer of any Certificated Security initially issued to a Non-Global Purchaser,
such Certificated Security may, unless a Global Security has previously been
exchanged for Certificated Securities, be exchanged for an interest in a
Global Security representing the principal amount of the Securities being
transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of any Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of any Global Security and (ii) ownership of
the Exchange Debentures evidenced by each Global Security will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to own, transfer
or pledge Exchange Debentures evidenced by any Global Security will be limited
to such extent. For certain other restrictions on the transferability of the
Exchange Debentures, see "Notice to Investors."
So long as the Global Security Holder is the registered owner of any
Exchange Debentures, the Global Security Holder will be considered the sole
holder under the Indenture of any Exchange Debentures evidenced by any Global
Security. Beneficial owners of Exchange Debentures evidenced by any Global
Security will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Exchange Debentures.
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Payments in respect of the principal of, premium, if any, interest and
Additional Interest, if any, on any Exchange Debentures registered in the name
of the Global Security Holder on the applicable record date will be payable by
the Trustee to or at the direction of the Global Security Holder in its
capacity as the registered holder under the Indenture. Under the terms of the
Indenture, the Company and the Trustee may treat the person in whose names
Exchange Debentures, including any Global Security, are registered as the
owners thereof for the purpose of receiving such payments. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Exchange
Debentures. The Company believes, however, that it is currently the policy of
the Depositary to immediately credit the accounts of the relevant Participants
with such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Exchange Debentures will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SECURITIES
Transferees of Exchange Debentures who are not "qualified institutional
buyers" as defined in Rule 144A under the Securities Act may hold Exchange
Debentures only in the form of Certificated Securities. All such Certificated
Securities would be subject to the legend requirements described herein under
"Notice to Investors." In addition, if (i) the Company notifies the Trustee in
writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that
it elects to change the issuance of Exchange Debentures in the form of
Certificated Securities under the Indenture then, upon surrender by the Global
Security Holder of any Global Security, Certificated Securities will be issued
to each person that the Global Security Holder and the Depositary identify as
being the beneficial owner of the related Exchange Debentures.
Neither the Company nor the Trustee will be liable for any delay by the
Global Security Holder or the Depositary in identifying the beneficial owners
of Exchange Debentures and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Security
Holder or the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Exchange
Debentures represented by the Global Security (including principal, premium,
if any, interest and Additional Interest, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Global Security
Holder. With respect to Certificated Securities, the Company will make all
payments of principal, premium, if any, interest and Additional Interest, if
any, by wire transfer of immediately available funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address. Secondary trading in long-term notes
and debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the Exchange Debentures represented by the Global
Security have been approved for trading in The Portal Market and to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Exchange Debentures will, therefore, be
required by the Depositary to be settled in immediately available funds. The
Company expects that secondary trading in the Certificated Securities will
also be settled in immediately available funds.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be,
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by
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which such Person becomes a Restricted Subsidiary or such asset acquisition
shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Capital
Stock of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Subsidiary or shall
be consolidated, merged with or into the Company or any Restricted Subsidiary
or (ii) any acquisition by the Company or any Restricted Subsidiary of the
assets of any Person which constitute substantially all of an operating unit
or line of business of such Person or which is otherwise outside of the
ordinary course of business of the Company or such Restricted Subsidiary.
"Additional Interest" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include any transfer of properties and assets (A) that is governed by the
provisions described under "Consolidation, Merger, Sale of Assets," (B) that
is by the Company to any Restricted Subsidiary or by any Restricted Subsidiary
to the Company or any other Restricted Subsidiary in accordance with the terms
of the Indenture, (C) that is of obsolete equipment in the ordinary course of
business, (D) the Fair Market Value of which in the aggregate does not exceed
$200,000 in any transaction or series of related transactions, (E) that is
made in accordance with the provisions described under "Certain Covenants--
Limitations on Restricted Payments," (F) which constitutes the granting of any
Permitted Lien and (G) any transfer of assets that are transferred in exchange
for one or more like-kind assets; provided that if the Fair Market Value of
the assets to be transferred by the Company or such Restricted Subsidiary
under this clause G, plus the Fair Market Value of any other consideration
paid or credited by the Company or such Restricted Subsidiary exceeds $1
million, such transaction shall require approval of the Board of Directors of
the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
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"Capital Stock" means (i) with respect to any Person that is a corporation,
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 such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership, membership or
other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more
than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than $500 million, whose short
term debt has a rating, at the time as of which any investment therein is
made, of "P-1" (or higher) according to Moody's Investors Service, Inc.
("Moody's") or any successor rating agency or "A-1" (or higher) according to
Standard & Poor's Corporation ("S&P") or any successor rating agency, (iii)
commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate or Restricted
Subsidiary of the Company) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P and (iv) any money market deposit accounts issued or
offered by a domestic commercial bank having capital and surplus in excess of
$500 million; provided that the short term debt of such commercial bank has a
rating, at the time of Investment, of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed
to have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office;
(iii) the Company consolidates with or merges with or into any Person or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with the
Company in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities
or other property, other than any such transaction where the outstanding
Voting Stock of the Company is not changed or exchanged at all (except to the
extent necessary to reflect a change in the jurisdiction of incorporation of
the Company or where no "person" or "group" owns, immediately after such
transaction, directly or indirectly, more than 50% of the total outstanding
Voting Stock of the surviving corporation); or (iv) the Company is liquidated
or dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
date of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body
performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value which is dependent upon, fluctuations in commodity
prices.
"Company" means Concentric Network Corporation, a corporation incorporated
under the laws of Delaware, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
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"Consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price
Protection Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b) (i) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such
Person and its subsidiaries plus (c) the interest expense actually paid by
such Person under any Guaranteed Debt of such Person and any Subsidiary to the
extent not included under clause (a)(iv) above, plus (d) the aggregate amount
for such period of cash or non-cash dividends on any Disqualified Stock or
preferred stock of the Company and its Restricted Subsidiaries, in each case
as determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and any Restricted Subsidiary for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included
in calculating such net income, by excluding, without duplication, (a) other
than for purposes of calculating the Basket, all extraordinary gains or losses
for such period, (b) other than for purposes of calculating the Basket, all
gains or losses from the sales or other dispositions of assets out of the
ordinary course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period: (c) that portion of such net
income derived from or in respect of investments in Persons other than
Restricted Subsidiaries, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject, in the case of any Restricted
Subsidiary, to the provisions of clause (f) of this definition); (d) the
portion of such net income (or loss) allocable to minority interests in any
Person (other than a Restricted Subsidiary) for such period, except to the
extent the Company's allocation portion of such Person's net income for such
period is actually received in cash by the Company or any Restricted
Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (f) of this definition); (e) the net income (or loss) or
any other Person combined with the Company or any Restricted Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination; and (f) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to
the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other non-
cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the
Company and any Restricted Subsidiary, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus
non-cash items to the extent they increase Consolidated Net Income (including
the partial or entire reversal of reserves taken in prior periods) for such
period.
"Credit Agreement" means, with respect to any Person, any agreement entered
into by and among such Person and one or more commercial banks or financial
institutions, providing for senior term or revolving credit borrowings of a
type similar to credit agreements typically entered into by commercial banks
and financial institutions, including and related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and related agreements may be amended,
extended, refinanced, renewed, restated, replaced or refunded from time to
time.
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"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the original issue date of the Exchange Debentures and
ending on the last day of the most recent fiscal quarter immediately preceding
the date of determination for which consolidated financial information of the
Company is available or, if such cumulative Consolidated Operating Cash Flow
for such period is negative, the negative amount by which cumulative
Consolidated Operating Cash Flow is less than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow
for the latest two fiscal quarters for which financial information is
available immediately preceding such Determination Date (the "Measurement
Period"). For purposes of calculating Consolidated Operating Cash Flow for the
Measurement Period immediately prior to the relevant Determination Date, (i)
any Person that is a Restricted Subsidiary on the Determination Date (or would
become a Restricted Subsidiary on such Determination Date in connection with
the transaction that requires the determination of such Consolidated Operating
Cash Flow) will be deemed to have been a Restricted Subsidiary at all times
during such Measurement Period, (ii) any Person that is not a Restricted
Subsidiary on such Determination Date (or would cease to be a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period, and (iii) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired (through an Acquisition or the
commencement of activities constituting such operating business) or (y)
disposed of (by of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to
such Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement
of activities constituting such operating business, all such transactions had
been consummated prior to the first day of such Measurement Period (it being
understood that in calculating Consolidated Operating Cash Flow the exclusions
set forth in clauses (a) through (f) of the definition of Consolidated Net
Income shall apply to an Acquired Person as if it were a Restricted
Subsidiary).
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Designated Senior Debt" means (i) a Credit Agreement, (ii) the Existing
Senior Notes and (iii) any other Senior Debt permitted under the Indenture the
principal amount of which is $20 million or more (when aggregated with all
other Debt incurred with the same issuance or transaction) and that has been
designated by the Company as "Designated Senior Debt."
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
(excluding the Exchange Preferred Stock) which, by its terms (or by the terms
of any security into which it is convertible at the option of the holder
thereof or for which it is exchangeable at the option of the holder thereof),
or upon the happening of any event, matures or becomes mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or becomes exchangeable
for Indebtedness at the option of the holder thereof, or becomes redeemable at
the option of the holder thereof, in whole or in part, on or prior to the
earlier of the Stated Maturity of the Exchange Debentures or the date the
Indenture is discharged pursuant to the terms of the Indenture; provided such
Capital Stock shall only constitute Disqualified Stock to the extent it so
matures or becomes so redeemable or
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exchangeable on or prior to the earlier of the Stated Maturity of the Exchange
Debentures or the date the Indenture is discharged pursuant to the terms of
the Indenture; provided, further, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the earlier of the Stated Maturity of the Exchange Debentures or the
date the Indenture is discharged pursuant to the terms of the Indenture shall
not constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in "Limitation on
Sale of Assets" and "Change of Control" described above and such Capital Stock
specifically provides that such person will not repurchase or redeem any such
stock pursuant to such provision prior to the Issuer's repurchase of such
Exchange Debentures as are required to be repurchased pursuant to the
"Limitation on Sale of Assets" and "Change of Control" provisions described
above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Exchange Debentures" means the Initial Exchange Debentures and the New
Exchange Debentures issued from time to time under the Indenture.
"Exchange Preferred Stock" means the Company's 13 1/2% Senior Redeemable
Exchangeable Preferred Stock due 2010.
"Exchange Preferred Stock Issue Date" means the date on which shares of the
Exchange Preferred Stock are first issued.
"Existing Senior Notes" means the Company's 12 3/4% Senior Notes due 2007.
"Existing Senior Notes Indenture" means the Indenture governing the
Company's 12 3/4% Senior Notes due 2007, as may be amended from time to time.
"Existing Senior Notes Maturity Date" means the earlier of (i) the "Stated
Maturity" of the principal of the Existing Senior Notes as such term is used
for the purpose of determining whether "Capital Stock" constitutes
"Indebtedness" (as such terms are defined in the Existing Senior Notes
Indenture) under the Existing Senior Notes Indenture or (ii) December 15,
2007.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market
Value shall be determined by the board of directors of the Company acting in
good faith and shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest in, the debtor (including
any agreement to pay for property or services without requiring that such
property be received or such services be rendered), (iv) to maintain working
capital or equity capital of the debtor, or otherwise to maintain the net
worth, solvency or other financial condition of the debtor or (v) otherwise to
assure
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a creditor against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course
of business.
"Guarantor" means any Restricted Subsidiary which is a guarantor of the
Exchange Debentures, including any Person that is required after the date of
the Indenture to execute a guarantee of the Exchange Debentures pursuant to
the "Limitation on Issuance of Guarantees of Indebtedness" covenant until a
successor replaces such party pursuant to the applicable provisions of the
Indenture and, thereafter, shall mean such successor.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of a Person existing at
the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary shall be
deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii)
all obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends of other Persons, the payment of which is secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness, (vii) all Disqualified Stock issued by such
Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accumulated and unpaid dividends, and (viii) any
amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (i)
through (vii) above. For purposes hereof, the "maximum fixed repurchase price"
of any Disqualified Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Stock as if
such Disqualified Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Disqualified Stock,
such Fair Market Value to be determined in good faith by the board of
directors of the issuer of such Disqualified Stock. In no event shall
"Indebtedness" include any trade payable or other current liabilities arising
in the ordinary course of business. The amount of any item of Indebtedness
shall be the amount of such Indebtedness properly classified as a liability on
a balance sheet prepared in accordance with GAAP.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Exchange Debentures including any
Guarantor, to pay principal of, premium, if any, and interest when due and
payable, and all other amounts due or to become due under or in connection
with the Indenture, the Exchange Debentures and the performance of all other
obligations to the Trustee and the holders under the Indenture and the
Exchange Debentures, according to the respective terms thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
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"Initial Exchange Debentures" means Exchange Debentures issued in this
Offering.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit 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 or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities issued or owned by any other
Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease
properly classified as an operating lease under GAAP and intellectual property
licensing arrangements.
"Issue Date" means the date on which shares of Preferred Stock are first
issued.
"Maturity" means, when used with respect to the Exchange Debentures, the
date on which the principal of the Exchange Debentures becomes due and payable
as therein provided or as provided in the Indenture, whether at Stated
Maturity, the Offer Date or the redemption date and whether by declaration of
acceleration, Offer in respect of Excess Proceeds, Change of Control Offer in
respect of a Change of Control, call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets
when disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) net of (i) brokerage commissions and other reasonable
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as
a result of such Asset Sale, (iii) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets or properties the
subject of such Asset Sale, (iv) amounts required to be paid to any Person
(other than the Company or any Restricted Subsidiary) owning a beneficial
interest in the assets subject to the Asset Sale and (v) appropriate amounts
to be provided by the Company or any Restricted Subsidiary, as the case may
be, as a reserve, in accordance with GAAP, against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an officers' certificate
delivered to the Trustee and (b) with respect to any issuance or sale of
Capital Stock or options, warrants or rights to purchase Capital Stock, or
debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock as referred to under "--Certain Covenants--Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of
cash or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale (or conversion in the case
of debt securities or Capital Stock that have been converted) and net of taxes
paid or payable as a result thereof.
"New Exchange Debentures" means New Exchange Debentures issued in exchange
for Initial Exchange Debentures pursuant to Registration Rights Agreement.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is
pari passu in right of payment to the Exchange Debentures and (b) with respect
to any Guarantee, Indebtedness which ranks pari passu in right of payment to
such Guarantee.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly
Owned Subsidiary or (b) is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, or is liquidated into,
the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company
or a Restricted Subsidiary described under clauses (iv) and (vii) of paragraph
(b) under "--Certain Covenants--Limitation on Indebtedness;" (iii) Investments
in any of the Exchange Debentures; (iv) Investments in Cash Equivalents; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale permitted under "--Certain Covenants--Limitation on Sale of
Assets" to the extent such Investments are non-cash proceeds as permitted
under such covenant; (vi) Investments in existence on the date of the
Indenture; (vii) guarantees of Indebtedness of a Wholly Owned Subsidiary given
by the Company or another Wholly Owned Subsidiary and guarantees of
Indebtedness of the Company given by any Restricted Subsidiary, in each case,
in accordance with the terms of the Indenture; (viii) advances to employees or
officers of the Company in the ordinary course of business so long as the
aggregate amount of such advances shall not exceed $1 million outstanding at
any one time; (ix) any Investment in the Company by any Restricted Subsidiary
of the Company; provided, that any such Investment in the form of Indebtedness
shall be Subordinated Indebtedness; (x) accounts receivable created or
acquired in the ordinary course of business of the Company or any Restricted
Subsidiary and Investments arising from transactions by the Company or any
Restricted Subsidiary with trade creditors or customers in the ordinary course
of business (including any such Investment received pursuant to any plan of
reorganization or similar arrangement pursuant to the bankruptcy or insolvency
of such trade creditors or customers or otherwise in settlement of a claim);
(xi) loans in the ordinary course of business to employees of the Company or a
Restricted Subsidiary to purchase Capital Stock of the Company pursuant to the
terms of employee stock benefit plans; (xii) Investments the consideration of
which is Capital Stock of the Company; (xiii) stock obligations or securities
received in satisfaction of judgments; (xiv) Investments in prepaid expenses,
negotiable instruments held for collection, and lease, utility and workers'
compensation, performance and other similar deposits; and (xv) any other
Investments in an aggregate amount not to exceed $20 million at any one time
outstanding. In connection with any assets or property contributed or
transferred to any Person as an Investment, such property and assets shall be
equal to the Fair Market Value (as determined by the Company's Board of
Directors) at the time of such Investment.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other insurance
or arising under worker's compensation laws or similar legislation; (4)
good faith deposits in connection with bids, tenders, leases, contracts
(other than contracts evidencing Indebtedness); (5) zoning restrictions,
easements, licenses, reservations, title defects, rights of others for
rights of way, utilities, sewers, electric lines, telephone or telegraph
lines, and other similar purposes, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of
title (and with respect to leasehold interests, mortgages, obligations,
liens and other encumbrances incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Restricted Subsidiary or the value of such
property for the purpose of such business; (6) deposits to secure public or
statutory obligations, or in lieu of surety or appeal bonds; or (7)
operation of law in favor of landlords, carriers, warehousemen, bankers,
mechanics, materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business for sums which are not yet delinquent
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or are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of
business of the Company or any Restricted Subsidiary;
(d) any Lien securing Indebtedness permitted under that section of the
Indenture described in clause (i) of paragraph (b) of "--Limitation on
Indebtedness" on the cash proceeds of such Indebtedness or on the property,
plant or equipment that is purchased, constructed or improved with the
direct or indirect proceeds of such Indebtedness (including any
attachments, accessions, additions to, or replacements or proceeds of such
property, plant or equipment); provided that the aggregate principal amount
of such Indebtedness does not exceed the sum of (i) the cost of purchasing,
constructing or improving such property, plant or equipment and (ii) the
remaining proceeds of such Indebtedness;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clauses (ii) or
(iii) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of the Company or any Restricted Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries
other than the property or assets of the Acquired Person covered thereby or
the property assets so acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or
the Trustee arising under the provisions in the Indenture;
(j) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any Restricted Subsidiary if and to the extent arising in the ordinary
course of business, including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure payment
of customs duties in connection with the importation of goods in the
ordinary course of business;
(l) leases or subleases granted to third Persons not interfering with the
ordinary course of business of the Company or its Restricted Subsidiaries;
and
(m) any Lien securing any extension, renewal, refinancing or replacement,
in whole or in part, of any obligation or Indebtedness described in the
foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"preferred stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of common stock of
the Company with gross proceeds to the Company of at least $25 million
pursuant to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than a registration statement
on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
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"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased at any time after the Issue Date; provided that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively, a
"Purchase Money Security Agreement") shall be entered into within 180 days
after the purchase or substantial completion of the construction of such
assets and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom,
(ii) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with the
purchase of additions and accessions thereto and except in respect of fees and
other obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Purchase Money Security Agreement is entered into exceed 100% of the
purchase price to the Company of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Senior Debt" means any Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in right
of payment to the Exchange Debentures. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (i) any liability for
federal, state, local or other taxes owed or owing by the Company, (ii) any
Indebtedness of the company to any of its Restricted Subsidiaries or other
Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred
in violation of the Indenture.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled Affiliate of
any Person which is or a controlled Affiliate of which is) engaged principally
in the Telecommunications Business and which has a Total Market Capitalization
of at least $1.0 billion.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Exchange Debentures or the Guarantee
of such Guarantor, as the case may be.
"Subsidiary" means, with respect to any Person, an corporation, association
or other business entity (i) of which outstanding Capital Stock having at
least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of
voting interest is owned, directly or indirectly, by such Person and/or one or
more subsidiaries of such Person.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in (i) the business of transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) the business of
creating, developing or marketing communications related network equipment,
software and other devices for use in a Telecommunications Business or (iii)
businesses reasonably related or incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and
any Restricted Subsidiary, on a Consolidated basis,
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outstanding as of such date of determination, after giving effect to any
Incurrence of Indebtedness and the application of the proceeds therefrom
giving rise to such determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for
purposes of clause (b) of the preceding sentence shall be determined by the
Board in good faith and evidenced by a resolution of the Board filed with the
Trustee. Notwithstanding the foregoing, unless the Person's Common Stock is
listed on any national securities exchange or on the Nasdaq National Market,
the "Total Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and
any subsidiaries (including the fair market value of their debt and equity),
as determined by an independent banking firm of national standing with
experience in such valuations and evidenced by a written opinion in customary
form filed with the Trustee; provided that for purposes of any such
determination, the enterprise value of the Person shall be calculated as if
the Person were a publicly held corporation without a controlling stockholder.
For purposes of any such determination, such banking firm's written opinion
may state that such fair market value is no less than a specified amount and
such opinion may be as of a date no earlier than 90 days prior to the date of
such determination.
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Restricted Subsidiaries provides credit support for Indebtedness of such
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness,
(c) any Investment in such Subsidiary made as a result of designating such
Subsidiary an Unrestricted Subsidiary shall not violate the provisions of the
"--Certain Covenants--Limitation on Unrestricted Subsidiaries" covenant and
such Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; and (v) such Unrestricted
Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the
Company which is not simultaneously being designated an Unrestricted
Subsidiary. Any such designation by the Board of Directors of the Company
shall be evidenced to the Trustee by filing with the Trustee a board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complies with the foregoing conditions and
shall be deemed a Restricted Payment on the date of designation in an amount
equal to the greater of (1) the net book value of such Investment or (2) the
fair market value of such Investment as determined in good faith by the
Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Restricted Subsidiary; provided
that (i) immediately after giving effect to such designation, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the restrictions under "--Certain Covenants--
Limitation on Indebtedness" and (ii) all Indebtedness of such Subsidiary shall
be deemed to be incurred on the date such Subsidiary becomes a Restricted
Subsidiary.
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"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence)
the Company shall be deemed to have made a Restricted Payment equal to the
principal amount of any such Indebtedness to the extent guaranteed at the time
such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon
the occurrence of a default with respect thereto, does not result in, or
permit any holder of any Indebtedness of the Company or any Restricted
Subsidiary to declare, a default on such Indebtedness of the Company or any
Restricted Subsidiary or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America, the payment of which its full faith and credit
is pledged.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of a corporation (irrespective of whether or not at the time Capital Stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which is owned by the Company or another Wholly Owned Subsidiary. For
the purposes of this definition, any director qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on the Closing Date. Pursuant to the Registration Rights Agreement,
the Company agreed to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act with respect to the
Series B Preferred, or if the Series A Preferred had been exchanged for
Exchange Debentures, the New Exchange Debentures. Upon the effectiveness of
the Exchange Offer Registration Statement, the Company will offer to the
holders of Transfer Restricted Securities (as defined) pursuant to the
Exchange Offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for Series B Preferred Stock or
New Exchange Debentures, as the case may be. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation
of the Exchange Offer that (A) it is prohibited by law or Commission policy
from participating in the Exchange Offer or (B) that it may not resell the New
Preferred Stock or New Exchange Debentures acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (C) that it is a broker-dealer and owns
Preferred Stock or Exchange Debentures acquired directly from the Company or
an affiliate of the Company, the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales
of the Preferred Stock or Exchange Debentures by the holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each share of Series A
Preferred or Exchange Debenture until (i) the date on which such Series A
Preferred or Exchange Debenture has been exchanged by a person other than a
broker-dealer for Series B Preferred or Exchange Debentures in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of
Series A Preferred or Exchange Debentures for Series B Preferred or New
Exchange Debentures, the date on which such Series B Preferred or New Exchange
Debentures are sold to a purchaser who receives from such broker-dealer on or
prior to the date of
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such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Series A Preferred or
Exchange Debenture has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement or (iv)
the date on which Series A Preferred or Exchange Debenture is distributed to
the public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 30
days after the Closing Date, (ii) the Company will use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, shares of Series B
Preferred or New Exchange Debentures, as the case may be, in exchange for all
Series A Preferred or Exchange Debentures tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
(and in any event within 150 days after the Closing Date) and to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to 90 days after such obligation arises (and in any event within 240
days after the Closing Date). If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Target Effectiveness Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 days of the Target
Effectiveness Date with respect to the Exchange Offer Registration Statement,
or (d) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "Registration Default"), the
dividend rate of the Preferred Stock or the interest rate borne by the
Exchange Debentures, as the case may be, shall be increased by one-half of one
percent per annum for the 90-day period following such Registration Default,
which rate will further increase by one-half of one percent per annum with
respect to each subsequent 90-day period up to a maximum aggregate increase in
rate of one and one-half percent (1.50%) per annum until cured ("Liquidated
Damages"). Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease and the dividend rate or the interest rate, as
the case may be, will revert to the original rate.
Holders of Series A Preferred or Exchange Debentures will be required to
make certain representations to the Company (as described in the Registration
Rights Agreement) in order to participate in the Exchange Offer and will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Series A Preferred or Exchange Debentures
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR NOTES
As of March 31, 1998, the Company had outstanding an aggregate principal
amount of $150,000,000 of 12 3/4% Senior Notes due 2007 (the "Existing Senior
Notes"). The Existing Senior Notes mature on December 15, 2007 and interest on
the Existing Senior Notes is payable semi-annually in arrears on June 15 and
December 15 of each year. The Existing Senior Notes may be redeemed at the
Company's option at any time after December 15, 2000 upon payment of the
redemption price plus accrued and unpaid interest, if any, to the date of
redemption. The Existing Senior Notes are secured, in an amount sufficient to
provide payment in full of the scheduled interest payments on such notes
through December 15, 2001, by a pledge of United States government securities.
In the event of a change of control of the Company, holders of the Existing
Senior Notes have the right to require the Company to purchase their Existing
Senior Notes, in whole or in part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase.
The covenants set forth in the Existing Senior Notes Indenture are similar,
but more restrictive in some instances, to those in the Indenture, including
with respect to the covenant described below under the caption "Description of
the Exchange Debentures--Certain Covenants--Limitations on Indebtedness." The
Existing Senior Notes Indenture contains certain covenants, that, among other
things, limit the ability of the Company and its subsidiaries to make certain
restricted payments, incur additional indebtedness and issue preferred stock,
pay dividends or make other distributions, repurchase equity interest or
subordinated indebtedness, engage in sale and leaseback transactions, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company or its subsidiaries, conduct certain lines of business, issue or
sell equity interests of the Company's subsidiaries or enter into certain
mergers and consolidations. In addition, under certain circumstances, the
Company is required to offer to purchase Existing Senior Notes at a price
equal to 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase, with the proceeds of certain asset
sales.
CAPITAL LEASE OBLIGATIONS
As of March 31, 1998, the Company had outstanding approximately $15.8
million aggregate principal amount of capital lease obligations arising
primarily from five master lease agreements for leases of network equipment
used in the Company's data centers. The effective interest rates under these
agreements range from 7.0% to 15.4% and expire from December 1998 to March
2003.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law. At March 31, 1998, there were
14,176,633 shares of Common Stock.
The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect of delaying, deferring, or preventing a future takeover or change
in control of the Company unless such takeover or change in control is
approved by the Board of Directors.
COMMON STOCK
The Company has authorized a total of 100,000,000 shares of Common Stock.
Holders of Common Stock do not have cumulative voting rights, and, therefore,
holders of a majority of the shares voting for the election of directors can
elect all of the directors. In such event, the holders of the remaining shares
will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. See "Dividend Policy." The Company
has never declared or paid cash dividends on its capital stock, expects to
retain future earnings, if any, for use in the operation and expansion of its
business, and does not anticipate paying any cash dividends in the foreseeable
future. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. The Common Stock has no preemptive, redemption or
subscription rights.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the Stockholders. The issuance of preferred stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of preferred stock other than the Preferred Stock. See "Description of
the Preferred Stock."
WARRANTS
As of March 31, 1998, the following warrants were outstanding:
(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $15.00 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on September 1, 1998.
(ii) Warrants to purchase 5,000 shares of Common Stock exercisable
through February 15, 2000, at a nominal exercise price.
(iii) Warrants to purchase 25,536 shares of Common Stock at an exercise
price of $7.40 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.
(iv) Warrants to purchase 117,046 shares of Common Stock at an exercise
price of $10.82 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 11, 1998.
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(v) Warrants to purchase 130,273 shares of Common Stock at an exercise
price of $26.87 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.
(vi) Warrants to purchase 38,482 shares of Common Stock at an exercise
price of $19.49 per share (subject to adjustment for stock splits, stock
dividends and the like), which expires on June 6, 1999. Warrants to
purchase 35,915 shares of Common Stock at an exercise price of $19.49 per
share (subject to adjustment for stock splits, stock dividends and the
like), which expire on July 31, 1999. Warrant to purchase 156,072 shares of
Common Stock at an exercise price of $19.49 per share (subject to
adjustment for stock splits, stock dividends and the like), which expires
on August 21, 1999. Warrants to purchase 462,324 shares of Common Stock at
an exercise price of $19.49 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on October 31, 1999.
Warrant to purchase 184,930 shares of Common Stock at an exercise price of
$19.49 per share (subject to adjustment for stock splits, stock dividends
and the like), which expires on March 5, 2000.
(vii) Warrants to purchase 63,351 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on June 19, 2002.
(viii) Warrants to purchase 83,333 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on June 27, 2002.
(ix) Warrants to purchase 291,667 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on August 6, 2002.
(x) Warrants to purchase 951,108 shares of Common Stock at an exercise
price per share equal to $10.8625, which expire on December 15, 2007.
REGISTRATION RIGHTS
Common Stockholders. Pursuant to the agreement between the Company and
holders of approximately 7,296,253 shares of Common Stock (the "Holders"), the
Holders are entitled to certain rights with respect to the registration of
such shares under the Securities Act. If the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other security Holders exercising registration rights
(including any Resale Registrations (as defined) filed on behalf of the
holders of the Warrants), such Holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Additionally, Holders of the Registrable Securities are also entitled to
certain demand registration rights pursuant to which they may require the
Company to file a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock, and the
Company is required to use its best efforts to effect such registration. All
of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration. Additionally, a majority
of the Holders have agreed not to request registration of their registrable
securities until the expiration of certain lock-up restrictions on the Holders
in August 1998. Additionally, pursuant to an agreement with CTI, certain
employees of CTI who have been granted options to purchase an aggregate of up
to 60,000 shares of the Company's Common Stock are entitled to certain
piggyback registration rights with respect to such shares. Such rights are
subject to the right of the underwriters of an offering to limit the number of
shares included in such registration.
Warrant Holders. The holders of the Warrants and the shares of Common Stock
underlying the Warrants (the "Warrant Shares") may require the Company, after
the first anniversary of the date of issuance of the Warrants, on three
occasions, to prepare and file a registration statement under the Securities
Act that provides for the public resale by the holders of Warrants and/or
Warrant Shares of all or any portion of their Warrant Shares in an
underwritten public offering or otherwise (a "Resale Registration"). All
shares of Common Stock included in such Resale Registration shall, under
certain circumstances, be subject to pro rata cut-back provisions.
Additionally, if, after the first anniversary of the date of issuance of the
Warrants, the Company proposes to register any of its Common Stock under the
Securities Act for its own account, the holders of the Warrants and the
Warrant Shares will be entitled to notice of the registration and will be
entitled to include all
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or any portion of their Warrant Shares therein, subject to pro rata cut-back
provisions. The Company is entitled to delay the filing of a shelf
registration statement under certain circumstances for up to 90 days.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Limitation of Director and Officer Liability
The Company's Certificate of Incorporation and Bylaws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides
that directors of the Company may not be held personally liable to the Company
or its stockholders for monetary damages for a breach of fiduciary duty,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of the law,
(iii) under Section 174 of the Delaware General Corporation Law, relating to
prohibited dividends, distributions and repurchases or redemptions of stock,
or (iv) for any transaction from which the director derives an improper
personal benefit. However, such limitation does not limit the availability of
non-monetary relief in any action or proceeding against a director. In
addition, the Company's Certificate of Incorporation and Bylaws provide that
the Company shall indemnify its directors and officers to the fullest extent
authorized by Delaware law.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
No Stockholder Action by Written Consent
The Company's Certificate of Incorporation provides that the stockholders
can take action only at a duly called annual or special meeting of
Stockholders. Stockholders of the Company are not able to take action by
written consent in lieu of a meeting. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of
the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services LLC has been appointed as the transfer
agent and registrar for the Company's Common Stock. Its telephone number for
such purposes is (800) 851-9677.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to initial holders of the Preferred Stock. This
summary is based upon current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), regulations of the Treasury Department,
administrative rulings and pronouncements of the Internal Revenue Service (the
"IRS") and judicial decisions currently in effect, all of which are subject to
change or differing interpretations, possibly with retroactive effect. The
discussion does not address all aspects of U.S. Federal income taxation that
may be relevant to particular investors in light of their personal
circumstances (for example, persons subject to the alternative minimum tax),
nor does it address U.S. Federal income tax considerations applicable to
certain types of investors subject to special treatment under the U.S. Federal
income tax laws (for example, insurance companies, tax-exempt organizations,
financial institutions or broker-dealers and persons holding Preferred Stock
or Exchange Debentures as part of a hedge, conversion, straddle, constructive
sale or other risk reduction transaction). The tax consequences of acquiring,
holding and disposing of the Preferred Stock is uncertain. The IRS is not
precluded from successfully adopting a position different from that described
herein. In addition, the discussion does not consider the effect of any
foreign, state, local, gift, estate (except with respect to non-U.S. Holders)
or other tax laws that may be applicable to a particular investor. Except as
provided below under "Non-U.S. Holders," the discussion assumes that investors
are U.S. Holders (as defined below) that will hold the Preferred Stock or
Exchange Debentures as capital assets within the meaning of Section 1221 of
the Code. The discussion also assumes the Preferred Stock constitutes "equity"
for U.S. Federal income tax purposes and the Exchange Debentures constitute
"indebtedness" for U.S. Federal income tax purposes. EACH POTENTIAL INVESTOR
SHOULD CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, HOLDING AND DISPOSING OF PREFERRED STOCK AND EXCHANGE DEBENTURES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
EXCHANGE OFFER
The exchange of Series A Preferred for Series B Preferred pursuant to the
Exchange Offer should not constitute a taxable exchange for U.S. Federal
income tax purposes. If the Company pays Liquidated Damages such amounts would
likely be treated in the same manner as distributions described below under
"Distributions with Respect to Preferred Stock in General." Nevertheless, the
IRS may assert, among other things, that such payments are not eligible for
the dividends-received deduction.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Preferred Stock or Exchange Debentures
that is (i) a citizen or resident (as defined in Section 7701(b)(1) of the
Code) of the United States, (ii) a corporation or other entity taxable as a
corporation created or organized under the laws of the United States or any
State thereof (including the District of Columbia), (iii) an estate or trust
described in Section 7701(a)(30) of the Code, or (iv) a person whose worldwide
income or gain is otherwise subject to U.S. Federal income taxation on a net
income basis (a "U.S. Holder").
Distributions With Respect to Preferred Stock In General
Distributions with respect to the Preferred Stock will be treated as
dividends (taxable as ordinary income) to the extent of the current and
accumulated earnings and profits of the Company. To the extent that the amount
of a distribution with respect to the Preferred Stock exceeds the current and
accumulated earnings and profits of the Company, it will be treated first as a
tax-free return of capital to the extent of the U.S. Holder's basis in the
Preferred Stock, and thereafter as capital gain from the sale or exchange of
the Preferred Stock. The Company does not currently have any current or
accumulated earnings and profits.
A U.S. Holder that is a corporation otherwise entitled to the dividends-
received deduction as provided in Section 243 of the Code will be entitled to
that deduction (generally at a 70% rate) with respect to amounts treated as
dividends on the Preferred Stock, but will not be entitled to that deduction
with respect to amounts treated as a return of capital or capital gain. In
addition, the benefit of a dividends-received deduction may be reduced by the
corporate alternative minimum tax.
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In determining entitlement to the dividends-received deduction, corporate
U.S. Holders should also consider the provisions of Sections 246(c), 246A and
1059 of the Code. Section 246(c) of the Code disallows the dividends-received
deduction in its entirety if (i) the U.S. Holder does not hold the share of
stock for a 46-day minimum holding period during the 90-day period beginning
on the date which is 45 days before the date on which such share becomes ex-
dividend with respect to such dividend, or, in certain circumstances, for a
91-day minimum holding period during the 180-day period beginning on the date
which is 90 days before the date on which such shares become ex-dividend with
respect to such dividend or (ii) the U.S. Holder is under an obligation to
make related payments with respect to positions in substantially similar or
related property. Code Section 246(c)(4) provides that a U.S. Holder may not
count toward the minimum holding period any period in which the U.S. Holder
(i) has, among other things, an option to sell, (ii) is under a contractual
obligation to sell, or (iii) has made (and not closed) a short sale of
substantially identical stock or securities. Section 246A of the Code contains
the "debt-financed portfolio stock" rules, under which the dividends-received
deduction could be reduced to the extent that a U.S. Holder incurs
indebtedness directly attributable to its investment in the Preferred Stock.
Under certain circumstances, where a corporate holder has not held Preferred
Stock for more than two years, Section 1059 of the Code (i) reduces the tax
basis of stock by a portion of any "extraordinary dividends" that are eligible
for the dividends-received deduction and (ii), to the extent that the basis
reduction would otherwise reduce the tax basis of the stock below zero,
requires immediate recognition of gain, which is treated as gain from the sale
or exchange of the stock. In the case of the Preferred Stock, an
"extraordinary dividend" is a dividend that (i) equals or exceeds five percent
of the U.S. Holder's adjusted tax basis in the stock (taking into account any
prior reduction in basis under Section 1059 as a result of any prior
dividend), treating all dividends having ex-dividend dates within an 85-day
period as one dividend or (ii) exceeds 20 percent of the U.S. Holder's
adjusted tax basis in the stock, treating all dividends having ex-dividend
dates within a 365-day period as one dividend. An extraordinary dividend would
also include any amount treated as a dividend with respect to a redemption
that is not pro rata to all stockholders (or meets certain other
requirements), without regard to either the relative amount of the dividend or
the U.S. Holder's holding period for the Preferred Stock. CORPORATE PREFERRED
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND DISPOSITION OF THE
PREFERRED STOCK.
Preferred Stock Distributions on the Preferred Stock
If the Company pays a distribution on the Preferred Stock in the form of
additional shares of Preferred Stock, such distribution will be taxable for
U.S. Federal income tax purposes in the same manner as distributions described
above under "Distributions With Respect to Preferred Stock in General." The
amount of such distribution should equal the fair market value on the
distribution date of the additional shares distributed to a U.S. Holder on
that date. A U.S. Holder's tax basis in an additional share of Preferred Stock
should equal the fair market value of such share on the distribution date, and
such U.S. Holder's holding period for such share will begin on the day
following the distribution date. It is possible, however, that the IRS will
argue that the amount of the distribution (and thus the holder's basis in the
additional shares) will equal the liquidation preference of the additional
shares distributed.
Redemption Premium
Under Section 305 of the Code and the Treasury Regulations promulgated
thereunder, if the redemption price of Preferred Stock exceeds its issue price
(i.e., the amount paid by the original purchaser) by more than a de minimis
amount, then under certain circumstances, such excess may be treated as a
constructive distribution taxable in the same manner as distributions
described above under "Distributions With Respect to Preferred Stock in
General." A holder of such Preferred Stock is required to treat such excess as
a constructive distribution received by the holder over the life of the
Preferred Stock under a constant interest (economic yield) method that takes
into account the compounding of yield.
It is anticipated that the mandatory redemption price of the Preferred Stock
(other than additional shares of Preferred Stock paid as distributions or
Preferred Stock) will not exceed such stock's issue price by more than a de
minimis amount.
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The issue price of an additional share of Preferred Stock will be the amount
treated as a dividend and this will likely be the fair market value of such
share on the date of distribution. If the liquidation preference of an
additional share of Preferred Stock exceeds the issue price of such share by
more than a de minimis amount, then a U.S. Holder thereof would be required to
treat such excess as a constructive distribution over the term of the
additional share (as described above), which distribution would be treated in
the same manner as distributions described above under "Distributions With
Respect to Preferred Stock In General." Because additional shares of Preferred
Stock may be issued at different times prior to June 1, 2003 (and possibly
thereafter), it is possible that a U.S. Holder would own additional shares of
Preferred Stock with different issue prices. In such event, if the Company had
current or accumulated earnings and profits, a U.S. Holder would be treated as
having received constructive dividends on its additional shares in differing
amounts depending on the issue price of each additional share, and those
shares would not be fungible with each other or with Preferred Stock purchased
pursuant to the Offering due to their differing U.S. Federal income tax
characteristics. As a result, the Company might not be able to determine the
proper amount of income to be accrued for any particular share of Preferred
Stock. Moreover, purchasers of Preferred Stock in the secondary market might
not be able to determine the proper amount of income to accrue with respect to
their Preferred Stock.
Accrued Dividends on the Preferred Stock
Any unpaid dividends on the Preferred Stock will accrue and will be payable
upon the optional or mandatory redemption of the Preferred Stock. The tax
treatment of such accruing dividends ("Accrued Dividends") is not free from
doubt. Under current law, it appears likely that Accrued Dividends would not
be treated as having been received by U.S. Holders of the Preferred Stock
until such Accrued Dividends were actually paid in cash or additional
preferred shares (and, would then be taxable for U.S. Federal income tax
purposes in the same manner as distributions described above under
"Distributions With Respect to Preferred Stock in General"). The legislative
history to the 1990 amendments to Section 305(c) of the Code, however, grants
the IRS authority to issue regulations (possibly with retroactive effect) that
would treat such Accrued Dividends as part of the redemption price of the
stock. If Accrued Dividends were included in the redemption price of the
Preferred Stock, a U.S. Holder would be required to take such Accrued
Dividends into account in determining the amount that constitutes an excessive
redemption price for purposes of Section 305(c) of the Code, as described
above under "Redemption Premium." The effect of such treatment would be to
treat such U.S. Holder as having received such Accrued Dividends as
constructive distributions at the time they accrue, rather than at the time
they are paid in cash. Until regulations requiring such treatment with respect
to Accrued Dividends are issued, however, the Company intends to take the
position that Accrued Dividends on Preferred Stock need not be treated as
received by a U.S. Holder until such time as such Accrued Dividends are
actually paid to such holder in cash or additional shares of Preferred Stock
and intends to report to the IRS on that basis.
PURCHASERS OF PREFERRED STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE TAX TREATMENT OF DIVIDENDS ON THE PREFERRED STOCK.
Sale, Redemption or other Taxable Disposition
Upon a sale or other taxable disposition of Preferred Stock (including
certain redemptions as described below), a U.S. Holder generally will
recognize capital gain or loss for U.S. Federal income tax purposes (except to
the extent of cash payments received on the disposition that are attributable
to declared dividends, which will be treated in the same manner as
distributions described above under "Distributions With Respect to Preferred
Stock in General") in an amount equal to the difference between (i) the sum of
the amount of cash and the fair market value of any property received upon
such sale, redemption or other taxable disposition and (ii) the U.S. Holder's
adjusted tax basis in the stock being disposed of. Such gain or loss will be
long term capital gain or loss if the holding period of the Preferred Stock
exceeds one year, and with respect to individual U.S. Holders, will be subject
to a maximum tax rate of 20% if the holding period exceeds 18 months.
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A U.S. Holder's initial tax basis in the Preferred Stock (other than
additional shares of Preferred Stock distributed on the Preferred Stock) will
equal the purchase price of such stock. A U.S. Holder's initial tax basis in
an additional share of Preferred Stock distributed on the Preferred Stock will
equal the fair market value of such share on the distribution date.
Thereafter, the initial tax basis of the Preferred Stock will be (i) increased
by the amount (if any) of any constructive distributions the U.S. Holder is
treated as having received pursuant to the rules described above under
"Redemption Premium," and (ii) decreased by the portion of any distribution
(actual or constructive) that is treated as a tax-free recovery of basis as
described above under "Distributions With Respect to Preferred Stock In
General."
Under Section 302 of the Code, gain or loss recognized by a U.S. Holder on a
redemption of the Preferred Stock (including, as discussed below, a redemption
in which the U.S. Holder receives Exchange Debentures) would qualify for the
treatment described above, if, taking into account stock that is actually or
constructively owned under the constructive ownership rules of Code Section
318 by such U.S. Holder, either (i) the U.S. Holder's interest in the stock of
the Company is completely terminated as a result of the redemption; (ii) such
U.S. Holder's percentage ownership of the voting stock of the Company
immediately after the redemption is less than 80% of such U.S. Holder's
percentage ownership immediately before the redemption; or (iii) the
redemption is "not essentially equivalent to a dividend" (the "Section 302
Tests"). Under Section 318 of the Code, a person generally will be treated as
the owner of stock of the Company owned by certain related parties or certain
entities in which the person owns an interest and stock that a U.S. Holder
could acquire through exercise of an option. Whether a redemption is not
essentially equivalent to a dividend depends on each U.S. Holder's facts and
circumstances, but in any event, requires a "meaningful reduction" in such
U.S. Holder's interest in the Company. A U.S. Holder of the Preferred Stock
who sells some or all of the stock of the Company owned by it may be able to
take such sales into account, if necessary, to satisfy one of the foregoing
conditions, but such a U.S. Holder should consult its own tax advisor in this
regard.
If none of the above conditions is satisfied, the entire amount of the cash
or the fair market value of the Exchange Debentures received on a redemption
will be treated as a distribution (without offset by the U.S. Holder's tax
basis in the redeemed shares), which will be treated in the same manner as
distributions described above under "Distributions With Respect to Preferred
Stock in General." Although not free from doubt, in such case, the U.S.
Holder's basis in the redeemed Preferred Stock would be transferred to the
U.S. Holder's remaining shares of the Company stock (if any) or, if the U.S.
Holder does not retain any shares of the Company stock, such basis may be
entirely lost. In addition, to the extent that any such distribution
constitutes a dividend, it may constitute an extraordinary dividend to which
the rules described above under "--Distributions With Respect to Preferred
Stock in General" would apply.
The tax consequences of a redemption, particularly an exchange of Preferred
Stock for an Exchange Debenture, are uncertain. PROSPECTIVE PURCHASERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT OF A
REDEMPTION.
Change of Control--Preferred Stock
The Company intends to take the position that the Change of Control
provisions on the Preferred Stock will have no effect prior to their becoming
operative. In addition, the Company intends to take the position that upon any
such change (including if the dividend rate on the Preferred Stock is reset
following a Change of Control), a U.S. Holder of the Preferred Stock would not
have a taxable exchange for U.S. Federal income tax purposes.
Exchange of Preferred Stock for Exchange Debentures
An exchange of Preferred Stock for an Exchange Debenture will also be
subject to the rules of Section 302 of the Code described above. If none of
the Section 302 Tests are met, the fair market value of the Exchange
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Debentures received upon the exchange will be treated in the same manner as
distributions described above under "Distributions With Respect to Preferred
Stock in General." In such event, the basis of the Exchange Debentures will be
equal to their fair market value as of the date of the exchange. If the holder
retains any Preferred Stock in the Company, the tax basis in the exchanged
Preferred Stock should be transferred to such retained stock. If the holder
retains no stock in the Company, it is unclear whether the tax basis in the
exchanged Preferred Stock would be transferred to the Exchange Debentures or
would be lost. For purposes of determining the recognition of gain under the
extraordinary dividend basis reduction rules described above, only the basis
of the shares of Preferred Stock exchanged for Exchange Debentures may be
taken into account.
In the event at least one of the Section 302 Tests is satisfied, a U.S.
Holder will recognize gain or loss equal to the fair market value of Exchange
Debentures received (except to the extent the Debentures are considered
attributable to accrued dividends not previously included in income) less the
U.S. Holder's tax basis in the Preferred Stock exchange therefor. Such gain or
loss would be long-term capital gain or loss if the holding period exceeds one
year, and will be taxable at a maximum rate of 20% if the holding period
exceeds 18 months. It is possible that the IRS may contend that the holding
period of Preferred Stock does not begin so long as the Company's redemption
right is outstanding. The installment method will not be available for
reporting such gain in the event that the Preferred Stock or the Debentures
are traded or readily tradable on an established securities market.
Original Issue Discount and Premium on Debentures
The Exchange Debentures will be issued with original issue discount, and
each U.S. Holder will be required to include in its gross income original
issue discount as described below. The amount of original issue discount on an
Exchange Debenture will equal the excess of the stated redemption price at
maturity of such Exchange Debenture over the issue price. The stated
redemption price at maturity of an Exchange Debenture will equal the total of
all payments required to be made thereon, including payments of stated
interest.
Determination of the issue price of an Exchange Debenture depends upon
whether the Preferred Stock or Exchange Debenture exchanged therefor is or
will be traded on an established securities market, for purposes of the
Treasury Regulations under Section 1273 of the Code, at any time during the
60-day period ending 30 days after the date of the exchange ("Traded").
If the exchange of Preferred Stock for an Exchange Debenture satisfies at
least one of the Section 302 Tests, (i) in the event the Exchange Debenture is
Traded, the issue price of the Exchange Debenture will be its fair market
value as determined as of the date of the exchange, (ii) in the event the
Exchange Debenture is not Traded, but the Preferred Stock is so Traded, the
issue price of the Exchange Debenture will be the fair market value of the
Preferred Stock exchanged therefor as of the date of the exchange, and (iii)
in the event that neither the Preferred Stock nor the Exchange Debentures are
Traded, the issue price of the Exchange Debenture will be its initial stated
principal amount, assuming that the Exchange Debenture bears "adequate stated
interest" within the meaning of Section 1274 of the Code, and if the Exchange
Debenture does not bear adequate stated interest, the issue price will be
equal to its "imputed principal amount" as determined under Section 1274 of
the Code.
If the exchange of Preferred Stock for an Exchange Debenture does not
satisfy the Section 302 Tests, (i) in the event the Exchange Debenture is
Traded, the issue price of the Exchange Debenture will be its fair market
value as determined as of the date of the exchange, and (ii) in the event the
Exchange Debenture is not so Traded, the issue price will be its stated
principal amount.
Additional Exchange Debentures distributed to holders of Exchange Debentures
should be aggregated with the Exchange Debentures, and should not be
considered to be a payment on the Exchange Debentures. Such additional
Exchange Debentures should be considered to be fungible with the Exchange
Debentures, and thus, among other things, should have the same issue price,
stated redemption price at maturity and yield to maturity as the Expense
Debentures.
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For U.S. federal income tax purposes, a U.S. Holder of an Exchange Debenture
will generally be required to include in gross income (irrespective of the
holder's method of accounting) a portion of the original issue discount as it
accrues, even though the cash to which such income is attributable would not
be received until maturity or redemption of the Exchange Debenture. The amount
of any original issue discount included in income for each year will be
calculated under a constant yield to maturity formula that will result in the
allocation of less original issue discount to the early years of the term of
the Exchange Debenture and more original issue discount to later years.
Original issue discount required to be included in income with respect to an
Exchange Debenture may be reduced or eliminated to the extent the holder has
amortizable bond premium or acquisition premium on such Exchange Debenture, as
discussed below.
If Preferred Stock is exchanged for an Exchange Debenture whose basis
exceeds the amount payable at maturity (or earlier call date, if appropriate),
such excess will be allowed as an offset or deduction (as described below) to
the holder, as amortizable bond premium over the term of the Exchange
Debenture (taking into account earlier call dates, as appropriate), under a
yield to maturity formula, if an election by the taxpayer under Section 171 of
the Code is in effect or is made. An election under Section 171 will apply to
all obligations owned or subsequently acquired by the taxpayer during or after
the taxable year in which the election is made. Amortizable bond premium will
be treated as an offset to stated interest on an Exchange Debenture to the
extent thereof and any excess will be allowable as a deduction subject to the
following limitation. The amount of any amortized bond premium deduction will
be limited to the excess of the holder's interest income inclusions on the
Exchange Debenture in prior accrual periods over bond premium deductions
allowed the holder in such prior periods, and any amount in excess of such
limitation will be carried forward as additional bond premium in the next
accrual period.
If Preferred Stock is exchanged for an Exchange Debenture, the basis of
which exceeds the issue price of the Exchange Debenture but not the stated
redemption price at maturity of such Exchange Debenture, the U.S. Holder of
such Exchange Debenture will be considered to have "acquisition premium" with
respect to the Exchange Debenture, which may reduce the amount of original
issue discount, if any, that the U.S. Holder is required to include in income.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
TREATMENT OF DISTRIBUTIONS, AND THE ACCRUAL OF ORIGINAL ISSUE DISCOUNT, ON
EXCHANGE DEBENTURES.
There are several circumstances under which the Company could make a payment
on an Exchange Debenture, which would affect the yield to maturity of an
Exchange Debenture, including (as described in "Description of the Exchange
Debentures") the payment of Liquidated Damages. According to Treasury
Regulations, the possibility of a change in the yield will not be treated as
affecting the amount of original issue discount required to be realized by a
holder, or the timing of such recognition, if the likelihood of the change, as
of the date the debt obligations are issued, is remote. The Company will
likely report on the basis that the likelihood of any change in the yield on
the Exchange Debentures is remote.
Redemption or Sale of Exchange Debentures
Generally, a redemption or sale of an Exchange Debenture will result in
taxable gain or loss equal to the difference between the amount of cash and
fair market value of other property received and the holder's tax basis in the
Exchange Debenture. To the extent that the amount received is attributable to
accrued interest, however, that amount will be taxed as ordinary income. The
tax basis of an Exchange Debenture will generally be equal to its basis at the
time of the Exchange plus any original issue discount included in the holder's
income less any payments on the Exchange Debenture and any premium previously
allowed as an offset to interest income on the Exchange Debenture. Gain or
loss on the sale of redemption of an Exchange Debenture will be capital gain
or loss and will be long-term gain or loss if the holding period exceeds one
year.
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If the Exchange Debentures are issued with original issue discount and the
Company were found to have had an intention at the time the Exchange
Debentures were issued to call them before maturity, any gain realized on a
sale, exchange or redemption of Exchange Debentures prior to maturity would be
considered ordinary income to the extent of any unamortized original issue
discount for the period remaining to the stated maturity of the Exchange
Debentures. The Company cannot predict whether it would have an intention,
when and if the Exchange Debentures are issued, to call the Exchange
Debentures before their maturity.
Change of Control--Exchange Debentures
The Company intends to take the position that the Change of Control
provisions on the Preferred Stock will have no effect prior to their becoming
operative. In the event of a Change of Control and a reset of the interest
rate on the Exchange Debentures, then solely for purposes of the accrual of
original issue discount, the yield and maturity of the Exchange Debentures
will be redetermined by treating the Exchange Debentures as retired and
reissued for an amount equal to its adjusted issue price.
Deemed Exchange Upon a Defeasance
In the event of a defeasance of the Exchange Debentures by the Company, for
U.S. Federal income tax purposes, the Exchange Debentures may be deemed to be
exchanged for new debentures. Assuming such deemed exchange constitutes a
recapitalization, (i) a U.S. Holder of an Exchange Debenture will recognize
gain but not loss on the deemed exchange, (ii) a U.S. Holder will receive a
tax basis in the new debenture equal to the U.S. Holder's adjusted tax basis
in the Exchange Debenture deemed exchanged therefor, plus any gain recognized
by the U.S. Holder in the exchange, and (iii) the U.S. Holder's holding period
for the new debenture will include the period in which the U.S. Holder held
the Exchange Debenture. The deemed exchange will not constitute a
recapitalization if the Exchange Debenture does not constitute a "security"
within the meaning of the provisions of the Code governing reorganizations. If
the deemed exchange does not constitute a recapitalization, a U.S. Holder
generally will recognize gain or loss on the exchange equal to the difference
between the fair market value of the Exchange Debenture at the time of the
exchange, and the U.S. Holder's adjusted tax basis in the Exchange Debenture.
In addition, in the event of a deemed exchange, the Company will redetermine
the amount of original issue discount accruing on the debentures. PROSPECTIVE
PURCHASERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX
TREATMENT TO THEM OF A DEFEASANCE.
NON-U.S. HOLDERS
For purposes of this discussion, a "Non-U.S. Holder" is any holder of
Preferred Stock that is not a U.S. Holder.
Dividends
Dividends paid in either cash or additional shares of Preferred Stock to a
Non-U.S. Holder of Preferred Stock generally will be subject to withholding of
U.S. Federal income tax at a 30% rate (or such lower rate as may be specified
by an applicable income tax treaty) unless the dividend (i) is effectively
connected with the conduct of a trade or business of the Non-U.S. Holder
within the United States or (ii) if a tax treaty applies, is attributable to a
United States permanent establishment of the Non-U.S. Holder, in which case
the dividend will be taxed at ordinary U.S. Federal income tax rates. If the
Non-U.S. Holder is a corporation, such effectively connected income may also
be subject to an additional "branch profits tax." Although under current law a
Non-U.S. Holder receiving dividends at an address in a foreign country is
presumed to be a resident of that country, under the Final Regulations
(defined below) this presumption is eliminated. Thus, for dividends paid after
December 31, 1999, a Non-U.S. Holder will be required to satisfy certain
certification requirements in order to claim treaty benefits or otherwise
claim a reduction of, or exemption from, the withholding obligation pursuant
to the above described rules. See "--Backup Withholding and Information
Reporting Requirements."
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For purposes of the foregoing discussion, dividends will also include
amounts received on the redemption of Preferred Stock (including an exchange
of Preferred Stock for Exchange Debentures) that are characterized as
distributions under the rules described above. See "--U.S. Holders--Sale,
Redemption or other Taxable Disposition," and "--U.S. Holders--Exchange of
Preferred Stock for Debentures." Thus any amounts so characterized would be
subject to withholding tax under the rules described above.
Interest and Original Issue Discount
Payments of interest and original issue discount on an Exchange Debenture
received by a Non-U.S. Holder will not be subject to United States federal
withholding tax, under the "portfolio interest exemption," provided that (a)
the Non-U.S. Holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (b) the holder is not a controlled foreign corporation that is related
to the Company through stock ownership, and (c) for payments on or prior to
December 31, 1999, either (1) the beneficial owner of the Debenture, under
penalties of perjury, provides the Company or its agent with its name and
address and certifies that it is not a United States person or (2) a
securities clearing organization, bank or other financial institution that
holds customer's securities in the ordinary course of its trade or business (a
"Financial Institution") certifies to the Company or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes to the
Company or its agent a copy thereof. For payments made after December 31,
1999, different certification rules will apply. See "--Backup Withholding and
Information Reporting Requirements."
Sale or Other Disposition of Preferred Stock or Exchange Debentures
A Non-U.S. Holder generally will not be subject to U.S. Federal income or
withholding tax in respect of any gain recognized on the sale or other taxable
disposition of a share of Preferred Stock (including upon the exchange of
Preferred Stock for an Exchange Debenture, but only if such exchange satisfies
one of the Section 302 tests described above) or an Exchange Debenture unless
(a) the gain is effectively connected with a trade or business of the Non-U.S.
Holder in the United States; (b) in the case of a Non-U.S. Holder who is an
individual and holds the Preferred Stock or Exchange Debenture as a capital
asset, the holder is present in the United States for 183 or more days in the
taxable year of the disposition and either (i) the individual has a "tax home"
for U.S. Federal income tax purposes in the United States or (ii) the gain is
attributable to an office or other fixed place of business maintained by the
individual in the United States; (c) the Non-U.S. Holder is subject to tax
pursuant to the provisions of U.S. Federal income tax law applicable to
certain United States expatriates; or (d) with respect to the sale or
disposition of Preferred Stock the Company is or has been during certain
periods preceding the disposition a "U.S. real property holding corporation"
for U.S. Federal income tax purposes (which the Company does not believe it is
or is likely to become).
Federal Estate Taxes
Preferred Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for U.S. Federal estate tax
purposes) of the United States at the time of death will be included in such
individual's gross estate for U.S. Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. An Exchange Debenture will
not be included in an individual's gross estate provided the portfolio
interest exemption applies with respect to interest on such Exchange
Debenture.
BACKUP WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS
On October 6, 1997, the IRS issued final regulations relating to
withholding, information reporting and backup withholding that unify current
certification procedures and forms and clarify reliance standards (the "Final
Regulations"). The Final Regulations generally will be effective with respect
to payments made after December 31, 1999. Except as provided below, this
section describes rules applicable to payments made on or before December 31,
1999.
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Information reporting and backup withholding may apply to certain
noncorporate U.S. Holders with respect to payments of dividends on the
Preferred Stock and interest including original issue discount on Exchange
Debentures by the Company. Such payments will be subject to backup withholding
at a rate of 31% unless the beneficial owner of the Preferred Stock or
Exchange Debentures supplies the payor or its agent with a taxpayer
identification number, certified under penalties of perjury, and certain other
information, or otherwise establishes, in the manner prescribed by law, an
exemption from backup withholding. Backup withholding generally will not apply
to dividends paid on the Preferred Stock to a Non-U.S. Holder at an address
outside the United States. The Company will be required to report annually to
the IRS and to each Non-U.S. Holder the amount of dividends paid to and the
amount of original issue discount accruing to, and the tax withheld with
respect to, such holder, regardless of whether any tax was actually withheld.
This information may also be made available to the tax authorities in the Non-
U.S. Holder's country of residence.
In addition, if a U.S. Holder sells Preferred Stock or Exchange Debentures
to (or through) a "broker," the broker may be required to withhold 31% of the
entire sales price, unless either (i) the broker determines that the seller is
a corporation or other exempt recipient or (ii) the seller provides, in the
required manner, certain identifying information. Such a sale must also be
reported by the broker to the IRS, unless the broker determines that the
seller is an exempt recipient. The term "broker" includes all persons who, in
the ordinary course of their business, stand ready to effect sales made by
others.
In the case of a Non-U.S. Holder that sells Preferred Stock to or through a
United States office of a broker, the broker must withhold at a rate of 31%
and report the sale to the IRS, unless the holder certifies its Non-U.S.
status under penalties of perjury or otherwise establishes an exemption. In
the case of a Non-U.S. Holder that sells Preferred Stock or an Exchange
Debenture to or through the foreign office of a United States broker, or a
foreign broker with certain types of relationships to the United States, the
broker must report the sale to the IRS (but not withhold) unless the broker
has documentary evidence in its files that the seller is a Non-U.S. Holder
and/or certain other conditions are met, or the holder otherwise establishes
an exemption.
Any amount withheld under the backup withholding rules from a payment to a
holder is allowable as a credit against the holder's U.S. Federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes
the required information to the IRS. In addition, certain penalties may be
imposed by the IRS on a holder who is required to supply information but does
not do so in the proper manner.
Prospective purchasers of the Preferred Stock are urged to consult their own
tax advisors as to the effect, if any, of the Final Regulations on their
purchase, ownership and disposition of the Preferred Stock and Exchange
Debentures.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PURCHASER OF THE PREFERRED STOCK SHOULD CONSULT WITH ITS OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK AND EXCHANGE
DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
INCOME AND EXCHANGE DEBENTURES OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by Participating Broker-Dealers in connection with resales of Series B
Preferred received in exchange for Series A Preferred where such Series A
Preferred were acquired as a result of market-making activities or other
trading activities. Each Participating Broker-Dealer that receives Series B
Preferred for its own account pursuant to the Exchange offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Series
B Preferred. The Company has agreed that under certain circumstances, the
Company shall use its best efforts to keep the Exchange Offer Registration
Statement continuously effective supplemented and amended to the extent
necessary to ensure that it is available for sales of Series B Preferred by
Participating Broker-Dealers, and to ensure that the Exchange Offer
Registration Statement conforms with the requirements of the Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period expiring approximately 180 days from the date on which the
Exchange Offer Registration Statement is declared effective.
The Company will not receive any proceeds from any sale of Series B
Preferred by broker-dealers. Series B Preferred received by broker-dealers for
their own account pursuant to the Exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Series B Preferred or a
combination of such methods or resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Series B
Preferred. Any Participating Broker-dealer that acquired Existing notes as a
result of market making activities or other trading activities and who resells
Series B Preferred that were received by it pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such Series B
Preferred may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Series B Preferred and any
commission or concession received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Series B Preferred
will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of InterNex Information Services, Inc. as of June
30, 1997 and for the year then ended, included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, dated
January 26, 1998, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
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GLOSSARY OF TERMS
56 Kbps...................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in
widespread use by medium and large businesses
primarily for entry level high-speed data and
very low-speed video applications.
ATM.......................... Asynchronous Transfer Mode. A low latency,
fixed delay information transfer standard for
routing traffic. The ATM format can be used by
many different information systems, including
LANs, to deliver traffic at varying rates,
permitting a mix of data, voice and video.
Backbone..................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................... The number of bits of information that can move
through a communications medium in given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and
Mbps. Bandwidth from public networks is
typically available to business and residential
end-users in increments from 56 Kbps to T-3.
CIR.......................... Committed Information Rate. The rate, usually
expressed as a particular quantitative amount
of Kbps of Mbps of bandwidth, at which data is
guaranteed to be transmitted through a
dedicated lease line network connection.
E-mail....................... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an E-
mail address.
Firewall..................... A system placed between networks that filters
data passing through it and removes
unauthorized traffic, thereby enhancing the
security of the network.
Frame relay.................. A variable delay information transfer standard
for relaying traffic. Frame relay can be an
economical means to backhaul traffic to an ATM
network.
FTP.......................... File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.
Internet..................... A global collection of interconnected computer
networks which use TCP/IP, a common
communications protocol.
ISDN......................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
Kbps......................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
G-1
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LAN.......................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
Latency...................... The time that elapses between the moment when a
command is sent to the time that a response is
received. On a network, latency is due to
delays in routers or switches, congestion
delays on a crowded backbone, and the time
required for electrons to travel a great
distance between nodes on a network.
Leased line.................. Telecommunications line dedicated to a
particular customer along a predetermined
route.
LEC.......................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
Mbps......................... Megabits per second.
Modem........................ A device for transmitting digital information
over an analog telephone line.
NAP.......................... Network Access Point. A location at which ISPs
exchange each other's traffic.
Online services.............. Commercial information services that offer a
computer user access to a specified slate of
information, entertainment and communications
menus on what appears to be a single system.
Peering...................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POPs......................... Points-of-presence. Geographic areas within
which the Company provides local access. For
purposes of this Memorandum, POPs include both
physical points of presence as well as VLA.
Router....................... A system placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.
Server....................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. In addition, such term means
the computer on which server software runs.
SuperPOP..................... A SuperPOP is a Concentric POP that is directly
connected to the Concentric ATM backbone.
SuperPOPs typically support dial access from
the region surrounding the SuperPOP (typically
within 200 miles of the SuperPOP) using the
services of a CLEC. SuperPOPs also support
dedicated access connections to customer
locations using Local Exchange Carrier and/or
Competitive Access Provider facilities to
connect the customer to the Concentric
SuperPOP.
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TCP/IP....................... Transmission Control Protocol/Internet
Protocol. A suite of network protocols that
allow computers with different architectures
and operating system software to communicate
with other computers on the Internet.
T-1.......................... A data communications circuit capable of
transmitting data at 1.5 Mbps.
T-3 or DS3................... A data communications circuit capable of
transmitting data at 45 Mbps.
UNIX......................... A computer operating system frequently found on
workstations and PCs and noted for its
portability and communications functionality.
VLA.......................... Virtual local access call numbers which allow a
subscriber in a location outside the calling
area of a physical POP to place a local call to
a phone number without incurring long distance
or message unit charges.
VPN.......................... Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e., low latency, high throughput,
security and customization) while maintaining
the benefits of a public network (i.e.,
ubiquity and economies of scale).
World Wide Web or Web........ A system that supports easy access to documents
that have been linked across the Internet. The
documents contain links to each other, hence
the term "Web." Users do not have to know the
locations of particular documents and work
through a user friendly interface.
Webserver.................... A server connected to the Internet from which
Internet users can obtain information.
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CONCENTRIC NETWORK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Concentric Network Corporation:
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Common Stock Subject to Rescission and
Stockholders' Equity (Deficit).......................................... F-5
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-9
InterNex Information Services, Inc.:
Report of Arthur Andersen LLP, Independent Public Accountants............ F-25
Balance Sheets........................................................... F-26
Statements of Operations................................................. F-27
Statements of Shareholder's Equity....................................... F-28
Statements of Cash Flows................................................. F-29
Notes to Financial Statements............................................ F-30
Selected Unaudited Pro Forma Condensed Combined Financial Information:
Introduction............................................................. F-35
Statement of Operations.................................................. F-36
Notes to Selected Unaudited Pro Forma Condensed Combined Financial
Information............................................................. F-37
</TABLE>
F-1
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors Concentric Network Corporation.
We have audited the accompanying balance sheets of Concentric Network
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, common stock subject to rescission and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Concentric Network
Corporation at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 27, 1998, except for Note
12 as to which the date is March
31, 1998
F-2
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- ---------------
1996 1997 1998
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 17,657 $ 119,959 $ 63,707
Current portion of restricted cash....... -- 19,125 19,125
Accounts receivable, net of allowances of
$56 in 1996, $80 in 1997 and $369 at
March 31, 1998 (unaudited).............. 1,849 4,549 6,542
Goodwill and other intangible assets..... -- -- 3,240
Prepaid expenses and other current
assets.................................. 1,722 5,139 5,185
-------- --------- ---------
Total current assets.................... 21,228 148,772 97,799
Property and equipment:
Computer and telecommunications
equipment............................... 55,091 71,942 75,451
Software................................. 583 1,519 2,120
Furniture and fixtures and leasehold
improvements............................ 2,130 2,984 4,257
-------- --------- ---------
57,804 76,445 81,828
Accumulated depreciation and
amortization............................ 9,877 22,735 27,912
-------- --------- ---------
47,927 53,710 53,916
Restricted cash, net of current portion... -- 33,400 34,148
Goodwill and other intangible assets, net
of current portion....................... -- -- 8,796
Other assets.............................. 1,567 8,607 8,211
-------- --------- ---------
Total assets.......................... $ 70,722 $ 244,489 $ 202,870
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 16,723 $ 10,144 $ 16,141
Accrued compensation and other employee
benefits................................ 714 1,577 1,219
Other current liabilities................ 2,163 4,917 9,916
Current portion of capital lease
obligations, including $10,180 in 1996,
$13,600 in 1997 and $4,696 at March 31,
1998 (unaudited) to a related party..... 11,258 15,326 6,911
Deferred revenue......................... 1,238 1,435 1,970
-------- --------- ---------
Total current liabilities............... 32,096 33,399 36,157
Capital lease obligations, including
$29,167 in 1996 and $32,373 in 1997 and
$7,299 at March 31, 1998 (unaudited) to a
related party, net of
current portion.......................... 30,551 33,595 8,879
Notes payable............................. -- 145,577 145,688
Commitments and contingencies
Class A common stock subject to
rescission, $0.001 par value:
Issued and outstanding shares--455 in
1996 and none in 1997................... 5,150 -- --
Stockholders' equity:
Preferred stock, $0.001 par value;
issuable in series:
Authorized shares--7,333 in 1996 and
10,000 in 1997
Issued and outstanding shares--4,901 in
1996 and none in 1997.................. 95,215 -- --
Common stock, $0.001 par value; issuable
in classes:
Authorized shares--13,343 in 1996 and
100,000 in 1997
Issued and outstanding shares--1,393 in
1996, 14,139 in 1997 and 14,177 at
March 31, 1998 (unaudited)............. 1,850 182,721 183,083
Accumulated deficit....................... (93,952) (149,534) (169,761)
Deferred compensation..................... (188) (1,269) (1,176)
-------- --------- ---------
Total stockholders' equity.............. 2,925 31,918 12,146
-------- --------- ---------
Total liabilities and stockholders'
equity............................... $ 70,722 $ 244,489 $ 202,870
======== ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................... $ 2,483 $ 15,648 $ 45,457 $ 9,154 $ 16,484
Costs and expenses:
Cost of revenue......... 16,168 47,945 61,439 15,744 17,724
Network equipment write-
off.................... -- 8,321 -- -- --
Development............. 837 2,449 4,850 1,025 1,507
Marketing and sales,
including $920, $2,448
and $2,600 to a related
party for the years
ended December 31,
1995, 1996 and 1997,
respectively........... 3,899 16,609 24,622 4,936 8,494
General and
administrative......... 2,866 3,445 4,790 1,060 1,852
Amortization of goodwill
and other intangible
assets................. -- -- -- -- 506
Write-off of in-process
technology............. -- -- -- -- 5,200
-------- -------- -------- --------- ---------
Total costs and
expenses............. 23,770 78,769 95,701 22,765 35,283
-------- -------- -------- --------- ---------
Loss from operations...... (21,287) (63,121) (50,244) (13,611) (18,799)
Other income.............. -- -- 1,233 -- --
Interest income........... 137 614 1,217 128 2,023
Interest expense,
including $797, $3,065
and $6,197 to related
parties for the years
ended December 31, 1995,
1996 and 1997,
respectively............. (858) (3,874) (7,788) (1,198) (6,493)
-------- -------- -------- --------- ---------
Loss before extraordinary
item..................... (22,008) (66,381) (55,582) (14,681) (23,269)
Extraordinary gain on
early retirement of
debt..................... -- -- -- -- 3,042
-------- -------- -------- --------- ---------
Net loss.................. $(22,008) $(66,381) $(55,582) $ (14,681) $ (20,227)
======== ======== ======== ========= =========
Loss per share (historical
1998 and 1995, pro-forma
1997 and 1996)
Loss before
extraordinary item..... $ (16.53) $ (13.46) $ (5.63) $ (2.17) $ (1.64)
Extraordinary gain...... -- -- -- -- 0.21
-------- -------- -------- --------- ---------
Net loss................ $ (16.53) $ (13.46) $ (5.63) $ (2.17) $ (1.43)
======== ======== ======== ========= =========
Shares used in computing
net loss per share
(historical 1998 and
1995, pro-forma 1997 and
1996).................... 1,331 4,937 9,872 6,767 14,157
======== ======== ======== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT)
SUBJECT TO ------------------------------------------ TOTAL
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED STOCKHOLDERS'
------------- ---------------- --------------- LATED COMPEN- EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION (DEFICIT)
------ ------ ------- -------- ------ -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 248 $2,812 -- $ -- 1,317 $ 1,361 $ (5,563) $ -- $ (4,202)
Issuance of Series A
preferred stock and
common stock (net of
issuance costs)....... -- -- 906 10,147 62 117 -- -- 10,264
Issuance of Series C
preferred stock (net
of issuance costs).... -- -- 805 20,691 -- -- -- -- 20,691
Conversion of note to
Series B preferred
stock................. -- -- 367 4,035 -- -- -- -- 4,035
Warrants issued to
purchase Series B
preferred stock....... -- -- -- 822 -- -- -- -- 822
Issuance of Class A
common stock.......... 23 690 -- -- -- 1 -- -- 1
Issuance of Class A
common stock for
services.............. -- -- -- -- 2 19 -- -- 19
Conversion of officer's
note payable for Class
B common stock........ -- -- -- -- 7 80 -- -- 80
Warrants issued to
purchase Class A
common stock.......... -- -- -- -- -- 61 -- -- 61
Conversion of
debentures to Class A
common stock.......... 174 1,578 -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- (22,008) -- (22,008)
--- ------ ------ -------- ----- -------- --------- ------- --------
Balance at December 31,
1995................... 445 5,080 2,078 35,695 1,388 1,639 (27,571) -- 9,763
Issuance of Class A
common stock.......... -- -- -- -- -- 1 -- -- 1
Conversion of
debentures to Class A
common stock.......... 10 70 -- -- -- -- -- -- --
Exercise of options.... -- -- -- -- 5 22 -- -- 22
Conversion of note to
Series C preferred
stock (net of issuance
costs)................ -- -- 123 2,960 -- -- -- -- 2,960
Issuance of Series D
preferred stock (net
of issuance costs).... -- -- 2,451 48,533 -- -- -- -- 48,533
Conversion of note to
Series D preferred
stock................. -- -- 249 5,072 -- -- -- -- 5,072
Warrants issued to
purchase Series D
preferred stock....... -- -- -- 2,955 -- -- -- -- 2,955
Deferred compensation
resulting from grant
of options............ -- -- -- -- -- 188 -- (188) --
Net loss............... -- -- -- -- -- -- (66,381) -- (66,381)
--- ------ ------ -------- ----- -------- --------- ------- --------
Balance at December 31,
1996................... 455 $5,150 4,901 $95,215 1,393 $ 1,850 $ (93,952) $ (188) $ 2,925
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT)
SUBJECT TO ---------------------------------------------
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED
-------------- ---------------- ---------------- LATED COMPEN-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION
------ ------- ------ -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A common stock
for services ..................... -- $ -- -- $ -- 5 $ 17 $ -- $ --
Conversion of Class B common to
Series A preferred stock ......... -- -- 7 -- (7) -- -- --
Conversion of Series A, B, C and D
preferred to Class A common
stock............................. -- -- (5,693) (99,604) 5,693 99,604 -- --
Shares issued upon the initial
public offering (net of issuance
costs) ........................... -- -- -- -- 4,945 52,757 -- --
Shares issued in a private
placement......................... -- -- -- -- 1,246 14,950 -- --
Conversion of note to Class A
common stock ..................... -- -- -- -- 253 3,041 -- --
Repurchase of Class A common stock
in connection with the initial
public offering .................. -- -- -- -- (185) (2,217) -- --
Shares issued subject to dilution
ratios............................ -- -- 484 -- -- -- -- --
Exercise of options to purchase
stock ............................ -- -- -- -- 65 243 -- --
Exercise of warrants to purchase
stock ............................ -- -- 301 3,281 309 1,201 -- --
Warrants issued to purchase stock . -- -- -- 1,108 -- 5,370 -- --
Deferred compensation resulting
from grant of options ............ -- -- -- -- -- 1,303 -- (1,303)
Amortization of deferred
compensation ..................... -- -- -- -- -- -- -- 222
Expiration of statutes of
limitations on common stock
subject to rescission............. (422) (4,602) -- -- 422 4,602 -- --
Repurchase of shares for
cancellation in connection with
Recission Offer................... (33) (548) -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- -- (55,582) --
---- ------- ------ -------- ------ -------- --------- -------
Balance at December 31, 1997 ....... -- -- -- -- 14,139 182,721 (149,534) (1,269)
Amortization of deferred
compensation (unaudited).......... -- -- -- -- -- -- -- 93
Common stock issued under stock
purchase plan (unaudited)......... -- -- -- -- 33 337 -- --
Exercise of options to purchase
common stock (unaudited).......... -- -- -- -- 5 25 -- --
Net loss (unaudited)............... -- -- -- -- -- -- (20,227) --
---- ------- ------ -------- ------ -------- --------- -------
Balance at March 31, 1998
(unaudited)........................ -- $ -- -- $ -- 14,177 $183,083 $(169,761) $(1,176)
- --------------------------------------------------
==== ======= ====== ======== ====== ======== ========= =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Issuance of Class A common stock
for services ..................... $ 17
Conversion of Class B common to
Series A preferred stock ......... --
Conversion of Series A, B, C and D
preferred to Class A common
stock............................. --
Shares issued upon the initial
public offering (net of issuance
costs) ........................... 52,757
Shares issued in a private
placement......................... 14,950
Conversion of note to Class A
common stock ..................... 3,041
Repurchase of Class A common stock
in connection with the initial
public offering .................. (2,217)
Shares issued subject to dilution
ratios............................ --
Exercise of options to purchase
stock ............................ 243
Exercise of warrants to purchase
stock ............................ 4,482
Warrants issued to purchase stock . 6,478
Deferred compensation resulting
from grant of options ............ --
Amortization of deferred
compensation ..................... 222
Expiration of statutes of
limitations on common stock
subject to rescission............. 4,602
Repurchase of shares for
cancellation in connection with
Recission Offer................... --
Net loss .......................... (55,582)
-------------
Balance at December 31, 1997 ....... 31,918
Amortization of deferred
compensation (unaudited).......... 93
Common stock issued under stock
purchase plan (unaudited)......... 337
Exercise of options to purchase
common stock (unaudited).......... 25
Net loss (unaudited)............... (20,227)
-------------
Balance at March 31, 1998
(unaudited)........................ $ 12,146
- --------------------------------------------------
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................. $(22,008) $(66,381) $(55,582) $ (14,681) $ (20,227)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 2,196 7,528 16,852 3,629 5,282
Amortization of deferred
interest, cost of
revenue and marketing
and sales related to
issuance of warrants... -- 1,942 1,720 193 304
Amortization of goodwill
and other intangible
assets................. -- -- -- -- 506
Amortization of deferred
interest related to
Senior Notes........... -- -- -- -- 127
Amortization of other
deferred assets........ -- -- -- -- 451
Amortization of deferred
compensation and
other.................. -- -- 658 18 93
Gain on retirement of
debt................... -- -- -- -- (3,042)
Write-off of in-process
technology............. -- -- -- -- 5,200
Loss on disposal of
equipment.............. 29 -- 162 -- --
Network equipment write-
off.................... -- 8,321 -- -- --
Compensation related to
stock and option
grants................. 883 -- -- -- --
Changes in current
assets and liabilities:
Prepaid expenses and
other current assets.. (818) (57) (3,581) 49 (97)
Accounts receivable.... (14) (1,734) (2,700) (474) (475)
Accounts payable....... 3,051 5,129 (7,287) 624 93
Accrued compensation
and other employee
benefits.............. 173 484 863 (143) (559)
Deferred revenue....... 141 1,097 197 (57) (66)
Other current
liabilities........... 539 1,546 2,795 (282) 3,995
-------- -------- -------- --------- ---------
Net cash used in operating
activities............... (15,828) (42,125) (45,903) (11,124) (8,415)
INVESTING ACTIVITIES
Additions of property and
equipment................ (1,427) (6,889) (6,130) (2,495) (1,543)
Increase in refundable
deposits................. -- (442) -- -- --
Decrease (increase) in
note receivable.......... 255 -- (370) -- --
Increase in restricted
cash..................... -- -- -- -- (748)
Acquisition of Internex
Information Services,
Inc., net of cash
acquired................. -- -- -- -- (15,452)
-------- -------- -------- --------- ---------
Net cash used in investing
activities............... (1,172) (7,331) (6,500) (2,495) (17,743)
FINANCING ACTIVITIES
Proceeds from notes
payable.................. 7,000 6,300 155,000 -- --
Increase in restricted
cash..................... -- -- (52,525) -- --
Repayment of lease
obligations to a related
party.................... (1,609) (4,561) (10,039) (1,972) (3,079)
Repayment of lease
obligations to a related
party--early retirement
of debt.................. -- -- -- -- (24,750)
Repayment of lease
obligations.............. -- (886) (1,517) (344) (504)
Repayment of notes
payable.................. (218) (1,300) (2,000) -- (1,960)
Repurchase of common
stock.................... -- -- (2,765) -- --
Deferred financing costs.. -- -- (5,006) -- (163)
Proceeds from issuances of
stock and warrants....... 30,818 48,506 73,557 1,119 362
-------- -------- -------- --------- ---------
Net cash provided by (used
in) financing
activities............... 35,991 48,059 154,705 (1,197) (30,094)
-------- -------- -------- --------- ---------
Increase (decrease) in
cash and cash
equivalents.............. 18,991 (1,397) 102,302 (14,816) (56,252)
Cash and cash equivalents
at beginning of period... 63 19,054 17,657 17,657 119,959
-------- -------- -------- --------- ---------
Cash and cash equivalents
at end of period......... $ 19,054 $ 17,657 $119,959 $ 2,841 $ 63,707
======== ======== ======== ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------
1995 1996 1997 1997 1998
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock exchanged for notes payable,
including accrued interest.......... $ 4,115 $ 8,082 $ 3,041 $ -- $ --
Capital lease obligations incurred
with a related party................ 14,578 30,945 16,668 6,435 1,285
Capital lease obligations incurred... 1,207 2,136 -- -- 19
Reduction of accounts payable through
capital lease obligations incurred.. -- -- 2,000 1,726 --
Convertible debentures exchanged for
stock............................... 1,578 70 -- -- --
Issuance of warrants................. 883 2,955 5,370 -- --
Purchase of property and equipment
through accounts payable............ -- 6,344 -- -- --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid........................ $ 850 $ 2,807 $ 5,728 $1,156 $1,397
</TABLE>
See accompanying notes.
F-8
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in 1991 and reincorporated into Delaware in 1997.
Concentric provides tailored, value-added Internet Protocol (IP) based network
services for businesses and consumers. To provide these services, the Company
utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks (VPNs), dedicated access
facilities (DAFs), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks.
Interim Results
The accompanying balance sheet as of March 31, 1998 and the statements of
operations and cash flows for the three months ended March 31, 1997 and 1998
and the statement of common stock subject to rescission and stockholders'
equity (deficit) for the three months ended March 31, 1998 are unaudited. In
the opinion of management, the statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statements for
these periods is also unaudited.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash and cash equivalents consist primarily of money market
funds and United States Government Obligations which are carried at cost which
approximates market value. Cash and cash equivalents are held primarily with
two banks.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the shorter of
the expected useful life or the related lease term (see Note 3).
Revenue and Customer Receivables
Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenues. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.
Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.
F-9
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Concentration of Credit Risk
The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.
Advertising Costs
The Company expenses the costs of advertising as incurred except for direct-
response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (FAS 109).
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.
Basic and Diluted Net Loss Per Share (Historical)
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the FAS 128 requirements.
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 98 (SAB No. 98) which was issued in February
1998, common and common equivalent shares issued by the Company for nominal
consideration during any of the periods for which a statement of operations
was presented in the Company's initial public offering registration statement
have been included in the calculation of basic and diluted net loss per share
for all such periods in a manner similar to a stock split. The net loss per
share calculations have been restated for all periods presented in accordance
with SAB No. 98 which replaced SAB No. 83. The following table shows basic net
loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Basic Net Loss Per Share......................... $(16.53) $(47.72) $(8.34)
======= ======= ======
Shares Used in Computing Basic Net Loss Per
Share........................................... 1,331 1,391 6,665
======= ======= ======
</TABLE>
F-10
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that were automatically converted to common
shares upon the closing of the Company's initial public offering (using the
as-if-converted method).
Stock-Based Compensation
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," effective January 1, 1996. The Company continually reviews
long-lived assets to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are recognized in operating results in the
period in which a permanent diminution in value is determined (see Note 2).
Customer Concentrations
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1996 and 1997 and for
the three months ended March 31, 1997 and 1998, revenue from WebTV Networks,
Inc. represented approximately 10.1% and 33.4% and 32.7% and 30.8%,
respectively, of the Company's total revenue.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). The Company is required to adopt these Statements in fiscal 1998. FAS
130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to
have no material impact on the Company's financial position, results of
operations or cash flows.
2. NETWORK EQUIPMENT WRITE-OFF
In December 1996, the Company wrote off approximately $8,321,000
representing the net book value and future commitments for certain network
equipment purchased from Sattel Communications LLC (Sattel), a stockholder of
the Company. The Company decided not to deploy the equipment in the network
because of concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. Included in
accounts payable in the accompanying balance sheet at December 31, 1996 and
1997 was $7,517,000 and $0, respectively, related to this equipment (see Note
11).
F-11
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. COMMITMENTS
Operating Leases
The Company has an agreement with a related party through which such related
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This
agreement expires in December 2000, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Expenses of approximately $1,155,000, $1,622,000
and $1,326,000 were incurred during the years ended December 31, 1995, 1996
and 1997, respectively, for these facilities. Additionally, the Company has
agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. The expiration dates associated
with these agreements range from December 1998 to January 2000.
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expires at various dates through December
2001. Total rent expense for all operating leases was approximately
$1,291,000, $2,060,000 and $2,418,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Future minimum lease commitments for all noncancelable operating leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $1,710
1999.................................................................. 829
2000.................................................................. 226
2001.................................................................. 216
------
Total................................................................. $2,981
======
</TABLE>
Capital Leases
In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $896,000 and
$1,443,000 at December 31, 1996 and 1997, respectively.
In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has leased
approximately $3,342,000 as of December 31, 1997. The term of the lease is 36
months and provides for monthly payments of approximately $114,000 as of
December 31, 1997. The Company has granted to the third party a security
interest in all equipment leased under this agreement.
Assets capitalized under capital leases totaled approximately $48,856,000,
and $61,927,000 at December 31, 1996 and 1997, respectively, and are included
in computer and telecommunications equipment. Accumulated amortization for
assets capitalized under capital leases totaled approximately $8,306,000 and
$18,542,000 at December 31, 1996 and 1997, respectively. Amortization of
leased assets is included in depreciation and
F-12
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
amortization expense. Future minimum lease payments under capital lease
obligations at December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $20,516
1999................................................................ 16,077
2000................................................................ 12,498
2001................................................................ 8,444
Thereafter.......................................................... 1,586
-------
Total minimum lease payments........................................ 59,121
Less amount representing interest................................... 10,200
-------
Present value of net minimum lease payments......................... 48,921
Less current portion of capital leases.............................. 15,326
-------
Long-term portion of capital leases................................. $33,595
=======
</TABLE>
Other
The Company has a noncancelable service agreement with AT&T for the
utilization of its frame relay telecommunications network. The agreement
provides for minimum payments to AT&T of approximately $300,000 per month over
its three-year term, expiring in June 1999.
The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, expiring in June 1998. The Company had
incurred expenses of approximately $3,700,000 and $8,100,000 for the years
ended December 31, 1996 and 1997, respectively, related to these other
services.
In November 1995, the Company entered into a two-year service agreement
under which a third party provided substantially all of the network analysis
and deployment and maintenance of POP sites. In 1997, the third party was
purchased by Williams Communication, Group Inc. (Williams), a stockholder of
the Company and whom also has a seat on the Board of Directors of the Company,
and the agreement was extended to December 31, 2000. The Company will
reimburse the related party for its employee compensation and direct costs for
services provided. At the end of the agreement, Williams is obligated to
transfer to the Company those personnel, resources, and facilities used to
support the Company's network analysis, POP site deployment, and maintenance.
Additionally, as part of the agreement, the Company granted 60,000 options for
its common stock to employees of Williams at an exercise price of $3.75. At
December 31, 1997, all of these options were vested.
In August 1997, the Company entered into a five-year service and equipment
agreement under which Williams, a related party, will provide
telecommunication services and equipment. The agreement provides for minimum
payments as follows: $1.2 million in 1998, $2.5 million in 1999, $7.0 million
in 2000, $6.5 million in 2001 and $4.0 million in 2002. At the election of the
third party, $2.0 million of the minimum payments may be paid by the issuance
of common stock of the Company at the then-current fair market value.
F-13
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. CONVERTIBLE DEBENTURES AND NOTES PAYABLE
Bridge Loans
At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of common stock subject to rescission was
completed in March 1996.
In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining
$3,000,000 outstanding at December 31, 1995 was converted into Series C
convertible preferred stock in February 1996.
In June 1997, the Company borrowed $3 million from a related party in the
form of a 10% convertible secured promissory note (the Secured Note). The
Secured Note automatically converted into 253,403 shares of common stock upon
the closing of the Public Offering at a per share conversion price equal to
the Public Offering price of $12.00. In connection with the Secured Note, the
Company issued a warrant to purchase 63,351 shares of common stock at an
exercise price of $6.00 per share (see Note 7).
In June 1997, the Company borrowed $2 million from a stockholder in the form
of a 10% unsecured promissory note (the Unsecured Note). The Unsecured Note
was repaid in August 1997. In connection with the Unsecured Note, the Company
issued a warrant to purchase 83,333 shares of common stock at an exercise
price of $6.00 per share (see Note 7).
Senior Notes
In December 1997, the Company issued 150,000 units (collectively, the
Units), each consisting of $1,000 principal amount of 12 3/4% Senior Notes
(the Senior Notes) due 2007 and one warrant (a Warrant), each Warrant
entitling the holder thereof to purchase 6.34 shares of common stock at $10.86
per share and such Warrants expire on December 15, 2007 (see Note 7) for
aggregate cash proceeds of $150.0 million. Approximately $52.5 million of the
cash proceeds was placed in a escrow account to fund the first six interest
payments in accordance with the Senior Note agreement.
The Warrants resulted in the right of the holders to purchase 951,108 shares
of the Company's common stock. The Company deemed the fair value of the
warrants, using the Black-Scholes method to be approximately $4,440,000 which
was recorded as a discount on the Senior Notes. The discount is being
amortized as interest expense over the term of the Senior Notes. Amortization
expense was nominal for the year ended December 31, 1997.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after December 15, 2002, at the redemption
prices set forth within the Senior Note agreement, plus accrued interest to
the date of redemption. In addition, on or prior to December 15, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of
Senior Notes at a redemption price of 112.75% of the principal amount,
together with accrued and unpaid interest to the date of redemption with the
net cash proceeds of one or more public equity offerings or the sale of common
stock to a strategic investor, provided that at least 65% of the original
aggregate principal amount of the Senior Notes remain outstanding.
In connection with the issuance of Senior Notes, the Company incurred
approximately $5,000,000 of debt issuance costs which are classified as other
assets. These costs are being amortized as interest expense over the term of
the Senior Notes. Amortization expense was nominal for the year ended
December 31, 1997.
F-14
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMON STOCK SUBJECT TO RESCISSION
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not have been available. As a result, on September 30, 1997, the Company made
rescission offers (the "Rescission Offer") to certain purchasers of these
securities who are entitled to a return of the consideration paid for their
stock or debentures. As such, these shares have been classified as common
stock subject to rescission in the accompanying financial statements.
Additionally, options issued pursuant to the Company's 1995 Stock Incentive
Plan to Employees and Consultants and non-plan options were issued in various
states for which the Company may not have had an available exemption under
state laws. Such options are potentially subject to rescission and the Company
has included them in the Rescission Offer. As of December 31, 1997, statutes
of limitations under federal and state securities laws applicable to the
shares which may have been issued without securities laws exemptions have
lapsed and the Rescission Offer had expired. Pursuant to the Rescission Offer,
the Company offered to rescind the issuance of shares and options as to which
the applicable statute of limitations had not run. There can be no assurances
that the Company will not otherwise be subject to additional liabilities with
respect to such issuances. The Company repurchased 32,423 shares of Common
Stock subject to the Rescission Offer for $548,000 and paid related interest
charges of $125,000. Based upon the above, the Company has reclassified the
remaining rescission liability and shares into stockholders' equity.
6. STOCKHOLDERS' EQUITY
On August 5, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Class A common stock and preferred
stock to 13,333,333 and 7,333,333, respectively. Of the 7,333,333 authorized
shares of preferred stock, 1,000,000, 866,667, 933,333, and 4,533,333 are
designated as Series A, B, C, and D, respectively.
Initial Public Offering and Direct Placements
Effective July 30, 1997, the Company reincorporated under the laws of the
state of Delaware, at which time a one for 15 reverse stock split took effect.
In addition, the Company authorized 100,000,000 shares of its common stock.
Upon closing of the initial public offering (the Public Offering), all
outstanding shares of Series A, B, C, and D convertible preferred stock and
Class B common stock were converted into common stock. All share and per share
data in these financial statements have been retroactively restated to reflect
the reverse stock split.
On August 1, 1997, the Company effected its Public Offering of common stock.
The offering consisted of 4,300,000 shares of common stock issued to the
public at $12.00 per share. Concurrent with the closing of the Public
Offering, certain strategic investors, including Williams, purchased directly
from the Company 1,499,236 shares of common stock having an aggregate purchase
price of approximately $18 million (including the cancellation of
approximately $3 million in indebtedness). Such shares are unregistered shares
and were purchased at the Public Offering price of $12.00 per share.
In connection with the direct purchase, the Company issued warrants to one
of the strategic investors to purchase 291,667 shares of the Company's common
stock at $6.00 per share (see Note 7). In September, the
F-15
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
underwriters exercised an option to purchase an additional 645,000 shares of
common stock at the Public Offering price of $12.00 per share to cover over-
allotments in connection with the Public Offering.
Preferred Stock
Preferred stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PAR LIQUIDATION
AUTHORIZED OUTSTANDING VALUE AMOUNT PREFERENCE
---------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A convertible.... 1,000,000 906,454 $0.001 $10,146,987 $10,000,000
Series B convertible.... 866,667 366,946 $0.001 4,857,130 4,035,130
Series C convertible.... 933,333 928,243 $0.001 23,651,008 20,690,804
Series D convertible.... 4,533,333 2,699,588 $0.001 56,559,871 55,071,586
--------- ----------- -----------
4,901,231 $95,214,996 $89,797,520
========= =========== ===========
</TABLE>
In connection with the Public Offering, all shares of Series A, B, C and D
preferred stock were converted into common stock of the Company.
Common Stock
Common stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED PAR
AUTHORIZED AND OUTSTANDING VALUE AMOUNT
---------- --------------- ------ ----------
<S> <C> <C> <C> <C>
Class A......................... 13,333,333 1,385,790 $0.001 $1,769,819
Class B......................... 10,024 7,117 $0.001 80,065
---------- --------- ----------
13,343,357 1,392,907 $1,849,884
========== ========= ==========
</TABLE>
In connection with the Public Offering, all shares of Class A and Class B
common stock were converted into common stock of the Company.
Stock Option Plans
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the 1995 Plan) provides
for the granting to employees of incentive stock options and for the granting
to employees and consultants of nonstatutory stock options, stock appreciation
rights (SARs) and restricted stock awards (RSAs). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was approved by the Board of
Directors in September 1995 and Stockholders in September 1995, and an
amendment decreasing the number of shares thereunder from 840,000 to 762,600
was approved by the Board of Directors in February 1996. Incentive stock
options granted under the 1995 Plan must generally be exercised within three
months of the end of an optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term,
which may not exceed ten years. The exercise price of all options granted
under the 1995 Plan must be at least equal to the fair market value of the
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any option must
equal at least 110% of the fair market value on
F-16
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
the grant date and the term of the option must not exceed five years. The term
of all other options granted under the 1995 Plan may not exceed 10 years. The
1995 Plan was terminated effective October 4, 1996, and no further grants are
being made thereunder. A total of 762,600 shares of common stock are reserved
for issuance pursuant to the 1995 Plan. As of December 31, 1997, options to
purchase 332,130 shares of common stock at a weighted exercise price of $3.75
per share were outstanding under the 1995 plan.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the Restated 1996 Plan) provides for the granting to
employees of incentive stock options and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights (Rights). The 1996 Plan was initially approved by the Board of
Directors effective as of December 1996. It was amended and restated in May
1997 and approved by the Stockholders at the 1997 annual meeting. Unless
terminated sooner, the Restated 1996 Plan will terminate automatically in
December 2006. The form of option agreement currently in use provides that
options generally must be exercised within 90 days of the end of optionee's
status as an employee, director or consultant of the Company. Under the
Restated 1996 Plan, options must be exercised within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. In the case of Rights, the Restricted Stock
Purchase Agreement issued in connection with the Right shall grant the Company
a repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company. The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
generally lapse at a rate of 20% per year over five years. Generally, options
vest 25% after one year and 1/36 per month thereafter. The exercise price of
all incentive stock options granted under the Restated 1996 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory stock options and Rights must at least be
equal to 85% of the fair market value of the common stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any incentive or nonstatutory stock option granted must
equal at least 110% of the fair market value on the grant date. The term of an
incentive stock option granted to such a 10% stockholder must not exceed five
years. The term of other options granted under the Restated 1996 Plan may not
exceed ten years. A total of 1,100,000 shares of common stock are currently
reserved for issuance pursuant to the Restated 1996 Plan. As of December 31,
1997, options to purchase 914,283 shares of common stock at a weighted average
exercise price of $6.40 per share were outstanding, and 185,717 shares of
common stock remained available for future grant under the Restated 1996 Stock
Plan.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Restated 1996 Plan provides the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable.
1997 Stock Plan. The Company's 1997 Stock Plan (the 1997 Plan) provides for
the granting to employees of incentive stock options and for the granting to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights (Rights). The 1997 Plan was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. Unless terminated
sooner, the 1997 Plan will terminate automatically in 2007. Options granted
under the 1997 Plan must generally be exercised within three months of the end
of optionee's status as an employee, director or consultant of the Company, or
within twelve months
F-17
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's term. The exercise price of all
incentive stock options granted under the 1997 Plan must be at least equal to
the fair market value of the common stock on the date of grant. The exercise
price of nonstatutory stock options and Rights granted under the 1997 Plan is
determined by the 1997 Plan's Compensation Committee, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation," the exercise price must at least be equal to the fair market
value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of other incentive stock options granted under the
1997 Plan may not exceed ten years. A total of 1,500,000 shares of common
stock are currently reserved for issuance pursuant to the 1997 Plan. As of
December 31, 1997, options to purchase 511,271 shares of common stock at a
weighted average exercise price of $11.25 per share were outstanding, and
988,729 shares of common stock remained available for future grants under the
1997 plan.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the 1997 Plan provides for the optionee or Right holder to
have the right to exercise the option or Right as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the 1997 Purchase Plan) was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. A total of 500,000
shares of common stock has been reserved for issuance under the 1997 Purchase
Plan. The 1997 Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, consists of 24-month offering periods beginning
on the first trading day on or after February 15 and August 15 of each year,
except for the first such offering period, which commenced on August 4, 1997
and ends on February 13, 1998. Each offering period contains four six-month
purchase periods. Employees are eligible to participate if they are
customarily employed by the Company or any designated subsidiary for at least
20 hours per week and more than five months in any calendar year. The 1997
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions of up to 10% of an employee's compensation (excluding
overtime, shift premium, and other bonuses and incentive compensation), up to
a maximum of $25,000 for all offering periods ending within the same calendar
year. No employee may purchase more than 25,000 shares in any purchase period.
The price of stock purchased under the 1997 Purchase Plan is 85% of the lower
of the fair market value of the common stock at the beginning of the offering
period or at the end of the current purchase period. Employees may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
The 1997 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of substantially all of the
Company's assets, each outstanding option shall be assumed or an equivalent
option shall be substituted for it, or the Board of Directors or its committee
shall shorten the purchase and offering periods then in progress (so that
employees' rights to purchase stock under the Plan are exercised prior to the
merger or sale of assets). The 1997 Purchase Plan will terminate in 2007.
In April 1995, an additional 53,333 options to purchase common stock for
$30.00 per share were issued to two of the Company's executives in connection
with their employment by the Company. These options were fully vested upon
issuance and are exercisable over five years.
F-18
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
In October 1995 and August 1996, the exercise price of options to purchase
182,375 shares and 46,673 shares of common stock, respectively, were repriced
to $3.75 per share, the then fair value of the common stock, as determined by
the Company's Board of Directors.
The Company issued options to purchase 179,300 shares of common stock in
December 1996, 40,267 shares of common stock in January 1997, 216,733 shares
of common stock in June 1997, and repriced 181,473 options in July 1997. The
Company recorded deferred compensation, for financial reporting purposes, of
approximately $188,000 in 1996 and $1,303,000 for the year ended December 31,
1997, with respect to such option grants to reflect the difference between the
exercise price and the deemed fair value for financial reporting purposes of
these shares. Amortization of this deferred compensation was $0 in 1996 and
$222,000 in the year ended December 31, 1997. The amortization of this
deferred compensation will continue over the four year vesting period of the
associated stock options.
The following table summarizes stock option activity under all of the Plans:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at December 31, 1994.......................... 352,456 $3.75--$33.00
Granted.............................................. 642,075 $3.75--$33.00
Exercised............................................ (133) $9.00
Canceled............................................. (187,315) $11.25--$12.45
---------
Balance at December 31, 1995.......................... 807,083 $3.75--$33.00
Granted.............................................. 421,620 $3.75
Exercised............................................ (4,483) $3.75--$ 9.00
Canceled............................................. (95,218) $3.75--$30.00
---------
Balance at December 31, 1996.......................... 1,129,002 $3.75--$33.00
Granted.............................................. 1,472,338 $3.75--$11.25
Exercised............................................ (64,544) $3.75
Canceled............................................. (244,630) $3.75--$11.25
---------
Balance at December 31, 1997.......................... 2,292,166 $3.75--$30.00
Granted (unaudited).................................. 294,267 $9.88--$13.00
Exercised (unaudited)................................ (5,969) $3.75--$ 6.00
Canceled (unaudited)................................. (44,459) $3.75--$13.00
---------
Balance at March 31, 1998 (unaudited)................. 2,536,005 $3.75--$30.00
=========
</TABLE>
At December 31, 1997, vested options totaled 710,495.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE NUMBER
NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.75................... 1,029,579 8.20 $ 3.75 612,161 $ 3.75
$6.00................... 394,638 9.04 $ 6.00 43,336 $ 6.00
$8.85--$9.30............ 301,780 9.46 $ 9.11 -- --
$11.25.................. 511,171 9.83 $11.25 -- --
$12.45--$30.00.......... 54,998 6.80 $12.98 54,998 $12.98
--------- -------
Total................... 2,292,166 710,495
========= =======
</TABLE>
F-19
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Options granted after the Public Offering have been valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with FAS 123, in arriving at an option valuation. The
minimum value method does not consider stock price volatility. Further,
certain other assumptions necessary to apply the Black-Scholes model may
differ significantly from assumptions used in calculating the value of options
granted in 1995 and 1996 under the minimum value method.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility........................................ N/A N/A .250
Expected life of options in years.......................... 4.4 4.0 3.3
Risk-free interest rate.................................... 6.2% 6.3% 6.0%
Expected dividend yield.................................... 0.00% 0.00% 0.00%
</TABLE>
The weighted average minimum value of stock options granted during 1997 was
$1.87. For pro forma purposes, the estimated minimum value of the Company's
stock-based awards to employees is amortized over the options' vesting period.
The results of applying FAS 123 to the Company's option grants in 1995, 1996
and 1997 was not material to the results of operations or loss per share for
those years reported in the accompanying statements of operations. Because FAS
123 is applicable only to awards granted subsequent to December 31, 1994, its
pro forma effect will not be fully reflected until approximately 1998.
7. WARRANTS TO PURCHASE COMMON STOCK
In connection with the Company's Public Offering, all of the outstanding
warrants to purchase preferred stock were converted to warrants to purchase
common stock. The following warrants to purchase shares of the Company's
common stock were outstanding at December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
----------------------------------
NUMBER WEIGHTED AVERAGE YEAR
EXERCISE PRICES OF SHARES EXERCISE PRICE EXPIRES
--------------- --------- ---------------- -------
<S> <C> <C> <C>
$ 7.40-$15.00............................. 187,517 $11.36 1998
$19.49.................................... 692,793 $19.49 1999
$ 3.75-$26.87............................. 320,203 $22.25 2000
$ 6.00.................................... 438,351 $ 6.00 2002
$10.86.................................... 951,108 $10.86 2007
---------
2,589,972
=========
</TABLE>
The above warrants were issued at various times during the three year period
ended December 31, 1997 in connection with a service agreement, a capital
lease agreement, and several debt and equity financings. The Company has
deemed the fair market value of such warrants, using the Black-Scholes method,
to be $822,000, $61,000, $5,700,000 and $2,623,000, respectively. The Company
is amortizing the value of the warrants over the term of the related
agreements which range from one to ten years. Amortization expense for the
years ended
F-20
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
December 31, 1995, 1996 and 1997 was $0, $1,942,000 and $1,720,000,
respectively. The Company has reserved the amount of shares necessary to meet
the exercise of these warrants.
8. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $6,000, $45,000 and $158,000 to the plan during the years
ended December 31, 1995, 1996 and 1997, respectively.
9. INCOME TAXES
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $141,000,000 and $109,000,000,
respectively. The net operating loss carryforwards will expire at various
dates beginning in the years 2003 through 2012, if not utilized.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 32,000,000 $ 55,000,000
Write-off of network equipment 5,000,000 4,000,000
Other, net..................................... 1,000,000 1,000,000
------------ ------------
Total deferred tax assets........................ 38,000,000 60,000,000
------------ ------------
Deferred tax liabilities:
Other, net 1,000,000 2,000,000
------------ ------------
Net deferred tax assets.......................... 37,000,000 58,000,000
Valuation allowance.............................. (37,000,000) (58,000,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
The net valuation allowance increased by approximately $28,000,000 in 1996
and $21,000,000 in 1997.
F-21
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
10. RELATED PARTY TRANSACTIONS--OTHER
An officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $920,000,
$2,448,000 and $2,600,000 in the years ended December 31, 1995, 1996, and
1997, respectively.
11. CONTINGENCIES
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel Communications LLC (Sattel), alleging securities fraud related to
plaintiffs' purchase of shares of Diana Common Stock in reliance upon
allegedly misleading statements made by defendants, Diana, Sattel and certain
of their respective affiliates, officers and directors. The Company was named
as a defendant in the complaint in connection with certain statements made by
Diana and officers of Diana related to the Company's purchase of network
switching equipment from Diana's Sattel subsidiary. The plaintiffs seek
unspecified compensatory damages. A trial date has not yet been determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matters could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcomes is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either or which could have a material adverse effect on the
Company's results of operations.
Sattel Settlement
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel). Sattel's complaint alleged that the
Company was in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network and also sought
unspecified consequential and punitive damages. On July 11, 1997, the Company
settled the complaint with Sattel in the amount of $4.4 million. The Company
also purchased 32,986 shares of the Company's common stock held by Sattel on
the day after the closing of the offering at the Public Offering price. In
August, 1997 the Company made cash payments to Sattel totaling approximately
$4.8 million, to satisfy its obligations pursuant to the settlement agreement
and the repurchase of common stock. Upon the settlement of the Sattel
complaint, the Company recorded $970,000 of other income related to the
reversal of previously established reserves.
F-22
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
12. SUBSEQUENT EVENTS
Acquisition
On February 5, 1998, the Company acquired all of the outstanding stock of
InterNex Information Services, Inc. (InterNex). The transaction was accounted
for using the purchase method of accounting. The total purchase price of
approximately $23.9 million consisted of a $15.5 million cash payment upon
closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current and other assets............................................ $ 1,348
Computer and telecommunications equipment........................... 4,784
Goodwill............................................................ 9,496
Other intangible assets............................................. 3,080
Write-off of in process technology.................................. 5,200
-------
Total purchase price allocation.................................... $23,908
=======
</TABLE>
The purchase price allocation has been recorded on a tentative basis, and
any adjustments to the purchase price allocation will be made within one year
of the purchase in accordance with generally accepted accounting principles.
Goodwill arising from the acquisition will be amortized on a straight-line
basis over 5 years. Other intangible assets include developed technology,
assembled workforce and customer lists and are being amortized over their
useful lives ranging from two to four years.
The following unaudited pro forma information represents the combined
results of operations as if the acquisition of InterNex had occurred as of the
beginning of the periods presented and does not purport to be indicative of
what would have occurred had the acquisitions been made as of that date or the
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Pro forma net revenues.................................. $ 55,411
Pro forma net loss...................................... $ (84,078)
Pro forma net loss per share............................ $ (8.52)
</TABLE>
The pro forma results include the historical operations of the Company and
the historical operations of the acquired business adjusted to reflect certain
pro forma adjustments, including the amortization of intangible assets,
totaling $3.2 million. In addition, the pro forma results reflect the interest
expense that would have been incurred had the Senior Notes been offered on
January 1, 1997. Finally, interest expense and related charges of bridge
financings have been excluded since such bridge financings would not have
occurred if the Senior Notes been offered on January 1, 1997. The pro forma
results do not include the write-off of purchased research and development of
$5.2 million since it is considered a non-recurring adjustment.
Early Retirement of Debt
On March 31, 1998 the Company retired a portion of debt in the form of
capital lease obligations to a related party. The Company paid $24.8 million
for extinguishment of debt and has a remaining liability of $1.5 million
F-23
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
for related sales taxes which is classified as accounts payable. The Company
recognized an extraordinary gain of $3.0 million in connection with this
transaction.
Operating Lease
The Company renewed the lease on its executive offices in Cupertino,
California. The lease expires in April 2003. The average annual rent expense
over the term of the lease is approximately $1.2 million per year.
13. SUBSEQUENT EVENT (UNAUDITED)
Acquisition
On May 29, 1998, the Company acquired Delta Internet Services, Inc.
("Delta") in a transaction that was accounted for as a pooling of interests.
The Company issued approximately 226,449 shares of its common stock to Delta
shareholders in exchange for all outstanding Delta shares. In addition, the
Company assumed all outstanding Delta stock options and warrants to purchase
approximately 98,713 shares of the Company's stock. The results of operations
of Delta have not been material in relation to those of the Company, and thus
the consolidated results of operations and financial position of the Company
for previously reported periods, have not be restated.
Preferred Stock
In June 1998, the Company issued 150,000 shares of Series A Preferred Stock
(the "Shares"), each Share consisting of $1,000 principal amount of 13 1/2%
Senior Redeemable Exchangeable Preferred Stock due 2010 for aggregate cash
proceeds of $150.0 million.
The Shares will be redeemable at the option of the Company, in whole or in
part, at any time on or after June 1, 2003, at the redemption prices set forth
within the Share agreement, plus accrued dividends to the date of redemption.
In addition, on or prior to June 1, 2001, the Company may redeem up to 35% of
the original Shares at a redemption price of 113.25% of the principal amount,
together with accrued and unpaid dividends to the date of redemption with the
net cash proceeds of one or more public equity offerings or the sale of common
stock to a strategic investor.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterNex Information Services, Inc.:
We have audited the accompanying balance sheet of InterNex Information
Services, Inc. (a California corporation and a wholly owned subsidiary of
InterNex Communications, Inc.) as of June 30, 1997 and the related statements
of operations, shareholder's equity 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 financial statements referred to above present fairly,
in all material respects, the financial position of InterNex Information
Services, Inc. as of June 30, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had an accumulated deficit of approximately
$11.2 million and negative working capital of approximately $2.7 million. In
addition, for the year ended June 30, 1997, the Company had a negative cash
flow from operations and incurred a significant net operating loss.
Management's current projections indicate that the cash flow from operations
will be insufficient to enable the Company to continue to meet its obligations
and fund operating expenses during fiscal 1998. These conditions, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
San Jose, California
January 26, 1998
F-25
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................... $ 68 $ 11
Accounts receivable, net of allowance for doubtful
accounts of $339 and $207, respectively............... 1,002 1,403
Inventories............................................ 162 40
Other current assets................................... 113 124
-------- -------
Total current assets.................................. 1,345 1,578
-------- -------
Property And Equipment:
Network and computer equipment......................... 6,310 6,618
Furniture and office equipment......................... 557 565
Leasehold improvements................................. 773 992
-------- -------
7,640 8,175
Less--Accumulated depreciation and amortization........ (1,872) (2,877)
-------- -------
Property and equipment, net............................. 5,768 5,298
-------- -------
Other Assets........................................ 145 144
-------- -------
$ 7,258 $ 7,020
======== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of capital lease obligations........... $ 523 $ 523
Notes payable to bank.................................. -- 1,228
Accounts payable....................................... 2,373 2,285
Accrued compensation and other employee benefits....... 165 216
Other current liabilities.............................. 994 1,052
-------- -------
Total current liabilities............................. 4,055 5,304
-------- -------
Capital lease obligations, net of current portion....... 1,115 852
-------- -------
Redeemable Convertible Preferred Stock.................. -- --
-------- -------
Commitments (Note 5)
Shareholder's Equity:
Preferred stock, no par value
Authorized--2,000,000 shares at June 30, 1997
Outstanding--None outstanding......................... -- --
Common stock, no par value
Authorized--30,000,000 shares
Issued and outstanding--7,000,000 at June 30, 1997.... 13,239 15,141
Accumulated deficit.................................... (11,151) (14,277)
-------- -------
Total shareholder's equity............................ 2,088 864
-------- -------
$ 7,258 $ 7,020
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, -------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Service revenue............................... $ 8,486 $ 3,801 $4,823
Equipment revenue............................. 1,696 1,397 147
------- -------- ---------
Total revenues.............................. 10,182 5,198 4,970
------- -------- ---------
Operating Costs And Expenses:
Data communications and operations............ 7,563 3,024 4,304
Equipment cost................................ 1,415 1,170 108
Sales and marketing........................... 3,687 1,503 1,807
General and administrative.................... 2,730 1,175 1,308
Research and development...................... 569 258 504
------- -------- ---------
Total operating expenses.................... 15,964 7,130 8,031
------- -------- ---------
Loss from operations............................ (5,782) (1,932) (3,061)
Other income (expense):
Interest expense.............................. (84) (39) (110)
Other income, net............................. -- -- 45
------- -------- ---------
(84) (39) (65)
------- -------- ---------
Net loss........................................ $(5,866) $ (1,971) $ (3,126)
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT DEFICIT EQUITY
------ ------- ----------- -------------
<S> <C> <C> <C> <C>
Balance At June 30, 1996.............. 4,048 $ 6,609 $ (5,285) $ 1,324
Contributed capital received from
Internex Communications, Inc....... -- 6,330 -- 6,330
Conversion of redeemable convertible
preferred stock into common stock.. 2,952 300 -- 300
Net loss............................ -- -- (5,866) (5,866)
----- ------- -------- -------
Balance At June 30, 1997.............. 7,000 13,239 (11,151) 2,088
Contributed capital received from
Internex Communications, Inc.
(unaudited)........................ -- 1,902 -- 1,902
Net loss (unaudited)................ -- -- (3,126) (3,126)
----- ------- -------- -------
Balance At December 31, 1997
(unaudited).......................... 7,000 $15,141 $(14,277) $ 864
===== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, --------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(5,866) $ (1,971) $ (3,126)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 1,380 506 1,005
Provision for doubtful accounts........... 563 140 --
Changes in operating assets and
liabilities:
Accounts receivable..................... (30) 304 (401)
Inventories............................. (29) (6) 122
Other assets............................ (190) (317) (10)
Accounts payable........................ 769 (217) (88)
Other current liabilities............... 385 414 109
------- --------- ---------
Net cash used in operating activities......... (3,018) (1,147) (2,389)
------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (3,140) (2,819) (535)
------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from Internex Communications,
Inc.......................................... 6,330 3,947 1,902
Proceeds from bank line of credit............. -- -- 1,228
Principal payments on capital lease
obligations.................................. (268) (28) (263)
------- --------- ---------
Net cash provided by financing activities..... 6,062 3,919 2,867
------- --------- ---------
Net decrease in cash.......................... (96) (47) (57)
Cash, beginning of period..................... 164 164 68
------- --------- ---------
Cash, end of period........................... $ 68 $ 117 $ 11
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital leases....... $ 1,316 $ -- $ --
======= ========= =========
Conversion of preferred stock into common
stock........................................ $ 300 $ -- $ --
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest expense................ $ 84 $ 39 $ 110
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. NATURE OF OPERATIONS, ORGANIZATION AND LIQUIDITY:
InterNex Information Services, Inc. ("InterNex" or the "Company"), a
California corporation, is a wholly owned subsidiary of InterNex
Communications, Inc., a California corporation ("Communications Inc." or the
"Parent Company"). The Company provides Internet access services and products
to both organizations and individuals throughout the United States. The
Company offers a broad spectrum of internet access services ranging from dial-
up services to continuous access services using dedicated high speed telephone
circuits. In addition, the Company offers Web hosting services, training and
consulting services.
The Company was incorporated in August 1993, and commenced commercial
operations in May 1995. On March 17, 1995, the shareholders of InterNex
entered into an organization and financing agreement with Communications Inc.,
a California corporation formed for the purpose of acquiring InterNex, whereby
the shareholders of Internex converted 4,048,000 shares of common stock,
2,024,000 shares of Series A preferred stock and an $83,000 debenture into
4,275,720 shares of Communications Inc. common stock (see Note 6).
The Company is subject to certain risks and uncertainties including, among
others, the need for additional financing, dependence on key personnel, actual
and prospective competition by entities with greater financial and other
resources, risks associated with the development of the Internet market, risks
associated with consolidation in the industry, acquisitions and international
expansion, limited experience in the market for individual customers and the
software industry, technology and regulatory risks and dependence upon sole
and limited suppliers.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of June 30, 1997, the Company had
an accumulated deficit of approximately $11.2 million and negative working
capital of approximately $2.7 million. In addition, for the year ended June
30, 1997, the Company had a negative cash flow from operations and incurred a
significant net operating loss. Management's current projections indicate that
the cash flow from operations will be insufficient to enable the Company to
continue to meet its obligations and fund operating expenses during fiscal
1998. The Company has been engaged in several efforts to raise the necessary
working capital through an equity offering to enable the Company to continue
to meet its debt obligations and monthly operating expense requirements,
however, there can be no assurances that the efforts to raise the necessary
working capital will be successful. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting 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.
Revenue Recognition
Revenues from services consist primarily of fixed monthly service fees and
hourly amounts based on usage and are recognized as the service is provided.
Payments received in advance of providing services are deferred until the
period such services are provided. Deferred revenue, which was approximately
$354,000 at June 30, 1997, is included in other current liabilities in the
accompanying balance sheet. Revenues from the sale of
F-30
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
equipment, which is provided by third-party equipment manufacturers, is
recognized at the time the installation of the equipment is complete.
Significant Customer
No single customer accounted for more than 10% of the Company's total
revenues during the year ended June 30, 1997.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends related
to past losses and other information. As of June 30, 1997, approximately 47%
of accounts receivable were concentrated with fifteen customers.
Inventories
Inventory consists of equipment purchased from third-party equipment
manufacturers and is stated at the lower of cost or market, using the first-
in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
depreciation of assets acquired under capital leases, is provided using the
straight-line method over the estimated useful lives of the assets (or over
the lease term, if shorter, for capital leases and leasehold improvements),
which range from three to five years.
The Company leases certain network and computer equipment under non-
cancelable capital leasing arrangements. Total cost of equipment capitalized
under capital leases as of June 30, 1997 was approximately $1.9 million and
related accumulated depreciation was approximately $325,000.
3. RELATED PARTY TRANSACTIONS:
The Company shares its corporate facilities with Internex Communications
Inc., and Tiara Computer Systems, Inc., ("Tiara") a non-operating wholly owned
subsidiary of Internex Communications Inc. that filed Chapter 7 liquidation
bankruptcy in 1996. Reimbursement of general operating expenses from Internex
Communications Inc. and Tiara was not significant during fiscal 1997. As of
June 30, 1997, amounts due to or from either Communications Inc., or Tiara
were not significant, and the total payments received from Tiara during 1997
were not significant.
4. BANK DEBT:
On July 21, 1997, the Company entered into a $200,000 promissory note
payable agreement with a bank which bears interest at the prime rate plus 1.5%
(10% as of January 26, 1998). Principal borrowings and accrued interest under
the promissory note are due by January 31, 1998. As of January 26, 1998,
$200,000 was outstanding under the promissory note.
F-31
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 26, 1997 the Company entered into a line of credit agreement (the
"Agreement") with a bank which allows for borrowings of up to $3 million.
Advances under the Agreement will be limited to 80% of eligible accounts
receivable and bears interest at the prime rate plus 2.25% (10.5% as of July
26, 1997). Borrowings outstanding under the Agreement will be secured by
substantially all of the assets of the Company. The Agreement, which expires
on July 26, 1999, requires that the Company maintain a minimum tangible net
worth, including any subordinated debt, of $1.5 million at all times. As of
January 26, 1998, approximately $1.0 million was outstanding under the
Agreement.
5. COMMITMENTS, CONTINGENCIES AND CAPITAL LEASES:
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expire at various dates through 2005. Total
rental expense for all operating leases was approximately $311,000 for the
year ended June 30, 1997. The Company also leases certain equipment under non-
cancelable capital leasing arrangements with a leasing company. The
obligations under the capital leasing arrangements are at fixed annual
interest rates at approximately 7% and 15% and are collateralized by the
related equipment.
The Company also has certain non-cancelable operating lease agreements with
several telephone companies (the "Connectivity Agreements"). Under the
Connectivity Agreements, the Company leases access to various high-speed
telephone lines and other telecommunication-related services. Total rental
expense for all Connectivity Agreements was approximately $710,000 for the
year ended June 30, 1997.
As of June 30, 1997, future minimum lease payments under all non-cancelable
operating leases, capital leases and Connectivity Agreements were as follows
(in thousands):
<TABLE>
<CAPTION>
CONNECTIVITY OPERATING CAPITAL
YEAR ENDING JUNE 30, TOTAL AGREEMENTS LEASES LEASES
-------------------- ------ ------------ --------- -------
<S> <C> <C> <C> <C>
1998................................. $1,969 $ 899 $ 360 $ 711
1999................................. 2,078 1,030 362 685
2000................................. 1,732 902 343 486
2001................................. 537 381 35 122
2002................................. 136 105 31 --
Thereafter........................... 101 -- 101 --
------ ------ ------ ------
Total minimum lease payments......... $6,553 $3,317 $1,232 2,004
====== ====== ======
Less: Amounts representing interest
on capital leases................... (366)
------
Present value of net minimum capital
lease payments...................... 1,638
Less: Current portion................ (523)
------
Long-term portion.................... $1,115
======
</TABLE>
From time to time, the Company is involved in various disputes which arise
in the ordinary course of business. Management believes that the ultimate
resolution of these disputes will not have a material adverse impact on the
Company's financial position or results of operation.
6. CONVERTIBLE PREFERRED STOCK:
As of June 30, 1996, the Company has authorized the issuance of up to
3,000,000 shares of redeemable convertible preferred stock, of which it has
designated 2,024,000 shares as Series A preferred stock, which were held by
the Parent Company. On May 12, 1997, the Parent Company converted the
outstanding 2,024,000 shares
F-32
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of redeemable convertible Series A preferred stock it held in the Company into
2,952,000 shares of Internex common stock.
As of June 30, 1997, there were no shares of preferred stock outstanding. In
August 1997, the Company increased the number of authorized preferred shares
to 5,000,000 and designated 2,000,000 shares as Series A preferred stock.
7. COMMON STOCK:
The Company has authorized the issuance of up to 30,000,000 shares of common
stock, of which 7,000,000 are issued and held by the Parent Company as of June
30, 1997.
Stock Plans
In April 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan"), whereby 1,500,000 shares of common stock have been reserved for future
issuance to employees, consultants and directors of the Company. As of January
26, 1998, no options have been issued under the 1997 Plan.
Effective March 17, 1995, the Parent Company adopted the 1995 Stock Option
Plan (the "1995 Plan"). Under the 1995 Plan, the Board of Directors of the
Parent Company may grant incentive and nonqualified stock options to
employees, consultants and directors of the Company to purchase common stock
of the Parent Company. The exercise price per share for an incentive stock
option cannot be less than the fair market value of a share of common stock,
as determined by the Board of Directors, on the date of grant. The exercise
price per share for nonqualified stock options cannot be less than 85% of the
fair market value, as determined by the Board of Directors of the Parent
Company, on the date of grant. Options generally expire ten years after the
date of grant and generally vest over a four-year period, not to exceed five
years.
In addition, effective March 17, 1995, the Parent Company adopted the 1995
Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, the Board
of Directors of the Parent Company may grant stock purchase rights to
employees and consultants of the Company to purchase common stock of the
Parent Company. The sale price per share for a stock purchase right cannot be
less than the fair market value of a share of common stock, as determined by
the Board of Directors of the Parent Company, on the date of grant. Stock
purchase rights are subject to repurchase as determined by the Board of
Directors of Communications Inc. As of June 30, 1997, rights to purchase
93,000 shares of common stock of the Parent Company have been granted to
consultants of the Company. The Company has recognized compensation expense of
approximately $25,000 related to these stock purchase rights for the years
ended June 30, 1997.
The following table summarizes option activity under the Option Plans:
<TABLE>
<CAPTION>
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- ---------
<S> <C> <C>
Outstanding at June 30, 1996......................... 3,223,500 $0.08-.60
Granted............................................ 1,547,500 0.50
Exercised.......................................... (157,708) 0.08-.60
Cancelled.......................................... (2,121,042) 0.08-.60
---------- ---------
Outstanding at June 30, 1997......................... 2,492,250 0.08-.60
Exercisable at June 30, 1996......................... 528,000 0.08-.60
========== =========
Exercisable at June 30, 1997......................... 1,046,000 $ .08-.60
========== =========
</TABLE>
F-33
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for the Option Plan and Purchase Plan (the "Plans")
under APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense is generally not recognized. Had
Compensation expense for the Plans been determined consistent with Statement
of Financial Accounting standards (SFAS) No. 123, "Accounting for Stock Based
Compensation," the Company's net loss would not had been materially different.
The weighted average fair values of options granted during fiscal 1997 was
$0.11 per share. The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1997: risk-free
interest rates of 6.2%; expected dividend yield of zero percent; expected life
of 4 years; expected volatility of zero percent.
8. INCOME TAXES:
The Parent Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". This statement requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Payables
and deferrals of income taxes are allocated to Internex through intercompany
accounts from the Parent Company, as the Parent Company reports income taxes
on a consolidated basis. As of June 30, 1997, the portion of the consolidated
deferred tax asset allocated to Internex was approximately $3.5 million and
consisted of net operating loss carryforwards and cumulative book to tax
temporary differences. The Company believes sufficient uncertainty exists
regarding the realizability of these items, and accordingly, a valuation
allowance for the entire amount has been established.
As of June 30, 1997, the portion of the consolidated net operating loss
carryforwards for Federal and state purposes allocated to Internex was
approximately $10.1 million and $5.5 million, respectively. The net operating
loss carryforwards expire at various dates through 2012. Under current tax
law, utilization of the net operating loss in any given year will be limited
upon the occurrence of certain events, including significant changes in
ownership interests.
9. SUBSEQUENT EVENT (UNAUDITED):
On February 5, 1998, Concentric Network Corporation ("Concentric"), a
Delaware corporation, acquired all of the outstanding capital stock of the
Company from Communications Inc., pursuant to a Share Acquisition Agreement,
dated February 1, 1998, by and among Concentric, the Company and
Communications Inc. Concentric paid approximately $15.5 million in cash to
Communications Inc. as consideration for all of the issued and outstanding
shares of capital stock of the Company. The amount of consideration for the
transaction was determined by arms-length negotiations between the parties.
F-34
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information
for the Company set forth below gives effect to the acquisition of InterNex
Information Services, Inc. ("InterNex"). The Unaudited Pro Forma Condensed
Combined Statement of Operations for the fiscal year ended December 31, 1997,
gives effect to the acquisition of InterNex as if such acquisition had been
consummated as of the beginning of the period presented. The Company's fiscal
year ends on December 31 and Internex's fiscal year ends on June 30. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1997 combines the results of the Company for such year with
the results of InterNex for the calendar year ended December 31, 1997. The
historical financial information set forth below has been derived from, and is
qualified by reference to, the financial statements of the Company and
InterNex and should be read in conjunction with those financial statements and
the notes thereto included elsewhere herein. The selected unaudited pro forma
condensed combined financial information set forth below reflects certain
adjustments, including, among others, adjustments to reflect the amortization
of the excess purchase price in connection with the acquisition of InterNex
and the interest expense which would have been incurred had the 12 3/4% Senior
Notes offering ("Offering") occurred on January 1, 1997.
The pro forma data is based on the historical combined statements of the
Company and Internex giving effect to the InterNex acquisition under the
purchase method of accounting, and to the assumptions and adjustments (which
the Company believes to be reasonable) described in the accompanying Notes to
Unaudited Pro Forma Condensed Combined Financial Information. Under the
purchase method of accounting, assets acquired and liabilities assumed will be
recorded at their estimated fair value at the date of acquisition. The pro
forma adjustments set forth in the following unaudited pro forma combined
financial information are estimated and may differ from the actual adjustments
when they become known; however, no material differences are anticipated by
the Company.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements--the Company and InterNex Information
Services, Inc." The selected unaudited pro forma condensed combined financial
information set forth below does not purport to represent what the combined
results of operations of the Company would actually have been if the InterNex
acquisition and Offering had in fact occurred on such dates or to project the
future combined results of operations of the Company.
F-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
INTERNEX FOR PRO FORMA
COMPANY FOR THE YEAR PRO FORMA COMBINED FOR
THE YEAR ENDED ENDED BUSINESS PRO FORMA THE YEAR ENDED
DECEMBER 31, DECEMBER 31, COMBINATION DEBT OFFERING DECEMBER 31,
1997 1997 COMBINED ADJUSTMENTS ADJUSTMENTS 1997
-------------- ------------ -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 45,457 $ 9,954 $ 55,411 $ -- $ -- $ 55,411
Cost and expenses:
Cost of revenue........ 61,439 9,196 70,635 -- -- 70,635
Development............ 4,850 815 5,665 -- -- 5,665
Marketing and sales.... 24,622 3,991 28,613 -- -- 28,613
General and
administrative........ 4,790 2,863 7,653 -- -- 7,653
Amortization of
goodwill and other
intangible assets..... -- -- -- 3,239(1) -- 3,239
-------- ------- -------- ------- -------- --------
Total cost and
expenses.............. 95,701 16,865 112,566 3,239 -- 115,805
-------- ------- -------- ------- -------- --------
Loss from operations.... (50,244) (6,911) (57,155) (3,239) -- (60,394)
Other income............ 1,233 45 1,278 -- -- 1,278
Interest income......... 1,217 -- 1,217 -- -- 1,217
Interest expense........ (7,788) (155) (7,943) -- (18,236)(2) (26,179)
-------- ------- -------- ------- -------- --------
Net Loss................ $(55,582) $(7,021) $(62,603) $(3,239) $(18,236) $(84,078)
======== ======= ======== ======= ======== ========
Pro forma net loss per
share(3)............... $ (8.52)
========
Shares used in computing
pro forma loss per
share.................. 9,872
========
</TABLE>
See accompanying notes.
F-36
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Pro forma business and Offering adjustments for the statement of operations
for the year ended December 31, 1997 are as follows:
(1) Reflects the amortization of the cost over the fair value of net
assets acquired for the InterNex acquisition as follows:
<TABLE>
<CAPTION>
COST OVER
THE FAIR VALUE
OF NET AMORTIZATION
ASSETS ACQUIRED PERIOD
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill........................................ 9,496 5 yrs
Other intangible assets ........................ 3,080 2 to 4 yrs
</TABLE>
The pro forma results do not include the write-off of purchased research and
development of $5.2 million since it is considered a non-recurring adjustment.
See Note 12 of Notes to Financial Statements.
(2) Reflects the interest expense that would have been incurred had the
Offering occurred on January 1, 1997.
(3) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding plus common equivalent shares
from convertible preferred stock, that was converted upon the Company's
proposed initial public offering (using the if-converted method), have been
included whether dilutive or anti-dilutive pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 98. Such pro forma net
loss per share reflects the impact of the adjustments above.
F-37
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE OF SERIES A PREFERRED FOR SERIES B
PREFERRED MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 14
Use of Proceeds.......................................................... 29
Dividend Policy.......................................................... 29
The Exchange Offer....................................................... 30
Capitalization........................................................... 39
Selected Historical Consolidated Financial and Other Data................ 40
Management's Discussion and Analysis of Condition and Results of
Operations.............................................................. 42
Business................................................................. 51
Management............................................................... 66
Principal Stockholders................................................... 70
Description of Preferred Stock........................................... 72
Description of Exchange Debentures....................................... 95
Description of Certain Indebtedness...................................... 129
Description of Capital Stock............................................. 130
Certain U.S. Federal Income Tax Considerations........................... 133
Plan of Distribution..................................................... 142
Legal Matters............................................................ 142
Experts.................................................................. 142
Glossary of Terms........................................................ G-1
Index to Financial Statements............................................ F-1
</TABLE>
================================================================================
================================================================================
$150,000,000
[CONCENTRIC LOGO]
EXCHANGE OFFER
WITH RESPECT TO
13 1/2% SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
----------------
PROSPECTUS
, 1998
----------------
EXCHANGE AGENT:
CHASEMELLON SHAREHOLDER SERVICES LLC
275 Montgomery Street, 23rd Floor
San Francisco, CA 94104
Attention: Duane Knutson
Tel: (415) 743-1426; Fax: (415) 489-5241
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In May 1997, the Registrant entered into indemnification agreements with its
directors and officers providing for limitations on a director's and officer's
liability for judgments, settlements, penalties, fines and expenses of defense
(including attorneys' fees, bonds and costs of investigation) arising out of
or in any way related to acts or omissions as a director or an officer, or in
any other capacity in which services are rendered to the Registrant. The
Registrant believes its indemnification agreements will assist it in
attracting and retaining qualified individuals to serve as directors and
officers. The agreements provide that a director or officer is not entitled to
indemnification under such agreements (i) if the director or officer is not
relieved of liability under applicable law, (ii) for violations of certain
securities laws, or (iii) for certain claims initiated by the officer or
director. Due to the lack of applicable case law, it is not clear whether
indemnification is available in case of a breach of securities laws of the
U.S.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Second Amended and Restated Certificate of Incorporation includes
a provision that eliminates the personal liability of its directors for
monetary damages for breach or alleged breach of their duty of care. In
addition, as permitted by Section 145 of the Delaware General Corporation Law
the Bylaws, as amended, of the Registrant provide that: the Registrant is
required to indemnify its directors and officers and persons serving in such
capacities in other business enterprises (including, for example, subsidiaries
of the Registrant) at the Registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the Registrant is required to
advance expenses, as incurred, to its directors and officers in connection
with defending a proceeding (except that it is not required to advance
expenses to a person against whom the Registrant brings a claim for breach of
the duty of loyalty, failure to act in good faith, intentional misconduct,
knowing violation of law or deriving an improper personal benefit); (iv) the
rights conferred in the Bylaws, as amended, are not exclusive, and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees; and (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to such
directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed
to directors and officers by Section 145 of the Delaware General Corporation
Law and the Bylaws, as amended, as well as certain additional procedural
protections.
The indemnification provisions in the Bylaws, as amended, and the agreements
entered into between the Registrant and its directors and officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
officers for liabilities arising under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
3.2* Form of Amended and Restated Certificate of Incorporation of Registrant.
3.4* Amended and Restated Bylaws of Registrant.
4.1 Certificate of Designation of Voting Power, Designation Preferences and
Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 13 1/2% Series A and
Series B Senior Redeemable Exchangeable Preferred Stock, due 2010 of the
Registrant.
4.2 Form of Series A Preferred Stock Certificate.
4.3 Form of Series B Preferred Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich& Rosati, Professional Corporation.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.1* Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended.
10.3* Form of Director and Officer Indemnification Agreement.
10.4* 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5* Amended and Restated 1996 Stock Plan.
10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8* Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9* Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10* Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins--Rector, Chad Shackley, GS Capital Partners, L.P.,
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB
Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies, Inc.,
as amended on September 30, 1996, and October 23, 1996, including
Colocation Services Agreement, dated as of November 1, 1994, between
the Registrant and Critical Technologies, Inc. and amendments thereto.
10.12+* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation.
10.13+* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation.
10.16+* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to Registrant
by Assignment and Novation Agreement #2, dated as of August 7, 1996.
10.17+* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18+* Amended and Restated Employee Services and Staffing Agreement.
10.19+* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc.
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.22+* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between the
Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25* Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26* Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27* (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spicker- French #130, Limited Partnership, as amended
by Lease Amendment No.1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29* Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30* Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc. ("WCG")
10.35* Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36* $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37* Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
10.38+* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41* Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield& Byers VII and KPCB Information
Science Zaibatsu Fund VII.
10.42** Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
10.43# Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns& Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers")
10.44# Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.45# Warrant Agreement, dated as of December 18, 1997, between the Regis-
trant and Chase Manhattan Bank and Trust Company, National Associa-
tion, as warrant agent.
10.46# Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers.
10.47# Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
10.48++ Standard Industrial Lease, dated as of February 17, 1995, by and be-
tween Tiara Computer Systems, Inc. and Internex Information Services,
Inc.
10.49++ Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and Internex Information Service, Inc.
10.50# Form of Indenture, dated as of December 18, 1997 among the Registrant
and Chase Manhattan Bank and Trust Company, National Association, as
trustee.
10.51# Form of $150,000,000 12 3/4% Senior Note due 2007.
10.52# Form of $150,000,000 new 12 3/4% Senior Notes due 2007.
10.53# Form of Warrant to purchase Common Stock.
10.54 Purchase Agreement, dated as of June 3, 1998, by and among the
Registrant and the Initial Purchasers.
10.55 Registration Rights Agreement, dated as of June 8, 1998, by and among
the Registrant and the Initial Purchasers.
10.56 Form of Indenture for Exchange Debentures.
11.1++ Statement re computation of earnings per share.
12.1 Statement of computation of ratio of earnings to fixed charges.
21.1++ List of Subsidiaries.
23.1 Consent of Wilson Sonsini Goodrich& Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants
24.1 Power of Attorney (see page II-6).
27.1++ Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-27241), as amended, declared effective by the Securities
and Exchange Commission ("SEC") on July 31, 1997.
** Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the SEC on November
14, 1997.
+ Certain information in this exhibit was omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request.
# Incorporated by reference from Registrant's Registration Statement on Form
S-4 (File No. 333-45055), as amended, declared effective by the SEC on
March 24, 1998.
++ Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
(b) Financial Statement Schedules
None.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) That every prospectus (i)that is filed pursuant to paragraph (1)
immediately preceding, or (ii)that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona filed offering thereof.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of
this Form, within one business day of receipt of such request, and to
send the incorporated documents by first call mail or other equally
prompt means. This includes information contained in documents filed
subsequent o the effective date of the registration statement through the
date of responding to the request.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT OF REGISTRATION STATEMENT ON FORM S-
4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF CUPERTINO, STATE OF CALIFORNIA, ON THE 7TH DAY OF JULY, 1998.
Concentric Network Corporation
By: /s/ Henry R. Nothhaft
---------------------------------
HENRY R. NOTHHAFT, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Henry R. Nothhaft and Michael F.
Anthofer, his attorney-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any and all amendments to this Registration
statement (including post-effective amendments), and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON JULY 7, 1998, BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE DATE
/s/ Henry R. Nothhaft President and Chief July 7, 1998
- ------------------------------------- Executive Officer
HENRY R. NOTHHAFT (Principal Executive
Officer), Director
/s/ Michael F. Anthofer Chief Financial July 7, 1998
- ------------------------------------- Officer (Principal
MICHAEL F. ANTHOFER Financial and
Accounting Officer)
/s/ Vinod Khosla Director July 7, 1998
- -------------------------------------
VINOD KHOSLA
Director
- -------------------------------------
FRANCO REGIS
/s/ Gary E. Rieschel Director July 7, 1998
- -------------------------------------
GARY E. RIESCHEL
/s/ Gordon C. Martin Director July 7, 1998
- -------------------------------------
GORDON C. MARTIN
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.4* Amended and Restated Bylaws of Registrant.
4.1 Certificate of Designation of Voting Power, Designation Preferences
and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 13 1/2% Series A and
Series B Senior Redeemable Exchangeable Preferred Stock, due 2010 of
the Registrant.
4.2 Form of Series A Preferred Stock Certificate.
4.3 Form of Series B Preferred Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich& Rosati, Professional Corporation.
10.1* Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended.
10.3* Form of Director and Officer Indemnification Agreement.
10.4* 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5* Amended and Restated 1996 Stock Plan.
10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8* Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9* Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10* Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins--Rector, Chad Shackley, GS Capital Partners, L.P.,
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB
Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies, Inc.,
as amended on September 30, 1996, and October 23, 1996, including
Colocation Services Agreement, dated as of November 1, 1994, between
the Registrant and Critical Technologies, Inc. and amendments thereto.
10.12+* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation.
10.13+* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16+* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to Registrant
by Assignment and Novation Agreement #2, dated as of August 7, 1996.
10.17+* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18+* Amended and Restated Employee Services and Staffing Agreement.
10.19+* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc.
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between the
Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25* Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26* Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27* (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spicker- French #130, Limited Partnership, as amended
by Lease Amendment No.1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29* Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30* Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc. ("WCG")
10.35* Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36* $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37* Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38+* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41* Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield& Byers VII and KPCB Information
Science Zaibatsu Fund VII.
10.42** Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
10.43# Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns& Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers")
10.44# Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers.
10.45# Warrant Agreement, dated as of December 18, 1997, between the Regis-
trant and Chase Manhattan Bank and Trust Company, National Associa-
tion, as warrant agent.
10.46# Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers.
10.47# Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
10.48++ Standard Industrial Lease, dated as of February 17, 1995, by and be-
tween Tiara Computer Systems, Inc. and Internex Information Services,
Inc.
10.49++ Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and Internex Information Service, Inc.
10.50# Form of Indenture, dated as of December 18, 1997 among the Registrant
and Chase Manhattan Bank and Trust Company, National Association, as
trustee.
10.51# Form of $150,000,000 12 3/4% Senior Note due 2007.
10.52# Form of $150,000,000 new 12 3/4% Senior Notes due 2007.
10.53# Form of Warrant to purchase Common Stock.
10.54 Purchase Agreement, dated as of June 3, 1998, by and among the
Registrant and the Initial Purchasers.
10.55 Registration Rights Agreement, dated as of June 8, 1998, by and among
the Registrant and the Initial Purchasers.
10.56 Form of Indenture for Exchange Debentures.
11.1++ Statement re computation of earnings per share.
12.1 Statement of computation of ratio of earnings to fixed charges.
21.1++ List of Subsidiaries.
23.1 Consent of Wilson Sonsini Goodrich& Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants
24.1 Power of Attorney (see page II-6).
27.1++ Financial Data Schedule.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-27241), as amended, declared effective by the Securities
and Exchange Commission ("SEC") on July 31, 1997.
** Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the SEC on November
14, 1997.
+ Certain information in this exhibit was omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request.
# Incorporated by reference from Registrant's Registration Statement on Form
S-4 (File No. 333-45055), as amended, declared effective by the SEC on
March 24, 1998.
++ Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF DESIGNATION OF VOTING POWER,
DESIGNATION PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS
AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS
OF
13 1/2% SERIES A AND SERIES B
SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
OF
CONCENTRIC NETWORK CORPORATION
-------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------------------
Concentric Network Corporation, a Delaware corporation (the "Company")
certifies that pursuant to the authority contained in ARTICLE FOURTH of its
Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Pricing Committee of the
Board of Directors of the Company at a meeting duly called and held on June 3,
1998, acting under the authority granted by the Board of Directors at a meeting
duly called and held on May 10, 1998, duly approved and adopted the following
resolution which resolution remains in full force and effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue of two series of
preferred stock having a par value of $1.00 per share, which shall be designated
as Series A Senior Redeemable Exchangeable Preferred Stock due 2010 (the "Series
A Preferred Stock") and Series B Senior Redeemable Exchangeable Preferred Stock
due 2010 (the "Series B Preferred Stock" and, together with the Series A
Preferred Stock, the "Exchangeable Preferred Stock") each consisting of 295,000
shares, provided that no shares of Series B Preferred Stock may be issued,
except upon the surrender and cancellation of such number of shares of Series A
Preferred Stock having an aggregate Liquidation Preference equal to the
aggregate Liquidation Preference of the shares of Series B Preferred Stock so
issued, and each shall have the following voting powers, preferences and
relative, participating, optional and other special rights, and qualifications,
limitations and restrictions thereof as follows:
1. CERTAIN DEFINITIONS.
<PAGE>
Unless the context otherwise requires, the terms defined in this
paragraph 1 shall have, for all purposes of this resolution, the meanings herein
specified (with terms defined in the singular having comparable meanings when
used in the plural).
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at
the time such Person becomes a Restricted Subsidiary or (ii) assumed in
connection with the acquisition of assets from such Person, in each case, other
than Indebtedness incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary or such acquisition, as the case may be,
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Person becomes a Restricted Subsidiary or such asset
acquisition shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any
other Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary to any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall become a Subsidiary or shall
be consolidated, merged with or into the Company or any Restricted Subsidiary or
(ii) any acquisition by the Company or any Restricted Subsidiary of the assets
of any Person which constitute substantially all of an operating unit or line of
business of such Person or which is otherwise outside of the ordinary course of
business of the Company or such Restricted Subsidiary.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Applicable Redemption Price" means a price per share equal to the
redemption prices specified below (expressed as percentages of the Liquidation
Preference thereof), in each case together with accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period) and Liquidated Damages, if any, to the date of redemption if
redeemed during the 12-month period commencing on June 1 of each of the years
set forth below:
2003 106.75%
2004 105.40%
2005 104.05%
2006 102.70%
2007 101.35%
2008 and thereafter 100.00%
<PAGE>
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of: (i) any
Capital Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or its
Restricted Subsidiaries; or (iii) any other properties or assets of the Company
or any Restricted Subsidiary other than in the ordinary course of business.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (b) the amount of each such principal
payment; by (ii) the sum of all such principal payments.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" means (i) with respect to any Person that is a
corporation, 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 such Person and (ii) with
respect to any Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing
not more than one year after the date of acquisition, issued by the United
States of America, or an instrumentality or agency thereof, and guaranteed fully
as to principal, premium, if any, and interest by the United States of America,
(ii) any certificate of deposit, maturing not more than one year after the date
of acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital and
surplus and undivided profits of not less than $500 million, whose short term
debt has a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's Investors Service, Inc. ("Moody's") or
any successor rating agency or "A-1" (or higher) according to Standard & Poor's
Corporation ("S&P") or any successor rating agency, (iii) commercial paper,
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Restricted Subsidiary of the Company)
organized and existing under the laws of the United States of America with a
rating, at the time as of which any investment therein is made, of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P and (iv) any
money market deposit accounts issued or offered by a domestic commercial bank
having capital and surplus in excess of $500 million; provided that the short
term debt of such commercial bank has a rating, at the time of Investment, of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following
events: (i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have beneficial ownership of all shares that such
<PAGE>
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50% of
the total outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any Person, or any
corporation consolidates with or merges into or with the Company, in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property,
other than any such transaction where the outstanding Voting Stock of the
Company is not changed or exchanged at all (except to the extent necessary to
reflect a change in the jurisdiction of incorporation of the Company or where no
"person" or "group" owns, immediately after such transaction, directly or
indirectly, more than 50% of the total outstanding Voting Stock of the surviving
corporation); or (iv) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies with the
provisions described under Section 9(d).
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or if at any time
after the Issue Date such Commission is not existing and performing the duties
now assigned to it under the Trust Indenture Act then the body performing such
duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period,
the provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without
duplication, for any period, the sum of (a) the interest expense of such Person
and its subsidiaries for such period, on a Consolidated basis, including,
without limitation, (i) amortization of debt discount, (ii) the net costs
associated with Interest Rate Agreements, Currency Hedging Agreements and
Commodity Price Protection Agreements (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such Person
and its subsidiaries plus (c) the interest expense actually paid by such Person
under any Guaranteed Debt of such Person and any Subsidiary to the extent not
included under clause (a)(iv) above, plus (d) the aggregate amount for such
period of cash or non-cash dividends on
<PAGE>
any Disqualified Stock or preferred stock of the Company and its Restricted
Subsidiaries, in each case as determined on a Consolidated basis in accordance
with GAAP.
"Consolidated Net Income" means, with respect to any period, the net
income of the Company and any Restricted Subsidiary for such period determined
on a consolidated basis in accordance with GAAP, adjusted, to the extent
included in calculating such net income, by excluding, without duplication: (a)
other than for purposes of calculating the Basket, all extraordinary gains or
losses for such period; (b) other than for purposes of calculating the Basket,
all gains or losses from the sales or other dispositions of assets out of the
ordinary course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period; (c) that portion of such net
income derived from or in respect of investments in Persons other than
Restricted Subsidiaries, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject, in the case of any Restricted
Subsidiary, to the provisions of clause (f) of this definition); (d) the portion
of such net income (or loss) allocable to minority interests in any Person
(other than a Restricted Subsidiary) for such period, except to the extent the
Company's allocation portion of such Person's net income for such period is
actually received in cash by the Company or any Restricted Subsidiary (subject,
in the case of any Restricted Subsidiary, to the provisions of clause (f) of
this definition); (e) the net income (or loss) or any other Person combined with
the Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination; and (f) the net
income of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is not at the time (regardless of any waiver) permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to the
extent deducted in calculating such Consolidated Net Income, by (a) Consolidated
Income Tax Expense for such period; (b) Consolidated Interest Expense for such
period; and (c) depreciation, amortization and any other non-cash items for such
period (other than any non-cash item which requires the accrual of, or a reserve
for, cash charges for any future period) of the Company and any Restricted
Subsidiary, including, without limitation, amortization of capitalized debt
issuance costs for such period, all of the foregoing determined on a
consolidated basis in accordance with GAAP minus non-cash items to the extent
they increase Consolidated Net Income (including the partial or entire reversal
of reserves taken in prior periods) for such period.
"Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on Issue Date and ending on the last day of the
most recent fiscal quarter immediately preceding the date of determination for
which consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange
<PAGE>
contracts, currency swap agreements or other similar agreements or arrangements
designed to protect against the fluctuations in currency values.
"Debentures" means the Exchange Debentures and the New Exchange
Debentures.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a)
the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow for
the latest two fiscal quarters for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (i) any Person that
is a Restricted Subsidiary on the Determination Date (or would become a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed to have been a Restricted Subsidiary at all times during
such Measurement Period, (ii) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (iii) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (through an Acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by of an Asset Sale or
the termination or discontinuance of activities constituting such operating
business) any operating business during such Measurement Period or after the end
of such period and on or prior to such Determination Date, such calculation will
be made on a pro forma basis in accordance with GAAP as if, in the case of an
Acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated prior to the first day of
such Measurement Period (it being understood that in calculating Consolidated
Operating Cash Flow the exclusions set forth in clauses (a) through (f) of the
definition of Consolidated Net Income shall apply to an Acquired Person as if it
were a Restricted Subsidiary).
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the board of directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital
Stock (excluding the Exchangeable Preferred Stock) which, by its terms (or by
the terms of any security into which it is convertible at the option of the
holder thereof or for which it is exchangeable at the option of the holder
thereof), or upon the happening of any event, matures or becomes mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or becomes
exchangeable for Indebtedness at the option of the holder thereof, or becomes
redeemable at the option of the holder thereof, in whole or in part, on or prior
to the earlier of the Mandatory Redemption Date or the date the Exchangeable
Preferred Stock is no longer outstanding; provided such Capital Stock shall only
constitute Disqualified Stock to the extent it so matures or becomes so
redeemable or exchangeable on or prior to the earlier of the Mandatory
Redemption Date or the date the Exchangeable Preferred Stock is no longer
outstanding; provided, further,
<PAGE>
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the earlier of the Mandatory
Redemption Date or the date the Exchangeable Preferred Stock is no longer
outstanding shall not constitute Disqualified Stock so long as, in the case of
any "change of control" provisions applicable to such Capital Stock, such
provisions are no more favorable to the holders of such Capital Stock than the
provisions contained in Section 8 hereof and such Capital Stock specifically
provides that such person will not repurchase or redeem any such stock pursuant
to such provision prior to the Issuer's repurchase of such shares of
Exchangeable Preferred Stock as is required to be repurchased pursuant to
Section 8 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Debentures" means the Company's 13 1/2% Series A Senior
Subordinated Debentures due 2010, issuable in exchange for the Exchangeable
Preferred Stock.
"Exchange Offer" means the exchange offer of the Series B Preferred
Stock for the Series A Preferred Stock or the New Exchange Debentures for the
Exchange Debentures, as applicable, pursuant to the Registration Rights
Agreement.
"Existing Senior Notes" means the Company's 12 3/4% Senior Notes due
2007.
"Existing Senior Notes Indenture" means the Indenture governing the
Company's 12 3/4% Senior Notes due 2007, as may be amended from time to time.
"Existing Senior Notes Maturity Date" means the earlier of: (i) the
"Stated Maturity" of the principal of the Existing Senior Notes as such term is
used for the purpose of determining whether "Capital Stock" constitutes
"Indebtedness" (as such terms are defined in the Existing Senior Notes
Indenture) under the Existing Senior Notes Indenture or (ii) December 15, 2007.
"Fair Market Value" means, with respect to any asset or property, the
sale value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market Value
shall be determined by the board of directors of the Company acting in good
faith and shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the Issue Date.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness
<PAGE>
or to assure the holder of such Indebtedness against loss, (iii) to supply funds
to, or in any other manner invest in, the debtor (including any agreement to pay
for property or services without requiring that such property be received or
such services be rendered), (iv) to maintain working capital or equity capital
of the debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor or (v) otherwise to assure a creditor against
loss; provided that the term "guarantee" shall not include endorsements for
collection or deposit, in either case in the ordinary course of business.
"Incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged or consolidated with or
into the Company or any Restricted Subsidiary shall be deemed to be Incurred at
such time.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all obligations under Interest Rate Agreements, Currency
Hedging Agreements or Commodity Price Protection Agreements of such Person, (v)
all Capital Lease Obligations of such Person, (vi) all Indebtedness referred to
in clauses (i) through (v) above of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Disqualified Stock issued by such Person valued at the greater of its voluntary
or involuntary maximum fixed repurchase price plus accumulated and unpaid
dividends, and (viii) any amendment, supplement, modification, deferral,
renewal, extension, refunding or refinancing of any liability of the types
referred to in clauses (i) through (vii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to this
Certificate of Designation, and if such price is based upon, or measured by, the
Fair Market Value of such Disqualified Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock. In no event shall "Indebtedness" include any trade payable
or other current liabilities arising in the ordinary course of business. The
amount of any item of Indebtedness shall be the amount of such Indebtedness
properly classified as a liability on a balance sheet prepared in accordance
with GAAP.
<PAGE>
"Interest Rate Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
interest rate protection agreements (including, without limitation, interest
rate swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or
indirectly, any advance, loan (including guarantees), or other extension of
credit 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 or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities issued or owned by
any other Person and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease properly
classified as an operating lease under GAAP and intellectual property licensing
arrangements.
"Net Cash Proceeds" means with respect to any issuance or sale of
Capital Stock or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock as referred to in Section 9(b) the proceeds of such issuance or
sale in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale (or conversion in the case of debt
securities or Capital Stock that have been converted) and net of taxes paid or
payable as a result thereof.
"New Exchange Debentures" means the 13 1/2% Series B Senior
Subordinated Debentures due 2010 of the Company issued pursuant to the Exchange
Offer.
"Permitted Investment" means: (i) Investments in any Wholly Owned
Subsidiary or any Person which, as a result of such Investment, (a) becomes a
Wholly Owned Subsidiary or (b) is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, or is liquidated
into, the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the
Company or a Restricted Subsidiary described in Sections 9(a)(ii)(D) and (G)
hereof; (iii) Investments in any of the Exchangeable Preferred Stock; (iv)
Investments in Cash Equivalents; (v) Investments acquired by the Company or any
Restricted Subsidiary in connection with an Asset Sale to the extent such
Investments are non-cash proceeds; (vi) Investments in existence on the Issue
Date; (vii) guarantees of Indebtedness of a Wholly Owned Subsidiary given by the
Company or another Wholly Owned Subsidiary and guarantees of Indebtedness of the
Company given by any Restricted Subsidiary, in each case, in accordance with the
terms of this Certificate
<PAGE>
of Designation; (viii) advances to employees or officers of the Company in the
ordinary course of business so long as the aggregate amount of such advances
shall not exceed $1.0 million outstanding at any one time; (ix) any Investment
in the Company by any Restricted Subsidiary of the Company; (x) accounts
receivable created or acquired in the ordinary course of business of the Company
or any Restricted Subsidiary and Investments arising from transactions by the
Company or any Restricted Subsidiary with trade creditors or customers in the
ordinary course of business (including any such Investment received pursuant to
any plan of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement of a
claim); (xi) loans in the ordinary course of business to employees of the
Company or a Restricted Subsidiary to purchase Capital Stock of the Company
pursuant to the terms of employee stock benefit plans; (xii) Investments the
consideration of which is Capital Stock of the Company; (xiii) stock obligations
or securities received in satisfaction of judgments; (xiv) Investments in
prepaid expenses, negotiable instruments held for collection, and lease, utility
and workers' compensation, performance and other similar deposits; and (xv) any
other Investments in an aggregate amount not to exceed $20.0 million at any one
time outstanding. In connection with any assets or property contributed or
transferred to any Person as an Investment, such property and assets shall be
equal to the Fair Market Value (as determined by the Company's Board of
Directors) at the time of such Investment.
"Permitted Lien" means:
(a) any Lien existing as of the Issue Date;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired; (2) taxes not
yet delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance or arising under worker's
compensation laws or similar legislation; (4) good faith deposits in connection
with bids, tenders, leases, contracts (other than contracts evidencing
Indebtedness); (5) zoning restrictions, easements, licenses, reservations, title
defects, rights of others for rights of way, utilities, sewers, electric lines,
telephone or telegraph lines, and other similar purposes, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor irregularities
of title (and with respect to leasehold interests, mortgages, obligations, liens
and other encumbrances incurred, created, assumed or permitted to exist and
arising by, through or under a landlord or owner of the leased property, with or
without consent of the lessee), none of which materially impairs the use of any
parcel of property material to the operation of the business of the Company or
any Restricted Subsidiary or the value of such property for the purpose of such
business; (6) deposits to secure public or statutory obligations, or in lieu of
surety or appeal bonds; or (7) operation of law in favor of landlords, carriers,
warehousemen, bankers, mechanics, materialmen, laborers, employees or suppliers,
incurred in the ordinary course of business for sums which are not yet
delinquent or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof;
<PAGE>
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business of
the Company or any Restricted Subsidiary;
(d) any Lien securing Indebtedness permitted under that Section
9(a)(ii)(A) hereof on the cash proceeds of such Indebtedness or on the property,
plant or equipment that is purchased, constructed or improved with the direct or
indirect proceeds of such Indebtedness (including any attachments, accessions,
additions to, or replacements or proceeds of such property, plant or equipment);
provided that the aggregate principal amount of such Indebtedness does not
exceed the sum of (i) the cost of purchasing, constructing or improving such
property, plant or equipment and (ii) the remaining proceeds of such
Indebtedness;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting a Voting Rights Triggering Event;
(f) any Lien securing obligations in connection with Indebtedness
permitted under Sections 9(a)(ii)(B) or (C) hereof;
(g) any Lien in favor of the Company or any Restricted Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries other
than the property or assets of the Acquired Person covered thereby or the
property assets so acquired; any Lien encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual or warranty
requirements of the Company or any Restricted Subsidiary if and to the extent
arising in the ordinary course of business, including rights of offset and set-
off;
(i) any Lien in favor of customs or revenue authorities to secure
payment of customs duties in connection with the importation of goods in the
ordinary course of business;
(j) leases or subleases granted to third Persons not interfering with
the ordinary course of business of the Company or its Restricted Subsidiaries;
and
(k) any Lien securing any extension, renewal, refinancing or
replacement, in whole or in part, of any obligation or Indebtedness described in
the foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
<PAGE>
"preferred stock" means, with respect to any Person, any Capital Stock
of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of common
stock of the Company with gross proceeds to the Company of at least $25.0
million pursuant to a registration statement that has been declared effective by
the Commission pursuant to the Securities Act (other than a registration
statement on Form S-8 or otherwise relating to equity securities issuable under
any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien
on assets related to the business of the Company and any additions and
accessions thereto, which are purchased at any time after the Issue Date;
provided that (i) the security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively, a "Purchase Money Security Agreement") shall be entered into
within 180 days after the purchase or substantial completion of the construction
of such assets and shall at all times be confined solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect of fees
and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement is entered into
exceed 100% of the purchase price to the Company of the assets subject thereto
or (B) the Indebtedness secured thereby shall be with recourse solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Disqualified Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement between the Company and the Initial Purchasers.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Stated Maturity" means, when used with respect to any Indebtedness or
any installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled
Affiliate of any Person which is or a controlled Affiliate of which is) engaged
principally in the
<PAGE>
Telecommunications Business and which has a Total Market Capitalization of at
least $1.0 billion.
"Subsidiary" means, with respect to any Person, an corporation,
association or other business entity (i) of which outstanding Capital Stock
having at least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of voting
interest is owned, directly or indirectly, by such Person and/or one or more
subsidiaries of such Person.
"Telecommunications Business" means, when used in reference to any
Person, that such Person is engaged primarily in (i) the business of
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii) the business
of creating, developing or marketing communications related network equipment,
software and other devices for use in a Telecommunications Business or (iii)
businesses reasonably related or incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and any Restricted Subsidiary, on a Consolidated basis, outstanding
as of such date of determination, after giving effect to any Incurrence of
Indebtedness and the application of the proceeds therefrom giving rise to such
determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists with
respect to shares of any such class, the value of such shares for purposes of
clause (b) of the preceding sentence shall be determined by the Board in good
faith and evidenced by a resolution of the Board to be made available to the
holders of Exchangeable Preferred Stock through the Transfer Agent.
Notwithstanding the foregoing, unless the Person's Common Stock is listed on any
national securities exchange or on the Nasdaq National Market, the "Total Market
Capitalization" of the Person shall mean, as of any day of determination, the
enterprise value (without duplication) of the Person and any subsidiaries
(including the fair market value of their debt and equity), as determined by an
independent banking firm of national standing with experience in such valuations
and evidenced by a written opinion in customary form to be made available to the
holders of Exchangeable Preferred Stock through the Transfer Agent; provided
that for purposes of any such determination, the enterprise value of the Person
shall be calculated as if the Person were a publicly held corporation without a
controlling stockholder. For purposes of any such determination, such banking
firm's written opinion may state that such fair market value is no less than a
specified amount and such opinion may be as of a date no earlier than 90 days
prior to the date of such determination.
<PAGE>
"Trading Day" with respect to a securities exchange or automated
quotation system means a day on which such exchange or system is open for a full
day of trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, or any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary if all of the
following conditions apply: (a) neither the Company nor any of its Restricted
Subsidiaries provides credit support for Indebtedness of such Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness, (c)
such Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; and (v) such Unrestricted Subsidiary does
not own any Capital Stock in any Restricted Subsidiary of the Company which is
not simultaneously being designated an Unrestricted Subsidiary. Any such
designation by the Board of Directors of the Company shall be made available to
the holders of Exchangeable Preferred Stock through the Transfer Agent a board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complies with the foregoing conditions and
shall be deemed a Restricted Payment on the date of designation in an amount
equal to the greater of (1) the net book value of such Investment or (2) the
fair market value of such Investment as determined in good faith by the
Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Restricted Subsidiary; provided that
(i) immediately after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the restrictions under Section 9(a) and (ii) all Indebtedness of such Subsidiary
shall be deemed to be incurred on the date such Subsidiary becomes a Restricted
Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary
means Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence) the
Company shall be deemed to have made a Restricted Payment equal to the principal
amount of any such Indebtedness to the extent guaranteed at the time such
Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the Company or any Restricted Subsidiary to
declare, a default on such Indebtedness of the Company or any Restricted
Subsidiary or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
<PAGE>
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which is owned by the Company or another Wholly Owned
Subsidiary. For the purposes of this definition, any director qualifying shares
or investments by foreign nationals mandated by applicable law shall be
disregarded in determining the ownership of a Restricted Subsidiary.
2. RANKING.
The Exchangeable Preferred Stock shall rank, with respect to dividend
distributions and distributions upon the liquidation, winding-up and dissolution
of the Company, (i) senior to all classes of common stock of the Company and to
each other class of capital stock or series of preferred stock established after
June 3, 1998 by the Board of Directors the terms of which do not expressly
provide that it ranks senior to or on a parity with the Exchangeable Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding-up and dissolution of the Company (collectively referred to with the
common stock of the Company as "Junior Securities"); (ii) on a parity with any
additional shares of Exchangeable Preferred Stock issued by the Company in the
future and any other class of capital stock or series of preferred stock issued
by the Company in the future and any other class of capital stock or series of
preferred stock issued by the Company established after the date of [the
Offering Memorandum] by the Board of Directors, the terms of which expressly
provide that such class or series will rank on a parity with the Exchangeable
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Parity Securities"); and (iii) junior to each class of capital stock or
series of preferred stock issued by the Company established after June 3, 1998
by the Board of Directors the terms of which expressly provide that such class
or series will rank senior to the Exchangeable Preferred Stock as to dividend
distributions and distributions upon liquidation, winding- up and dissolution of
the Company (collectively referred to as "Senior Securities").
3. DIVIDENDS.
(a) The holders of shares of the Exchangeable Preferred Stock shall be
entitled to receive, when, as and if dividends are declared by the Board of
Directors out of funds of the Company legally available therefor, cumulative
preferential dividends from the Issue Date accumulating at the rate of 13 1/2%
of the Liquidation Preference per share per annum, payable quarterly in arrears
on each March 1, June 1, September 1 and December 1 of each year or, if any such
date is not a Business Day, on the next succeeding Business Day (each, a
"Dividend Payment Date"), to the holders of record as of the next preceding
February 15, May 15, August 15 and November 15 (each, a "Record Date").
Dividends may be paid, at the Company's option, by the issuance of additional
shares of Exchangeable Preferred Stock (including fractional shares, provided,
that the Company may, at its option, pay cash in lieu of issuing fractional
shares) having an aggregate Liquidation Preference equal to the amount of such
dividends; provided that after June 1, 2003, to the extent and so long as the
Company is not precluded from
<PAGE>
paying dividends on the Exchangeable Preferred Stock by the terms of any
agreement or instruments governing and then outstanding, the Company shall pay
dividends in cash. The issuance of such additional shares of Exchangeable
Preferred Stock shall constitute "payment" of the related dividend for all
purposes of this Certificate of Designation. The first dividend payment of
Exchangeable Preferred Stock shall be payable on September 1, 1998. Dividends
payable on the Exchangeable Preferred Stock will be computed on the basis of a
360-day year consisting of twelve 30- day months and will be deemed to
accumulate on a daily basis on the Liquidation Preference of the Exchangeable
Preferred Stock.
(b) Dividends on the Exchangeable Preferred Stock shall accrue whether
or not the Company has earnings or profits, whether or not there are funds
legally available for the payment of such dividends and whether or not dividends
are declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Company shall
take all actions required or permitted under the Delaware General Corporation
Law (the "DGCL") to permit the payment of dividends on the Exchangeable
Preferred Stock, including, without limitation, through the revaluation of its
assets in accordance with the DGCL, to make or keep funds legally available for
the payment of dividends.
(c) No dividend whatsoever shall be declared or paid upon, or any sum
set apart for the payment of dividends upon, any outstanding share of the
Exchangeable Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividend, upon
all outstanding shares of Exchangeable Preferred Stock. Unless full cumulative
dividends on all outstanding shares of Exchangeable Preferred Stock for all past
dividend periods shall have been declared and paid, or declared and a sufficient
sum for the payment thereof set apart, then: (i) no dividend (other than a
dividend payable solely in shares of any Junior Securities) shall be declared or
paid upon, or any sum set apart for the payment of dividends upon, any shares of
Junior Securities; (ii) no other distribution shall be declared or made upon, or
any sum set apart for the payment of any distribution upon, any shares of Junior
Securities, other than a distribution consisting solely of Junior Securities;
(iii) no shares of Junior Securities shall be purchased, redeemed or otherwise
acquired or retired for value (excluding an exchange for shares of other Junior
Securities) by the Company or any of its Subsidiaries; and (iv) no monies shall
be paid into or set apart or made available for a sinking or other like fund for
the purchase, redemption or other acquisition or retirement for value of any
shares of Junior Securities by the Company or any of its Subsidiaries. Holders
of the Exchangeable Preferred Stock will not be entitled to any dividends,
whether payable in cash, property or stock, in excess of the full cumulative
dividends as herein described.
4. LIQUIDATION RIGHTS.
Upon any voluntary or involuntary liquidation, dissolution or winding-
up of the Company or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of the Company's
capital stock, each holder of shares of the Exchangeable Preferred Stock will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the Liquidation Preference per share of Exchangeable
Preferred Stock held by such holder, plus accrued and unpaid dividends and
Liquidated Damages (as defined in the Registration Rights Agreement), if any, to
the date fixed
<PAGE>
for liquidation, dissolution, winding-up or reduction or decrease in capital
stock, before any distribution is made on any Junior Securities, including,
without limitation, common stock of the Company. After payment in full of the
Liquidation Preference and all accumulated dividends and Liquidated Damages, if
any, to which holders of Exchangeable Preferred Stock are entitled, such holders
will not be entitled to any further participation in any distribution of assets
of the Company. If, upon any voluntary or involuntary liquidation, dissolution
or winding-up of the Company, the amounts payable with respect to the
Exchangeable Preferred Stock and all other Parity Securities are not paid in
full, the holders of the Exchangeable Preferred Stock and the Parity Securities
will share equally and ratably in any distribution of assets of the Company in
proportion to the full liquidation preference and accumulated and unpaid
dividends and Liquidated Damages, if any, to which each is entitled. However,
neither the voluntary sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of the
property or assets of the Company nor the consolidation or merger of the Company
with or into one or more Persons will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding-up of the Company or reduction or decrease
in capital stock, unless such sale, conveyance, exchange or transfer shall be in
connection with a liquidation, dissolution or winding-up of the business of the
Company or reduction or decrease in capital stock.
5. REDEMPTION BY THE COMPANY.
(a) On June 1, 2010 (the "Mandatory Redemption Date"), the Company
shall be required to redeem (subject to the legal availability of funds
therefor) all outstanding shares of Exchangeable Preferred Stock at a price in
cash equal to the Liquidation Preference thereof, plus accumulated and unpaid
dividends (including an amount in cash equal to a prorated dividend for any
partial dividend period) and Liquidated Damages, if any, to the date of
redemption. The Company shall not be required to make sinking fund payments with
respect to the Exchangeable Preferred Stock. The Company shall take all actions
required or permitted under the DGCL to permit such redemption.
(b) Except as set forth below, the Exchangeable Preferred Stock may
not be redeemed at the option of the Company prior to June 1, 2003. The
Exchangeable Preferred Stock will be subject to redemption at any time on or
after June 1, 2003, at the option of the Company, in whole or in part, at the
Application Redemption Price. In addition, at any time prior to June 1, 2001,
the Company may use the net proceeds of one or more Public Equity Offerings or
the sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or a series of related transactions,
to redeem up to an aggregate of 35% of the shares of Exchangeable Preferred
Stock then outstanding (whether initially issued or issued in lieu of cash
dividends) at a redemption price equal to 113 1/2% of the Liquidation Preference
per share, plus accumulated and unpaid dividends thereon and Liquidated Damages,
if any, to the redemption date; provided that at least 65% of the shares of
Exchangeable Preferred Stock initially issued remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 45 days
after the related Public Equity Offering and must consummate such redemption
within 60 days of the closing of the Public Equity Offering.
<PAGE>
(c) In case of redemption of less than all of the shares of
Exchangeable Preferred Stock at the time outstanding, the shares to be redeemed
shall be selected pro rata or by lot as determined by the Company in its sole
discretion.
(d) Notice of any redemption shall be sent by or on behalf of the
Company not less than 30 nor more than 60 days prior to the date specified for
redemption in such notice (including the Mandatory Redemption Date, the
"Redemption Date"), by first class mail, postage prepaid, to all holders of
record of the Exchangeable Preferred Stock at their last addresses as they shall
appear on the books of the Company; provided, however, that no failure to give
such notice or any defect therein or in the mailing thereof shall affect the
validity of the proceedings for the redemption of any shares of Exchangeable
Preferred Stock except as to the holder to whom the Company has failed to give
notice or except as to the holder to whom notice was defective. In addition to
any information required by law or by the applicable rules of any exchange upon
which Exchangeable Preferred Stock may be listed or admitted to trading, such
notice shall state: (i) whether such redemption is being made pursuant to the
optional or the mandatory redemption provisions hereof; (ii) the Redemption
Date; (iii) the Applicable Redemption Price; (iv) the number of shares of
Exchangeable Preferred Stock to be redeemed and, if less than all shares held by
such holder are to be redeemed, the number of such shares to be redeemed; (v)
the place or places where certificates for such shares are to be surrendered for
payment of the Applicable Redemption Price, including any procedures applicable
to redemptions to be accomplished through book-entry transfers; and (vi) that
dividends on the shares to be redeemed will cease to accumulate on the
Redemption Date. Upon the mailing of any such notice of redemption, the Company
shall become obligated to redeem at the time of redemption specified thereon all
shares called for redemption.
(e) If notice has been mailed in accordance with Section 5(d) above
and provided that on or before the Redemption Date specified in such notice, all
funds necessary for such redemption shall have been set aside by the Company,
separate and apart from its other funds in trust for the pro rata benefit of the
holders of the shares so called for redemption, so as to be, and to continue to
be available therefor, then, from and after the Redemption Date, dividends on
the shares of the Exchangeable Preferred Stock so called for redemption shall
cease to accumulate, and said shares shall no longer be deemed to be outstanding
and shall not have the status of shares of Exchangeable Preferred Stock, and all
rights of the Holders thereof as stockholders of the Company (except the right
to receive from the Company the Applicable Redemption Price) shall cease. Upon
surrender, in accordance with said notice, of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Company shall so
require and the notice shall so state), such shares shall be redeemed by the
Company at the Applicable Redemption Price. In case fewer than all the shares
represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed shares without cost to
the holder thereof.
(f) Any funds deposited with a bank or trust company for the purpose
of redeeming Exchangeable Preferred Stock shall be irrevocable except that:
(i) the Company shall be entitled to receive from such bank or
trust company the interest or other earnings, if any, earned on any
money so
<PAGE>
deposited in trust, and the holders of any shares redeemed shall have
no claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the Company and
unclaimed by the holders of the Exchangeable Preferred Stock entitled
thereto at the expiration of two years from the applicable Redemption
Date shall be repaid, together with any interest or other earnings
earned thereon, to the Company, and after any such repayment, the
holders of the shares entitled to the funds so repaid to the Company
shall look only to the Company for payment without interest or other
earnings.
(g) No Exchangeable Preferred Stock may be redeemed except with funds
legally available for the purpose. The Company shall take all actions required
or permitted under the DGCL to permit any such redemption.
(h) Notwithstanding the foregoing provisions of this Section 5, unless
the full cumulative dividends on all outstanding shares of Exchangeable
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of Exchangeable Preferred
Stock shall be redeemed unless all outstanding shares of Exchangeable Preferred
Stock are simultaneously redeemed.
(i) All shares of Exchangeable Preferred Stock redeemed pursuant to
this Section 5 shall be restored to the status of authorized and unissued shares
of preferred stock, without designation as to series and may thereafter be
reissued as shares of any series of preferred stock other than shares of
Exchangeable Preferred Stock.
6. EXCHANGE.
(a) The Company may, at its option, on any Dividend Payment Date,
exchange, in whole, but not in part, the then outstanding shares of Exchangeable
Preferred Stock for Debentures with a principal amount equal to the aggregate
Liquidation Preference of the Exchangeable Preferred Stock to be issued pursuant
to an indenture (the "Indenture") in substantially the form of Exhibit A to the
certificate of the Company dated June 8, 1998 provided to the Transfer Agent
setting forth the form of Indenture to be entered into and dated on or as of
such Dividend Payment Date between the Company and a trustee to be named by the
Company (the "Trustee"); provided, that on the date of such exchange (i) there
are no accumulated and unpaid dividends and Liquidated Damages, if any, on the
Exchangeable Preferred Stock (including the dividends payable on such date) or
other contractual impediments to such exchange; (ii) there shall be legally
available funds sufficient therefor; (iii) immediately after giving effect to
such exchange, no Default or Event of Default (each as defined in the Indenture)
would exist under the Indenture or would be caused thereby and; (iv) the
Indenture has been qualified under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), if such qualification is required at the time of
exchange; and (v) the Company shall have delivered a written opinion of counsel
to the Trustee (as defined) to the effect that all conditions to be satisfied
prior to such exchange have been satisfied and otherwise as to the matters
described in Section 6(e).
<PAGE>
(b) Upon any exchange pursuant to the preceding paragraph, holders of
outstanding Exchangeable Preferred Stock will be entitled to receive, subject to
the second succeeding sentence of this paragraph, $1.00 principal amount of
Debentures for each $1.00 of the aggregate Liquidation Preference of
Exchangeable Preferred Stock held by them. The Debentures will be issued in
registered form, without coupons. The Debentures shall be issuable in principal
amounts of $1,000 and integral multiples thereof to the extent possible, and
shall also be issuable in principal amounts less than $1,000 so that each holder
of Exchangeable Preferred Stock will receive certificates representing the
entire amount of Debentures to which such holder's shares of Exchangeable
Preferred Stock entitle such holder. Notice of the intention to exchange shall
be sent by or on behalf of the Company not more than 60 days nor less than 30
days prior to the date fixed for the exchange (the "Exchange Date"), by first
class mail, postage prepaid, to each holder of record of Exchangeable Preferred
Stock at its registered address. In addition to any information required by law
or by the applicable rules of any exchange upon which the Exchangeable Preferred
Stock may be listed or admitted to trading, such notice shall state: (i) the
Exchange Date; (ii) the place or places where certificates for such shares are
to be surrendered for exchange, including any procedures applicable to exchanges
to be accomplished through book-entry transfers; and (iii) that dividends on the
shares of Exchangeable Preferred Stock to be exchanged will cease to accumulate
on the Exchange Date.
(c) A holder delivering Exchangeable Preferred Stock for exchange
shall not be required to pay any taxes or duties in respect of the issue or
delivery of Debentures on exchange but shall be required to pay any tax or duty
that may be payable in respect of any transfer involved in the issue or delivery
of the Debentures in a name other than that of the holder of the Exchangeable
Preferred Stock. Certificates representing Debentures shall not be issued or
delivered unless all taxes and duties, if any, payable by the holder have been
paid.
(d) If notice of any exchange has been properly given, and if on or
before the Exchange Date the Debentures have been duly executed and
authenticated and an amount in cash or additional shares of Exchangeable
Preferred Stock (as applicable) equal to all accumulated and unpaid dividends
and Liquidated Damages, if any, thereon to the Exchange Date has been deposited
with the Transfer Agent, then on and after the close of business on the Exchange
Date, the shares of Exchangeable Preferred Stock to be exchanged shall no longer
be deemed to be outstanding and may thereafter be issued in the same manner as
the other authorized but unissued preferred stock, but not as Exchangeable
Preferred Stock, and all rights of the holders thereof as stockholders of the
Company shall cease, except the right of the holders to receive upon surrender
of their certificates the Debentures and all accrued interest, if any, thereon
to the Exchange Date.
(e) As a condition to the exercise of the exchange rights described in
this Section 6, the Company shall deliver a written opinion of counsel to the
Trustee as to the due authorization, execution, delivery and enforceability of
both the Debentures and the Indenture and as to the compliance by the Company
with the provisions hereof.
7. VOTING RIGHTS.
(a) The holders of record of shares of the Exchangeable Preferred
Stock shall have no voting rights, except as required by law and as hereinafter
provided in this Section 7.
<PAGE>
(b) Upon:
(i) the accumulation of dividends remaining unpaid either
in cash or by the issuance of additional shares of Exchangeable
Preferred Stock on the outstanding Exchangeable Preferred Stock in an
amount equal to six (6) quarterly dividends (whether or not
consecutive);
(ii) the failure of the Company to satisfy any mandatory
redemption or repurchase obligation (including, without limitation,
pursuant to any required Change of Control Offer (as defined)) with
respect to the Exchangeable Preferred Stock;
(iii) the failure of the Company to make a Change of Control
Offer on the terms and in accordance with the provisions described
below in Section 8 hereof;
(iv) the failure of the Company to comply with any of the
other covenants or agreements set forth in this Certificate of
Designation and the continuance of such failure for 60 consecutive
days or more after notice from the holders of at least 25% of the
Exchangeable Preferred Stock; or
(v) any (i) default by the Company or any Subsidiary in
the payment of the principal, premium, if any, or interest has
occurred with respect to amounts in excess of $5.0 million under any
agreement, indenture or instrument evidencing Indebtedness when the
same shall become due and payable in full and such default shall have
continued after any applicable grace period and shall not have been
cured or waived and, if not already matured at its final maturity in
accordance with its terms, the holder of such Indebtedness shall have
the right to accelerate such Indebtedness or (ii) event of default as
defined in any agreement, indenture or instrument of the Company
evidencing Indebtedness in excess of $5.0 million shall have occurred
and the Indebtedness thereunder, if not already matured at its final
maturity in accordance with its terms, shall have been accelerated
(each of the events described in clauses (i), (ii), (iii), (iv) and
(v) being referred to herein as a "Voting Rights Triggering Event");
then the holders of a majority of the outstanding shares of Exchangeable
Preferred Stock, voting as a separate single class, shall be entitled to elect
two members to the Board of Directors of the Company and the number of members
of the Company's Board of Directors shall be immediately and automatically
increased by two. The voting rights provided for in this Section 7 shall be the
exclusive remedy for the holders of the Exchangeable Preferred Stock for any
violation by the Company of its obligations under this Certificate of
Designation that constitutes an Event of Default.
(c) Whenever such voting right shall have vested, such right may be
exercised initially either at a special meeting of the holders of Exchangeable
Preferred Stock, called as hereinafter provided, or at any annual meeting of
stockholders held for the purpose of electing directors, and thereafter at such
annual meetings or by the written consent of the holders of
<PAGE>
Exchangeable Preferred Stock. Such right of the holders of Exchangeable
Preferred Stock to elect directors may be exercised until (i) all dividends in
arrears shall have been paid in full and (ii) all other Voting Rights Triggering
Events have been cured or waived, at which time the term of such directors
previously elected shall thereupon terminate, and such directors shall be deemed
to have resigned.
(d) At any time when such voting right shall have vested in the
holders of Exchangeable Preferred Stock and if such right shall not already have
been initially exercised, a proper officer of the Company shall, upon the
written request of holders of record of 25% or more of the Exchangeable
Preferred Stock then outstanding, addressed to the Secretary of the Company,
call a special meeting of holders of Exchangeable Preferred Stock. Such meeting
shall be held at the earliest practicable date upon the notice required for
annual meetings of stockholders at the place for holding annual meetings of
stockholders of the Company or, if none, at a place designated by the Secretary
of the Company. If such meeting shall not be called by the proper officers of
the Company within 30 days after the personal service of such written request
upon the Secretary of the Company, or within 30 days after mailing the same
within the United States, by registered mail, addressed to the Secretary of the
Company at its principal office (such mailing to be evidenced by the registry
receipt issued by the postal authorities), then the holders of record of 25% of
the shares of Exchangeable Preferred Stock then outstanding may designate in
writing a holder of Exchangeable Preferred Stock to call such meeting at the
expense of the Company, and such meeting may be called by such person so
designated upon the notice required for annual meetings of stockholders and
shall be held at the place for holding annual meetings of the Company or, if
none, at a place designated by such holder. Any holder of Exchangeable Preferred
Stock that would be entitled to vote at such meeting shall have access to the
stock books of the Company for the purpose of causing a meeting of stockholders
to be called pursuant to the provisions of this Section 7. Notwithstanding the
provisions of this paragraph, however, no such special meeting shall be called
if any such request is received less than 90 days before the date fixed for the
next ensuing annual or special meeting of stockholders.
(e) If any director so elected by the holders of Exchangeable
Preferred Stock shall cease to serve as a director before his term shall expire,
the holders of Exchangeable Preferred Stock then outstanding may, at a special
meeting of the holders called as provided above, elect a successor to hold
office for the unexpired term of the director whose place shall be vacant.
8. CHANGE OF CONTROL.
(a) If a Change of Control shall occur at any time, then, subject to
Section 8(f), each holder of Exchangeable Preferred Stock shall have the right
to require that the Company purchase such holder's Exchangeable Preferred Stock
in whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash, in an amount equal to 101% of the
principal amount of such Exchangeable Preferred Stock or portion thereof, plus
accrued and unpaid interest, if any, to the date of purchase (the "Change of
Control Purchase Date"), pursuant to the offer described below in this Section 8
(the "Change of Control Offer").
<PAGE>
(b) The Change of Control Offer shall include all instructions and
materials necessary to enable holders to tender their shares of Exchangeable
Preferred Stock.
(c) The Company shall comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Exchangeable Preferred Stock as a result of a Change of
Control.
(d) Within 30 days following any Change of Control, the Company shall
mail a notice to each holder stating:
(i) that the Change of Control Offer is being made pursuant to
this Section 8, that all shares of Exchangeable Preferred Stock
tendered will be accepted for payment, the date of such event and the
circumstances and relevant facts regarding such Change of Control;
(ii) the purchase price and the purchase date, which shall be no
earlier than 30 days nor later than 60 days from the date such notice
is mailed or such later date as is necessary to comply with the
Exchange Act (the "Change of Control Payment Date");
(iii) that any share of Exchangeable Preferred Stock not tendered
will continue to accumulate dividends;
(iv) that, unless the Company fails to pay the Change of Control
Payment, all shares of Exchangeable Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to
accumulate dividends after the Change of Control Payment Date;
(v) that holders electing to have any shares of Exchangeable
Preferred Stock purchased pursuant to a Change of Control Offer will
be required to surrender the shares of Exchangeable Preferred Stock,
with the form entitled "Option of Holder to Elect Purchase" which
shall be included with the Notice of Change of Control completed, to
the Paying Agent at the address specified in the notice prior to the
close of business on the third Business Day preceding the Change of
Control Payment Date;
(vi) that holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the
name of the holder, the number of shares of Exchangeable Preferred
Stock delivered for purchase, and a statement that such holder is
withdrawing his election to have such shares purchased; and
(vii) the circumstances and relevant facts regarding such Change
of Control (including, but not limited to, information with respect to
pro forma historical financial information after giving effect to such
Change of Control and information regarding the Person or Persons
acquiring control).
<PAGE>
(e) On the Change of Control Payment Date, the Company shall, to the
extent lawful, (i) accept for payment all shares of Exchangeable Preferred Stock
or portions thereof properly tendered pursuant to the Change of Control Offer,
(ii) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all shares of Exchangeable Preferred Stock or portions
thereof so tendered and (iii) deliver or cause to be delivered to the Transfer
Agent the shares of Exchangeable Preferred Stock so accepted together with an
Officers' Certificate stating the aggregate Liquidation Preference of the shares
of Exchangeable Preferred Stock or portions thereof being purchased by the
Company. The Paying Agent shall promptly mail to each holder of Exchangeable
Preferred Stock so tendered the Change of Control Payment for such Exchangeable
Preferred Stock, and the Transfer Agent shall promptly authenticate and mail (or
cause to be transferred by book entry) to each holder a new certificate
representing the shares of Exchangeable Preferred Stock equal in Liquidation
Preference amount to any unpurchased portion of the shares of Exchangeable
Preferred Stock surrendered, if any. The Company shall publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
(f) The Company shall not be required to make a Change of Control
Offer upon a Change of Control if either (i) a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 8 applicable to a Change of Control Offer
made by the Company and purchases all shares of Exchangeable Preferred Stock
validly tendered and not withdrawn under such Change of Control Offer or (ii)
the date on which such Change of Control Offer would otherwise be required to be
made is on or prior to the Existing Senior Notes Maturity Date.
(g) If the date on which a Change of Control Offer otherwise would be
required to be made is on or prior to the Existing Senior Notes Maturity Date,
then, in lieu of any such Change of Control Offer, holders of two-thirds of the
Exchangeable Preferred Stock will be entitled to designate an Independent
Financial Advisor (as defined below) to determine, within 20 days of such
designation, in the opinion of such firm, the appropriate dividend rate that the
Exchangeable Preferred Stock should bear so that, after such reset, the
Exchangeable Preferred Stock would have a market value of 101% of the
Liquidation Preference. If, for any reason and within 15 days of the designation
of an Independent Financial Advisor by the holders, such Independent Financial
Advisor is unacceptable to the Company, the Company may designate a second
Independent Financial Advisor to determine, within 15 days of such designation,
in its opinion, such an appropriate reset dividend rate for the Exchangeable
Preferred Stock. In the event that the two Independent Financial Advisors cannot
agree, within 25 days of the designation of an Independent Financial Advisor by
the holders of two-thirds of the Exchangeable Preferred Stock, on the
appropriate reset dividend rate, the two Independent Financial Advisors shall,
within 10 days of such 25th day, designate a third Independent Financial
Advisor, which, within 15 days of designation, will determine, in its opinion,
such an appropriate reset rate which is between the two rates selected by the
first two Independent Financial Advisors; provided, however, that the reset rate
shall in no event be less than 13 1/2% per annum nor greater than 15 1/2% per
annum. The reasonable fees and expenses, including reasonable fees and expenses
of legal counsel, if any, and customary indemnification, of each of the three
above-referenced Independent Financial Advisors shall be borne by the Company.
Upon the determination of the reset rate, the Exchangeable Preferred Stock shall
accrue and cumulate dividends at the reset rate as of the date of occurrence of
the Change of Control.
<PAGE>
"Independent Financial Advisor" means a United States investment banking firm
of national standing in the United States which does not, and whose directors,
officers and employees or affiliates do not, have a direct or indirect financial
interest in the Company.
9. CERTAIN COVENANTS.
The sole remedy to holders of Exchangeable Preferred Stock in the
event of a breach of any of the covenants described below and the continuation
of such failure for 60 days following receipt of written notice thereof from the
holders of 25% of the Exchangeable Preferred Stock outstanding will be the
voting rights arising from a Voting Rights Triggering Event, and such breach by
the Company will not cause any action taken by the Company to be invalid or
unauthorized under its charter documents.
(a) Limitation on Indebtedness.
(i) The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness
(other than the Exchangeable Preferred Stock); provided, however, that the
Company may Incur Indebtedness, and the Company or any Restricted
Subsidiary may Incur Acquired Indebtedness, if, at the time of such
Incurrence, the Debt to Annualized Operating Cash Flow Ratio would be less
than or equal to 5.5 to 1.0 prior to December 15, 2000, or less than or
equal to 5.0 to 1.0 after December 15, 2000.
(ii) The foregoing limitations of Section 9(a)(i) will not apply
to Incurrence of Indebtedness permitted under any of the following
("Permitted Indebtedness"), each of which shall be given independent
effect:
(A) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (other than Acquired Indebtedness)
consisting of Capital Lease Obligations, Purchase Money Obligations,
mortgage financings or other obligations incurred for the purpose of
financing all or any part of the purchase price, cost of construction
or improvement of property, plant or equipment used in connection with
the Telecommunications Business or a credit facility or a master lease
arrangement entered into for the purpose of providing such financing,
provided that such Indebtedness does not exceed the lesser of the Fair
Market Value (determined at the time of the consummation of the
purchase, construction or improvement of such property, plant or
equipment), or the purchase price of such property, plant or
equipment;
(B) Indebtedness of the Company or any of its Restricted
Subsidiaries, and any renewals, extensions, substitutions,
refinancings or replacements of such Indebtedness, so long as the
aggregate principal amount of such Indebtedness shall not exceed $50.0
million outstanding at any one time in the aggregate;
(C) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (other than secured Acquired
Indebtedness) in an aggregate principal amount not to exceed, at any
one time outstanding, 2.0 times
<PAGE>
the Net Cash Proceeds received by the Company from the issuance and
sale of any class or series of its Capital Stock (other than
Disqualified Stock) on and after the Issue Date plus the Fair Market
Value of any of its Capital Stock (other than Disqualified Stock)
issued on and after the Issue Date in connection with the acquisition
of an equity interest in a Telecommunications Business or assets used
in a Telecommunications Business; provided that such Indebtedness does
not mature prior to the Mandatory Redemption Date or have an Average
Life to Stated Maturity that is shorter than the period then remaining
prior to the Mandatory Redemption Date;
(D) Indebtedness of the Company or any Restricted Subsidiary
entered into in the ordinary course of business (I) pursuant to
Interest Rate Agreements designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates in
respect of Indebtedness of the Company or any Restricted Subsidiary as
long as the notional principal amount of such Interest Rate Agreements
do not exceed the aggregate principal amount of such Indebtedness then
outstanding, (II) under any Currency Hedging Arrangements designed to
protect the Company or any Restricted Subsidiary against fluctuations
in the value of any currency or (III) under any Commodity Price
Protection Agreements designed to protect the Company or any
Restricted Subsidiary against fluctuations in the price of any
commodity;
(E) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in respect of bid, performance or advance
payment bonds and appeal or surety bonds;
(F) Indebtedness existing on the Issue Date;
(G) the Incurrence of (a) Indebtedness of any Restricted
Subsidiary owed to and held by the Company or another Restricted
Subsidiary and (b) Indebtedness of the Company owed to and held by any
Restricted Subsidiary; and
(H) any renewals, extensions, substitutions, refundings,
refinancings or replacements (collectively, a "refinancing") of any
Indebtedness described in clauses (A), (B), (C), (F) and (G) of this
paragraph (ii) of this covenant including any successive refinancings
so long as the borrower under such refinancing is the Company or, if
not the Company, the same as the borrower of the Indebtedness being
refinanced and the aggregate principal amount of Indebtedness
represented thereby is not increased by such refinancing plus the
lesser of (I) the stated amount of any premium or other payment
required to be paid in connection with such a refinancing pursuant to
the terms of the Indebtedness being refinanced or (II) the amount of
premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing.
<PAGE>
(iii) For purposes of determining any particular amount of
Indebtedness under this Section 9(a), guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included.
(iv) For purposes of determining compliance with this Section
9(a), in the event that an item of Indebtedness may be Incurred through
paragraph (i) of this Section 9(a) or by meeting the criteria of one or
more of the types of Indebtedness described in paragraph (ii) of this
Section 9(a) (or the definitions of the terms used therein), the Company,
in its sole discretion, (A) may classify such item of Indebtedness under
and comply with either of paragraphs (i) or (ii) (or any of such
definitions), as applicable, (B) may classify and divide such item of
Indebtedness into more than one of paragraphs (i) or (ii) (or definitions),
as applicable, and (C) may elect to comply with such paragraphs (or
definitions), as applicable, in any order.
(b) Limitation on Restricted Payments.
(i) The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly:
(A) declare or pay any dividend on, or make any distribution
on any shares of the Company's Capital Stock that are Junior
Securities (other than dividends or distributions payable solely in
shares of its Qualified Capital Stock that are Junior Securities or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock that are Junior Securities);
(B) purchase, redeem or otherwise acquire or retire for
value, directly or indirectly, the Company's Capital Stock or any
Capital Stock of any Affiliate of the Company (other than Capital
Stock of any Wholly Owned Subsidiary of the Company) or options,
warrants or other rights to acquire such Capital Stock that are Junior
Securities;
(C) declare or pay any dividend or distribution on any
Capital Stock of any Restricted Subsidiary to any Person (other than
(I) to the Company or any of its Wholly Owned Subsidiaries or (II) to
all holders of Capital Stock of such Restricted Subsidiary on a pro
rata basis); or
(D) make any Investment in any Person (other than any
Permitted Investments)
(any of the foregoing actions described in clauses (A) through (D), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Voting Rights Triggering Event shall
have occurred and be continuing; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company could
incur $1.00 of additional Indebtedness (other
<PAGE>
than Permitted Indebtedness) under the provisions described under Section 9(a);
and (3) after giving effect to the proposed Restricted Payment, the aggregate
amount of all such Restricted Payments declared or made after the Issue Date,
does not exceed the sum of the following (the "Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the
time of such Restricted Payment less (ii) 150% of cumulative
Consolidated Interest Expense determined for the period (treated as
one accounting period) commencing on the Issue Date and ending on the
last day of the most recent fiscal quarter immediately preceding the
date of such Restricted Payment for which consolidated financial
information of the Company is required to be available;
(B) the sum of (i) (x) capital contributions to the Company
after the Issue Date or (y) the aggregate Net Cash Proceeds received
after the Issue Date by the Company from the issuance or sale (other
than to any of its Restricted Subsidiaries) of Qualified Capital Stock
of the Company or any options, warrants or rights to purchase such
Qualified Capital Stock of the Company (except, in each case, to the
extent such proceeds are used to purchase, redeem or otherwise retire
Capital Stock or Subordinated Indebtedness as set forth below in
clause (B) or (C) of paragraph (ii) below);
(C) the aggregate Net Cash Proceeds received after the Issue
Date by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase Qualified Capital Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the Issue
Date by the Company from the conversion or exchange, if any, of debt
securities or Disqualified Stock of the Company or its Restricted
Subsidiaries into or for Qualified Capital Stock of the Company plus,
to the extent such debt securities or Disqualified Stock were issued
after the Issue Date, the aggregate of Net Cash Proceeds from their
original issuance; and
(E) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment, an amount equal to the return
of capital with respect to such Investment and the initial amount of such
Investment.
(ii) Notwithstanding the foregoing, and in the case of clauses
(B) and (C) below, so long as there is no Voting Rights Triggering Event
continuing, the foregoing provisions shall not prohibit the following
actions (each of clauses (A) through (C) being referred to as a "Permitted
Payment"):
(A) the payment of any dividend within 60 days after the
date of declaration thereof, if at such date of declaration such
payment was permitted by the provisions of paragraph (a) of this
Section and such payment shall have been deemed to have been paid on
such date of declaration and shall not have
<PAGE>
been deemed a Permitted Payment for purposes of the calculation
required by paragraph (a) of this Section;
(B) the repurchase, redemption, or other acquisition or
retirement for value of any shares of any class of Capital Stock of
the Company that are Junior Securities in exchange for (including any
such exchange pursuant to the exercise of a conversion right or
privilege in connection with which cash is paid in lieu of the
issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issuance and sale for cash
(other than to a Restricted Subsidiary) of, other shares of Qualified
Capital Stock of the Company that are Junior Securities; provided that
the Net Cash Proceeds from the issuance of such shares of Qualified
Capital Stock are excluded from clause (3)(B) of paragraph (a) of this
Section;
(C) the repurchase of shares of, or options to purchase
shares of, common stock of the Company or any of its Restricted
Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Restricted Subsidiaries (or
permitted transferees of such employees, former employees, directors
or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto)
approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell, shares
of such common stock; provided, however, that the aggregate amount of
such repurchases in any calendar year shall not exceed $1.0 million
and $5.0 million in the aggregate.
(c) Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) pay dividends or
make any other distribution on its Capital Stock, (ii) pay any Indebtedness owed
to the Company or any other Restricted Subsidiary, (iii) make any Investment in
the Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction, with respect to a Restricted Subsidiary
that is not a Restricted Subsidiary of the Company on the Issue Date, in
existence at the time such Person becomes a Restricted Subsidiary of the Company
and not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary; (b) encumbrances or restrictions (I) by reason
of applicable law, or (II) under this Certificate of Designation; (c) customary
non-assignment provisions of any contract or lease of any Restricted Subsidiary
entered into in the ordinary course of business; (d) encumbrances or
restrictions imposed pursuant to contracts entered into in connection with
Permitted Liens; (e) any encumbrance or restriction imposed pursuant to
contracts for the sale of assets with respect to the assets to be sold pursuant
to such contract; and (f) any encumbrance or restriction existing under any
agreement that extends, renews, refinances or replaces the agreements containing
the encumbrances or restrictions in the foregoing clauses (a) through (e), or in
this clause (f), provided that the terms and conditions of any such encumbrances
or restrictions are no more restrictive in any material respect than those under
or
<PAGE>
pursuant to the agreement evidencing the Indebtedness so extended, renewed,
refinanced or replaced.
(d) Consolidation, Merger, Sale of Assets.
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Restricted Subsidiaries to enter into
any such transaction or series of related transactions if such transaction or
series of related transactions, in the aggregate, would result in a sale,
assignment, conveyance, transfer, lease or disposition of all or substantially
all of the properties and assets of the Company and its Restricted Subsidiaries
on a Consolidated basis to any other Person or group of affiliated Persons,
unless at the time and after giving effect thereto (i) either (a) the Company
will be the continuing corporation in the case of a consolidation or merger
involving the Company or (b) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its Restricted
Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and such Person
expressly assumes all the obligations of the Company under the Exchangeable
Preferred Stock and Series B Preferred Stock; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or any of
its Restricted Subsidiaries which becomes the obligation of the Company or any
of its Restricted Subsidiaries as a result of such transaction as having been
incurred at the time of such transaction), no Voting Rights Triggering Event
will have occurred and be continuing; and (iii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of Section 9(a). Notwithstanding the
foregoing, the Company (i) may merge or consolidate with any of its Restricted
Subsidiaries, and (ii) the Company may merge or consolidate into any Person in a
transaction designed solely for the purpose of effecting a change in the
jurisdiction of incorporation of the Company within the United States of
America.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Entity, such Surviving Entity shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Exchangeable Preferred Stock and Series B Preferred Stock.
(e) Limitation on Transactions with Affiliates.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with or for the benefit of
any Affiliate of the Company (other than the Company or a Wholly Owned
Subsidiary) unless such transaction or series of related transactions is entered
into in good faith
<PAGE>
and in writing and (i) such transaction or series of related transactions is on
terms that are no less favorable to the Company or such Restricted Subsidiary,
as the case may be, than those that would be reasonably expected to be available
in a comparable transaction in arm's-length dealings with an unrelated third
party, (ii) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5.0 million, the Company delivers an
officers' certificate to the Transfer Agent certifying that such transaction or
series of related transactions complies with clause (i) above, and (iii) with
respect to any transaction or series of related transactions involving aggregate
value in excess of $10.0 million, either (A) such transaction or series of
related transactions has been approved by a majority of the Disinterested
Directors of the Company, or in the event there is only one Disinterested
Director, by such Disinterested Director, or (B) the Company delivers to the
Transfer Agent a written opinion of an investment banking firm of national
standing or other recognized independent expert with experience appraising the
terms and conditions of the type of transaction or series of related
transactions for which an opinion is required stating that the transactions or
series of related transactions is fair to the Company or such Restricted
Subsidiary from a financial point of view; provided, however, that this
provision shall not apply to: (i) compensation and employee benefit arrangements
with any officer, director or employee of the Company, including under any stock
option or stock incentive plans, in the ordinary course of business; (ii) any
transaction solely between or among the Company and/or any Restricted
Subsidiaries, if such transaction is otherwise in compliance with this
Certificate of Design and is on fair and reasonable terms; (iii) any transaction
otherwise permitted by the terms of Section 9(b) hereof; (iv) the execution and
delivery of or payments made under any tax sharing agreement between or among
any of the Company and any Restricted Subsidiary; (v) licensing or sublicensing
of use of any intellectual property by the Company or any Restricted Subsidiary
to any Restricted Subsidiary of the Company; provided that the licensor shall
continue to have access to such intellectual property to the extent necessary
for the conduct of its respective business; (vi) arrangements between the
Company and any Restricted Subsidiary of the Company for the purpose of
providing services or employees to such Restricted Subsidiary; (vii) any
transaction entered into for the purpose of granting or altering registration
rights with respect to the Capital Stock of the Company; and (viii) any
transaction or series of related transactions entered into prior to the Issue
Date.
(f) Provision of Financial Statements.
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange Act,
file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the Commission
pursuant to Section 13(a) or 15(d) if the Company were so subject, such
documents to be filed with the Commission on or prior to the date (the
"Required Filing Date") by which the Company would have been required so to
file such documents if the Company were so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date transmit by mail to
all holders, as their names and addresses appear in the security register,
without cost to such holders copies of the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company
were subject to either of such Sections and (y) if filing such documents by the
Company with the Commission is not permitted under the Exchange Act, promptly
upon written request and payment of the reasonable cost of duplication and
delivery, supply copies of such documents to
<PAGE>
any prospective holder at the Company's cost. So long as any of the Series A
Preferred Stock remain outstanding, the Company will make available to any
prospective purchaser of Series A Preferred Stock or beneficial owner of Series
A Preferred Stock in connection with any sale thereof the information required
by Rule 144A(d)(4) under the Securities Act, until such time as the Company has
either exchanged the Series A Preferred Stock for securities identical in all
material respects which have been registered under the Securities Act or until
such time as the holders thereof have disposed of such Series A Preferred Stock
pursuant to an effective registration statement under the Securities Act.
10. AMENDMENT.
(a) The Company shall not, without the affirmative vote or consent of
the holders of at least a majority of the shares of Exchangeable Preferred Stock
then outstanding (with shares held by the Company or any of its Affiliates not
being considered to be outstanding for this purpose) voting or consenting as the
case may be, as one class:
(i) authorize, create (by way of reclassification or otherwise)
or issue any Senior Securities or any obligation or security
convertible or exchangeable into or evidencing the right to purchase,
shares of any class or series of Senior Securities;
(ii) amend or otherwise alter this Certificate of Designation
(including the provisions of Section 8 hereof) in any manner that
adversely affects the specified rights, preferences, privileges or
voting rights of holders of Exchangeable Preferred Stock; or
(iii) waive any existing Voting Rights Triggering Event or
compliance with any provision of this Certificate of Designation;
provided, however, that the Company may not amend the Change of
Control provisions of this Certificate of Designation (including the
related definitions) without the approval of the holders of all of the
then outstanding shares of Exchangeable Preferred Stock, voting or
consenting, as the case may be, as one class.
(b) Without the consent of each holder affected, an amendment or
waiver of the Company's Certificate of Incorporation or of this Certificate of
Designation may not (with respect to any shares of Exchangeable Preferred Stock
held by a non-consenting holder):
(i) alter the voting rights with respect to the Exchangeable
Preferred Stock or reduce the number of shares of Exchangeable
Preferred Stock whose holders must consent to an amendment, supplement
or waiver;
(ii) reduce the Liquidation Preference of or change the
Mandatory Redemption Date of any share of Exchangeable Preferred Stock
or alter the provisions with respect to the redemption of the
Exchangeable Preferred Stock;
(iii) reduce the rate of or change the time for payment of
dividends on any share of Exchangeable Preferred Stock;
<PAGE>
(iv) waive the consequences of any failure to pay dividends on
the Exchangeable Preferred Stock;
(v) make any share of Exchangeable Preferred Stock payable in
any form other than that stated in this Certificate of Designation;
(vi) make any change in the provisions of this Certificate of
Designation relating to waivers of the rights of holders of
Exchangeable Preferred Stock to receive the Liquidation Preference and
dividends on the Exchangeable Preferred Stock;
(vii) waive a redemption payment with respect to any share of
Exchangeable Preferred Stock (except as provided with respect to
Section 8 hereof); or
(viii) make any change in the foregoing amendment and waiver
provisions.
(c) The Company in its sole discretion may without the vote or consent
of any holders of the Exchangeable Preferred Stock amend or supplement this
Certificate of Designation:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Exchangeable Preferred Stock
in addition to or in place of certificated Exchangeable Preferred
Stock;
or
(iii) to make any change that would provide any additional
rights or benefits to the holders of the Exchangeable Preferred Stock
or that does not adversely affect the legal rights under this
Certificate of Designation of any such holder.
Except as set forth above, the creation, authorization or issuance of,
or the increase or decrease in the authorized amount of, capital stock of any
class, including any preferred stock, shall not require the consent of the
holders of the Exchangeable Preferred Stock and shall not be deemed to affect
adversely the rights, preferences, privileges, special rights or voting rights
of holders of shares of Exchangeable Preferred Stock.
11. EXCLUSION OF OTHER RIGHTS.
Except as may otherwise be required by law, the shares of Exchangeable
Preferred Stock shall not have any voting powers, preferences and relative,
participating, optional or other special rights, other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) and in the Certificate of Incorporation. The shares of Exchangeable
Preferred Stock shall have no preemptive or subscription rights.
<PAGE>
12. HEADINGS OF SUBDIVISIONS.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
13. SEVERABILITY OF PROVISIONS.
If any voting powers, preferences and relative, participating,
optional and other special rights of the Exchangeable Preferred Stock and
qualifications, limitations and restrictions thereof set forth in this
resolution (as such resolution may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other voting powers, preferences and relative, participating,
optional and other special rights of Exchangeable Preferred Stock and
qualifications, limitations and restrictions thereof set forth in this
resolution (as so amended) which can be given effect without the invalid,
unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of Exchangeable Preferred Stock
and qualifications, limitations and restrictions thereof shall, nevertheless,
remain in full force and effect, and no voting powers, preferences and relative,
participating, optional or other special rights of Exchangeable Preferred Stock
and qualifications, limitations and restrictions thereof herein set forth shall
be deemed dependent upon any other such voting powers, preferences and relative,
participating, optional or other special rights of Exchangeable Preferred Stock
and qualifications, limitations and restrictions thereof unless so expressed
herein.
14. FORM OF EXCHANGEABLE PREFERRED STOCK.
(a) The Exchangeable Preferred Stock shall initially be issued in the
form of one or more Global Securities ("Global Securities"). The Global
Securities shall be deposited on the Issue Date with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede &
Co., as nominee of the Depositary (such nominee being referred to as the "Global
Security Holder").
(b) So long as the Global Security Holder is the registered owner of
any Exchangeable Preferred Stock, the Global Security Holder will be considered
the sole holder under this Certificate of Designation of any shares of
Exchangeable Preferred Stock evidenced by the Global Security. Beneficial owners
of shares of Exchangeable Preferred Stock evidenced by the Global Security shall
not be considered the owners or holders thereof under this Certificate of
Designation for any purpose.
(c) Payments in respect of the Liquidation Preference, dividends and
Liquidated Damages, if any, on any Exchangeable Preferred Stock registered in
the name of the Global Security Holder on the applicable record date shall be
payable by the Company to or at the direction of the Global Security Holder in
its capacity as the registered holder under this Certificate of Designation. The
Company may treat the persons in whose names Exchangeable Preferred Stock,
including the Global Security, are registered as the owners thereof for the
purpose of receiving such payments.
(d) Any person having a beneficial interest in a Global Security may,
upon request to the Transfer Agent, exchange such beneficial interest for
Exchangeable Preferred
<PAGE>
Stock in the form of registered definitive certificates (the "Certificated
Securities"). Upon any such issuance, the Transfer Agent shall register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). If (i) the Company
notifies the holders in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Transfer Agent
in writing that it elects to cause the issuance of Exchangeable Preferred Stock
in the form of Certificated Securities under this Certificate of Designation,
then, upon surrender by the Global Security Holder of its Global Security,
Exchangeable Preferred Stock in such form will be issued to each person that the
Global Security Holder and the Depositary identify as being the beneficial owner
of the related Exchangeable Preferred Stock. Each Certificated Security shall
bear a legend in substantially the following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY
EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT
PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY BY ITS
ACCEPTANCE HEREOF AGREES TO (A) OFFER, SELL, PLEDGE OR OTHERWISE
TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (4) TO AN
INSTITUTIONAL "ACCREDIT INVESTOR" (AS DEFINED IN RULE 501(a)(1),
(2), (3) or (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI")
THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRANSFER AGENT A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO
THE TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM THE TRANSFER AGENT) OR (5) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT (AND
<PAGE>
BASED ON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN
EACH OF THE FOREGOING CASES TO APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THAT
IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A) ABOVE."
(e) Each Global Security shall bear a legend in substantially the
following form:
"UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR A SECURITY
IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE
OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR
DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. THE DEPOSITARY
TRUST COMPANY SHALL ACT AS THE DEPOSITARY UNTIL A SUCCESSOR SHALL BE
APPOINTED BY THE COMPANY AND THE TRANSFER AGENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITARY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK)
("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE &
CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN."
(f) The shares of Exchangeable Preferred Stock and the Debentures
issuable upon exchange thereof will bear a legend to the following effect,
unless the Company determines otherwise in compliance with applicable law:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED
<PAGE>
HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, OR (c) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR
(3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE,
IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE."
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be duly
executed by Henry R. Nothhaft, Chairman of the Board, President and Chief
Executive Officer of the Company and attested by Michael F. Anthofer, Senior
Vice President and Chief Financial Officer of the Company, this 4th day of June,
1998.
CONCENTRIC NETWORK CORPORATION
By: _______________________________
Name: Henry R. Nothhaft
Title: Chairman of the Board, President and
Chief Executive Officer
ATTEST:
By: _______________________
Name: Michael F. Anthofer
Title: Senior Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT 4.2
INCORPORATED UNDER THE LAWS OF THE STATE OF
DELAWARE
SEE RESTRICTIONS ON REVERSE SIDE
A-1 **150,000**
CUSIP 20589R 20 6
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2010
CONCENTRIC NETWORK CORPORATION
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PREFERRED STOCK
$0.001 PAR VALUE PER SHARE OF CONCENTRIC NETWORK CORPORATION
This is to Certify that ** CEDE & CO. ** is the owner of **ONE HUNDRED
FIFTY THOUSAND** shares of fully paid and non-assessable 13 1/2% SERIES A SENIOR
REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010 of CONCENTRIC NETWORK
CORPORATION transferable only on the books of the Corporation by the holder
hereof in person or by the duly authorized Attorney upon surrender of this
certificate properly endorsed. Witness, the seal of the Corporation and the
signatures of its duly authorized officers.
Dated: June 8, 1998
- ------------------------------- ------------------------------
Peter J. Bergeron, Secretary Henry R. Nothhaft, President
<PAGE>
FOR VALUE RECEIVED I DO HEREBY SELL, ASSIGN, AND TRANSFER UNTO ________________
______________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND
DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT __________________________________
_______________, AS ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER
OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ____________________, 199___ ____________________________________
(Shareholder)
__________________________________ ____________________________________
(Witness) (Shareholder)
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(A) TO A PERSON WHO THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (B) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, OR (C) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER HOLD
IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR A SECURITY IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. THE DEPOSITARY TRUST COMPANY SHALL ACT AS THE DEPOSITARY UNTIL A
SUCCESSOR SHALL BE APPOINTED Y THE COMPANY AND THE TRANSFER AGENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"),TO ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
<PAGE>
EXHIBIT 4.3
INCORPORATED UNDER THE LAWS OF THE STATE OF
DELAWARE
SEE RESTRICTIONS ON REVERSE SIDE
B-1 **150,000**
CUSIP 20589R 30 5
13 1/2% SERIES B SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2010
CONCENTRIC NETWORK CORPORATION
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PREFERRED STOCK
$1.00 PAR VALUE PER SHARE OF CONCENTRIC NETWORK CORPORATION
This is to Certify that ** CEDE & CO. ** is the owner of **ONE HUNDRED
FIFTY THOUSAND** shares of fully paid and non-assessable 13 1/2% SERIES B SENIOR
REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010 of CONCENTRIC NETWORK
CORPORATION transferable only on the books of the Corporation by the holder
hereof in person or by the duly authorized Attorney upon surrender of this
certificate properly endorsed. Witness, the seal of the Corporation and the
signatures of its duly authorized officers.
Dated: _____ __, 1998
- ----------------------------- ----------------------------
Peter J. Bergeron, Secretary Henry R. Nothhaft, President
<PAGE>
FOR VALUE RECEIVED I DO HEREBY SELL, ASSIGN, AND TRANSFER UNTO ________________
______________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND
DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ___________________________, AS
ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ____________________, 199____ ______________________________________
(Shareholder)
____________________________________ ______________________________________
(Witness) (Shareholder)
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
<PAGE>
EXHIBIT 5.1
July 6, 1998
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, California 95014
RE: REGISTRATION STATEMENT ON FORM S-4 FOR CONCENTRIC NETWORK CORPORATION
Ladies and Gentlemen:
We have acted as corporate counsel to Concentric Network Corporation, a
Delaware corporation (the "Company"), in connection with the filing by the
Company with the Securities and Exchange Commission of a registration statement
(the "Registration Statement") on Form S-4 under the Securities Act of 1933, as
amended (the "Securities Act"). The Registration Statement relates to the
proposed issuance of up to 150,000 shares of the Company's 13 1/2 % Series B
Senior Redeemable Exchangeable Preferred Stock due 2010 ("Series B Preferred")
which have been registered under the Securities Act and are to be issued in
exchange for all outstanding shares of the Company's 13 1/2 % Series A Senior
Redeemable Exchangeable Preferred Stock due 2010 ("Series A Preferred").
As counsel to the Company, we have examined and relied upon originals or
copies, certified or otherwise identified to our satisfaction, of such
documents, certificates, corporate records and other instruments as we have
deemed necessary or advisable for the purpose of this opinion. In our
examination, we have assumed the authenticity of all documents submitted to us
as originals, the genuineness of all signatures thereon, the legal capacity of
natural persons executing such documents and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
Based upon the foregoing, and subject to the assumptions and limitations
set forth herein, we are of the opinion that the Series B Preferred when issued
in accordance with the Registration Statement and related Prospectus and Letter
of Transmittal, will be duly and validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.54
CONCENTRIC NETWORK CORPORATION
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
PURCHASE AGREEMENT
JUNE 3, 1998
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
UBS SECURITIES LLC
CIBC OPPENHEIMER
LIBRA INVESTMENTS, INC.
<PAGE>
CONCENTRIC NETWORK CORPORATION
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
PURCHASE AGREEMENT
June 3, 1998
New York, New York
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
UBS SECURITIES LLC
CIBC OPPENHEIMER
LIBRA INVESTMENTS, INC.
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies & Gentlemen:
Concentric Network Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell to Bear, Stearns & Co. Inc., First Union Capital
Markets, UBS Securities LLC, CIBC Oppenheimer, and Libra Investments, Inc.
(together, the "Initial Purchasers") 150,000 shares of its 13 1/2% Series A
Senior Redeemable Exchangeable Preferred Stock due 2010, each share having a
liquidation preference of $1,000 per share (the "Series A Preferred Stock").
The Series A Preferred Stock is to be authorized and issued pursuant to the
provisions of a Certificate of Designation of the Voting Power, Designation
Preferences and Relative, Participating, Optional or Other Special Rights and
Qualifications, Limitations and Restrictions (the "Certificate of Designation")
to be filed with the Secretary of State of the State of Delaware. ChaseMellon
Shareholder Services, Inc. will be transfer agent and registrar for the Series A
Preferred Stock. The Series A Preferred Stock and the New Preferred Stock (as
defined below) issuable in exchange therefore are collectively referred to
herein as the "Securities." Under certain circumstances set forth in the
Certificate of Designation, the Securities may be exchanged for the Company's 13
1/2% Senior Subordinated Debentures due 2010 (the "Exchange Debentures"). The
Exchange Debentures and the New Exchange Debentures (as defined below) issuable
in exchange therefor are collectively referred to herein as the "Debentures."
Capitalized terms used but not otherwise defined herein shall have the meanings
given to such terms in the Certificate of Designation.
1. ISSUANCE OF SECURITIES. The Company proposes to, upon the terms and subject
to the conditions set forth herein, issue and sell to the Initial Purchasers an
aggregate of 150,000 shares of Series A Preferred Stock. Upon original issuance
thereof, and until such time as the same is no longer required under the
applicable requirements of the Securities Act of 1933, as
<PAGE>
amended, (the "Act") , the Series A Preferred Stock (and all securities issued
in exchange therefor, in substitution thereof or upon conversion thereof) shall
bear the following legend:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY BY
ITS ACCEPTANCE HEREOF IS HEREBY NOTIFIED THAT THE SELLER MAY BE
RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, OR (c) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR
(3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE,
IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE."
2. OFFERING. The Series A Preferred Stock will be offered and sold to the
Initial Purchasers pursuant to an exemption from the registration requirements
under the Act. The Company has prepared a preliminary confidential offering
memorandum, dated May 20, 1998 (the "Preliminary Offering Memorandum"), and a
final confidential offering memorandum dated June 3, 1998 (the "Offering
Memorandum"), relating to the Company and the issuance of the Series A Preferred
Stock.
2
<PAGE>
The Initial Purchasers have advised the Company that the Initial
Purchasers will make offers (the "Exempt Resales") of the Series A Preferred
Stock on the terms set forth in the Offering Memorandum, as amended or
supplemented, solely to persons whom any of the Initial Purchasers reasonably
believe to be "qualified institutional buyers," as defined in Rule 144A under
the Act ("QIBs"). The QIBs are referred to herein as the "Eligible Purchasers."
The Initial Purchasers will offer the Series A Preferred Stock to such QIBs
initially at a price of $1,000 per share. Such price may be changed at any
time without notice.
Holders (including subsequent transferees) of the Series A Preferred Stock
will have the registration rights set forth in the registration rights agreement
relating thereto (the "Registration Rights Agreement") in substantially the form
of Exhibit A hereto, to be dated the Closing Date (as defined), for so long as
such Series A Preferred Stock constitute "Transfer Restricted Securities" (as
defined in the Registration Rights Agreement). Pursuant to the Registration
Rights Agreement, the Company will agree to file with the Securities and
Exchange Commission (the "Commission"), under the circumstances set forth
therein, (i) a registration statement under the Act (the "Exchange Offer
Registration Statement") relating to the 13 1/2% Series B Redeemable
Exchangeable Preferred Stock due 2010 (the "New Preferred Stock") to be offered
in exchange for the Series A Preferred Stock, or if the Series A Preferred Stock
has been exchanged for the Exchange Debentures, the Company's 13 1/2%
Subordinated Debentures due 2010 (the "New Exchange Debentures") to be offered
in exchange for the Exchange Debentures (in either case such offer to exchange
being referred to as the "Exchange Offer"), and, if necessary, (ii) a shelf
registration statement pursuant to Rule 415 under the Act (the "Shelf
Registration Statement") relating to the resale by certain holders of the Series
A Preferred Stock or Exchange Debentures, as the case may be, and to use its
best efforts to cause such Registration Statements to be declared effective and
consummate the Exchange Offer.
This Agreement, the Certificate of Designation, the indenture pursuant to
which the Exchange Debentures will be issued (the "Indenture"), the Securities,
the Debentures and the Registration Rights Agreement are hereinafter sometimes
referred to collectively as the "Operative Documents."
3. PURCHASE, SALE AND DELIVERY.
(a) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to the terms and conditions herein, the
Company agrees to issue and sell to each Initial Purchaser, and each Initial
Purchaser agrees severally and not jointly to purchase from the Company, that
number of shares set forth opposite its name on Schedule I hereto. The purchase
price for the Series A Preferred Stock shall be $1,000 per share.
(b) Delivery of, and payment of the purchase price for, the Series A
Preferred Stock shall be made, against payment of the purchase price, at the
offices of Bear, Stearns & Co. Inc. at 245 Park Avenue, New York, New York
10167, or such other location as may be mutually acceptable. Such delivery and
payment shall be made at 11:00 a.m., New York City time, on June 8, 1998, or at
such other time as shall be agreed upon by the Initial Purchasers and the
Company. The time and date of such delivery and payment are herein called the
"Closing Date."
3
<PAGE>
(c) The Series A Preferred Stock shall initially be issued in the form of
one or more Global Securities (the "Global Securities"), registered in the name
of Cede & Co., as nominee of the Depository Trust Company ("DTC"), having a
liquidation preference corresponding to the aggregate liquidation preference of
the Series A Preferred Stock. The Global Securities shall be delivered by the
Company to the Initial Purchasers (or as the Initial Purchasers direct) in each
case with any transfer taxes payable upon initial issuance thereof duly paid by
the Company against payment of the Purchase Price by wire transfer of same-day
funds to the order of the Company. The Global Securities shall be made available
to the Initial Purchasers for inspection not later than 11:00 a.m., New York
City time, on the business day immediately preceding the Closing Date.
4. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with each of
the Initial Purchasers as follows:
(a) The Company shall furnish promptly to each of the Initial Purchasers a
copy of the Offering Memorandum and each amendment and supplement thereto and
shall deliver promptly to the Initial Purchasers such number of copies of the
Offering Memorandum and each amendment and supplement thereto as the Initial
Purchasers may reasonably request.
(b) If at any time prior to the completion, as determined by the Initial
Purchasers, of the distribution of the Series A Preferred Stock, any event
occurs as a result of which the Offering Memorandum would contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading, the Company will promptly so notify the
Initial Purchasers and will prepare and furnish to the Initial Purchasers,
subject to Paragraph 5(c), copies of such amendments or supplements to the
Offering Memorandum as may be necessary so that the statements in the Offering
Memorandum as so amended or supplemented will not contain any such untrue
statement or omit to state any such material fact or be misleading and so that
the Offering Memorandum, as so amended or supplemented, will comply with
applicable law.
(c) Within a reasonable amount of time prior to any proposed publication
of any amendment or supplement to the Offering Memorandum, the Company shall
furnish a copy thereof to the Initial Purchasers and shall not publish or use
any such amendment or supplement to which the Initial Purchasers or its counsel
shall reasonably object.
(d) If, after the date hereof and prior to consummation of any Exempt
Resale, any event shall occur as a result of which, in the judgment of the
Company or in the reasonable opinion of either counsel to the Company or counsel
to the Initial Purchasers, it becomes necessary or advisable to amend or
supplement the Preliminary Offering Memorandum or Offering Memorandum in order
to make the statements therein, in the light of the circumstances when such
Offering Memorandum is delivered to an Eligible Purchaser which is a prospective
purchaser, not misleading, or if it is necessary or advisable to amend or
supplement the Preliminary Offering Memorandum or Offering Memorandum to comply
with applicable law, (i) to notify the Initial Purchasers and (ii) forthwith to
prepare an appropriate amendment or supplement to such Offering Memorandum so
that the statements therein as so amended or
4
<PAGE>
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that such Offering Memorandum will comply with
applicable law.
(e) The Company will endeavor to qualify the Series A Preferred Stock for
offer and sale under the securities or Blue Sky laws of such jurisdictions as
the Initial Purchasers shall reasonably request and to continue such
qualification in effect so long as reasonably required for resale by the Initial
Purchasers of the Series A Preferred Stock; provided that the Company shall not
be required to file a general consent to service of process in any jurisdiction.
(f) Whether or not the transactions contemplated hereby are consummated or
this Agreement becomes effective or is terminated, to pay all costs, expenses,
fees and taxes incident to the performance of the obligations of the Company
hereunder, including in connection with: (i) the preparation, printing, filing
and distribution of the Preliminary Offering Memorandum and the Offering
Memorandum (including, without limitation, financial statements) and all
amendments and supplements thereto required pursuant hereto, (ii) the
preparation (including, without limitation, duplication costs) and delivery of
all preliminary and final Blue Sky memoranda prepared and delivered in
connection herewith and with the Exempt Resales, (iii) the issuance, transfer
and delivery by the Company of the Securities and, if issued, the Debentures to
the Initial Purchasers, (iv) the qualification or registration of the Securities
for offer and sale under the securities or Blue Sky laws of the several states
(including, without limitation, the reasonable fees and disbursements of counsel
to the Initial Purchasers relating thereto), (v) furnishing such copies of the
Preliminary Offering Memorandum and the Offering Memorandum, and all amendments
and supplements thereto, as may be requested for use in connection with Exempt
Resales, (vi) the preparation of certificates for the Securities (including,
without limitation, printing and engraving thereof), (vii) the fees,
disbursements and expenses of the Company's counsel and accountants, (viii) all
expenses and listing fees in connection with the application for quotation of
the Series A Preferred Stock in the National Association of Securities Dealers,
Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"), (ix) all fees and
expenses (including fees and expenses of counsel to the Company) of the Company
in connection with the approval of the Securities by DTC for "book-entry"
transfer, (x) rating the Securities by rating agencies, (xi) the reasonable fees
and expenses of the Transfer Agent and its counsel in connection with the
Certificate of Designation, (xii) the performance by the Company of its other
obligations under this Agreement and the other Operative Documents and (xiii)
"road show" travel and other expenses incurred in connection with the marketing
and sale of the Securities (other than out-of-pocket expenses incurred by the
Initial Purchasers for travel, meals and lodgings and one-half of any expenses
relating to chartered aircraft).
(g) To use the proceeds from the sale of the Series A Preferred Stock
substantially in the manner described in the Offering Memorandum under the
caption "Use of Proceeds."
(h) To the extent permitted by applicable law, not to claim voluntarily,
and to resist actively an attempt to claim, the benefit of any usury laws
against the holders of any Securities or Debentures.
(i) To do and perform all things required to be done and performed under
this Agreement by it prior to or after the Closing Date and to satisfy all
conditions precedent on its part to the delivery of the Series A Preferred
Stock.
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(j) The Company will take all action that is appropriate or reasonably
necessary to assure that its offerings of other securities will not be
integrated for purposes of the registration requirements of the Securities Act
with the offerings contemplated hereby.
(k) If, at any time prior to two years after the Closing Date, the Company
is neither subject to Section 13 or 15(d) of the Exchange Act of 1934, as
amended (the "Exchange Act") nor exempt from reporting pursuant to Rule 12g3-
2(b) under the Exchange Act, the Company shall furnish, as soon as available, to
the Initial Purchasers, and, upon request of a holder of Series A Preferred
Stock or Exchange Debentures, to such holder and any prospective purchaser
designated by such holder, copies of the information required to be delivered to
holders and prospective purchasers of any Series A Preferred Stock or Exchange
Debentures which constitute "restricted securities" under Rule 144 under the Act
in order to permit compliance with Rule 144A under the Act.
(l) To cause the Exchange Offer to be made in the appropriate form to
permit registered New Preferred Stock or New Exchange Debentures to be offered
in exchange for the Series A Preferred Stock or Exchange Debentures, as the case
may be, and to comply with all applicable federal and state securities laws in
connection with the Exchange Offer.
(m) To comply with all of its agreements set forth in the Registration
Rights Agreement and all agreements set forth in the representation letters of
the Company to DTC relating to the approval of the Securities by DTC for "book-
entry" transfer.
(n) If requested by the Initial Purchasers, to use its best efforts to
effect the inclusion of the Series A Preferred Stock in PORTAL and to obtain
approval of the Securities by DTC for "book-entry" transfer.
(o) During a period of five years following the Closing Date, to deliver
without charge to each of the Initial Purchasers, as they may reasonably
request, promptly upon their becoming available, copies of (i) all reports or
other publicly available information that the Company shall mail or otherwise
make available to its stockholders and (ii) all reports, financial statements
and proxy or information statements filed by the Company with the Commission or
any national securities exchange and such other publicly available information
concerning the Company or its subsidiaries, including without limitation, press
releases, provided the Securities or the Exchange Debentures remain outstanding
at the time of such request.
(p) Prior to the Closing Date, to furnish to each of the Initial
Purchasers, as soon as they have been publicly disclosed by the Company, a copy
of any consolidated financial statements of the Company for any period
subsequent to the period covered by the financial statements appearing in the
Offering Memorandum.
(q) Neither the Company nor any of its affiliates will take, directly or
indirectly, any action designed to or which constitutes or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Series A Preferred Stock at any time prior to the Initial
Purchasers notifying the Company of the completion of the distribution of the
Series A Preferred Stock other than as permitted under Regulation M of the Act.
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(r) To comply with the agreements in the Certificate of Designation, the
Indenture, the Registration Rights Agreement and any other Operative Document.
5. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents, warrants and agrees that:
(i) The Company has prepared the Preliminary Offering Memorandum and the
Offering Memorandum. Copies of the Preliminary Offering Memorandum and
the Offering Memorandum have been delivered by the Company to the
Initial Purchasers. The Preliminary Offering Memorandum, as of its
date, and the Offering Memorandum does not, as of the date hereof, and
will not, as of the date of any amendment or supplement thereto or as
of the Closing Date (as defined in Paragraph 3(b)), contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided
that the Company makes no representation or warranty as to information
contained in the Offering Memorandum in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Initial Purchaser expressly for inclusion therein.
(ii) The Company and its subsidiaries (the "Subsidiaries") have been duly
incorporated and each is validly existing as a corporation in good
standing under the laws of the State of Delaware and (with respect to
each of the Subsidiaries) California, with full corporate power and
authority to own, lease and operate its properties and conduct its
business as described in the Offering Memorandum. The Company and the
Subsidiaries are duly qualified to do business as a foreign
corporation in good standing in each jurisdiction where the ownership
or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to so qualify would not
have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and the Subsidiaries
(a "Material Adverse Effect"). Other than the Subsidiaries, the
Company does not own, directly or indirectly, any shares of stock or
any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture,
association or other entity, with the exception of a less than 20%
interest in Unified Gamers Online, LLC. Complete and correct copies of
the certificates of incorporation and of the bylaws of the Company and
all amendments thereto have been delivered to the Initial Purchasers,
and no changes will be made subsequent to the date hereof and prior to
the Closing Date.
(iii) This Agreement has been duly and validly executed and delivered by the
Company and constitutes a legal, valid and binding agreement of the
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Company, enforceable against the Company in accordance with its terms,
except to the extent that the enforceability thereof may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
such enforcement is considered in a proceeding in equity or at law).
(iv) The shares of Series A Preferred Stock have been duly and validly
authorized for issuance and sale to the Initial Purchasers by the
Company pursuant to this Agreement and, when issued, delivered and
paid for in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable and entitled to the
rights, privileges and preferences set forth in the Certificate of
Designation, and the issuance of such shares of Series A Preferred
Stock will not be subject to any preemptive or similar rights. The
Series A Preferred Stock will conform in all material respects with
the description thereof in the Offering Memorandum.
(v) The shares of New Preferred Stock have been duly and validly
authorized by the Company and, when issued and delivered in accordance
with the terms of the Certificate of Designation and the Exchange
Offer, will be validly issued, fully paid and non-assessable and
entitled to the rights, privileges and preferences set forth in the
Certificate of Designation, and the issuance of such shares of New
Preferred Stock will not be subject to any preemptive or similar
rights. The New Preferred Stock will conform in all material respects
to the description thereof in the Offering Memorandum.
(vi) The Exchange Debentures have been duly and validly authorized by the
Company and, if and when issued by the Company will conform in all
material respects to the description thereof in the Offering
Memorandum. When the Exchange Debentures are issued, authenticated and
delivered in accordance with the Indenture, the Exchange Debentures
will constitute legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture, except as the
enforceability thereof may be limited (i) by the effect of bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws now or hereafter in effect relating to or affecting the
rights and remedies of creditors and (ii) by the effect of general
principles of equity, regardless of whether enforcement is considered
in a proceeding in equity or at law, and the discretion of the court
before which any proceeding therefor may be brought. The description
of the Exchange Debentures in the Offering Memorandum is accurate in
all material respects.
(vii) The New Exchange Debentures have been duly and validly authorized by
the Company and, if and when issued and delivered by the Company in
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accordance with the terms of the Indenture and the Exchange Offer,
will constitute legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture, except as the
enforceability thereof may be limited (i) by the effect of bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws now or hereafter in effect relating to or affecting the
rights and remedies of creditors and (ii) by the effect of general
principles of equity, regardless of whether enforcement is considered
in a proceeding in equity or at law, and the discretion of the court
before which any proceeding therefor may be brought. The description
of the New Exchange Debentures in the Offering Memorandum is accurate
in all material respects.
(viii) The Certificate of Designation has been duly authorized by all
necessary corporate and any necessary stockholder action and, on the
Closing Date will have been duly executed by the Company and filed
with the Secretary of State of the State of Delaware and will conform
in all material respects to the description thereof in the Offering
Memorandum.
(ix) The Indenture has been duly and validly authorized by the Company,
will conform to the description thereof in the Offering Memorandum
and, when duly executed and delivered by the Company, will be the
legally valid and binding obligation of the Company, enforceable
against it in accordance with its terms, except as the enforceability
thereof may be limited (i) by the effect of bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other similar laws
now or hereafter in effect relating to or affecting the rights and
remedies of creditors and (ii) by the effect of general principles of
equity, regardless of whether enforcement is considered in a
proceeding in equity or at law, and the discretion of the court before
which any proceeding therefor may be brought.
(x) The Company has duly authorized the Registration Rights Agreement and,
when the Company has duly executed and delivered the Registration
Rights Agreement (assuming the due authorization, execution and
delivery thereof by the Initial Purchasers), the Registration Rights
Agreement will be the legally valid and binding obligation of the
Company, enforceable against it in accordance with its terms, except
as the enforceability thereof may be limited (i) by the effect of
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws now or hereafter in effect relating
to or affecting the rights and remedies of creditors, (ii) by the
effect of general principles of equity, regardless of whether
enforcement is considered in a proceeding in equity or at law, and the
discretion of the court before which any proceeding therefor may be
brought and (iii) to the extent that rights to indemnification and
contribution thereunder may be limited by federal or state securities
laws or public policy relating thereto. The description of the
Registration Rights
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Agreement in the Offering Memorandum is accurate in all material
respects.
(xi) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all federal and state securities
laws, were not issued in violation of any preemptive right, resale
right, right of first refusal or similar right. The authorized and
outstanding capital stock of the Company conforms in all material
respects to the description thereof contained in the Offering
Memorandum (and such description correctly states the substance of the
provisions of the instruments defining the capital stock of the
Company).
(xii) Except as set forth in the Offering Memorandum, none of (i) the
execution, delivery or performance by the Company of this Agreement
and the other Operative Documents, (ii) the issuance and sale of the
Series A Preferred Stock, (iii) the issuance of the New Preferred
Stock in exchange for the Series A Preferred Stock, (iv) the
performance by the Company of its obligations under this Agreement and
the other Operative Documents and (v) the consummation of the
transactions contemplated by this Agreement and the other Operative
Documents violate, conflict with or constitute a breach of any of the
terms or provisions of, or a default under (or an event that with
notice or the lapse of time, or both, would constitute a default) or
result in the imposition of a lien or encumbrance on any assets or
properties of the Company or an acceleration of indebtedness of the
Company to, (A) the charter or bylaws of the Company, (B) any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement
or instrument to which the Company is a party or by which it or its
assets or properties is bound, (C) any statute, rule or regulation
that is applicable to the Company or any of its assets or properties,
or (D) any judgment, order or decree of any court or governmental
agency or authority that has jurisdiction over the Company or its
assets or properties, except in the case of clauses (B), (C) and (D)
insofar as any such violation, conflict, breach, default, lien,
encumbrance or acceleration that would not reasonably be expected,
either individually or in the aggregate, to have a Material Adverse
Effect.
(xiii) Other than as described in the Offering Memorandum, no consent,
waiver, approval, authorization or order of, or filing, registration,
qualification, license or permit of or with, any domestic or foreign
court or governmental agency, body or administrative agency or other
person that is material to the conduct of the business of the Company
is required for the execution, delivery and performance by the Company
of each of this Agreement, the other Operative Documents, the issuance
and sale of the Securities and the consummation of the transactions
described in the Offering Memorandum except (i) such as have been
obtained and made (or, in the case of the Registration Rights
Agreement, will be obtained and
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made) and (ii) such as to which the failure to be obtained or made
could not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect.
(xiv) Except as otherwise set forth in the Offering Memorandum, there is (A)
no action, suit or proceeding before or by any court, arbitrator or
governmental agency, bodily or official, domestic or foreign, pending
or, to the knowledge of the Company, threatened to which the Company
is, or will be, a party or to which the business, assets or property
of the Company is, or will be, subject, (B) no injunction, restraining
order or order of any nature that has been issued by a federal or
state court or foreign court of competent jurisdiction to which the
Company is, or will be, subject or to which the business, assets or
property of the Company that would, in the case of clauses (A) and
(B), reasonably be expected, either individually or in the aggregate,
to have a Material Adverse Effect. There is no legal or administrative
proceedings, statutes, contracts or documents concerning the Company
of a character that would be required to be described in a
registration statement on Form S-1 under the Securities Act that is
not described in the Offering Documents.
(xv) To the Company's knowledge, Ernst & Young LLP (the "Accountants"), who
have examined the financial statements, together with the related
schedules and notes, of the Company included in the Offering
Memorandum, are independent public accountants within the meaning of
the Securities Act and the Rules and Regulations. The financial
statements of the Company, together with the related notes, included
in the Offering Memorandum, fairly present the financial position and
the results of operations of the Company at the respective dates and
for the respective periods to which they apply. All financial
statements, together with the related notes, included in the Offering
Memorandum have been prepared in accordance with generally accepted
accounting principles as in effect in the United States consistently
applied throughout the periods involved except as may be otherwise
stated in the Offering Memorandum. The selected and summary financial
and statistical data included in the Offering Memorandum present
fairly, in all material respects, the information shown therein and
have been compiled on a basis consistent with the financial statements
presented therein. There are no other financial statements or
schedules of a character that would be required to be included in a
registration statement on Form S-1 under the Securities Act that are
not included in the Offering Memorandum.
(xvi) Subsequent to the respective dates as of which information is given in
the Offering Memorandum, there has not been (i) any material adverse
change, or any development which, in the Company's reasonable
judgment, is likely to cause a material adverse change, in the
business, properties or assets described or referred to in the
Offering Memorandum, or the results of operations, condition
(financial or otherwise), business or
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operations of the Company, (ii) any transaction which is material to
the Company, except transactions in the ordinary course of business,
(iii) any obligation, direct or contingent, incurred by the Company,
which is material to the Company, except obligations incurred in the
ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company which is material to the
Company, or (v) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company. The Company does not
have any material contingent obligation which is not disclosed in the
Offering Memorandum and which is of a character that would be required
to be included in a registration statement on Form S-1 under the
Securities Act.
(xvii) Except as set forth in the Offering Memorandum or otherwise permitted,
(i) the Company has good and marketable title to all material
properties and assets described in the Offering Memorandum as owned by
it, free and clear of any lien, (ii) the agreements to which the
Company is a party described in the Offering Memorandum are valid
agreements, enforceable against the Company in accordance with their
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles, and, to the Company's knowledge, the other contracting
party or parties thereto are not in material breach or default under
any of such agreements and (iii) the Company has valid and enforceable
leases for the properties described in the Offering Memorandum as
leased by it, and such leases conform in all material respects to the
description thereof, if any, set forth in the Offering Memorandum.
(xviii) Except as set forth in the Offering Memorandum, the Company now holds
and at the Closing Date will hold, all licenses, certificates,
approvals and permits from all state, United States, foreign and other
regulatory authorities that are material to the conduct of the
business of the Company (as such business is currently conducted),
except for such licenses, certificates, approvals and permits the
failure of which to hold would not have a Material Adverse Effect, all
of which are valid and in full force and effect (and there is no
proceeding pending or, to the knowledge of the Company, threatened
which may cause any such license, certificate, approval or permit to
be withdrawn, cancelled, suspended or not renewed). The Company is not
in violation of its certificate of incorporation, as amended, or
bylaws, as amended, or, except for defaults or violations which would
not have a Material Adverse Effect, in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
joint venture or other agreement or instrument to which it is a party
or by which it or any of its properties are bound, or in violation of
any law, order, rule,
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regulation, writ, injunction or decree of any court or governmental
agency or body.
(xix) The Company has filed on a timely basis all necessary federal, state
and foreign income, franchise and other tax returns and has paid all
taxes shown thereon as due, and the Company has no knowledge of any
tax deficiency which has been or might be asserted against the Company
which might have a Material Adverse Effect. All material tax
liabilities are adequately provided for within the financial
statements of the Company.
(xx) The Company maintains insurance of the types and in the amounts
adequate for its business as presently conducted and consistent with
insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering product
liability and real and personal property owned or leased against
theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force
and effect.
(xxi) The Company is not involved in any labor dispute or disturbance and,
to the knowledge of the Company, no such dispute or disturbance is
threatened.
(xxii) Except as described in the Offering Memorandum, the Company owns or
possesses adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks,
service mark applications, tradenames, copyrights, manufacturing
processes, formulae, trade secrets, know-how, franchises, and other
material intangible property and assets (collectively, "Intellectual
Property" necessary to the conduct of its businesses as conducted and
as proposed to be conducted as described in the Offering Memorandum.
The Company has no knowledge that it lacks or will be unable to obtain
any rights or licenses to use any of the Intellectual Property
necessary to conduct the business now conducted or proposed to be
conducted by it as described in the Offering Memorandum, except as
described in the Offering Memorandum. The Offering Memorandum fairly
and accurately describes the Company's rights with respect to the
Intellectual Property. Except as described in the Offering Memorandum,
the Company has not received any written notice of infringement or of
conflict with rights or claims of others with respect to any
Intellectual Property which could result in any material adverse
effect on the Company. The Company is not aware of any patents of
others which are infringed upon by potential products or processes
referred to in the Offering Memorandum in such a manner as to
materially and adversely affect the Company, except as described in
the Offering Memorandum.
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(xxiii) The Company is not an "investment company," or a "promoter" or
"principal underwriter" for a registered investment company, as such
terms are defined in the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(xxiv) The Company has not incurred any liability for a fee, commission, or
other compensation on account of the employment of a broker or finder
in connection with the transactions contemplated by this Agreement
other than the discount contemplated hereby.
(xxv) The Company is (i) in compliance with any and all applicable United
States, state and local environmental laws, rules, regulations,
treaties, statutes and codes promulgated by any and all governmental
authorities relating to the protection of human health and safety, the
environment or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to
conduct its business as currently conducted, and (iii) is in
compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permit licenses or other approvals would
not, individually or in the aggregate, have a Material Adverse Effect.
No action, proceeding, revocation proceeding, writ, injunction or
claim is pending or threatened relating to the Environmental Laws or
to the Company's activities involving Hazardous Materials. "Hazardous
Materials" means any material or substance (iv) that is prohibited or
regulated by any environmental law, rule, regulation, order, treaty,
statute or code promulgated by any governmental authority, or any
amendment or modification thereto, or (v) that has been designated or
regulated by any governmental authority as radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the
environment.
(xxvi) To the Company's knowledge, the Company has not engaged in the
generation, use, manufacture, transportation or storage of any
Hazardous Materials on any of the Company's properties or former
properties, except where such use, manufacture, transportation or
storage is in compliance with Environmental Laws, or to the extent
such activity could be reasonably expected not to have a material
adverse effect on the Company. To the Company's knowledge, no
Hazardous Materials have been treated or disposed of on any of the
Company's properties or on properties formerly owned or leased by the
Company during the time of such ownership or lease, except in
compliance with Environmental Laws, or those that could reasonably be
expected not to have a material adverse effect on the Company.
(xxvii) The Company has not at any time during the last five years (i) made
any unlawful contribution to any candidate for foreign office, or
failed to
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disclose fully any contribution in violation of law, or (ii) made any
payment to any foreign, United States or state governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the
United States.
(xxviii) Neither the Company nor, to its knowledge, any of its officers,
directors or affiliates has taken, and at the Closing Date, neither
the Company nor, to its knowledge, any of its officers, directors or
affiliates will have taken, directly or indirectly, any action which
has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the
Series A Preferred Stock.
(xxix) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date and (ii) completion of the distribution
of the Series A Preferred Stock, any offering material in connection
with the offering and sale of the Series A Preferred Stock other than
any Offering Memorandum and other materials, if any, permitted by the
Securities Act.
(xxx) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xxxi) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Offering
Memorandum.
(xxxii) The Company is a "reporting issuer," as defined in Rule 902 under the
Securities Act.
(xxxiii) Except as otherwise set forth in this Agreement, the Registration
Rights Agreement or the Offering Memorandum, there are no holders of
securities of the Company which by reason of the execution of this
Agreement or any other Operative Document and the consummation of the
transactions contemplated hereby or thereby, have the right to request
or demand that the Company register any of its securities under the
Securities Act.
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(xxxiv) When the Securities are issued and delivered pursuant to this
Agreement, none of the Securities will be of the same class (within
the meaning of Rule 144A under the Securities Act) as securities of
the Company that are listed on a national securities exchange
registered under Section 6 of the Exchange Act or that are quoted in a
United States automated inter-dealer quotation system.
(xxxv) No registration under the Act of the Series A Preferred Stock is
required for the sale of the Series A Preferred Stock to the Initial
Purchasers as contemplated hereby or for the Exempt Resales assuming
(i) that the purchasers who buy the Series A Preferred Stock in the
Exempt Resales are QIBs and (ii) the accuracy of the Initial
Purchasers' representations regarding the absence of general
solicitation in connection with the sale of Series A Preferred Stock
to the Initial Purchasers and the Exempt Resales contained herein. No
form of general solicitation or general advertising was used by the
Company or any of its representatives (other than the Initial
Purchasers, as to which the Company makes no representation or
warranty) in connection with the offer and sale of any of the Series A
Preferred Stock or in connection with Exempt Resales, including, but
not limited to, articles, notices or other communications published in
any newspaper, magazine, or similar medium or broadcast over
television or radio, or any seminar or meeting whose attendees have
been invited by any general solicitation or general advertising. No
securities of the same class as the Series A Preferred Stock have been
issued and sold by the Company within the six-month period immediately
prior to the date hereof.
The Company acknowledges that each of the Initial Purchasers and, for
purposes of the opinions to be delivered to the Initial Purchasers pursuant to
Section 8 hereof, counsel to the Company and counsel to the Initial Purchasers,
will rely upon the accuracy and truth of the foregoing representations and
hereby consents to such reliance.
(b) Each of the Initial Purchasers, severally and not jointly, represents,
warrants and covenants to the Company and agrees that:
(i) Such Initial Purchaser is a QIB, with such knowledge and experience in
financial and business matters as are necessary in order to evaluate
the merits and risks of an investment in the Series A Preferred Stock.
(ii) Such Initial Purchaser (A) is not acquiring the Series A Preferred
Stock with a view to any distribution thereof that would violate the
Act or the securities laws of any state of the United States or any
other applicable jurisdiction and (B) will be reoffering and reselling
the Series A Preferred Stock only to QIBs in reliance on the exemption
from the registration requirements of the Act provided by Rule 144A.
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(iii) No form of general solicitation or general advertising has been or will
be used by any of the Initial Purchasers or any of their
representatives in connection with the offer and sale of any of the
Series A Preferred Stock, including, but not limited to, articles,
notices or other communications published in any newspaper, magazine,
or similar medium or broadcast over television or radio, or any seminar
or meeting whose attendees have been invited by any general
solicitation or general advertising.
(iv) Each of the Initial Purchasers agrees that, in connection with the
Exempt Resales, it will solicit offers to buy the Series A Preferred
Stock only from, and will offer to sell the Series A Preferred Stock
only to, Eligible Purchasers. The Initial Purchasers further agree (A)
that they will offer to sell the Series A Preferred Stock only to, and
will solicit offers to buy the Series A Preferred Stock only from QIBs
who in purchasing such Series A Preferred Stock will be deemed to have
represented and agreed that they are purchasing the Series A Preferred
Stock for their own accounts or accounts with respect to which they
exercise sole investment discretion and that they or such accounts are
QIBs and (B) that, in the case of such Eligible Purchasers,
acknowledges and agrees that such Series A Preferred Stock will not
have been registered under the Act and may be resold, pledged or
otherwise transferred only (1)(a) to a person who the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule
144A, (b) in a transaction meeting the requirements of Rule 144 under
the Act, (c) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Act or (d)
in accordance with another exemption from the registration requirements
of the Act (and based upon an opinion of counsel if the Company so
requests), (2) to the Company, (3) pursuant to an effective
registration statement under the Act and, in each case, in accordance
with any applicable securities laws of any state of the United States
or any other applicable jurisdiction and (C) that the holder will, and
each subsequent holder is required to, notify any purchaser of the
security evidenced thereby of the resale restrictions set forth in (B)
above.
(v) Each of the Initial Purchasers understands that the Company and, for
purposes of the opinions to be delivered to the Initial Purchasers
pursuant to Section 8 hereof, counsel to the Company and counsel to the
Initial Purchasers will rely upon the accuracy and truth of the
foregoing representations and hereby consents to such reliance.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless (i) each of the
Initial Purchasers, (ii) each person, if any, who controls any of the Initial
Purchasers within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and (iii) the respective officers, directors, partners, employees,
representatives and agents of any of the Initial Purchasers or any controlling
person to the fullest extent lawful, from and against any and all losses,
liabilities, claims, damages and expenses whatsoever (including but not limited
to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any investigation or litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), joint or several, to which they or
any of them may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Offering
Memorandum or the Offering Memorandum, or in any supplement thereto or amendment
thereof, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company will not be liable in
any such case to the extent, but only to the extent, that (i) any such loss,
liability,
17
<PAGE>
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of the Initial Purchasers expressly for use therein
and (ii) the foregoing indemnity with respect to any untrue statement contained
in or omitted from a preliminary offering memorandum shall not inure to the
benefit of any Initial Purchaser (or any person controlling such Initial
Purchaser), from whom the person asserting any such loss, liability, claim,
damage or expense purchased any of the Series A Preferred Stock which are the
subject thereof if it is finally judicially determined that such loss,
liability, claim, damage or expense resulted solely from the fact that the
Initial Purchaser sold Series A Preferred Stock to a person to whom there was
not sent or given, at or prior to the written confirmation of such sale, a copy
of the Offering Memorandum, as amended or supplemented, and (x) the Company
shall have previously and timely furnished sufficient copies of the Offering
Memorandum, as so amended or supplemented, to such Initial Purchaser in
accordance with this Agreement and (y) the Offering Memorandum, as so amended or
supplemented, would have corrected such untrue statement or omission of a
material fact. This indemnity agreement will be in addition to any liability
which the Company may otherwise have, including, under this Agreement.
(b) Each Initial Purchaser, severally and not jointly, agrees to
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any losses, liabilities, claims, damages and expenses
whatsoever (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending against
any investigation or litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Preliminary Offering Memorandum or the Offering
Memorandum, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, in
each case to the extent, but only to the extent, that any such loss, liability,
claim, damage or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
18
<PAGE>
the Company by or on behalf of any such Initial Purchaser expressly for use
therein; provided, however, that in no case shall any Initial Purchaser be
liable or responsible for any amount in excess of the discounts and commissions
received by such Initial Purchaser, as set forth on the cover page of the
Offering Memorandum. This indemnity agreement will be in addition to any
liability which any Initial Purchaser may otherwise have, including, under this
Agreement.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 6 except to the extent that it has been prejudiced
in any material respect by such failure or from any liability which it may
otherwise have). In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
take charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying party or parties shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of counsel
shall be borne by the indemnifying parties; provided, however, that the
indemnifying party under subsection (a) or (b) above, shall only be liable for
the legal expenses of one counsel (in addition to any local counsel) for all
indemnified parties in each jurisdiction in which any claim or action is
brought. Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that such consent was
not unreasonably withheld.
7. CONTRIBUTION. In order to provide for contribution in circumstances in
which the indemnification provided for in Section 6 is for any reason held to be
unavailable from the Company or is insufficient to hold harmless a party
indemnified thereunder, the Company and the Initial Purchasers shall contribute
to the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company, any contribution received by the Company from persons,
other than the Initial Purchasers, who may also be liable for contribution,
including persons who control the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act) to which the Company and one or
19
<PAGE>
more of the Initial Purchasers may be subject, in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Initial Purchasers from the offering of the Series A Preferred Stock or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 6, in such proportion as is appropriate to reflect not only
the relative benefits referred to above but also the relative fault of the
Company and the Initial Purchasers in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Initial Purchasers shall be deemed to
be in the same proportion as (x) the total net proceeds from the offering of
Series A Preferred Stock obtained by subtracting accrued dividends or interest,
as the case may be, received by the Company and (y) the discounts received by
the Initial Purchasers, respectively. The relative fault of the Company and of
the Initial Purchasers shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Initial Purchasers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Initial Purchasers agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to above.
Notwithstanding the provisions of this Section 7, (i) in no case shall any of
the Initial Purchasers be required to contribute any amount in excess of the
amount by which the discount applicable to the Series A Preferred Stock
purchased by such Initial Purchaser pursuant to this Agreement exceeds the
amount of any damages which such Initial Purchaser has otherwise been required
to pay by reason of any untrue or alleged untrue statement or omission or
alleged omission and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, (A) each person, if any, who
controls any of the Initial Purchasers within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act and (B) the respective officers,
directors, partners, employees, representatives and agents of any of the Initial
Purchasers or any controlling person shall have the same rights to contribution
as such Initial Purchaser, and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
shall have the same rights to contribution as the Company, subject in each case
to clause (i) of this Section 7. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 7, notify such party
or parties from whom contribution may be sought, but the failure to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 7 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its prior written consent; provided,
however, that such written consent was not unreasonably withheld.
8. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS. The several obligations
of the Initial Purchasers to purchase and pay for the Series A Preferred Stock,
as provided herein, shall be subject to the satisfaction of the following
conditions:
20
<PAGE>
(a) All of the representations and warranties of the Company contained in
this Agreement shall be true and correct on the date hereof and on the Closing
Date with the same force and effect as if made on and as of the date hereof and
the Closing Date, respectively. The Company shall have performed or complied in
all material respects with all of the agreements herein contained and required
to be performed or complied with by it at or prior to the Closing Date.
(b) The Offering Memorandum shall have been printed and copies distributed
to the Initial Purchasers not later than 10:00 a.m., New York City time, on the
day following the date of this Agreement or at such later date and time as to
which the Initial Purchasers may agree, and no stop order suspending the
qualification or exemption from qualification of the Series A Preferred Stock in
any jurisdiction referred to in Section 4(e) shall have been issued and no
proceeding for that purpose shall have been commenced or shall be pending or
threatened.
(c) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the issuance of the Series A
Preferred Stock; no action, suit or proceeding shall have been commenced and be
pending against or affecting or, to the best knowledge of the Company,
threatened against, the Company or the Subsidiaries before any court or
arbitrator or any governmental body, agency or official that could reasonably be
expected to result in a Material Adverse Effect; and no stop order shall have
been issued preventing the use of the Offering Memorandum, or any amendment or
supplement thereto, or which could reasonably be expected to have a Material
Adverse Effect.
(d) Since the dates as of which information is given in the Offering
Memorandum, (i) there shall not have been any material adverse change, or any
development that is reasonably likely to result in a material adverse change, in
the capital stock or the long-term debt, or material increase in the short-term
debt, of the Company and the Subsidiaries from that set forth in the Offering
Memorandum, (ii) no dividend or distribution of any kind shall have been
declared, paid or made by the Company or any Subsidiaries (other than any
dividends or distributions paid to the Company) on any class of its capital
stock and (iii) neither the Company nor any Subsidiaries shall have incurred any
liabilities or obligations, direct or contingent, that are material,
individually or in the aggregate, to the Company and the Subsidiaries, taken as
a whole, and that are required to be disclosed on a balance sheet or notes
thereto in accordance with generally accepted accounting principles and are not
disclosed on the latest balance sheet or notes thereto included in the Offering
Memorandum. Since the date hereof and since the dates as of which information is
given in the Offering Memorandum, there shall not have occurred any material
adverse change, or any development which may reasonably be expected to involve a
material adverse change, in the properties, business, results of operations,
condition (financial or otherwise), affairs or prospects of the Company and the
Subsidiaries taken as a whole.
(e) The Initial Purchasers shall have received a certificate, dated the
Closing Date, signed on behalf of the Company by (i) Henry R. Nothhaft, Chairman
of the Board, President and Chief Executive Officer and (ii) Michael F.
Anthofer, Senior Vice President and Chief Financial Officer, in form and
substance reasonably satisfactory to the Initial Purchasers, confirming, as of
the Closing Date, the matters set forth in paragraphs (a), (b), (c) and (d) of
this
21
<PAGE>
Section 8 and that, as of the Closing Date, the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed in all material
respects
(f) The Initial Purchasers shall have received on the Closing Date an
opinion, dated the Closing Date, in form and substance satisfactory to the
Initial Purchasers and counsel to the Initial Purchasers, of Wilson Sonsini
Goodrich & Rosati, counsel for the Company, to the effect set forth in Exhibit B
hereto and of Winthrop Stimson Putnam & Roberts, New York counsel of the
Company, to the effect set forth in Exhibit C hereto.
(g) The Initial Purchasers shall have received an opinion, dated the
Closing Date, in form and substance reasonably satisfactory to the Initial
Purchasers, of Brobeck, Phleger & Harrison LLP, counsel to the Initial
Purchasers, covering such matters as are customarily covered in such opinions.
(h) At the time this Agreement is executed and at the Closing Date the
Initial Purchasers shall have received from Ernst & Young LLP, independent
public accountants for the Company, dated as of the date of this Agreement and
as of the Closing Date, customary comfort letters addressed to the Initial
Purchasers and in form and substance satisfactory to the Initial Purchasers and
counsel to the Initial Purchasers with respect to the financial statements and
certain financial information of the Company contained in the Offering
Memorandum
(i) Brobeck, Phleger & Harrison LLP shall have been furnished with such
documents, in addition to those set forth above, as they may reasonably require
for the purpose of enabling them to review or pass upon the matters referred to
in this Section 8 and in order to evidence the accuracy, completeness or
satisfaction in all material respects of any of the representations, warranties
or conditions herein contained.
(j) Prior to the Closing Date, the Company and the Subsidiary shall have
furnished to the Initial Purchasers such further information, certificates and
documents as the Initial Purchasers may reasonably request.
(k) The Company shall have authorized, executed and filed the Certificate
of Designation in accordance with Delaware law and each of the Initial
Purchasers shall have received an original copy of the Certificate of
Designation, duly executed by the Company.
(l) The Company shall have entered into the Registration Rights Agreement
and the Initial Purchasers shall have received counterparts, conformed as
executed, thereof.
(m) The Series A Preferred Stock shall have been accepted for settlement
through the facilities of DTC.
All opinions, letters, evidences and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to Brobeck, Phleger & Harrison LLP, counsel to the Initial Purchasers.
9. INITIAL PURCHASERS' INFORMATION. The Company and the Initial Purchasers
severally acknowledge that the statements with respect to the offering of the
Series A Preferred
22
<PAGE>
Stock set forth in the last paragraph of the cover page, the third paragraph and
the sixth and seventh sentences of the fourth paragraph under the caption "Plan
of Distribution" in such Offering Memorandum constitute the only information
furnished in writing by the Initial Purchasers expressly for use in the Offering
Memorandum.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Initial Purchasers and the Company
contained in this Agreement, including the agreements contained in Sections 4(f)
and 11(d), the indemnity agreements contained in Section 6 and the contribution
agreements contained in Section 7, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Initial
Purchasers or any controlling person thereof or by or on behalf of the Company
or any controlling person thereof, and shall survive delivery of and payment for
the Series A Preferred Stock to and by the Initial Purchasers. The
representations contained in Section 6 and the agreements contained in Sections
4(f), 5, 7 and 11(d) shall survive the termination of this Agreement, including
any termination pursuant to Section 11.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective upon execution and delivery of a
counterpart hereof by each of the parties hereto.
(b) The Initial Purchasers shall have the right to terminate this Agreement
at any time prior to the Closing Date by notice to the Company from the Initial
Purchasers, without liability (other than with respect to Sections 6 and 7) on
the Initial Purchasers' part to the Company if, on or prior to such date,
(i) the Company shall have failed, refused or been unable to perform
in any material respect any agreement on its part to be performed
hereunder,
(ii) any other condition to the obligations of the Initial Purchasers
hereunder as provided in Section 8 is not fulfilled when and as
required in any material respect,
(iii) in the reasonable judgment of the Initial Purchasers any material
adverse change shall have occurred since the respective dates as
of which information is given in the Offering Memorandum in the
condition (financial or otherwise), business, properties, assets,
liabilities, prospects, net worth, results of operations or cash
flows of the Company and the Subsidiaries taken as a whole, other
than as set forth in the Offering Memorandum, or
(iv) (A) any domestic or international event or act or occurrence has
materially disrupted, or in the opinion of the Initial Purchasers
will in the immediate future materially disrupt, the market for
the Company's securities or for securities in general; or (B)
trading in securities generally on the New York or American Stock
Exchanges shall have been suspended or materially limited, or
minimum or maximum prices for trading shall have been established,
or maximum ranges for prices for securities shall have
23
<PAGE>
been required, on such exchange, or by such exchange or other
regulatory body or governmental authority having jurisdiction; or
(C) a banking moratorium shall have been declared by Federal or
state authorities, or a moratorium in foreign exchange trading by
major international banks or persons shall have been declared; or
(D) there is an outbreak or escalation of armed hostilities
involving the United States on or after the date hereof, or if
there has been a declaration by the United States of a national
emergency or war, the effect of which shall be, in the Initial
Purchasers' judgment, to make it inadvisable or impracticable to
proceed with the offering or delivery of the Series A Preferred
Stock on the terms and in the manner contemplated in the Offering
Memorandum; or (E) there shall have been such a material adverse
change in general economic, political or financial conditions or
if the effect of international conditions on the financial markets
in the United States shall be such as, in the Initial Purchasers'
judgment, makes it inadvisable or impracticable to proceed with
the delivery of the Series A Preferred Stock as contemplated
hereby.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, telephonic facsimile, or telegraph, confirmed in writing
by letter.
(d) If this Agreement shall be terminated pursuant to any of the provisions
hereof (otherwise than pursuant to any of clauses (iii) or (iv) of Section
11(b), in which case each party will be responsible for its own expenses), or if
the sale of the Series A Preferred Stock provided for herein is not consummated
because any condition to the obligations of the Initial Purchasers set forth
herein is not satisfied or because of any refusal, inability or failure on the
part of the Company to perform any agreement herein or comply with any provision
hereof, the Company will, subject to demand by the Initial Purchasers, reimburse
the Initial Purchasers for all out-of-pocket expenses (including the reasonable
fees and expenses of Initial Purchasers' counsel), incurred by the Initial
Purchasers in connection herewith.
12. NOTICE. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the Initial
Purchasers shall be mailed, delivered, or telexed, telegraphed or telecopied and
confirmed in writing to Bear, Stearns & Co. Inc., First Union Capital Markets,
UBS Securities LLC, CIBC Oppenheimer, and Libra Investments, Inc., c/o Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention:
Corporate Finance Department, telecopy number: (212) 272-3092; and if sent to
the Company, shall be mailed, delivered or telexed, telegraphed or telecopied
and confirmed in writing to Concentric Network Corporation, 10590 North Tantau
Avenue, Cupertino, California 95014, Attention: Michael F. Anthofer, Chief
Financial Officer, telecopy number: (408) 342-2876, with a copy to Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304,
Attention: David J. Segre, Esq., telecopy number (650) 493-6811; provided,
however, that any notice pursuant to Section 7 shall be mailed, delivered or
telexed, telegraphed or telecopied and confirmed in writing.
13. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Initial Purchasers and the Company and the
controlling persons and agents referred to in Sections 6 and 7, and their
respective successors and assigns, and no other person shall have
24
<PAGE>
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Series A Preferred Stock from the Initial Purchasers.
14. CONSTRUCTION. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. TIME IS OF
THE ESSENCE IN THIS AGREEMENT.
15. CAPTIONS. The captions included in this Agreement are included solely
for convenience of reference and are not to be considered a part of this
Agreement.
16. COUNTERPARTS. This Agreement may be executed in various counterparts
which together shall constitute one and the same instrument.
[Signature page to follow]
25
<PAGE>
If the foregoing correctly sets forth the understanding among the Initial
Purchasers and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
CONCENTRIC NETWORK CORPORATION
By: -----------------------------------
Name: __________________________
Title: _________________________
Accepted and agreed to as of the date first above written:
By: BEAR, STEARNS & CO. INC
By: -----------------------------------
Name: __________________________
Title: _________________________
By: FIRST UNION CAPITAL MARKETS
By: -----------------------------------
Name: __________________________
Title: _________________________
By: UBS SECURITIES LLC
By: -----------------------------------
Name: __________________________
Title: _________________________
By: CIBC OPPENHEIMER
By: -----------------------------------
Name: __________________________
Title: _________________________
26
<PAGE>
By: LIBRA INVESTMENTS, INC.
By: -----------------------------------
Name: __________________________
Title: _________________________
27
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
SHARES OF SERIES A
------------------
Initial Purchaser PREFERRED STOCK TO
- ----------------- ------------------
BE PURCHASED
------------
<S> <C>
Bear, Stearns & Co. Inc....................................... 86,250
First Union Capital Markets................................... 22,500
CIBC Oppenheimer.............................................. 18,750
UBS Securities LLC............................................ 15,000
Libra Investments, Inc........................................ 7,500
-------
Total............................................ 150,000
=======
</TABLE>
<PAGE>
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
A-1
<PAGE>
EXHIBIT B
FORM OF OPINION OF
WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION
You shall have received on the Closing Date, the following opinion of
counsel for the Company, dated the Closing Date, addressed to the Initial
Purchasers and with reproduced copies or signed counterparts thereof for each of
the Initial Purchasers, to the effect that:
1. Each of the Company and the Subsidiaries have been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware;
2. Each of the Company and the Subsidiaries have the corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Offering Memorandum;
3. Each of the Company and the Subsidiaries are duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction,
if any, in which the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company or the Subsidiaries. To such counsel's knowledge, the Company does not
own or control, directly or indirectly, any corporation, association or other
entity other than the Subsidiaries;
4. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Offering Memorandum under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, unless otherwise
described in the Offering Memorandum, will not have been issued in violation of
or subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right;
5. This Agreement has been duly and validly authorized, executed and
delivered by the Company.
6. The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement, the
Certificate of Designation, the Indenture, the Registration Rights Agreement and
the other Operative Documents, as applicable, and to consummate the transactions
contemplated thereby, including, without limitation, the corporate power and
authority to issue, sell and deliver the Securities as provided herein and
therein.
7. The shares of Series A Preferred Stock have been duly and validly
authorized for issuance and sale to the Initial Purchasers by the Company
pursuant to this Agreement and, when issued, delivered and paid for in
accordance with the terms of this Agreement, will be validly issued, fully paid
and non-assessable and entitled to the rights,
B-1
<PAGE>
privileges and preferences set forth in the Certificate of Designation, and the
issuance of such shares of Series A Preferred Stock will not be subject to any
preemptive or similar rights.
8. The shares of New Preferred Stock have been duly and validly authorized
by the Company and, when issued and delivered in accordance with the terms of
the Certificate of Designation and the Exchange Offer, will be validly issued,
fully paid and non-assessable and entitled to the rights, privileges and
preferences set forth in the Certificate of Designation, and the issuance of
such shares of New Preferred Stock will not be subject to any preemptive or
similar rights.
9. The Company has duly authorized the issuance of the Exchange
Debentures.
10. The Company has duly authorized the issuance of the New Exchange
Debentures.
11. The Certificate of Designation has been duly authorized by all
necessary corporate and any necessary stockholder action and, on the Closing
Date will have been duly executed by the Company and filed with the Secretary of
State of the State of Delaware.
12. The Company has duly authorized the Indenture.
13. The Company has duly authorized, executed and delivered the
Registration Rights Agreement.
14. When the Series A Preferred Stock are issued and delivered pursuant to
this Agreement, no Series A Preferred Stock will be of the same class (within
the meaning of Rule 144A under the Securities Act) as securities of the Company
that are listed on a national securities exchange registered under Section 6 of
the Exchange Act or that are quoted in a United States automated inter-dealer
quotation system.
15. Except as set forth in the Offering Memorandum, none of (i) the
execution, delivery and performance by each of the Company of this Agreement and
the other Operative Documents, (ii) the issuance and sale of the Series A
Preferred Stock, (iii) the issuance of the New Preferred Stock in exchange for
the Series A Preferred Stock, (iv) the performance by the Company of its
obligations under this Agreement and other Operative Documents and (v) the
consummation of the transactions contemplated by this Agreement and other
Operative Documents violates, conflicts with or constitutes a breach of any of
the terms or provisions of, or a default under (or an event that with notice or
the lapse of time, or both, would constitute a default) or result in the
imposition of a lien or encumbrance on any assets or properties of the Company
or an acceleration of indebtedness of the Company pursuant to, (A) the charter
or bylaws of the Company, (B) to our knowledge, any material bond, debenture,
note, indenture, mortgage, deed of trust or other instrument listed in Exhibit
A, (C) to such counsel's knowledge any statute, rule or regulation that is
applicable to the Company or any of its assets or properties, or (D) to such
counsel's knowledge any judgment, order or decree of any court or governmental
agency or authority that has jurisdiction over the Company or its assets or
properties, except in the case of clauses (B), (C) and (D) insofar as any such
violation, conflict, breach, default, lien,
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encumbrance or acceleration that would not reasonably be expected, either
individually or in the aggregate, to have a Material Adverse Effect.
16. Other than as described in the Offering Memorandum and as otherwise
set forth in the Operative Documents, to our knowledge, no consent, waiver,
approval, authorization or order of, or filing, registration, qualification,
license or permit or with any domestic or foreign court or governmental agency,
body or administrative agency or other person is required for the execution,
delivery and performance by the Company of this Agreement and the other
Operative Documents, the issuance and sale of the Series A Preferred Stock, New
Preferred Stock, Exchange Debentures and New Exchange Debentures and the
consummation of the transactions described in the Offering Memorandum except (i)
such as have been obtained and made (or, in the case of the Registration Rights
Agreement, will be obtained and made) under the Securities Act, the Trust
Indenture Act, and state securities or Blue Sky laws and regulations and (ii)
such as to which the failure to be obtained or made would not reasonably be
expected, either individually or in the aggregate, to have a Material Adverse
Effect.
17. To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character that would
be required to be described in a registration statement on Form S-1 under the
Securities Act that is not described in the Offering Documents.
18. To such counsel's knowledge, the Company is not presently (a) in
material violation of its charter or by laws, or (b) in material breach of any
applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order writ or decree of any court or governmental
agency or body having jurisdiction over the Company or over any of its
properties or operations except where such violation or breach would not
materially adversely affect the business, properties, financial condition or
results of operations of the Company.
19. The Company is not (i) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act, or (ii) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the Holding Company Act.
20. To the knowledge of such counsel, the Company (or any agent thereof
acting on the behalf of the Company) has not taken any action that might cause
this Agreement, the issuance or sale of the Series A Preferred Stock, the
application of the proceeds from the Offering and the consummation of the
transactions described in the Offering Memorandum to violate Regulation G (12
C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R.
Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the
Federal Reserve System, in each case as in effect on the Closing Date.
21. To the knowledge of such counsel, except as otherwise set forth in
this Agreement, the Registration Rights Agreement or the Offering Memorandum,
there are no holders of securities of the Company who, by reason of the
execution of this Agreement or any other Operative Document and the consummation
of the transactions contemplated hereby or thereby, have the right to request or
demand that the Company register any of its securities under
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the Securities Act with respect to the Exchange Offer which have not otherwise
been waived or expired.
22. The statements set forth in the Offering Memorandum under the captions
"Description of Preferred Stock," "Description of the Exchange Debentures," and
"Description of Capital Stock," insofar as they purport to constitute a summary
of terms of the Series A Preferred Stock, New Preferred Stock, Debentures and
New Exchange Debentures, and under the captions ["Certain Transactions" and
"Certain Federal Income Tax Considerations"] insofar as such statements
constitute summaries of the legal matters or documents referred to therein,
fairly summarize in all material respects the matters referred to therein.
23. No registration under the Securities Act of the Series A Preferred
Stock is required for the sale of the Series A Preferred Stock to the Initial
Purchasers as contemplated hereby and by the Offering Memorandum or for the
Exempt Resales (to the extent such sale and the Exempt Resales are effected in
accordance with this Agreement and the Offering Memorandum, assuming (i) that
the purchasers who buy the Units in the Exempt Resales are QIBs , (ii) the
accuracy of the Initial Purchasers' representations and full compliance by the
Initial Purchasers with their obligation set forth in Section 5(b) of this
Agreement, (iii) the accuracy of the representations and warranties deemed to
have been made as described under the caption "Notice to Investors" in the
Offering Memorandum and the full compliance with the covenants deemed to have
been made as described under the caption "Notice to Investors" in the Offering
Memorandum and (iv) the accuracy of the Company's representations and warranties
and the full compliance by the company with the covenants set forth in Section 4
of the Purchase Agreement, it being understood that no opinion is being
expressed as to any subsequent resale of any Series A Preferred Stock, New
Preferred Stock, Exchange Debentures or New Exchange Debentures. To such
counsel's knowledge, no form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) was used by the
Company or any of its representatives in connection with the offer and sale of
any of the Securities or in connection with Exempt Resales.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the Initial
Purchasers, Initial Purchasers' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Offering Memorandum and related matters were discussed, and although they have
not verified the accuracy or completeness of the statements contained in the
Offering Memorandum, nothing has come to the attention of such counsel which
leads them to believe that, at the Closing Date, the Offering Memorandum
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States, the State of Delaware or the State
California upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, and of government
officials, in which case their opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, and to
Initial Purchasers' Counsel.
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EXHIBIT C
FORM OF OPINION OF WINTHROP, STIMSON, PUTNAM & ROBERTS
You shall have received on the Closing Date, the following opinion of
New York counsel for the Company, dated the Closing Date, addressed to the
Initial Purchasers and with reproduced copies or signed counterparts thereof for
each of the Initial Purchasers to the effect that:
1. The Registration Rights Agreement constitutes a valid and legally
binding agreement of the Company enforceable against the Company in accordance
with its terms.
2. If and when the Indenture is executed and delivered in accordance with
the terms of the Certificate of Designation and the Series A Preferred Stock,
the Indenture will constitute a valid and legally binding agreement of the
Company, enforceable against the company in accordance with its terms.
C-1
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EXHIBIT 10.55
REGISTRATION RIGHTS AGREEMENT
Dated as of June 8, 1998
by and among
CONCENTRIC NETWORK CORPORATION
and
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
UBS SECURITIES LLC
CIBC OPPENHEIMER
LIBRA INVESTMENTS, INC.
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and entered
into as of June 8, 1998 by and among Concentric Network Corporation, a Delaware
corporation (the "Company"), and Bear, Stearns & Co. Inc., First Union Capital
Markets, a division of Wheat First Securities, Inc., UBS Securities LLC, CIBC
Oppenheimer and Libra Investments, Inc. (each an "Initial Purchaser" and
together, the "Initial Purchasers"), each of whom have agreed to purchase the
Company's 13-1/2% Series A Redeemable Exchangeable Preferred Stock due 2010 (the
"Series A Preferred Stock") pursuant to the Purchase Agreement (as defined
below). Pursuant to the terms of the Certificate of Designation (as defined
below), the Series A Preferred Stock is exchangeable under certain circumstances
for the Company's 13-1/2% Subordinated Debentures due 2010 (the "Exchange
Debentures") or for the New Preferred Stock (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated June 3,
1998 (the "Purchase Agreement"), by and among the Company and the Initial
Purchasers. In order to induce the Initial Purchasers to purchase the Series A
Preferred Stock, the Company has agreed to provide the registration rights set
forth in this Agreement. The execution and delivery of this Agreement is a
condition to the obligations of the Initial Purchasers set forth in Section 8 of
the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Act: The Securities Act of 1933, as amended.
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
Broker-Dealer Transfer Restricted Securities: New Preferred Stock or New
Exchange Debentures that are acquired by a Broker-Dealer in the Exchange Offer
in exchange for Series A Preferred Stock or Exchange Debentures, as the case may
be, that such Broker-Dealer acquired for its own account as a result of market
making activities or other trading activities (other than Series A Preferred
Stock or Exchange Debentures acquired directly from the Company or any of its
affiliates).
Business Day: Any day except a Saturday, Sunday or other day in the City of
New York, or in the city of the corporate trust office of the Trustee, on which
banks are authorized to close.
Certificate of Designation: The Certificate of Designation filed with the
Secretary of State of the State of Delaware pursuant to which the shares of
Series A Preferred Stock and New Preferred Stock are to be issued, as such
Certificate of Designation is amended or supplemented from time to time in
accordance with the terms thereof.
Certificated Securities: As defined in the Certificate of Designation and
the Indenture.
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<PAGE>
Closing Date: The date hereof.
Commission: The Securities and Exchange Commission.
Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of
this Agreement upon the occurrence of (a) the filing and effectiveness under the
Act of the Exchange Offer Registration Statement relating to the New Preferred
Stock, or if the Series A Preferred Stock has been exchanged for Exchange
Debentures, the New Exchange Debentures to be issued in the Exchange Offer, (b)
the maintenance of such Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than the minimum period
required pursuant to Section 3(b) hereof and (c) the delivery by the Company to
the Transfer Agent of shares of New Preferred Stock with the same aggregate
Liquidation Preference as the aggregate Liquidation Preference of the shares of
Series A Preferred Stock that were tendered by Holders thereof pursuant to the
Exchange Offer, or, if the Series A Preferred Stock has been exchanged for
Exchange Debentures, the delivery by the Company to the Trustee of New Exchange
Debentures in the same aggregate principal amount as the aggregate principal
amount of Exchange Debentures that were tendered by Holders thereof pursuant to
the Exchange Offer.
Damages Payment Date: Each Dividend Payment Date or Interest Payment Date,
as the case may be.
Dividend Payment Date: As defined in the Certificate of Designation.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Offer: The registration by the Company under the Act of the New
Preferred Stock or, if the Series A Preferred Stock has been exchanged for
Exchange Debentures, the New Exchange Debentures pursuant to the Exchange Offer
Registration Statement pursuant to which the Company shall offer the Holders of
all outstanding Transfer Restricted Securities the opportunity to exchange all
such outstanding Transfer Restricted Securities for New Preferred Stock with the
same aggregate Liquidation Preference as the Series A Preferred Stock tendered
in such exchange by such Holders, or New Exchange Debentures in an aggregate
principal amount equal to the aggregate principal amount of the Exchange
Debentures tendered in such exchange offer by such Holders, as the case may be.
Exchange Offer Registration Statement: The Registration Statement relating
to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers propose to
sell the Series A Preferred Stock or Exchange Debentures to certain "qualified
institutional buyers," as such term is defined in Rule 144A under the Act.
Global Security Holder: As defined in the Certificate of Designation and
the Indenture.
Holders: As defined in Section 2 hereof.
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<PAGE>
Indenture: The Indenture to be entered into upon exchange of the Series A
Preferred Stock for Exchange Debentures, by the Company and the Trustee
substantially in the form attached to Exhibit A to the certificate of the
Company dated June 8, 1998 provided to the Transfer Agent, pursuant to which the
Exchange Debentures and New Exchange Debentures are to be issued, as such
Indenture is amended or supplemented from time to time in accordance with the
terms thereof.
Interest Payment Date: As defined in the Indenture and the Exchange
Debentures.
Liquidated Damages: As defined in Section 5 hereof.
Liquidation Preference: As defined in the Certificate of Designation.
NASD: National Association of Securities Dealers, Inc.
Offering Memorandum: The final offering memorandum, dated June 3, 1998,
relating to the Company and the Series A Preferred Stock.
New Exchange Debentures: The Company's 13-1/2% Series B Subordinated
Debentures due 2010 to be issued pursuant to the Indenture (i) in the Exchange
Offer or (ii) upon the request of any Holder of Exchange Debentures covered by a
Shelf Registration Statement in exchange for such Exchange Debentures.
New Preferred Stock: The Company's 13-1/2% Series B Redeemable Exchangeable
Preferred Stock due 2010 to be issued pursuant to the Certificate of Designation
(i) in the Exchange Offer or (ii) upon the request of any Holder of Series A
Preferred Stock covered by a Shelf Registration Statement in exchange for such
Series A Preferred Stock.
Person: An individual, partnership, corporation, trust, unincorporated
organization, or a government or agency or political subdivision thereof.
Preliminary Offering Memorandum: The preliminary offering memorandum,
dated May 20, 1998 relating to the Company and the Series A Preferred Stock.
Prospectus: The prospectus included in a Registration Statement at the time
such Registration Statement is declared effective, as amended or supplemented by
any prospectus supplement and by all other amendments thereto, including post-
effective amendments, and all material incorporated by reference into such
Prospectus.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any registration statement of the Company relating
to (a) an offering of New Preferred Stock or New Exchange Debentures pursuant to
an Exchange Offer or (b) the registration for resale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement, in each case, (i) which
is filed pursuant to the provisions of this Agreement and (ii) including the
Prospectus included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
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<PAGE>
Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer
Transfer Restricted Securities.
Shelf Registration Statement: As defined in Section 4 hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as
in effect on the date of the Indenture.
Target Effectiveness Date: As defined in Section 5.
Transfer Agent: The transfer agent with respect to the Series A Preferred
Stock.
Transfer Restricted Securities: Each share of New Preferred Stock or each
Exchange Debenture until the earliest to occur of (i) the date on which such
Series A Preferred Stock or Exchange Debenture is exchanged by a person other
than a broker-dealer in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer, the date on which such New Preferred Stock
or New Debenture, as the case may be, is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Series A Preferred Stock or Exchange Debenture is effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Series A Preferred Stock
or Exchange Debenture is distributed to the public pursuant to Rule 144 under
the Act.
Underwritten Registration or Underwritten Offering: A registration in which
securities of the Company are sold to an underwriter for re-offering to the
public.
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities (each,
a "Holder") whenever such Person owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by applicable federal
law (after the procedures set forth in Section 6(a)(i) below have been complied
with), the Company shall (i) cause to be filed with the Commission as soon as
practicable after the Closing Date, but in no event later than 30 days after the
Closing Date, the Exchange Offer Registration Statement, (ii) use its best
efforts to cause such Exchange Offer Registration Statement to become effective
at the earliest possible time, but in no event later than 120 days after the
Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective
amendments to such Exchange Offer Registration Statement as may be necessary in
order to cause such Exchange Offer Registration Statement to become effective,
(B) file, if applicable, a post-effective amendment to such Exchange Offer
Registration Statement pursuant to Rule 430A under the Act and (C) cause all
necessary filings, if any, in connection with the registration and qualification
of the New Preferred Stock or the New Exchange Debentures, as the case may be,
to be made under the Blue Sky laws of such jurisdictions as are necessary to
permit Consummation of the Exchange
4
<PAGE>
Offer and (iv) upon the effectiveness of such Exchange Offer Registration
Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall
be on the appropriate form permitting registration of the New Preferred Stock or
the New Exchange Debentures, as the case may be, to be offered in exchange for
the Series A Preferred Stock or the Exchange Debentures, as the case may be,
that are Transfer Restricted Securities and to permit sales of Broker-Dealer
Transfer-Restricted Securities by Restricted Broker-Dealers as contemplated by
Section 3(c) below.
(b) The Company shall cause the Exchange Offer Registration Statement to
be effective continuously, and shall keep the Exchange Offer open, for a period
of not less than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; provided, however, that in no
event shall such period be less than 20 Business Days. The Company shall cause
the Exchange Offer to comply with all applicable federal and state securities
laws. No securities other than the New Preferred Stock and the New Exchange
Debentures shall be included in the Exchange Offer Registration Statement. The
Company shall use its best efforts to cause the Exchange Offer to be Consummated
on the earliest practicable date after the Exchange Offer Registration Statement
has become effective, but in no event later than 30 Business Days thereafter.
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Restricted Broker-Dealer who holds Series A Preferred Stock or
Exchange Debentures that are Transfer Restricted Securities and that were
acquired for the account of such Broker-Dealer as a result of market-making
activities or other trading activities, may exchange such Series A Preferred
Stock or Exchange Debentures (other than Transfer Restricted Securities acquired
directly from the Company) pursuant to the Exchange Offer; however, such Broker-
Dealer may be deemed to be an "underwriter" within the meaning of the Act and
must, therefore, deliver a prospectus meeting the requirements of the Act in
connection with its initial sale of each New Preferred Stock or New Exchange
Debenture received by such Broker-Dealer in the Exchange Offer, which prospectus
delivery requirement may be satisfied by the delivery by such Broker-Dealer of
the Prospectus contained in the Exchange Offer Registration Statement. Such
"Plan of Distribution" section shall also contain all other information with
respect to such sales of Broker-Dealer Transfer Restricted Securities by
Restricted Broker-Dealers that the Commission may require in order to permit
such sales pursuant thereto, but such "Plan of Distribution" shall not name any
such Broker-Dealer or disclose the amount of Series A Preferred Stock or
Exchange Debentures held by any such Broker-Dealer except to the extent required
by the Commission as a result of a change in policy after the date of this
Agreement.
The Company shall use its best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for sales of Broker-Dealer Transfer Restricted
Securities by Restricted Broker-Dealers, and to ensure that such Registration
Statement conforms with the requirements of this Agreement, the Act and the
policies, rules and regulations of the Commission as
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<PAGE>
announced from time to time, for a period expiring on the earlier of (i) the
date that all Holders of Transfer Restricted Securities have registered such
securities pursuant to the Exchange Offer and (ii) 365 days from the date on
which the Exchange Offer Registration Statement is declared effective.
The Company shall promptly provide sufficient copies of the latest version
of such Prospectus to such Restricted Broker-Dealers upon request at any time
during such 365-day period in order to facilitate such sales.
SECTION 4. SHELF REGISTRATION
(a) SHELF REGISTRATION. If (i) the Company is not required to file the
Exchange Offer Registration Statement with respect to the New Preferred Stock or
the New Exchange Debentures or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy (after the procedures set forth in Section 6(a)(i) below have been
complied with) or (ii) any Holder of Transfer Restricted Securities notifies the
Company within 20 Business Days following the Consummation of the Exchange Offer
that (A) such Holder is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) such Holder may not resell the New
Preferred Stock or New Exchange Debentures acquired by it in the Exchange Offer
to the public without delivering a prospectus and the Prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available for
such resales by such Holder or (C) such Holder is a Broker-Dealer and holds
Series A Preferred Stock or Exchange Debentures acquired directly from the
Company or an affiliate of the Company, then the Company shall (x) cause to be
filed on or prior to (1) in the case of a Registration Statement filed pursuant
to clause (i) above, 30 days after the date on which the Company determines that
it is not required to file the Exchange Offer Registration Statement and (2) in
the case of a Registration Statement filed pursuant to clause (ii) above, 30
days after the date on which the Company receives the notice specified in clause
(ii) above (and in any event, within 150 days after the Closing Date), a shelf
registration statement pursuant to Rule 415 under the Act, (which may be an
amendment to the Exchange Offer Registration Statement (in either event, the
"Shelf Registration Statement")), relating to all Transfer Restricted Securities
the Holders of which shall have provided the information required pursuant to
Section 4(b) hereof, and (y) use its best efforts to cause such Shelf
Registration Statement to become effective on or prior to (1) in the case of a
Registration Statement filed pursuant to clause (i) above, 90 days after the
date on which the Company becomes obligated to file such Shelf Registration
Statement and (2) in the case of a Registration Statement filed pursuant to
clause (ii) above, 90 days after the date on which the Company receives the
notice specified in clause (ii) above (and in any event, within 240 days after
the Closing Date). If, after the Company has filed an Exchange Offer
Registration Statement which satisfies the requirements of Section 3(a) above,
the Company is required to file and make effective a Shelf Registration
Statement solely because the Exchange Offer is not permitted under applicable
federal law, then the filing of the Exchange Offer Registration Statement shall
be deemed to satisfy the requirements of clause (x) above. Such an event shall
have no effect on the requirements of this clause (y), or on the Target
Effectiveness Date as defined in Section 5 below. The Company shall use its best
efforts to keep the
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Shelf Registration Statement discussed in this Section 4(a) continuously
effective, supplemented and amended as required by the provisions of Sections
6(b) and (c) hereof to the extent necessary to ensure that it is available for
sales of Transfer Restricted Securities by the Holders thereof entitled to the
benefit of this Section 4(a), and to ensure that it conforms with the
requirements of this Agreement, the Act and the policies, rules and regulations
of the Commission as announced from time to time, for a period expiring on the
earlier of (i) the date that all Holders of Transfer Restricted Securities have
sold such securities pursuant to the Exchange Offer and (ii) 365 days from the
date on which the Exchange Offer Registration Statement is declared effective.
(b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH THE
SHELF REGISTRATION STATEMENT. No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 20 Business Days after receipt of a request
therefor, such information specified in item 507 of Regulation S-K under the Act
for use in connection with any Shelf Registration Statement or Prospectus or
preliminary Prospectus included therein. No Holder of Transfer Restricted
Securities shall be entitled to Liquidated Damages pursuant to Section 5 hereof
unless and until such Holder shall have provided all such information required
to be provided by such Holder for inclusion therein. Each Holder as to which any
Shelf Registration Statement is being effected agrees to furnish promptly to the
Company, for so long as the Registration Statement is effective, all information
required to be disclosed in order to make the information previously furnished
to the Company by such Holder not materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) the Company fails to file any of the Registration Statements
required by this Agreement on or before the date specified for such filing in
this Agreement, (ii) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Target Effectiveness Date"), (iii) the Company fails to
Consummate the Exchange Offer within 30 business days of the Target
Effectiveness Date with respect to the Exchange Offer Registration Statement or
(iv) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or usable
in connection with resales of Transfer Restricted Securities during the periods
specified in this Agreement without being succeeded within the time period
provided for herein by a post effective amendment to such Registration Statement
that cures such failure and that is itself declared effective within ten
Business Days of the filing thereof (each such event referred to in clauses (i)
through (iv) above, a "Registration Default"), the dividend rate of the Series A
Preferred Stock or the interest rate borne by the Exchange Debentures, as the
case may be, shall be increased by one-half of one percent per annum for the 90-
day period following such Registration Default, which rate will further increase
by one-half of one percent per annum with respect to each subsequent 90-day
period up to a maximum aggregate increase in rate of one and one-half percent
(1.50%) per annum until cured ("Liquidated Damages"). Following the cure of
all Registration Defaults, the
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accrual of Liquidated Damages will cease and the dividend rate or the interest
rate, as the case may be, will revert to the original rate.
All accrued Liquidated Damages shall be paid to the Global Security Holder
by wire transfer of immediately available funds or by federal funds check and to
Holders of Certificated Securities by mailing checks to their registered
addresses by the Company on each Damages Payment Date. All obligations of the
Company set forth in the preceding paragraph that are outstanding with respect
to any Transfer Restricted Security at the time such security ceases to be a
Transfer Restricted Security shall survive until such time as all such
obligations with respect to such security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection with the Exchange
Offer, the Company shall comply with all applicable provisions of Section 6(c)
below, shall use its best efforts to effect such exchange and to permit the sale
of Broker-Dealer Transfer Restricted Securities being sold in accordance with
the intended method or methods of distribution thereof, and shall comply with
all of the following provisions:
(i) If, following the date hereof there has been published a change
in Commission policy with respect to exchange offers such as the Exchange Offer,
such that in the reasonable opinion of counsel to the Company there is a
substantial question as to whether the Exchange Offer is permitted by applicable
federal law, the Company hereby agrees to seek a no-action letter or other
favorable decision from the Commission allowing the Company to Consummate an
Exchange Offer for such Series A Preferred Stock or Exchange Debentures, as the
case may be. The Company hereby agrees to pursue the issuance of such a decision
to the Commission staff level. In connection with the foregoing, the Company
hereby agrees to take all such other actions as are requested by the Commission
or otherwise required in connection with the issuance of such decision,
including without limitation (A) participating in telephonic conferences with
the Commission, (B) delivering to the Commission staff an analysis prepared by
counsel to the Company setting forth the legal bases, if any, upon which such
counsel has concluded that such an Exchange Offer should be permitted and (C)
diligently pursuing a resolution by the Commission staff of such submission.
Nothing in this Section 6(a)(i) shall prevent the Company from promptly filing a
Registration Statement in accordance with Section 3(a) hereof.
(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Company, prior to the
Consummation of the Exchange Offer, a written representation to the Company
(which may be contained in the letter of transmittal contemplated by the
Exchange Offer Registration Statement) to the effect that (A) it is not an
affiliate of the Company, (B) it is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the New Preferred Stock or New Exchange
Debentures to be issued in the Exchange Offer and (C) it is acquiring the New
Preferred Stock or New Exchange Debentures in its ordinary course of business.
Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such
Holder using the Exchange Offer to
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participate in a distribution of the securities to be acquired in the Exchange
Offer (1) could not under Commission policy as in effect on the date of this
Agreement rely on the position of the Commission enunciated in Morgan Stanley
and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation
(available May 13, 1988), as interpreted in the Commission's letter to Shearman
& Sterling dated July 2, 1993, and similar no-action letters (including, if
applicable, any no-action letter obtained pursuant to clause (i) above), and (2)
must comply with the registration and prospectus delivery requirements of the
Act in connection with a secondary resale transaction and that such a secondary
resale transaction must be covered by an effective registration statement
containing the selling security holder information required by Item 507 or 508,
as applicable, of Regulation S-K if the resales are of New Preferred Stock or
New Exchange Debentures obtained by such Holder in exchange for Series A
Preferred Stock or Exchange Debentures acquired by such Holder directly from the
Company.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company shall provide a supplemental letter to the Commission (A)
stating that the Company is registering the Exchange Offer in reliance on the
position of the Commission enunciated in Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991),
K-III Communications Corporation (available May 14, 1993) and, if applicable,
any no-action letter obtained pursuant to clause (i) above, (B) including a
representation that the Company has not entered into any arrangement or
understanding with any Person to distribute the New Preferred Stock or New
Exchange Debentures to be received in the Exchange Offer and that, prior to
consummation of the Exchange Offer the Company will have received appropriate
representations from participating Holders to allow the Company to state to the
best of the Company's information and belief, that each Holder participating in
the Exchange Offer is not affiliated with the Company, is acquiring the New
Preferred Stock or New Exchange Debentures in its ordinary course of business
and has no arrangement or understanding with any Person to participate in the
distribution of the New Preferred Stock or New Exchange Debentures received in
the Exchange Offer and (C) any other undertaking or representation required by
the Commission as set forth in any no-action letter obtained pursuant to clause
(i) above.
(b) SHELF REGISTRATION STATEMENT. In connection with the Shelf
Registration Statement the Company shall comply with all the provisions of
Section 6(c) below and shall use its best efforts to effect such registration to
permit the sale of the Transfer Restricted Securities being sold in accordance
with the intended method or methods of distribution thereof (as indicated in the
information furnished to the Company pursuant to Section 4(b) hereof), and
pursuant thereto the Company will prepare and file with the Commission a
Registration Statement relating to the registration on any appropriate form
under the Act, which form shall be available for the sale of the Transfer
Restricted Securities in accordance with the intended method or methods of
distribution thereof within the time periods and otherwise in accordance with
the provisions hereof.
(c) GENERAL PROVISIONS. In connection with any Registration Statement and
any related Prospectus required by this Agreement to permit the sale or resale
of Transfer Restricted Securities (including, without limitation, any Exchange
Offer Registration
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Statement and the related Prospectus, to the extent that the same are required
to be available to permit sales of Broker-Dealer Transfer Restricted Securities
by Restricted Broker-Dealers), the Company shall:
(i) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for the
period specified in Section 3 or 4 of this Agreement, as applicable. Upon the
occurrence of any event that would cause any such Registration Statement or the
Prospectus contained therein (A) to contain a material misstatement or omission
or (B) not to be effective and usable for resale of Transfer Restricted
Securities during the period required by this Agreement, the Company shall file
promptly an appropriate amendment to such Registration Statement (1) in the case
of clause (A), correcting any such misstatement or omission, and (2) in the case
of either clause (A) or (B), use its best efforts to cause such amendment to be
declared effective and such Registration Statement and the related Prospectus to
become usable for their intended purpose(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to keep
the Registration Statement effective for the applicable period set forth in
Section 3 or 4 hereof, or such shorter period as will terminate when all
Transfer Restricted Securities covered by such Registration Statement have been
sold; cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Act, and to comply fully with Rules 424 and 430A, as applicable, under the Act
in a timely manner; and comply with the provisions of the Act with respect to
the disposition of all securities covered by such Registration Statement during
the applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration Statement or
supplement to the Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders promptly
and, if requested by such Persons, confirm such advice in writing, (A) when the
Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and, with respect to any Registration Statement or any post-effective
amendment thereto, when the same has become effective, (B) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information relating thereto,
(C) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement under the Act or of the suspension
by any state securities commission of the qualification of the Transfer
Restricted Securities for offering or sale in any jurisdiction, or the
initiation of any proceeding for any of the preceding purposes, (D) of the
existence of any fact or the happening of any event that makes any statement of
a material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes in
the Registration Statement in order to make the statements therein not
misleading, or that requires the making of any additions to or changes in the
Prospectus in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If at any time the
Commission shall issue any
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stop order suspending the effectiveness of the Registration Statement, or any
state securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the Transfer
Restricted Securities under state securities or Blue Sky laws, the Company shall
use its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(iv) make available to each selling Holder named in any Registration
Statement or Prospectus and each of the underwriter(s) in connection with such
sale, if any, before filing with the Commission, copies of any Registration
Statement or any Prospectus included therein or any amendments or supplements to
any such Registration Statement or Prospectus (including all documents
incorporated by reference after the initial filing of such Registration
Statement), which documents will be subject to the review and comment of such
Holders and underwriter(s) in connection with such sale, if any, for a period of
at least five Business Days, and the Company will not file any such Registration
Statement or Prospectus or any amendment or supplement to any such Registration
Statement or Prospectus (including all such documents incorporated by reference)
to which the selling Holders of the Transfer Restricted Securities covered by
such Registration Statement or the underwriter(s) in connection with such sale,
if any, shall reasonably object within five Business Days after the receipt
thereof. A selling Holder or underwriter, if any, shall be deemed to have
reasonably objected to such filing if such Registration Statement, amendment,
Prospectus or supplement, as applicable, as proposed to be filed, contains a
material misstatement or omission or fails to comply with the applicable
requirements of the Act;
(v) promptly upon the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus, make
available copies of such document to the selling Holders and to the
underwriter(s) in connection with such sale, if any, make the Company's
representatives available for discussion of such document and other customary
due diligence matters, and include such information in such document prior to
the filing thereof as such selling Holders or underwriter(s), if any, reasonably
may request;
(vi) make available at reasonable times for inspection by the selling
Holders, any underwriter participating in any disposition pursuant to such
Registration Statement and any attorney or accountant retained by such selling
Holders or any of such underwriter(s), all financial and other records,
pertinent corporate documents and properties of the Company and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such Holder, underwriter, attorney or accountant in connection
with such Registration Statement or any post-effective amendment thereto
subsequent to the filing thereof and prior to its effectiveness; provided that
any person to whom information is provided under this clause (vi) agrees in
writing to maintain the confidentiality of such information to the extent such
information is not in the public domain;
(vii) if requested by any selling Holders or the underwriter(s) in
connection with such sale, if any, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective amendment if
necessary, such information as
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such selling Holders and underwriter(s), if any, may reasonably request to have
included therein, including, without limitation, information relating to the
"Plan of Distribution" of the Transfer Restricted Securities, information with
respect to the principal amount of Transfer Restricted Securities being sold to
such underwriter(s), the purchase price being paid therefor and any other terms
of the offering of the Transfer Restricted Securities to be sold in such
offering; and make all required filings of such Prospectus supplement or post-
effective amendment as soon as practicable after the Company is notified of the
matters to be included in such Prospectus supplement or post-effective
amendment;
(viii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if so
requested by the Holders of a majority in aggregate Liquidation Preference of
Series A Preferred Stock or aggregate principal amount of Exchange Debentures,
as the case may be, covered thereby or the underwriter(s), if any;
(ix) furnish to each selling Holder and each of the underwriter(s) in
connection with such sale, if any, without charge, at least one copy of the
Registration Statement, as first filed with the Commission, and of each
amendment thereto, and make available all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by reference);
(x) deliver to each selling Holder and each of the underwriter(s), if
any, without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such Persons
reasonably may request; the Company hereby consents to the use of the Prospectus
and any amendment or supplement thereto by each of the selling Holders and each
of the underwriter(s), if any, in connection with the offering and the sale of
the Transfer Restricted Securities covered by the Prospectus or any amendment or
supplement thereto;
(xi) enter into such agreements (including, unless not required
pursuant to Section 10 hereof, an underwriting agreement) and make such
representations and warranties and take all such other actions in connection
therewith in order to expedite or facilitate the disposition of the Transfer
Restricted Securities pursuant to any Registration Statement contemplated by
this Agreement as may be reasonably requested by any Holder of Transfer
Restricted Securities or underwriter in connection with any sale or resale
pursuant to any Registration Statement contemplated by this Agreement, and in
such connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an Underwritten Registration, the Company
shall:
(A) furnish to each selling Holder and each underwriter, if any, upon the
effectiveness of the Shelf Registration Statement and to each
Restricted Broker-Dealer upon consummation of the Exchange Offer:
(1) a certificate, dated the date of effectiveness of the Shelf
Registration Statement or the date of Consummation of the
Exchange Offer, as the case may be, signed by (x) the President
or any Vice President and (y) a principal financial or accounting
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<PAGE>
officer of the Company, confirming, as of the date thereof, the
matters set forth in paragraphs (a), (b), (c) and (d) of Section
8 of the Purchase Agreement and such other matters as the Holders
and/or underwriter(s) may reasonably request;
(2) an opinion, dated the date of effectiveness of the Shelf
Registration Statement or the date of Consummation of the
Exchange Offer, as the case may be, of counsel for the Company,
covering (i) due authorization and enforceability of the Series A
Preferred Stock, the New Preferred Stock, the Exchange Debentures
and the New Exchange Debentures, (ii) a statement to the effect
that such counsel has participated in conferences with officers
and other representatives of the Company and representatives of
the independent public accountants for the Company and have
considered the matters required to be stated therein and the
statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of
such statements; and that such counsel advises that, on the basis
of the foregoing (relying as to materiality to a large extent
upon facts provided to such counsel by officers and other
representatives of the Company and without independent check or
verification), no facts came to such counsel's attention that
caused such counsel to believe that the applicable Registration
Statement, at the time such Registration Statement or any post-
effective amendment thereto became effective, and, in the case of
the Exchange Offer Registration Statement, as of the date of
Consummation, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that
the Prospectus contained in such Registration Statement as of its
date and, in the case of the opinion dated the date of
Consummation of the Exchange Offer, as of the date of
Consummation, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading and (iii) such other matters of
the type customarily covered in opinions of counsel for an issuer
in connection with similar securities offerings, as may
reasonably be requested by such parties. Without limiting the
foregoing, such counsel may state further that such counsel
assumes no responsibility for, and has not independently
verified, the accuracy, completeness or fairness of the financial
statements, notes and schedules and other financial, statistical
and accounting data included in any Registration Statement
contemplated by this Agreement or the related Prospectus; and
(3) if the registration is a registration in which securities of the
Company are sold to any underwriter for offering to the public, a
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<PAGE>
customary comfort letter, dated as of the date of effectiveness
of the Shelf Registration Statement or the date of Consummation
of the Exchange Offer, as the case may be, from the Company's
independent accountants, in the customary form and covering
matters of the type customarily covered in comfort letters to
underwriters in connection with primary underwritten offerings,
and affirming the matters set forth in the comfort letters
delivered pursuant to Section 8(h) of the Purchase Agreement,
without exception; (B) set forth in full or incorporate by
reference in the underwriting agreement, if any, in connection
with any sale or resale pursuant to any Shelf Registration
Statement the indemnification provisions and procedures of
Section 8 hereof with respect to all parties to be indemnified
pursuant to said Section; and (C) deliver such other documents
and certificates as may be reasonably requested by such parties
to evidence compliance with clause (A) above and with any
customary conditions contained in the underwriting agreement or
other agreement entered into by the Company pursuant to this
clause (xi), if any.
The above shall be done at each closing under such underwriting or similar
agreement, as and to the extent required thereunder, and if at any time the
representations and warranties of the Company contemplated in (A)(1) above cease
to be true and correct, the Company shall so advise the underwriter(s), if any,
and selling Holders promptly and if requested by such Persons, shall confirm
such advice in writing;
(xii) prior to any public offering of Transfer Restricted Securities,
cooperate with the selling Holders, the underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of the
Transfer Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders or underwriter(s), if any, may request and
do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Transfer Restricted Securities covered
by the applicable Registration Statement; provided, however, that the Company
shall not be required to register or qualify as a foreign corporation where it
is not now so qualified or to take any action that would subject it to the
service of process in suits or to taxation, other than as to matters and
transactions relating to the Registration Statement, in any jurisdiction where
it is not now so subject;
(xiii) issue, upon the request of any Holder of Series A Preferred
Stock or covered by any Shelf Registration Statement contemplated by this
Agreement, New Preferred Stock or New Exchange Debentures, as the case may be,
having an aggregate Liquidation Preference or an aggregate principal amount, as
the case may be, equal to the aggregate Liquidation Preference of Series A
Preferred Stock or the aggregate principal amount of Exchange Debentures, as the
case may be, surrendered to the Company by such Holder in exchange therefor or
being sold by such Holder; such New Preferred Stock or New Exchange Debentures
to be registered in the name of such Holder or in the name of the purchaser(s)
of such New Preferred Stock or New Exchange Debentures, as
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<PAGE>
the case may be; in return, the Series A Preferred Stock or Exchange Debentures,
as the case may be, held by such Holder shall be surrendered to the Company for
cancellation;
(xiv) in connection with any sale of Transfer Restricted Securities
that will result in such securities no longer being Transfer Restricted
Securities, cooperate with the selling Holders and the underwriter(s), if any,
to facilitate the timely preparation and delivery of certificates representing
Transfer Restricted Securities to be sold and not bearing any restrictive
legends; and to register such Transfer Restricted Securities in such
denominations and such names as the Holders or the underwriter(s), if any, may
request at least two Business Days prior to such sale of Transfer Restricted
Securities;
(xv) use its best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the underwriter(s), if any, to
consummate the disposition of such Transfer Restricted Securities, subject to
the proviso contained in clause (xii) above;
(xvi) if any fact or event contemplated by Section 6(c)(iii)(D) above
shall exist or have occurred, prepare a supplement or post-effective amendment
to the Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of Transfer Restricted Securities, the Prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(xvii) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of a Registration Statement covering such
Transfer Restricted Securities and provide the Transfer Agent or the Trustee, as
the case may be, with printed certificates for the Transfer Restricted
Securities which are in a form eligible for deposit with the Depository Trust
Company;
(xviii) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is required
to be retained in accordance with the rules and regulations of the NASD, and use
its best efforts to cause such Registration Statement to become effective and
approved by such governmental agencies or authorities as may be necessary to
enable the Holders selling Transfer Restricted Securities to consummate the
disposition of such Transfer Restricted Securities;
(xix) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to its
security holders with regard to any applicable Registration Statement, as soon
as practicable, a consolidated earnings statement meeting the requirements of
Rule 158 (which need not be audited) covering a twelve-month period beginning
after the effective date of the Registration Statement (as such term is defined
in paragraph (c) of Rule 158 under the Act);
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(xx) in the event such Transfer Restricted Securities are Exchange
Debentures, cause the Indenture to be qualified under the TIA not later than (a)
the date on which the Series A Preferred Stock is exchanged for Exchange
Debentures or (b) the effective date of the first Registration Statement
relating to the Exchange Debentures required by this Agreement, and, in
connection therewith, cooperate with the Trustee and the Holders of Exchange
Debentures to effect such changes to the Indenture as may be required for such
Indenture to be so qualified in accordance with the terms of the TIA; and
execute and use its best efforts to cause the Trustee to execute, all documents
that may be required to effect such changes and all other forms and documents
required to be filed with the Commission to enable such Indenture to be so
qualified in a timely manner;
(xxi) cause all Transfer Restricted Securities covered by the
Registration Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed if requested by the Holders of
a majority in aggregate Liquidation Preference of Series A Preferred Stock or
aggregate principal amount of Exchange Debentures or the managing
underwriter(s), if any;
(xxii) provide promptly to each Holder upon written request each
document filed with the Commission pursuant to the requirements of Section 13 or
Section 15(d) of the Exchange Act; and
(d) RESTRICTIONS ON HOLDERS. Each Holder agrees by acquisition of a
Transfer Restricted Security that, upon receipt of any notice from the Company
of the existence of any fact of the kind described in Section 6(c)(iii)(D)
hereof, such Holder will forthwith discontinue disposition of Transfer
Restricted Securities pursuant to the applicable Registration Statement until
such Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(c)(xvi) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings that are incorporated
by reference in the Prospectus. If so directed by the Company, each Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Transfer Restricted Securities that was current at the time of
receipt of such notice. In the event the Company shall give any such notice, the
time period regarding the effectiveness of such Registration Statement set forth
in Section 3 or 4 hereof, as applicable, shall be extended by the number of days
during the period from and including the date of the giving of such notice
pursuant to Section 6(c)(iii)(D) hereof to and including the date when each
selling Holder covered by such Registration Statement shall have received the
copies of the supplemented or amended Prospectus contemplated by Section
6(c)(xvi) hereof or shall have received the Advice.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or compliance
with this Agreement will be borne by the Company, regardless of whether a
Registration Statement becomes effective, including without limitation: (i) all
registration and filing fees and expenses (including filings made with the NASD
(including, if applicable, the
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fees and expenses (excluding underwriting discounts or commissions) of any
"qualified independent underwriter" and its counsel, as may be required by the
rules and regulations of the NASD)); (ii) all fees and expenses of compliance
with federal securities and state Blue Sky or securities laws; (iii) all
expenses of printing (including printing certificates for the New Preferred
Stock or New Exchange Debentures and printing of Prospectuses), messenger and
delivery services and telephone; (iv) all fees and disbursements of counsel for
the Company and, in accordance with Section 7(b) below, the Holders of Transfer
Restricted Securities; (v) all application and filing fees in connection with
listing the New Preferred Stock or New Exchange Debentures on a national
exchange or automated quotation system if required hereunder; and (vi) all fees
and disbursements of independent certified public accountants of the Company
(including the expenses of any special audit and comfort letters required by or
incident to such performance).
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Company.
(b) In connection with any Registration Statement required by this
Agreement, the Company will reimburse the Holders of Transfer Restricted
Securities being tendered in the Exchange Offer and/or resold pursuant to the
"Plan of Distribution" contained in the Exchange Offer Registration Statement or
registered pursuant to the Shelf Registration Statement, as applicable, for the
reasonable fees and disbursements of not more than one counsel chosen by the
Holders of a majority in Liquidation Preference or principal amount of the
Transfer Restricted Securities for whose benefit such Registration Statement is
being prepared.
SECTION 8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless (i) each Holder,
(ii) each person, if any, who controls a Holder within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act and (iii) the respective
officers, directors, partners, employees, representatives and agents of any
Holder or any controlling person to the fullest extent lawful, from and against
any and all losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
investigation or litigation, commenced or threatened, or any claim whatsoever,
and any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Company
will not be liable in any such case to the extent, but only to the extent, that
(i) any such loss, liability,
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claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of such Holder expressly for use therein and (ii)
the foregoing indemnity with respect to any untrue statement contained in or
omitted from a Registration Statement or the Prospectus shall not inure to the
benefit of any Holder (or any person controlling such Holder), from whom the
person asserting any such loss, liability, claim, damage or expense purchased
any of the Series A Preferred Stock, New Preferred Stock, Exchange Debentures or
New Exchange Debentures, as the case may be, which are the subject thereof if it
is finally judicially determined that such loss, liability, claim, damage or
expense resulted solely from the fact that the Holder sold Series A Preferred
Stock, New Preferred Stock, Exchange Debentures or New Exchange Debentures, as
the case may be, to a person to whom there was not sent or given, at or prior to
the written confirmation of such sale, a copy of the Registration Statement and
the Prospectus, as amended or supplemented, and (x) the Company shall have
previously and timely furnished sufficient copies of the Registration Statement
or Prospectus, as so amended or Supplemented, to such Holder in accordance with
this Agreement and (y) the Registration Statement or Prospectus, as so amended
or supplemented, would have corrected such untrue statement or omission of a
material fact. This indemnity agreement will be in addition to any liability
which the Company may otherwise have, including, under this Agreement.
(b) Each Holder, severally and not jointly, agrees to indemnify and hold
harmless the Company and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
investigation or litigation, commenced or threatened, or any claim whatsoever
and any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in each case to the extent, but only
to the extent, that any such loss, liability, claim, damage or expense arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of such Holder
expressly for use therein. This indemnity will be in addition to any liability
which a Holder may otherwise have, including under this Agreement. In no event,
however, shall the liability of any selling Holder hereunder be greater in
amount than the dollar amount of the proceeds received by such Holder upon its
sale of the Series A Preferred Stock, New Preferred Stock, Exchange Debenture or
New Exchange Debenture giving rise to such indemnification obligation.
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(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 8 except to the extent that it has been prejudiced
in any material respect by such failure or from any liability which it may
otherwise have). In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by the indemnifying parties in connection with the defense of such
action, (ii) the indemnifying parties shall not have employed counsel to take
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying party or parties shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of counsel
shall be borne by the indemnifying parties; provided, however, that the
indemnifying party under subsection (a) or (b) above, shall only be liable for
the legal expenses of one counsel (in addition to any local counsel) for all
indemnified parties in each jurisdiction in which any claim or action is
brought. Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or action
effected without its prior written consent; provided, however, that such consent
was not unreasonably withheld.
(d) In order to provide for contribution in circumstances in which the
indemnification provided for in this Section 8 is for any reason held to be
unavailable from the Company or is insufficient to hold harmless a party
indemnified thereunder, the Company and each Holder shall contribute to the
aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company, any contribution received by the Company from persons,
other than the Holders, who may also be liable for contribution, including
persons who control the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act) to which the Company and any Holder may be
subject, in such proportion as is appropriate to reflect the relative benefits
received by the Company from the offering of Series A Preferred Stock, New
Preferred Stock, Exchange Debentures or New Exchange Debentures, as the case may
be, and any such Holder from its sale of Series A
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Preferred Stock, New Preferred Stock, Exchange Debentures or New Exchange
Debentures, as the case may be, or, if such allocation is not permitted by
applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in this Section 8, in
such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the Holders in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and any
Holder shall be deemed to be in the same proportion as (x) the total proceeds
from the offering (net of discounts but before deducting expenses) of the Series
A Preferred Stock, New Preferred Stock, Exchange Debentures or New Exchange
Debentures, as the case may be, received by the Company and (y) the total
proceeds received by such Holder upon its sale of Series A Preferred Stock, New
Preferred Stock, Exchange Debentures or New Exchange Debentures, as the case may
be, which would otherwise give rise to the indemnification obligation,
respectively. The relative fault of the Company and of the Holders shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Holders
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
each Holder agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by pro rata allocation or by any
other method of allocation which does not take into account the equitable
considerations referred to above. Notwithstanding the provisions of this Section
8, (i) no Holder shall be required to contribute, in the aggregate, any amount
in excess of the amount by which the total received by such Holder with respect
to the sale of its Series A Preferred Stock, New Preferred Stock, Exchange
Debentures or New Exchange Debentures, as the case may be, exceeds the sum of
(A) the amount paid by such Holder for such Series A Preferred Stock, New
Preferred Stock, Exchange Debentures or New Exchange Debentures, as the case may
be, plus (B) the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, (A) each person, if any, who
controls a Holder within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act and (B) the respective officers, directors, partners,
employees, representatives and agents of a Holder or any controlling person
shall have the same rights to contribution as such Holder, and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act shall have the same rights to contribution as
the Company, subject in each case to clauses (i) and (ii) of this Section 8(d).
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 8, notify such party or parties from whom contribution may be
sought, but the failure to so notify such party or parties shall not relieve the
party or parties from whom contribution may be sought from any obligation it or
they may have under this Section 8 or otherwise. No party shall be
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liable for contribution with respect to any action or claim settled without its
prior written consent; provided, however, that such written consent was not
unreasonably withheld.
SECTION 9. RULE 144A
The Company hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding, to make available, upon request of any
Holder of Transfer Restricted Securities, to any Holder or beneficial owner of
Transfer Restricted Securities in connection with any sale thereof and any
prospective purchaser of such Transfer Restricted Securities designated by such
Holder or beneficial owner, the information required by Rule 144A(d)(4) under
the Act in order to permit resales of such Transfer Restricted Securities
pursuant to Rule 144A.
SECTION 10. UNDERWRITTEN REGISTRATIONS
The Holders of Transfer Restricted Securities may elect to sell their
Transfer Restricted Securities pursuant to one or more Underwritten
Registrations; provided, however, that in no event shall any Holder commence any
such Underwritten Registration if a period of less than 180 days has elapsed
since the consummation of the most recent Underwritten Registration hereunder;
and provided further that in no event shall the Holders effect more than three
such Underwritten Registrations hereunder. No Holder may participate in any
Underwritten Registration hereunder unless such Holder (a) agrees to sell such
Holder's Transfer Restricted Securities on the basis provided in customary
underwriting arrangements entered into in connection therewith and (b) completes
and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents required under the
terms of such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
In any Underwritten Offering, the investment banker or investment bankers
and manager or managers that will administer the offering will be selected by
the Holders of a majority in aggregate Liquidation Preference or aggregate
principal amount of the Transfer Restricted Securities included in such
offering; provided, that such investment bankers and managers must be reasonably
satisfactory to the Company. Such investment bankers and managers are referred
to herein as the "underwriters."
SECTION 12. MISCELLANEOUS
(a) REMEDIES. Each Holder, in addition to being entitled to exercise all
rights provided herein, in the Certificate of Designation, the Indenture, the
Purchase Agreement or granted by law, including recovery of liquidated or other
damages, will be entitled to specific performance of its rights under this
Agreement. The Company agrees that monetary damages (including the Liquidated
Damages contemplated hereby) would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Agreement and
hereby agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate.
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(b) NO INCONSISTENT AGREEMENTS. The Company will not on or after the date
of this Agreement enter into any agreement with respect to its securities that
conflicts with the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's securities under any agreement in
effect on the date hereof, except where a waiver with respect thereto has been
obtained prior to the date of effectiveness of any registration statement
required under this Agreement.
(c) ADJUSTMENTS AFFECTING THE SERIES A PREFERRED STOCK OR EXCHANGE
DEBENTURES. The Company will not take any action, or permit any change to occur,
with respect to the Series A Preferred Stock or Exchange Debentures that would
materially adversely affect the ability of the Holders to Consummate any
Exchange Offer.
(d) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding Liquidation
Preference or principal amount of Transfer Restricted Securities.
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof that relates exclusively to the rights of Holders whose
securities are being tendered pursuant to the Exchange Offer and that does not
affect directly or indirectly the rights of other Holders whose securities are
not being tendered pursuant to such Exchange Offer may be given by the Holders
of a majority of the outstanding Liquidation Preference or principal amount of
Transfer Restricted Securities that are subject to such Exchange Offer.
(e) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:(i) if to a Holder, at the address set
forth on the records of the Transfer Agent or the Trustee, as the case may be,
with a copy to the Transfer Agent or the Trustee, as the case may be; and (ii)
if to the Company:
Concentric Network Corporation
10590 North Tantau Avenue
Cupertino, California 95014
Telecopier No.: (408) 342-2876
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Telecopier No.: (650) 493-6811
Attn: David J. Segre, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being
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deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt acknowledged, if telecopied; and on the next business day,
if timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Transfer Agent or
the Trustee, as the case may be, at the address specified in the Certificate of
Designation or the Indenture.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities directly from such Holder.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW
RULES THEREOF.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) ENTIRE AGREEMENT. This Agreement together with the other Operative
Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CONCENTRIC NETWORK CORPORATION
By: __________________________________
Name: Henry R. Nothhaft
Title: President, Chief Executive Officer
and Director
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
UBS SECURITIES LLC
CIBC OPPENHEIMER
LIBRA INVESTMENTS, INC.
By: BEAR, STEARNS & CO. INC., on behalf of the Initial
Purchasers
By: __________________________________
Name:
Title:
24
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EXHIBIT 10.56
CONCENTRIC NETWORK CORPORATION, AS ISSUER,
and
___________________________, as Trustee
-----------
INDENTURE
Dated as of _________________
-----------
$___________
13 1/2% SUBORDINATED DEBENTURES DUE 2010
<PAGE>
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of _________________
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- --------------- ---------
<S> <C>
(S) 310 (a)(1) 609
(a)(2) 609
(b) 607, 610
(S) 311 (a) 613
(S) 312 (a) 701
(c) 702
(S) 313 (a) 703
(c) 703, 704
(S) 314 (a) 704
(a)(4) 1018
(c)(1) 103
(c)(2) 103
(e) 103
(S) 315 (a) 601(b)
(b) 602
(c) 601(a)
(d) 601(c), 603
(e) 514
(S) 316 (a)(last sentence) 101 ("Outstanding")
(a)(1)(A) 502, 512
(a)(1)(B) 513
(b) 508
(c) 105
(S) 317 (a)(1) 503
(a)(2) 504
(b) 1003
(S) 318 (a) 108
- ------------------------
</TABLE>
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be a part of this Indenture.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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RECITALS OF THE COMPANY 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1
Section 101. Definitions 1
Section 102. Other Definitions 22
Section 103. Compliance Certificates and Opinions 23
Section 104. Form of Documents Delivered to Trustee 24
Section 105. Acts of Holders 25
Section 106. Notices, etc., to the Trustee, the Company and any Guarantor 26
Section 107. Notice to Holders; Waiver 27
Section 108. Conflict with Trust Indenture Act 27
Section 109. Effect of Headings and Table of Contents 27
Section 110. Successors and Assigns 27
Section 111. Separability Clause 28
Section 112. Benefits of Indenture 28
Section 113. Governing Law 28
Section 114. Legal Holidays 28
Section 115. Independence of Covenants 28
Section 116. Schedules and Exhibits 28
Section 117. Counterparts 29
ARTICLE TWO
SECURITY FORMS 29
Section 201. Forms Generally 29
Section 202. Form of Face of Security 30
ARTICLE THREE
THE SECURITIES 52
Section 301. Title and Terms 52
Section 302. Denominations 52
Section 303. Execution, Authentication, Delivery and Dating 53
Section 304. Temporary Securities 54
Section 305. Registration, Registration of Transfer and Exchange 54
Section 306. Book Entry Provisions for Global Securities 56
Section 307. Special Transfer and Exchange Provisions 57
Section 308. Mutilated, Destroyed, Lost and Stolen Securities 59
Section 309. Payment of Interest; Interest Rights Preserved 59
Section 310. CUSIP Numbers 61
Section 311. Persons Deemed Owners 61
Section 312. Cancellation 61
Section 313. Computation of Interest 61
ARTICLE FOUR
DEFEASANCE AND COVENANT DEFEASANCE 61
Section 401. Company's Option to Effect Defeasance or Covenant Defeasance 62
Section 402. Defeasance and Discharge 62
Section 403. Covenant Defeasance 62
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Section 404. Conditions to Defeasance or Covenant Defeasance 63
Section 405. Deposited Money and U S Government Obligations to Be Held in Trust;
Other Miscellaneous Provisions 65
Section 406. Reinstatement 65
ARTICLE FIVE
REMEDIES 66
Section 501. Events of Default 66
Section 502. Acceleration of Maturity; Rescission and Annulment 68
Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee 69
Section 504. Trustee May File Proofs of Claim 70
Section 505. Trustee May Enforce Claims without Possession of Securities 71
Section 506. Application of Money Collected 71
Section 507. Limitation on Suits 71
Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest 72
Section 509. Restoration of Rights and Remedies 72
Section 510. Rights and Remedies Cumulative 72
Section 511. Delay or Omission Not Waiver 73
Section 512. Control by Holders 73
Section 513. Waiver of Past Defaults 73
Section 514. Undertaking for Costs 74
Section 515. Waiver of Stay, Extension or Usury Laws 74
Section 516. Remedies Subject to Applicable Law 74
ARTICLE SIX
THE TRUSTEE 75
Section 601. Duties of Trustee 75
Section 602. Notice of Defaults 76
Section 603. Certain Rights of Trustee 76
Section 604. Trustee Not Responsible for Recitals, Dispositions of Securities or
Application of Proceeds Thereof 77
Section 605. Trustee and Agents May Hold Securities; Collections; etc 77
Section 606. Money Held in Trust 78
Section 607. Compensation and Indemnification of Trustee and Its Prior Claim 78
Section 608. Conflicting Interests 79
Section 609. Trustee Eligibility 79
Section 610. Resignation and Removal; Appointment of Successor Trustee 79
Section 611. Acceptance of Appointment by Successor 81
Section 612. Merger, Conversion, Consolidation or Succession to Business 81
Section 613. Preferential Collection of Claims Against Company 82
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY 82
Section 701. Company to Furnish Trustee Names and Addresses of Holders 82
Section 702. Disclosure of Names and Addresses of Holders 82
Section 703. Reports by Trustee 83
Section 704. Reports by Company 83
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS 84
Section 801. Company and Guarantors May Consolidate, etc., Only on Certain Terms 84
</TABLE>
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Terms 84
Section 802. Successor Substituted 85
ARTICLE NINE
SUPPLEMENTAL INDENTURES 85
Section 901. Supplemental Indentures and Agreements without Consent of Holders 85
Section 902. Supplemental Indentures and Agreements with Consent of Holders 86
Section 903. Execution of Supplemental Indentures and Agreements 88
Section 904. Effect of Supplemental Indentures 88
Section 905. Conformity with Trust Indenture Act 88
Section 906. Reference in Securities to Supplemental Indentures 88
Section 907. Notice of Supplemental Indentures 88
ARTICLE TEN
COVENANTS 89
Section 1001. Payment of Principal, Premium and Interest 89
Section 1002. Maintenance of Office or Agency 89
Section 1003. Money for Security Payments to Be Held in Trust 89
Section 1004. Corporate Existence 91
Section 1005. Payment of Taxes and Other Claims 91
Section 1006. Maintenance of Properties 91
Section 1007. Maintenance of Insurance 92
Section 1008. Limitation on Indebtedness 92
Section 1009. Limitation on Restricted Payments 94
Section 1010. Limitation on Transactions with Affiliates 97
Section 1011. Limitation on Liens 98
Section 1012. Limitation on Sale of Assets 98
Section 1013. Limitation on Issuances of Guarantees of Indebtedness 100
Section 1014. Purchase of Securities upon a Change of Control 100
Section 1015. Limitation on Sale and Leaseback Transactions 104
Section 1016. Limitation on Restricted Subsidiary Capital Stock 104
Section 1017. Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries 105
Section 1018. Limitations on Unrestricted Restricted Subsidiaries 105
Section 1019. Provision of Financial Statements 106
Section 1020. Statement by Officers as to Default 106
Section 1021. Waiver of Certain Covenants 107
Section 1022. Limitation on Business 107
ARTICLE ELEVEN
REDEMPTION OF SECURITIES 107
Section 1101. Rights of Redemption 107
Section 1102. Applicability of Article 108
Section 1103. Election to Redeem; Notice to Trustee 108
Section 1104. Selection by Trustee of Securities to Be Redeemed 108
Section 1105. Notice of Redemption 108
Section 1106. Deposit of Redemption Price 109
Section 1107. Securities Payable on Redemption Date 110
Section 1108. Securities Redeemed or Purchased in Part 110
ARTICLE TWELVE
SATISFACTION AND DISCHARGE 110
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Section 1201. Satisfaction and Discharge of Indenture 110
Section 1202. Application of Trust Money 111
ARTICLE THIRTEEN
SUBORDINATION 112
Section 1301. Agreement to Subordinate 112
Section 1302. Liquidation; Dissolution; Bankruptcy 112
Section 1303. Default on Designated Senior Debt 112
Section 1304. Acceleration of Securities 113
Section 1305. When Distribution Must Be Paid Over 113
Section 1306. Notice By Company 113
Section 1307. Subrogation 114
Section 1308. Relative Rights 114
Section 1309. Subordination May Not Be Impaired By Company 114
Section 1310. Distribution or Notice to Representative 114
Section 1311. Rights of Trustee and Paying Agent 115
Section 1312. Authorization to Effect Subordination 115
Section 1313. Amendments 115
</TABLE>
TESTIMONIUM
SIGNATURES AND SEALS
ACKNOWLEDGMENTS
EXHIBIT A Restricted Security Certificate
EXHIBIT B Unrestricted Security Certificate
APPENDIX I Form of Transferee Certificate for Series A Securities
APPENDIX II Form of Transferee Certificate for Series B Securities
6
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INDENTURE, dated as of December 18, 1997, between CONCENTRIC NETWORK
CORPORATION, a Delaware corporation (the "Company"), and _____________________,
a ____________________________, as trustee (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of 13 1/2%
Subordinated Debentures due 2010, Series A (the "Series A Securities"), to be
issued in exchange for the Company's 13 1/2% Series A Senior Redeemable
Exchangeable Preferred Stock due 2010 (the "Series A Exchange Preferred Stock")
issued and outstanding, if any, as of the date hereof, and an issue of 13 1/2%
Subordinated Debentures due 2010, Series B (the "Series B Securities" and,
together with the Series A Securities, the "Securities") to be issued in
exchange for the Company's 13 1/2% Series B Senior Redeemable Exchangeable
Preferred Stock due 2010 (the "Series B Exchange Preferred Stock" and, together
with the Series A Exchange Preferred Stock, the "Exchange Preferred Stock")
issued and outstanding, if any, as of the date hereof or, if no Series B
Exchange Preferred Stock is issued and outstanding as of the date hereof, to be
issuable in exchange for the Series A Securities pursuant to the Registration
Rights Agreement, of substantially the tenor and amount hereinafter set forth,
and to provide therefor the Company has duly authorized the execution and
delivery of this Indenture and the Securities;
This Indenture is subject to, and shall be governed by, the provisions
of the Trust Indenture Act that are required to be part of and to govern
indentures qualified under the Trust Indenture Act;
All acts and things necessary have been done to make the Securities,
when duly issued and executed by the Company and authenticated and delivered
hereunder, the valid obligations of the Company and this Indenture a valid
agreement of the Company and each of the Guarantors in accordance with the terms
of this Indenture;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101. Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
7
<PAGE>
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(e) all references to $, US$, dollars or United States dollars shall
refer to the lawful currency of the United States of America; and
(f) all references herein to particular Sections or Articles refer to
this Indenture unless otherwise so indicated.
Certain terms used principally in Article Four are defined in Article
Four.
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at
the time such Person becomes a Restricted Subsidiary or (ii) assumed in
connection with the acquisition of assets from such Person, in each case, other
than Indebtedness incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary or such acquisition, as the case may be,
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Person becomes a Restricted Subsidiary or such asset
acquisition shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any
other Person which merges with or into or becomes a Restricted Subsidiary of
such specified Person.
"Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary to any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall become a Restricted
Subsidiary or shall be consolidated, merged with or into the Company or any
Restricted Subsidiary or (ii) any acquisition by the Company or any Restricted
Subsidiary of the assets of any Person which constitute substantially all of an
operating unit or line of business of such Person or which is otherwise outside
of the ordinary course of business of the Company or such Restricted Subsidiary.
"Additional Interest" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Security to the extent
applicable to such transaction and as in effect at the time of such transfer or
transaction.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of: (i) any
Capital Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or its
Restricted Subsidiaries; or (iii) any other properties or assets of the Company
or any Restricted Subsidiary other than in the ordinary course of business. For
the purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties and assets (A) that is governed by
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the provisions described under "Consolidation, Merger, Sale of Assets," (B) that
is by the Company to any Restricted Subsidiary or by any Restricted Subsidiary
to the Company or any other Restricted Subsidiary in accordance with the terms
of this Indenture, (C) that is of obsolete equipment in the ordinary course of
business, (D) the Fair Market Value of which in the aggregate does not exceed
$200,000 in any transaction or series of related transactions, (E) that is made
in accordance with the provisions described in Section 1009, (F) which
constitutes the granting of any Permitted Lien and (G) in which assets will be
transferred in exchange for one or more like-kind assets; provided that if the
Fair Market Value of the assets to be transferred by the Company or such
Restricted Subsidiary under this clause G, plus the Fair Market Value of any
other consideration paid or credited by the Company or such Restricted
Subsidiary exceeds $1 million, such transaction shall require approval of the
Board of Directors of the Company.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (b) the amount of each such principal
payment; by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of
1978, as amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Board of Directors" means the board of directors of the Company or
any Guarantor, as the case may be, or any duly authorized committee of such
board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company or any Guarantor, as the case
may be, to have been duly adopted by the Board of Directors and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Book-Entry Security" means any Global Securities bearing the legend
specified in Section 202 evidencing all or part of a series of Securities,
authenticated and delivered to the Depositary for such series or its nominee,
and registered in the name of such Depositary or nominee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions or trust companies in
The City of New York or the city in which the Corporate Trust Office of the
Trustee is located are authorized or obligated by law, regulation or executive
order to close.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" means (i) with respect to any Person that is a
corporation, 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 such Person and (ii) with
respect to any Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing
not more than one year after the date of acquisition, issued by the United
States of America, or an instrumentality or agency thereof, and guaranteed fully
as to principal, premium, if any, and interest by the United States of America,
(ii) any certificate of deposit, maturing not more than one year after the date
of acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital and
surplus and undivided profits of not less than $500 million, whose short term
debt has a
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rating, at the time as of which any investment therein is made, of "P-1" (or
higher) according to Moody's or any successor rating agency or "A-1" (or higher)
according to S&P or any successor rating agency, (iii) commercial paper,
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Restricted Subsidiary of the Company)
organized and existing under the laws of the United States of America with a
rating, at the time as of which any investment therein is made, of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P and (iv) any
money market deposit accounts issued or offered by a domestic commercial bank
having capital and surplus in excess of $500 million; provided that the short
term debt of such commercial bank has a rating, at the time of Investment, of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the Company; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election to such
board or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved), cease for any reason to constitute a
majority of such Board of Directors then in office; (iii) the Company
consolidates with or merges with or into any Person or conveys, transfers or
leases all or substantially all of its assets to any Person, or any corporation
consolidates with or merges into or with the Company in any such event pursuant
to a transaction in which the outstanding Voting Stock of the Company is changed
into or exchanged for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the Company is not changed or
exchanged at all (except to the extent necessary to reflect a change in the
jurisdiction of incorporation of the Company or where no "person" or "group"
owns, immediately after such transaction, directly or indirectly, more than 50%
of the total outstanding Voting Stock of the surviving corporation); or (iv) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under Article Eight.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or if at any time
after the date of this Indenture such Commission is not existing and performing
the duties now assigned to it under the Trust Indenture Act then the body
performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Common Stock" means the common stock, par value $0.001 per share, of
the Company.
"Company" means Concentric Network Corporation, a corporation
incorporated under the laws of Delaware, until a successor Person shall have
become such pursuant to the applicable provisions of this Indenture, and
thereafter "Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by any one of its Chairman of the Board, its
President, its Chief Executive Officer, its Chief Financial Officer or a Vice
President (regardless of Vice Presidential designation), and by any one of
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its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary,
and delivered to the Trustee.
"Consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period,
the provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without
duplication, for any period, the sum of (a) the interest expense of such Person
and its subsidiaries for such period, on a Consolidated basis, including,
without limitation, (i) amortization of debt discount, (ii) the net costs
associated with Interest Rate Agreements, Currency Hedging Agreements and
Commodity Price Protection Agreements (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such Person
and its subsidiaries plus (c) the interest expense actually paid by such Person
under any Guaranteed Debt of such Person and any Subsidiary to the extent not
included under clause (a)(iv) above, plus (d) the aggregate amount for such
period of cash or non-cash dividends on any Disqualified Stock or Preferred
Stock of the Company and its Restricted Subsidiaries, in each case as determined
on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net
income of the Company and any Restricted Subsidiary for such period determined
on a consolidated basis in accordance with GAAP, adjusted, to the extent
included in calculating such net income, by excluding, without duplication, (a)
other than for purposes of calculating the Basket, all extraordinary gains or
losses for such period, (b) other than for purposes of calculating the Basket,
all gains or losses from the sales or other dispositions of assets out of the
ordinary course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period: (c) that portion of such net
income derived from or in respect of investments in Persons other than
Restricted Subsidiaries, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject, in the case of any Restricted
Subsidiary, to the provisions of clause (f) of this definition); (d) the portion
of such net income (or loss) allocable to minority interests in any Person
(other than a Restricted Subsidiary) for such period, except to the extent the
Company's allocation portion of such Person's net income for such period is
actually received in cash by the Company or any Restricted Subsidiary (subject,
in the case of any Restricted Subsidiary, to the provisions of clause (f) of
this definition); (e) the net income (or loss) or any other Person combined with
the Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination; and (f) the net
income of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is not at the time (regardless of any waiver) permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to the
extent deducted in calculating such Consolidated Net Income, by (a) Consolidated
Income Tax Expense for such period; (b) Consolidated Interest Expense for such
period; and (c) depreciation, amortization and any other non-cash items for such
period (other than any non-cash item which requires the accrual of, or a reserve
for, cash charges for any future period) of the Company and any Restricted
Subsidiary, including, without limitation, amortization of capitalized debt
issuance costs for such period, all of the foregoing determined on a
consolidated basis in accordance with GAAP minus non-cash items to the extent
they increase Consolidated Net Income (including the partial or entire reversal
of reserves taken in prior periods) for such period.
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"Corporate Trust Office" means the office of the Trustee or an
affiliate or agent thereof at which at any particular time the corporate trust
business for the purposes of this Indenture shall be principally administered,
which office at the date of execution of this Indenture is located at 101
California Street, Suite 2725, San Francisco, CA 94111.
"Credit Agreement" means, with respect to any Person, any agreement
entered into by and among such Person and one or more commercial banks or
financial institutions, providing for senior term or revolving credit borrowings
of a type similar to credit agreements typically entered into by commercial
banks and financial institutions, including all related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and related agreements may be amended,
extended, refinanced, renewed, restated, replaced or refunded from time to time.
"Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on the original issue date of the Securities and
ending on the last day of the most recent fiscal quarter immediately preceding
the date of determination for which consolidated financial information of the
Company is available or, if such cumulative Consolidated Operating Cash Flow for
such period is negative, the negative amount by which cumulative Consolidated
Operating Cash Flow is less than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar agreements
or arrangements designed to protect against the fluctuations in currency values.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a)
the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow for
the latest two fiscal quarters for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (i) any Person that
is a Restricted Subsidiary on the Determination Date (or would become a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed to have been a Restricted Subsidiary at all times during
such Measurement Period, (ii) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (iii) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (through an Acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by of an Asset Sale or
the termination or discontinuance of activities constituting such operating
business) any operating business during such Measurement Period or after the end
of such period and on or prior to such Determination Date, such calculation will
be made on a pro forma basis in accordance with GAAP as if, in the case of an
Acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated prior to the first day of
such Measurement Period (it being understood that in calculating Consolidated
Operating Cash Flow the exclusions set forth in clauses (a) through (f) of the
definition of Consolidated Net Income shall apply to an Acquired Person as if it
were a Restricted Subsidiary).
"Default" means any event which is, or after notice or passage of any
time or both would be, an Event of Default.
"Designated Senior Debt" means (i) a Credit Agreement, (ii) the
Existing Senior Notes and (iii) any other Senior Debt permitted under the
Indenture the principal amount of which is $20 million or
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more (when aggregated with all other Debt incurred with the same issuance or
transaction) and that has been designated by the Company as "Designated Senior
Debt."
"Depositary" means, with respect to the Securities issued in the form
of one or more Book-Entry Securities, The Depositary Trust Company ("DTC"), its
nominees and successors, or another Person designated as Depositary by the
Company, which must be a clearing agency registered under the Exchange Act.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital
Stock (excluding the Exchange Preferred Stock) which, by its terms (or by the
terms of any security into which it is convertible at the option of the holder
thereof or for which it is exchangeable at the option of the holder thereof), or
upon the happening of any event, matures or becomes mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or becomes exchangeable for
Indebtedness at the option of the holder thereof, or becomes redeemable at the
option of the holder thereof, in whole or in part, on or prior to the Stated
Maturity of the Securities or the date this Indenture is discharged pursuant its
terms; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the earlier of the Stated Maturity of the Securities or the date this Indenture
is discharged pursuant its terms; provided, further, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the earlier of the Stated Maturity of the Securities or the
date this Indenture is discharged pursuant to its terms shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in Section 1012 and Section 1014 and
such Capital Stock specifically provides that such person will not repurchase or
redeem any such stock pursuant to such provision prior to the Issuer's
repurchase of such Securities as are required to be repurchased pursuant to
Section 1012 and Section 1014.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Offer" means the exchange offer by the Company of Series B
Securities for Series A Securities to be effected pursuant to Section 3 of the
Registration Rights Agreement to the extent that the Series B Exchange Preferred
Stock shall not have been exchanged for the Series A Exchange Preferred Stock
pursuant to the Registration Rights Agreement prior to the date hereof.
"Exchange Offer Registration Statement" means the registration
statement under the Securities Act contemplated by Section 3(a) of the
Registration Rights Agreement.
"Exchange Preferred Stock" means the Company's 13 1/2% Senior
Redeemable Exchangeable Preferred Stock due 2010.
"Exchange Preferred Stock Issue Date" means the date on which shares
of the Exchange Preferred Stock are first issued.
"Existing Senior Notes" means the Company's 12 3/4% Senior Notes due
2007.
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"Existing Senior Notes Indenture" means the Indenture governing the
Company's 12 3/4% Senior Notes due 2007, as may be amended from time to time.
"Existing Senior Notes Maturity Date" means the earlier of (i) the
"Stated Maturity" of the principal of the Existing Senior Notes as such term is
used for the purpose of determining whether "Capital Stock" constitutes
"Indebtedness" (as such terms are defined in the Existing Senior Notes
Indenture) under the Existing Senior Notes Indenture or (ii) December 15, 2007.
"Fair Market Value" means, with respect to any asset or property, the
sale value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market Value
shall be determined by the Board of Directors of the Company acting in good
faith and shall be evidenced by a Board Resolution.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date hereof.
"Global Securities" means the Rule 144A Global Securities and the
Series B Global Securities to be issued as Book-Entry Securities issued to the
Depositary in accordance with Section 306.
"Guarantee" means the guarantee by any Guarantor of the Company's
Indenture Obligations.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a creditor
against loss; provided that the term "guarantee" shall not include endorsements
for collection or deposit, in either case in the ordinary course of business.
"Guarantor" means any Restricted Subsidiary which is a guarantor of
the Securities, including any Person that is required after the date hereof to
execute a guarantee of the Securities pursuant to Section 1013 until a successor
replaces such party pursuant to the applicable provisions of this Indenture and,
thereafter, shall mean such successor.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged or consolidated with or
into the Company or any Restricted Subsidiary shall be deemed to be Incurred at
such time.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii) all
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obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all obligations under Interest Rate Agreements, Currency
Hedging Agreements or Commodity Price Protection Agreements of such Person, (v)
all Capital Lease Obligations of such Person, (vi) all Indebtedness referred to
in clauses (i) through (v) above of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Disqualified Stock issued by such Person valued at the greater of its voluntary
or involuntary maximum fixed repurchase price plus accumulated and unpaid
dividends, and (viii) any amendment, supplement, modification, deferral,
renewal, extension, refunding or refinancing of any liability of the types
referred to in clauses (i) through (vii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to this
Indenture, and if such price is based upon, or measured by, the Fair Market
Value of such Disqualified Stock, such Fair Market Value to be determined in
good faith by the Board of Directors of the issuer of such Disqualified Stock.
In no event shall "Indebtedness" include any trade payable or other current
liabilities arising in the ordinary course of business. The amount of any item
of Indebtedness shall be the amount of such Indebtedness properly classified as
a liability on a balance sheet prepared in accordance with GAAP.
"Indenture" means this instrument as originally executed (including
all exhibits and schedules thereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company and any
other obligor under this Indenture or under the Securities including any
Guarantor, to pay principal of, premium, if any, and interest when due and
payable, and all other amounts due or to become due under or in connection with
this Indenture, the Securities and the performance of all other obligations to
the Trustee and the holders under this Indenture and the Securities, according
to the respective terms thereof.
"Initial Purchasers" means Bear, Stearns & Co. Inc., First Union
Capital Markets, UBS Securities LLC, LIBC Oppenheimer and Libra Investments,
Inc.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Interest Rate Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
interest rate protection agreements (including, without limitation, interest
rate swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or
indirectly, any advance, loan (including guarantees), or other extension of
credit 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 or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities issued or owned by
any other Person and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP.
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"Issue Date" means the date on which the Preferred Stock first issued.
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease properly
classified as an operating lease under GAAP and intellectual property licensing
arrangements.
"Maturity" means, when used with respect to the Securities, the date
on which the principal of the Securities becomes due and payable as therein
provided or as provided in this Indenture, whether at Stated Maturity, the Offer
Date or the redemption date and whether by declaration of acceleration, Offer in
respect of Excess Proceeds, Change of Control Offer in respect of a Change of
Control, call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. or any successor
rating agency.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset Sales)
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) net of (i) brokerage commissions and other reasonable
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a
result of such Asset Sale, (iii) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets or properties the subject
of such Asset Sale, (iv) amounts required to be paid to any Person (other than
the Company or any Restricted Subsidiary) owning a beneficial interest in the
assets subject to the Asset Sale and (v) appropriate amounts to be provided by
the Company or any Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset Sale
and retained by the Company or any Restricted Subsidiary, as the case may be,
after such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an officers' certificate delivered to the Trustee and
(b) with respect to any issuance or sale of Capital Stock or options, warrants
or rights to purchase Capital Stock, or debt securities or Capital Stock that
have been converted into or exchanged for Capital Stock as referred to in
Section 1009, the proceeds of such issuance or sale in the form of cash or Cash
Equivalents including payments in respect of deferred payment obligations when
received in the form of, or stock or other assets when disposed of for, cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary), net of
attorney's fees, accountant's fees and brokerage, consultation, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale (or conversion in the case of debt securities or Capital Stock that have
been converted) and net of taxes paid or payable as a result thereof.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, the President, the Chief Executive Officer, the Chief Financial
Officer or a Vice President (regardless of Vice Presidential designation), and
by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary, of the Company or any Guarantor, as the case may be, and in form and
substance reasonably satisfactory to, and delivered to, the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the
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Company, any Guarantor or the Trustee, unless an Opinion of Independent Counsel
is required pursuant to the terms of this Indenture, and who shall be acceptable
to the Trustee, and which opinion shall be in form and substance reasonably
satisfactory to the Trustee.
"Opinion of Independent Counsel" means a written opinion of counsel,
who may be regular outside counsel for the Company, but which is issued by a
Person who is not an employee or consultant (other than non-employee legal
counsel) of the Company, or any Guarantor and who shall be reasonably acceptable
to the Trustee, and which opinion shall be in form and substance reasonably
satisfactory to the Trustee.
"Outstanding" when used with respect to Securities means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(a) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(b) Securities, or portions thereof, for whose payment or redemption
money in the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company) in trust or set aside and segregated
in trust by the Company (if the Company shall act as its own Paying Agent) for
the Holders of such Securities; provided that if such Securities are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor reasonably satisfactory to the Trustee has been
made;
(c) Securities, except to the extent provided in Sections 402 and 403,
with respect to which the Company has effected defeasance or covenant defeasance
as provided in Article Four; and
(d) Securities in exchange for or in lieu of which other Securities
have been authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to the
Trustee and the Company proof reasonably satisfactory to each of them that such
Securities are held by a bona fide purchaser in whose hands the Securities are
valid obligations of the Company; provided, however, that in determining whether
the Holders of the requisite principal amount of Outstanding Securities have
given any request, demand, authorization, direction, notice, consent or waiver
hereunder, Securities owned by the Company, any Guarantor, or any other obligor
upon the Securities or any Affiliate of the Company, any Guarantor or such other
obligor shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the reasonable satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company, any Guarantor or any other obligor upon the
Securities or any Affiliate of the Company, any Guarantor or such other obligor.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company
which ranks pari passu in right of payment to the Securities and (b) with
respect to any Guarantee, Indebtedness which ranks pari passu in right of
payment to such Guarantee.
"Paying Agent" means any Person (including the Company) authorized by
the Company to pay the principal of, premium, if any, or interest on, any
Securities on behalf of the Company.
"Permitted Investment" means (i) Investments in any Wholly Owned
Subsidiary or any Person which, as a result of such Investment, (a) becomes a
Wholly Owned Subsidiary or (b) is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, or is liquidated
into, the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the
Company or a Restricted Subsidiary
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<PAGE>
described under clauses (iv) and (vii) of paragraph (b) of Section 1008; (iii)
Investments in any of the Securities; (iv) Investments in Cash Equivalents; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale permitted under Section 1012 to the extent such Investments
are non-cash proceeds as permitted under such covenant; (vi) Investments in
existence on the date of the Indenture; (vii) guarantees of Indebtedness of a
Wholly Owned Subsidiary given by the Company or another Wholly Owned Subsidiary
and guarantees of Indebtedness of the Company given by any Subsidiary, in each
case, in accordance with the terms of the Indenture; (viii) advances to
employees or officers of the Company in the ordinary course of business so long
as the aggregate amount of such advances shall not exceed $1 million outstanding
at any one time; (ix) any Investment in the Company by any Restricted Subsidiary
of the Company; provided, that any such Investment in the form of Indebtedness
shall be Subordinated Indebtedness; (x) accounts receivable created or acquired
in the ordinary course of business of the Company or any Restricted Subsidiary
and Investments arising from transactions by the Company or any Restricted
Subsidiary with trade creditors or customers in the ordinary course of business
(including any such Investment received pursuant to any plan of reorganization
or similar arrangement pursuant to the bankruptcy or insolvency of such trade
creditors or customers or otherwise in settlement of a claim); (xi) loans in the
ordinary course of business to employees of the Company or a Restricted
Subsidiary to purchase Capital Stock of the Company pursuant to the terms of
employee stock benefit plans; (xii) Investments the consideration of which is
Capital Stock of the Company; (xiii) stock obligations or securities received in
satisfaction of judgments; (xiv) Investments in prepaid expenses, negotiable
instruments held for collection, and lease, utility and workers' compensation,
performance and other similar deposits; and (xv) any other Investments in an
aggregate amount not to exceed $20 million at any one time outstanding. In
connection with any assets or property contributed or transferred to any Person
as an Investment, such property and assets shall be equal to the Fair Market
Value (as determined by the Company's Board of Directors) at the time of such
Investment.
"Permitted Lien" means:
(a) any Lien existing as of the date of this Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired; (2) taxes not
yet delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance or arising under worker's
compensation laws or similar legislation; (4) good faith deposits in connection
with bids, tenders, leases, contracts (other than contracts evidencing
Indebtedness); (5) zoning restrictions, easements, licenses, reservations, title
defects, rights of others for rights of way, utilities, sewers, electric lines,
telephone or telegraph lines, and other similar purposes, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor irregularities
of title (and with respect to leasehold interests, mortgages, obligations, liens
and other encumbrances incurred, created, assumed or permitted to exist and
arising by, through or under a landlord or owner of the leased property, with or
without consent of the lessee), none of which materially impairs the use of any
parcel of property material to the operation of the business of the Company or
any Restricted Subsidiary or the value of such property for the purpose of such
business; (6) deposits to secure public or statutory obligations, or in lieu of
surety or appeal bonds; or (7) operation of law in favor of landlords, carriers,
warehousemen, bankers, mechanics, materialmen, laborers, employees or suppliers,
incurred in the ordinary course of business for sums which are not yet
delinquent or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business of
the Company or any Restricted Subsidiary;
(d) any Lien securing obligations in connection with Indebtedness
permitted under
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<PAGE>
clause (i) of paragraph (b) of Section 1008 on the cash proceeds of such
Indebtedness or on the property, plant or equipment that is purchased,
constructed or improved with the direct or indirect proceeds of such
Indebtedness (including any attachments, accessions, additions to, or
replacements or proceeds of such property, plant or equipment); provided that
the aggregate principal amount of such Indebtedness does not exceed the sum of
(i) the cost of purchasing, constructing or improving such property, plant or
equipment, and (ii) the remaining proceeds of such Indebtedness;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness
permitted in clauses (ii) or (iii) of paragraph (b) of Section 1008;
(g) any Lien in favor of the Company or any Restricted Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries other
than the property or assets of the Acquired Person covered thereby or the
property assets so acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or
the Trustee arising under the provisions in the Indenture;
(j) any Lien encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the Company
or any Restricted Subsidiary if and to the extent arising in the ordinary course
of business, including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure
payment of customs duties in connection with the importation of goods in the
ordinary course of business;
(l) leases or subleases granted to third Persons not interfering with
the ordinary course of business of the Company or its Restricted Subsidiaries;
and
(m) any Lien securing any extension, renewal, refinancing or
replacement, in whole or in part, of any obligation or Indebtedness described in
the foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 308 in exchange for a mutilated
Security or in lieu of a lost, destroyed or stolen Security shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Security.
"Preferred Stock" means, with respect to any Person, any Capital Stock
of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
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<PAGE>
"Prospectus" means the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including any such
prospectus supplement with respect to the terms of the offering of any portion
of the Series A Securities covered by a Shelf Registration Statement, and by all
other amendments and supplements to a prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
therein.
"Public Equity Offering" means an underwritten offering of Common
Stock of the Company with gross proceeds to the Company of at least $25 million
pursuant to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than a registration statement
on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien
on assets related to the business of the Company and any additions and
accessions thereto, which are purchased by the Company at any time after the
Issue Date; provided that (i) the security agreement or conditional sales or
other title retention contract pursuant to which the Lien on such assets is
created (collectively, a "Purchase Money Security Agreement") shall be entered
into within 90 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect of fees
and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement is entered into
exceed 100% of the purchase price to the Company of the assets subject thereto
or (B) the Indebtedness secured thereby shall be with recourse solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom.
"QIB" means a "Qualified Institutional Buyer" under Rule 144A under
the Securities Act.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Disqualified Stock.
"Redemption Date" when used with respect to any Security to be
redeemed pursuant to any provision in this Indenture means the date fixed for
such redemption by or pursuant to this Indenture.
"Redemption Price" when used with respect to any Security to be
redeemed pursuant to any provision in this Indenture means the price at which it
is to be redeemed pursuant to this Indenture.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of ___________, 1998, between the Company and the Initial
Purchasers.
"Registration Statement" means any registration statement of the
Company which covers any of the Series A Securities or Series B Securities
pursuant to the provisions of the Registration Rights Agreement, and all
amendments and supplements to any such Registration Statement, including post-
effective amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference therein.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the June 1 or December 1 (whether or not a Business Day) next
preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act, as amended
from time to time.
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"Responsible Officer" when used with respect to the Trustee means any
officer or employee assigned to the Corporate Trust Office or any agent of the
Trustee appointed hereunder, including any vice president, assistant vice
president, secretary, assistant secretary, or any other officer or assistant
officer of the Trustee or any agent of the Trustee appointed hereunder to whom
any corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act, as amended from
time to time.
"Rule 144A Global Securities" means one or more permanent global
Securities in registered form representing the aggregate principal amount of
Securities sold in reliance on Rule 144A under the Securities Act.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which the Company or a Restricted Subsidiary
sells or transfers any property or asset in connection with the leasing, or the
resale against installment payments, of such property or asset to the seller or
transferor.
"S&P" means Standard & Poor's Rating Group, a division of McGraw Hill,
Inc. or any successor rating agency.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Senior Debt" means any Indebtedness permitted to be incurred by the
Company under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in right of
payment to the Exchange Debentures. Notwithstanding anything to the contrary in
the foregoing, Senior Debt will not include (i) any liability for federal,
state, local or other taxes owed or owing by the Company, (ii) any Indebtedness
of the Company to any of its Restricted Subsidiaries or other Affiliates, (iii)
any trade payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
"Series B Global Securities" means one or more permanent Global
Securities in registered form representing the aggregate principal amount of
Series B Securities exchanged for Series A Securities pursuant to the Exchange
Offer or issued in exchange for the Series B Exchange Preferred Stock, as the
case may be.
"Shelf Registration Statement" means a "shelf" registration statement
of the Company pursuant to Section 4 of the of the Registration Rights
Agreement, which covers all of the Registrable Securities (as defined in the
Registration Rights Agreement) on an appropriate form under Rule 415 under the
Securities Act, or any similar rule that may be adopted by the Commission, and
all amendments and supplements to such registration statement, including post-
effective amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference therein.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 309.
"Stated Maturity" means, when used with respect to any Indebtedness or
any installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
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"Strategic Investor" means any Person which is (or a controlled
Affiliate of any Person which is or a controlled Affiliate of which is) engaged
principally in the Telecommunications Business and which has a Total Market
Capitalization of at least $1.0 billion.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor subordinated in right of payment to the Securities or the Guarantee of
such Guarantor, as the case may be.
"Subsidiary" means, with respect to any Person, an corporation,
association or other business entity (i) of which outstanding Capital Stock
having at least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of voting
interest is owned, directly or indirectly, by such Person and/or one or more
subsidiaries of such Person.
"Successor Security" of any particular Security means every Security
issued after, and evidencing all or a portion of the same debt as that evidenced
by, such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 308 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Telecommunications Business" means, when used in reference to any
Person, that such Person is engaged primarily in (i) the business of
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii) the business
of creating, developing or marketing communications related network equipment,
software and other devices for use in a Telecommunications Business or (iii)
businesses reasonably related or incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and any Restricted Subsidiary, on a Consolidated basis, outstanding
as of such date of determination, after giving effect to any Incurrence of
Indebtedness and the application of the proceeds therefrom giving rise to such
determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for purposes
of clause (b) of the preceding sentence shall be determined by the Board of
Directors in good faith and evidenced by a Board Resolution filed with the
Trustee. Notwithstanding the foregoing, unless the Person's Common Stock is
listed on any national securities exchange or on the Nasdaq National Market, the
"Total Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and any
subsidiaries (including the fair market value of their debt and equity), as
determined by an independent banking firm of national standing with experience
in such valuations and evidenced by a written opinion in customary form filed
with the Trustee; provided that for purposes of any such determination, the
enterprise value of the Person shall be calculated as if the Person were a
publicly held corporation without a controlling stockholder. For purposes of any
such determination, such banking firm's written opinion may state that such fair
market value is no less than a specified amount and such opinion may be as of a
date no earlier than 90 days prior to the date of such determination.
"Trading Day" with respect to a securities exchange or automated
quotation system means a day on which such exchange or system is open for a full
day of trading.
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"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture, until a successor trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, or any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (including any newly acquired or
newly formed subsidiary) to be an Unrestricted Subsidiary if all of the
following conditions apply: (a) neither the Company nor any of its Restricted
Subsidiaries provides credit support for Indebtedness of such Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness, (c)
any Investment in such Subsidiary made as a result of designating such
Subsidiary an Unrestricted Subsidiary shall not violate the provisions of
Section 1018 and such Unrestricted Subsidiary is not party to any agreement,
contract, arrangement or understanding at such time with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; and (v) such Unrestricted
Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the
Company which is not simultaneously being designated an Unrestricted Subsidiary.
Any such designation by the Board of Directors of the Company shall be evidenced
to the Trustee by filing with the Trustee a board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complies with the foregoing conditions and shall be deemed a Restricted Payment
on the date of designation in an amount equal to the greater of (1) the net book
value of such Investment or (2) the fair market value of such Investment as
determined in good faith by the Company's Board of Directors. The Board of
Directors of the Company may designate any Unrestricted Subsidiary as a
Restricted Subsidiary; provided that (i) immediately after giving effect to such
designation, the Company could incur $1.00 of additional Indebtedness pursuant
to Section 1008(a) and (ii) all Indebtedness of such Restricted Subsidiary shall
be deemed to be incurred on the date such Restricted Subsidiary becomes a
Restricted Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary
means Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence) the
Company shall be deemed to have made a Restricted Payment equal to the principal
amount of any such Indebtedness to the extent guaranteed at the time such
Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the Company or any Restricted Subsidiary to
declare, a default on such Indebtedness of the Company or any Restricted
Subsidiary or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"U.S. Government Securities" means securities that are direct
obligations of the United States of America, the payment of which its full faith
and credit is pledged.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of
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any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which is owned by the Company or another Wholly Owned
Subsidiary. For the purposes of this definition, any director qualifying shares
or investments by foreign nationals mandated by applicable law shall be
disregarded in determining the ownership of a Restricted Subsidiary.
Section 102. Other Definitions.
-----------------
<TABLE>
<CAPTION>
Term Defined in Section
- ---- ------------------
<S> <C>
"Act" 105
"Agent Members" 306
"Basket" 1009
"Change of Control Offer" 1015
"Change of Control Purchase Date" 1015
"Change of Control Purchase Notice" 1015
"Change of Control Purchase Price" 1015
"covenant defeasance" 403
"Defaulted Interest" 309
"defeasance" 402
"Defeasance Redemption Date" 404
"Defeased Securities" 401
"Excess Proceeds" 1012
"Exchange Preferred Stock" Recitals
"Offer" 1012
"Offer Date" 1012
"Offered Price" 1012
"Pari Passu Debt Amount" 1012
"Pari Passu Offer" 1012
"Permitted Indebtedness" 1008
"Permitted Payment" 1009
"Physical Securities" 306
"Private Placement Legend" 202
"Purchase Money Security Agreement" 101
"refinancing" 1009
"Required Filing Date" 1020
"Restricted Payments" 1009
"Securities" Recitals
"Security Amount" 1012
"Security Register" 305
"Security Registrar" 305
"Series A Exchange Preferred Stock" Recitals
"Series B Exchange Preferred Stock" Recitals
"Series A Securities" Recitals
"Series B Securities" Recitals
"Special Payment Date" 309
"Surviving Entity" 801
"Surviving Guarantor Entity" 801
"U.S. Government Obligations" 404
</TABLE>
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Section 103. Compliance Certificates and Opinions.
------------------------------------
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company and any Guarantor
(if applicable) and any other obligor on the Securities (if applicable) shall
furnish to the Trustee an Officers' Certificate in a form and substance
reasonably acceptable to the Trustee stating that all conditions precedent, if
any, provided for in this Indenture (including any covenant compliance with
which constitutes a condition precedent) relating to the proposed action have
been complied with, and an Opinion of Counsel in a form and substance reasonably
acceptable to the Trustee stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that, in the case
of any such application or request as to which the furnishing of such
certificates or opinions is specifically required by any provision of this
Indenture relating to such particular application or request, no additional
certificate or opinion need be furnished.
Every certificate or Opinion of Counsel with respect to compliance
with a condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual signing such certificate or
individual or firm signing such opinion has read and understands such covenant
or condition and the definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such individual or such
firm, he or it has made such examination or investigation as is necessary to
enable him or it to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such individual
or such firm, such condition or covenant has been complied with.
Section 104. Form of Documents Delivered to Trustee.
--------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate of an officer of the Company, any Guarantor or other
obligor on the Securities may be based, insofar as it relates to legal matters,
upon a certificate or opinion of, or representations by, counsel, unless such
officer knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to the matters upon which
his certificate or opinion is based are erroneous. Any such certificate or
opinion may be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an officer or officers of the
Company, any Guarantor or other obligor on the Securities stating that the
information with respect to such factual matters is in the possession of the
Company, any Guarantor or other obligor on the Securities, unless such officer
or counsel knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to such matters are
erroneous. Opinions of Counsel required to be delivered to the Trustee may have
qualifications customary for opinions of the type required and counsel
delivering such Opinions of Counsel may rely on certificates of the Company or
government or other officials customary for opinions of the type required,
including certificates certifying as to matters of fact, including that various
financial covenants have been complied with.
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Any certificate or opinion of an officer of the Company, any Guarantor
or other obligor on the Securities may be based, insofar as it relates to
accounting matters, upon a certificate or opinion of, or representations by, an
accountant or firm of accountants in the employ of the Company, unless such
officer knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to the accounting matters
upon which his certificate or opinion may be based are erroneous. Any
certificate or opinion of any independent firm of public accountants filed with
the Trustee shall contain a statement that such firm is independent with respect
to the Company.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 105. Acts of Holders.
---------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section 105.
(b) The ownership of Securities shall be proved by the Security
Register.
(c) Any request, demand, authorization, direction, notice, consent,
waiver or other Act by the Holder of any Security shall bind every future Holder
of the same Security or the Holder of every Security issued upon the transfer
thereof or in exchange therefor or in lieu thereof, in respect of anything done,
suffered or omitted to be done by the Trustee, any Paying Agent or the Company,
any Guarantor or any other obligor of the Securities in reliance thereon,
whether or not notation of such action is made upon such Security.
(d) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(e) If the Company shall solicit from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other Act, the Company may,
at its option, by or pursuant to a Board Resolution, fix in advance a record
date for the determination of such Holders entitled to give such request,
demand, authorization, direction, notice, consent, waiver or other Act, but the
Company shall have no obligation to do so. Notwithstanding Trust Indenture Act
Section 316(c), any such record date shall be the record date specified in or
pursuant to such Board Resolution, which shall be a date not more than 30 days
prior to the first solicitation of Holders generally in connection therewith and
no later than the date such first solicitation is completed.
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<PAGE>
If such a record date is fixed, such request, demand, authorization,
direction, notice, consent, waiver or other Act may be given before or after
such record date, but only the Holders of record at the close of business on
such record date shall be deemed to be Holders for purposes of determining
whether Holders of the requisite proportion of Securities then Outstanding have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other Act, and for this purpose the
Securities then Outstanding shall be computed as of such record date; provided
that no such request, demand, authorization, direction, notice, consent, waiver
or other Act by the Holders on such record date shall be deemed effective unless
it shall become effective pursuant to the provisions of this Indenture not later
than six months after such record date.
(f) For purposes of this Indenture, any action by the Holders which
may be taken in writing may be taken by electronic means or as otherwise
reasonably acceptable to the Trustee.
Section 106. Notices, etc., to the Trustee, the Company and any
--------------------------------------------------
Guarantor.
- ---------
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company or any Guarantor or
any other obligor on the Securities shall be sufficient for every purpose
(except as provided in Section 501(c)) hereunder if in writing and mailed,
first-class postage prepaid, or delivered by recognized overnight courier, to or
with the Trustee at its Corporate Trust Office, Attention: Corporate Trust
Administration, or at any other address previously furnished in writing to the
Holders or the Company, any Guarantor or any other obligor on the Securities by
the Trustee; or
(b) the Company or any Guarantor by the Trustee or any Holder shall be
sufficient for every purpose (except as provided in Section 501(c)) hereunder if
in writing and mailed, first-class postage prepaid, or delivered by recognized
overnight courier, to the Company or such Guarantor addressed to it c/o
Concentric Network Corporation, 10590 N. Tantau Avenue, Cupertino, California
95014, Attention: Chief Financial Officer or at any other address previously
furnished in writing to the Trustee by the Company or such Guarantor.
Section 107. Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, or delivered by
recognized overnight courier, to each Holder affected by such event, at its
address as it appears in the Security Register, not later than the latest date,
and not earlier than the earliest date, prescribed for the giving of such
notice. In any case where notice to Holders is given by mail, neither the
failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders. Any notice when mailed to a Holder in the aforesaid manner shall
be conclusively deemed to have been received by such Holder whether or not
actually received by such Holder. Where this Indenture provides for notice in
any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause, it shall be impracticable to mail notice of any event
as required by any provision of this Indenture, then any method of giving such
notice as shall be reasonably satisfactory to the Trustee shall be deemed to be
a sufficient giving of such notice.
27
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Section 108. Conflict with Trust Indenture Act.
---------------------------------
If any provision hereof limits, qualifies or conflicts with any
provision of the Trust Indenture Act or another provision which is required or
deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, the provision or requirement of the Trust Indenture Act shall
control. If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or to be
excluded, as the case may be.
Section 109. Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 110. Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company and the
Guarantors shall bind their respective successors and assigns, whether so
expressed or not.
Section 111. Separability Clause.
-------------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 112. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person (other than the parties hereto and their successors
hereunder, any Paying Agent and the Holders) any benefit or any legal or
equitable right, remedy or claim under this Indenture.
Section 113. Governing Law.
-------------
THIS INDENTURE, THE SECURITIES AND ANY GUARANTEE SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
Section 114. Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date, Maturity
or Stated Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest or principal or premium, if any, need not be made on such
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on such Interest Payment Date or Redemption Date, or at
the Maturity or Stated Maturity and no interest shall accrue with respect to
such payment for the period from and after such Interest Payment Date,
Redemption Date, Maturity or Stated Maturity, as the case may be, to the next
succeeding Business Day.
Section 115. Independence of Covenants.
-------------------------
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any such covenants, the fact that it would be permitted by an
28
<PAGE>
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
Section 116. Schedules and Exhibits.
----------------------
All schedules and exhibits attached hereto are by this reference made
a part hereof with the same effect as if herein set forth in full.
Section 117. Counterparts.
------------
This Indenture may be executed in any number of counterparts, each of
which shall be deemed an original; but all such counterparts shall together
constitute but one and the same instrument.
ARTICLE TWO
SECURITY FORMS
Section 201. Forms Generally.
---------------
The Securities and the Trustee's certificate of authentication thereon
shall be in substantially the forms set forth in this Article Two, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted hereby and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange, any organizational
document or governing instrument or applicable law or as may, consistently
herewith, be determined by the officers executing such Securities, as evidenced
by their execution of the Securities. Any portion of the text of any Security
may be set forth on the reverse thereof, with an appropriate reference thereto
on the face of the Security.
The definitive Securities shall be printed, lithographed or engraved
or produced by any combination of these methods or may be produced in any other
manner permitted by the rules of any securities exchange on which the Securities
may be listed, all as determined by the officers executing such Securities, as
evidenced by their execution of such Securities.
Series A Securities issued in exchange for Series A Exchange Preferred
Stock offered and sold in reliance on Rule 144A shall be issued initially in the
form of one or more Rule 144A Global Securities, substantially in the form set
forth in Section 202 in like aggregate principal amount to the Series A Exchange
Preferred Stock so exchanged, deposited upon issuance with the Trustee, as
custodian for the Depositary, registered in the name of the Depositary, or its
nominee, in each case for credit to an account of a direct or indirect
participant of the Depositary, duly executed by the Company and authenticated by
the Trustee as hereinafter provided. The aggregate principal amount of the Rule
144A Global Securities may from time to time be increased or decreased by
adjustments made on the records of the Trustee, as custodian for the Depositary
or its nominee, as hereinafter provided.
Series B Securities exchanged for Series A Securities or Series B
Exchange Preferred Stock, as the case may be, shall be issued initially in the
form of one or more Series B Global Securities, substantially in the form set
forth in Section 202 in like aggregate principal amount to the Series A
Securities or Series B Exchange Preferred Stock, as the case may be, so
exchanged, deposited upon issuance with the Trustee, as custodian for the
Depositary, registered in the name of the Depositary or its nominee, in each
case for credit to an account of a direct or indirect participant of the
Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The aggregate principal amount of the Series B Global
Securities may from time to time be increased or decreased by adjustments made
on the records of the
29
<PAGE>
Trustee, as custodian for the Depositary or its nominee, as hereinafter
provided.
Section 202. Form of Face of Security.
------------------------
(a) The form of the face of any Series A Securities authenticated and
delivered hereunder shall be substantially as follows:
Unless and until (i) a Series A Security is issued in exchange for
Exchange Preferred Stock sold under an effective Registration Statement or (ii)
a Series A Security is exchanged for a Series B Security in connection with an
effective Registration Statement, in each case pursuant to the Registration
Rights Agreement, then such Series A Security shall bear the legend set forth
below (the "Private Placement Legend") on the face thereof:
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION AS SET FORTH BELOW.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT ("RULE 144A")) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES TO OFFER, SELL OR OTHERWISE
TRANSFER SUCH SECURITY PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF
THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT
WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS
THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A INSIDE THE UNITED
STATES, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER"
AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF
A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A, (D) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPHS (A)(1),
(A)(2), (A)(3) OR (A)(7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING
THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL
"ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR
OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO
CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN
EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE
FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEROR TO THE TRUSTEE. AS USED
30
<PAGE>
HEREIN, THE TERM "UNITED STATES," HAS THE MEANING GIVEN TO IT BY REGULATION S
UNDER THE SECURITIES ACT.
[Legend if Security is a Global Security]
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF
CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS
OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
31
<PAGE>
CONCENTRIC NETWORK CORPORATION
__________________
13 1/2% SUBORDINATED DEBENTURE DUE 2010, SERIES A
CUSIP NO.______________
No. __________ $_______________________
Concentric Network Corporation, a Delaware corporation (herein called
the "Company," which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_______________ or registered assigns, the principal sum of _______________
United States dollars on June 1, 2010, at the office or agency of the Company
referred to below, and to pay interest thereon from _________________, or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, semiannually on June 1 and December 1, in each year, commencing on
________________ at the rate of 13 1/2% per annum, subject to adjustments as
described in the second following paragraph, in United States dollars and
otherwise to the provisions hereof and of the Indenture, until the principal
hereof is paid or duly provided for. Interest payable on or prior to June 1,
2003 may be paid in the form of additional Series A Securities, valued at the
principal amount thereof. Interest payable after June 1, 2003 will be required
to be paid in cash. Interest shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Holder of this Series A Security is entitled to the benefits of
the Registration Rights Agreement between the Company and the Initial
Purchasers, dated _________________, pursuant to which, subject to the terms and
conditions thereof, the Company is obligated to consummate the Exchange Offer
pursuant to which the Holder of this Security shall have the right under certain
circumstances on the terms provided therein to exchange this Security for 13
1/2% Senior Notes due 2010, Series B (herein called the "Series B Securities")
in like principal amount as provided therein. The Series A Securities rank pari
passu in right of payment with the Series B Securities.
In the event that (a) the Exchange Offer Registration Statement has
not been filed with the Commission on or prior to the date specified in the
Registration Rights Agreement, (b) the Exchange Offer Registration Statement has
not been declared effective on or prior to the date specified in the
Registration Rights Agreement, (c) the Exchange Offer has not been consummated
or a Shelf Registration Statement has not been declared effective, in either
case, on or prior to the date specified in the Registration Rights Agreement, or
(d) the Shelf Registration Statement or the Exchange Offer Registration
Statement has been declared effective but thereafter ceases to be effective or
usable in connection with resales of the Series A Securities during the periods
specified in the Registration Rights Agreement, without being succeeded
immediately by a post effective amendment to such Registration Statement that
cures such failure and that is itself declared effective within a five Business
Day period after filing such post effective amendment (each such event referred
to in clauses (a) through (d) above, a "Registration Default"), then commencing
on the day following the date on which such Registration Default occurs, the
interest rate borne by the Series A Securities shall be increased by one-half of
one percent per annum for the 90-day period following such Registration Default,
which rate will increase by one-half of one percent per annum with respect to
each subsequent 90-day period up to a maximum of one and one half percent
(1.50%) per annum until cured ("Additional Interest"). Following the cure of
all Registration Defaults, the accrual of Additional Interest will cease and the
interest rate will revert to the original rate.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture hereinafter
referred to, be paid to the Person in whose name this
32
<PAGE>
Security (or any Predecessor Securities) is registered at the close of business
on the Regular Record Date for such interest, which shall be the May 15 or
November 15 (whether or not a Business Day), as the case may be, next preceding
such Interest Payment Date. Any such interest not so punctually paid, or duly
provided for, and interest on such defaulted interest at the interest rate borne
by the Series A Securities, to the extent lawful, shall forthwith cease to be
payable to the Holder on such Regular Record Date, and may either be paid to the
Person in whose name this Security (or any Predecessor Securities) is registered
at the close of business on a Special Record Date for the payment of such
defaulted interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Securities not less than 10 days prior to such Special Record Date,
or be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities may be listed,
and upon such notice as may be required by this Indenture not inconsistent with
the requirements of such exchange, all as more fully provided in this Indenture.
Payment of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on, this Security, and exchange or transfer of the
Security, will be made at the office or agency of the Company in The City of San
Francisco maintained for that purpose (which initially will be a corporate trust
office of the Trustee located at ________________________________), or at such
other office or agency as may be maintained for such purpose, or, at the option
of the Company, payment of interest may be made by check mailed to the address
of the Person entitled thereto as such address shall appear on the Security
Register, and provided, that payment by wire transfer of immediately available
funds will be required with respect to principal of and interest on all Global
Securities and all other Securities the Holders of which shall have provided
wire transfer instructions to the Company or the Paying Agent. Such payment
shall be in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Security shall not be entitled to any benefit under the Indenture,
or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers and its
corporate seal to be affixed or reproduced hereon.
CONCENTRIC NETWORK CORPORATION
[Seal] By:
Title:
Attest:
____________________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
33
<PAGE>
This is one of the 13 1/2% Subordinated Debentures due 2010, Series A
referred to in the within-mentioned Indenture.
______________________________
______________________________
as Trustee
By: _________________________________
Authorized Signer
Dated:
34
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1012 or Section 1014, as applicable, of the Indenture, check the Box:
[ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1012 or Section 1014 as applicable, of the
Indenture, state the amount (in original principal amount):
$ _______________.
Date: ___________________ Your Signature: _____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: __________________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
(b) The form of the face of any Series B Securities authenticated and
delivered hereunder in exchange for Series A Securities shall be substantially
as follows:
[Legend if Security is a Global Security]
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY
OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF
THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT
IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO
THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR
PAYMENT AND ANY SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. CONCENTRIC NETWORK
CORPORATION
__________________
13 1/2% SUBORDINATED DEBENTURE DUE 2010, SERIES B
CUSIP NO. ______________
35
<PAGE>
No. __________ $_______________________
Concentric Network Corporation, a Delaware corporation (herein called
the "Company," which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________ or registered assigns, the principal sum of _______________ United
States dollars on ___________, ____, at the office or agency of the Company
referred to below, and to pay interest thereon from ___________, ____, or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, semiannually on June 1 and December 1 in each year, commencing
_______, ____ at the rate of 13 1/2% per annum, in United States dollars, until
the principal hereof is paid or duly provided for; provided that to the extent
interest has not been paid or duly provided for with respect to the Series A
Security exchanged for this Series B Security, interest on this Series B
Security shall accrue from the most recent Interest Payment Date to which
interest on the Series A Security which was exchanged for this Series B Security
has been paid or duly provided for. Interest shall be computed on the basis of a
360-day year comprised of twelve 30-day months.
This Series B Security was issued pursuant to the Exchange Offer
pursuant to which the 13 1/2% Senior Notes due 2010, Series A (herein called the
"Series A Securities") in like principal amount were exchanged for the Series B
Securities. The Series B Securities rank pari passu in right of payment with
the Series A Securities.
In addition, for any period in which the Series A Security exchanged
for this Series B Security was outstanding, in the event that (a) the Exchange
Offer Registration Statement is not filed with the Commission on or prior to the
date specified in the Registration Rights Agreement, (b) the Exchange Offer
Registration Statement has not been declared effective on or prior to the date
specified in the Registration Rights Agreement, (c) the Exchange Offer is not
consummated or a Shelf Registration Statement is not declared effective, in
either case, on or prior to the date specified in the Registration Rights
Agreement the date of original issue of the Series A Security, or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of the Series A Securities during the periods specified above, without
being succeeded immediately by a post effective amendment to such Registration
Statement that cures such failure and that is itself declared effective within a
five Business Day period after filing such post effective amendment (each such
event referred to in clauses (a) through (d) above, a "Registration Default"),
then commencing on the day following the date on which such Registration Default
occurs, the interest rate borne by the Series A Securities shall be increased by
one-half of one percent per annum for the 90-day period following such
Registration Default, which rate will increase by one-half of one percent per
annum with respect to each subsequent 90-day period up to a maximum of one and
one half percent (1.50%) per annum until cured ("Additional Interest").
Following the cure of all Registration Defaults, the accrual of Additional
Interest will cease and the interest rate will revert to the original rate;
provided that, to the extent interest at such increased interest rate has been
paid or duly provided for with respect to the Series A Security, interest at
such increased interest rate, if any, on this Series B Security shall accrue
from the most recent Interest Payment Date to which such interest on the Series
A Security has been paid or duly provided for; provided, however, that, if after
any such reduction in interest rate, a different event specified in clause (a),
(b), (c) or (d) above occurs, the interest rate shall again be increased
pursuant to the foregoing provisions.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture hereinafter
referred to, be paid to the Person in whose name this Security (or any
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the May 15 or November 15 (whether
or not a Business Day), as the case may be, next preceding such Interest Payment
Date. Any such interest not so punctually paid, or duly provided for, and
interest on such defaulted interest at the interest rate borne by the Series B
Securities, to the extent lawful, shall forthwith cease to be payable to the
Holder on such Regular Record Date, and may either be paid to the Person in
whose name this Security (or any Predecessor Securities) is registered at the
close of business on a Special Record Date for the payment of such defaulted
interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Securities not less than 10 days prior to such Special Record
36
<PAGE>
Date, or be paid at any time in any other lawful manner not inconsistent with
the requirements of any securities exchange on which the Securities may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in this Indenture.
Payment of the principal of, premium, if any, and interest on, this
Security, and exchange or transfer of the Security, will be made at the office
or agency of the Company in The City of San Francisco maintained for such
purpose (which initially will be a corporate trust office of the Trustee located
at __________________________________________________________________), or at
such other office or agency as may be maintained for such purpose, or at such
other office or agency as may be maintained for such purpose, or, at the option
of the Company, payment of interest may be made by check mailed to the address
of the Person entitled thereto as such address shall appear on the Security
Register, and provided, that payment by wire transfer of immediately available
funds will be required with respect to principal of and interest on all Global
Securities and all other Securities the Holders of which shall have provided
wire transfer instructions to the Company or the Paying Agent. Such payment
shall be in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Security shall not be entitled to any benefit under the Indenture,
or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers and its
corporate seal to be affixed or reproduced hereon.
CONCENTRIC NETWORK CORPORATION
[Seal] By:
Title:
Attest:
____________________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 13 1/2% Subordinated Debentures due 2010, Series B
referred to in the within-mentioned Indenture.
______________________________,
as Trustee
By: _________________________________
Authorized Signer
Dated:
37
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1012 or Section 1014, as applicable, of the Indenture, check the Box:
[ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1012 or Section 1014 as applicable, of the
Indenture, state the amount (in original principal amount):
$ _______________.
Date: ___________________ Your Signature: _____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: __________________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
38
<PAGE>
(c) The form of the face of any Series B Securities authenticated and
delivered hereunder in exchange for Series B Exchange Preferred Stock shall be
substantially as follows:
[Legend if Security is a Global Security]
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY
OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF
THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT
IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO
THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR
PAYMENT AND ANY SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
39
<PAGE>
CONCENTRIC NETWORK CORPORATION
__________________
13 1/2% SUBORDINATED DEBENTURE DUE 2010, SERIES B
CUSIP NO. ______________
No. __________ $_______________________
Concentric Network Corporation, a Delaware corporation (herein called
the "Company," which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________ or registered assigns, the principal sum of _______________ United
States dollars on ___________, ____, at the office or agency of the Company
referred to below, and to pay interest thereon from ___________, ____, or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, semiannually on June 1 and December 1 in each year, commencing
_______, ____ at the rate of 13 1/2% per annum, in United States dollars and
otherwise to the provisions hereof and of the Indenture, until the principal
hereof is paid or duly provided for; provided that to the extent interest has
not been paid or duly provided for with respect to the Series A Security
exchanged for this Series B Security, interest on this Series B Security shall
accrue from the most recent Interest Payment Date to which interest on the
Series A Security which was exchanged for this Series B Security has been paid
or duly provided for. Interest payable on or prior to June 1, 2003 may be paid
in the form of additional Series B Securities valued at the principal amount
thereof. Interest payable after June 1, 2003 will be required to be paid in
cash. Interest shall be computed on the basis of a 360-day year comprised of
twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture hereinafter
referred to, be paid to the Person in whose name this Security (or any
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the May 15 or November 15 (whether
or not a Business Day), as the case may be, next preceding such Interest Payment
Date. Any such interest not so punctually paid, or duly provided for, and
interest on such defaulted interest at the interest rate borne by the Series B
Securities, to the extent lawful, shall forthwith cease to be payable to the
Holder on such Regular Record Date, and may either be paid to the Person in
whose name this Security (or any Predecessor Securities) is registered at the
close of business on a Special Record Date for the payment of such defaulted
interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Securities not less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, all as more fully provided in this
Indenture.
Payment of the principal of, premium, if any, and interest on, this
Security, and exchange or transfer of the Security, will be made at the office
or agency of the Company in The City of San Francisco maintained for such
purpose (which initially will be a corporate trust office of the Trustee located
at __________________________________________________________________), or at
such other office or agency as may be maintained for such purpose, or at such
other office or agency as may be maintained for such purpose, or, at the option
of the Company, payment of interest may be made by check mailed to the address
of the Person entitled thereto as such address shall appear on the Security
Register, and provided, that payment by wire transfer of immediately available
funds will be required with respect to principal of and interest on all Global
Securities and all other Securities the Holders of which shall have provided
wire transfer instructions to the Company or the Paying Agent. Such payment
shall be in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
40
<PAGE>
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Security shall not be entitled to any benefit under the Indenture,
or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers and its
corporate seal to be affixed or reproduced hereon.
CONCENTRIC NETWORK CORPORATION
[Seal] By:
Title:
Attest:
____________________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 13 1/2% Subordinated Debentures due 2010, Series B
referred to in the within-mentioned Indenture.
______________________________,
as Trustee
By: _________________________________
Authorized Signer
Dated:
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1012 or Section 1014, as applicable, of the Indenture, check the Box:
[ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1012 or Section 1014 as applicable, of the
Indenture, state the amount (in original principal amount):
$ _______________.
Date: ___________________ Your Signature: _____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: __________________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
41
<PAGE>
Section 203. Form of Reverse of Securities.
-----------------------------
(a) The form of the reverse of the Series A Securities shall be
substantially as follows:
Concentric Network Corporation
13 1/2% Subordinated Debenture due 2010, Series A
This Security is one of a duly authorized issue of Securities of the
Company designated as its 13 1/2% Subordinated Debentures due 2010, Series A
(herein called the "Securities"), limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to _____, issued
under and subject to the terms of an indenture (herein called the "Indenture")
dated as of ___________, ____, between the Company and ________________________
_____________________________________, as trustee (herein called the "Trustee,"
which term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties, obligations
and immunities thereunder of the Company, the Guarantors, the Trustee and the
Holders of the Securities, and of the terms upon which the Securities are, and
are to be, authenticated and delivered.
The Indenture contains provisions for defeasance at any time of (a)
the entire Indebtedness on the Securities and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance with
certain conditions set forth therein.
Except as set forth below, the Securities may not be redeemed at the
option of the Company prior to June 1, 2003. The Securities will be subject to
redemption on or after June 1, 2003, at the option of the Company, in whole or
in part, on not less than 30 nor more than 60 days' prior notice, in amounts of
$1,000 or an integral multiple thereof, at the following redemption prices
(expressed as percentages of the principal amount), if redeemed during the 12-
month period beginning June 1 of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ------------
<S> <C>
2003 106.75%
2004 105.40%
2005 104.05%
2006 102.70%
2007 101.35%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
In addition, at any time on or prior to June 1, 2001, the Company may,
at its option, use the net proceeds of one or more Public Equity Offerings or
the sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or in a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Securities originally issued under the Indenture at a redemption price
equal to 113 1/2 % of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the Redemption Date; provided that at least
65% aggregate principal amount of Securities remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 45 days
after the closing of the related Public Equity Offering and must consummate such
redemption within 60 days of the closing of the Public Equity Offering.
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities or portions thereof to be redeemed pro rata, by lot
or by any other method the Trustee shall deem fair and reasonable.
42
<PAGE>
Upon the occurrence of a Change of Control, each Holder may require
the Company to purchase such Holder's Securities in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, pursuant to a Change of Control Offer in accordance with the
procedures set forth in the Indenture.
Under certain circumstances, in the event the Net Cash Proceeds
received by the Company from any Asset Sale, which proceeds are not used to
repay any Pari Passu Indebtedness of the Company or any Restricted Subsidiary or
invested in properties or other assets that replace the properties and assets
that were the subject of the Asset Sale or which will be used in the
Telecommunications Business, exceeds a specified amount the Company will be
required to apply such proceeds to the repayment of the Securities and certain
Indebtedness ranking pari passu in right of payment to the Securities.
In the case of any redemption or repurchase of Securities in
accordance with the Indenture, interest installments whose Stated Maturity is on
or prior to the Redemption Date will be payable to the Holders of such
Securities of record as of the close of business on the relevant Regular Record
Date or Special Record Date referred to on the face hereof. Securities (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
In the event of redemption or repurchase of this Security in
accordance with the Indenture in part only, a new Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal
amount of all the Securities may be declared due and payable in the manner and
with the effect provided in the Indenture.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders and certain amendments
which require the consent of all the Holders) as therein provided, the amendment
thereof and the modification of the rights and obligations of the Company and
the Guarantors and the rights of the Holders under the Indenture and the
Securities and the Guarantees at any time by the Company and the Trustee with
the consent of the Holders of at least a majority in aggregate principal amount
of the Securities at the time Outstanding. The Indenture also contains
provisions permitting the Holders of at least a majority in aggregate principal
amount of the Securities (100% of the Holders in certain circumstances) at the
time Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company and the Guarantors with certain provisions of the
Indenture and the Securities and the Guarantees and certain past Defaults under
the Indenture and the Securities and the Guarantees and their consequences. Any
such consent or waiver by or on behalf of the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof whether or not notation of such consent or
waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Securities (in the event such Guarantor or
such other obligor is obligated to make payments in respect of the Securities),
which is absolute and unconditional, to pay the principal of, premium, if any,
and interest on, this Security at the times, place, and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Security Registrar duly executed by,
the Holder hereof or its attorney duly authorized in writing, and
43
<PAGE>
thereupon one or more new Securities, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees.
Certificated securities shall be transferred to all beneficial holders
in exchange for their beneficial interests in the Rule 144A Global Securities if
(x) the Depositary notifies the Company that it is unwilling or unable to
continue as depository for such Global Security and a successor depository is
not appointed by the Company within 90 days or (y) there shall have occurred and
be continuing an Event of Default and the Security Registrar has received a
request from the Depositary. Upon any such issuance, the Trustee is required to
register such certificated Securities in the name of, and cause the same to be
delivered to, such Person or Persons (or the nominee of any thereof). All such
certificated Securities would be required to include the Private Placement
Legend.
Securities in certificated form are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof.
As provided in the Indenture and subject to certain limitations therein set
forth, the Securities are exchangeable for a like aggregate principal amount of
Securities of a differing authorized denomination, as requested by the Holder
surrendering the same.
At any time when the Company is not subject to Sections 13 or 15(d) of
the Exchange Act, upon the written request of a Holder of a Security, the
Company will promptly furnish or cause to be furnished such information as is
specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto) to such Holder or to a prospective purchaser of such Security
who such Holder informs the Company is reasonably believed to be a "Qualified
Institutional Buyer" within the meaning of Rule 144A under the Securities Act,
as the case may be, in order to permit compliance by such Holder with Rule 144A
under the Securities Act.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, any Guarantor, the Trustee and any agent of the Company,
any Guarantor or the Trustee may treat the Person in whose name this Security is
registered as the owner hereof for all purposes, whether or not this Security is
overdue, and neither the Company, any Guarantor, the Trustee nor any such agent
shall be affected by notice to the contrary.
THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES THEREOF.
All terms used in this Security which are defined in the Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Indenture.
[The Transferee Certificate, in the form of Appendix I hereto, will be
attached to the Series A Security.]
(b) The form of the reverse of the Series B Securities shall be
substantially as follows:
Concentric Network Corporation
13 1/2% Subordinated Debentures due 2010, Series B
This Security is one of a duly authorized issue of Securities of the
Company designated as its 13 1/2% Subordinated Debentures 2010, Series B (herein
called the "Securities"), limited (except as otherwise provided in the Indenture
referred to below) in aggregate principal amount to $___________, issued under
and subject to the terms of an indenture (herein called the "Indenture") dated
as of ___________, ____, between the
44
<PAGE>
Company and ____________________________________________________________, as
trustee (herein called the "Trustee," which term includes any successor trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties, obligations and immunities thereunder of the Company, the
Guarantors, the Trustee and the Holders of the Securities, and of the terms upon
which the Securities are, and are to be, authenticated and delivered.
The Indenture contains provisions for defeasance at any time of (a)
the entire Indebtedness on the Securities and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance with
certain conditions set forth therein.
Except as set forth below, the Securities may not be redeemed at the
option of the Company prior to June 1, 2003. The Securities will be subject to
redemption at any time on or after June 1, 2003, at the option of the Company,
in whole or in part, on not less than 30 nor more than 60 days' prior notice, in
amounts of $1,000 or an integral multiple thereof, at the following redemption
prices (expressed as percentages of the principal amount), if redeemed during
the 12-month period beginning June 1 of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ------------
<S> <C>
2003 106.75%
2004 105.40%
2005 104.05%
2006 102.70%
2007 101.35%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
In addition, at any time on or prior to June 1, 2001, the Company may,
at its option, use the net proceeds of one or more Public Equity Offerings or
the sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or in a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Securities originally issued under the Indenture at a redemption price
equal to 113 1/2% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the Redemption Date; provided that at least
65% aggregate principal amount of Securities remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 45 days
after the closing of the related Public Equity Offering and must consummate such
redemption within 60 days of the closing of the Public Equity Offering.
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities or portions thereof to be redeemed pro rata, by lot
or by any other method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, each Holder may require
the Company to purchase such Holder's Securities in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, pursuant to Change of Control Offer and in accordance with the
procedures set forth in the Indenture.
Under certain circumstances, in the event the Net Cash Proceeds
received by the Company
45
<PAGE>
from any Asset Sale, which proceeds are not used to repay any Pari Passu
Indebtedness of the Company or any Subsidiary or invested in properties or other
assets that replace the properties and assets that were the subject of the Asset
Sale or which will be used in the Telecommunications Business, exceeds a
specified amount, the Company will be required to apply such proceeds to the
repayment of the Securities and certain Indebtedness ranking pari passu in right
of payment to the Securities.
In the case of any redemption or repurchase of Securities in
accordance with the Indenture, interest installments whose Stated Maturity is on
or prior to the Redemption Date will be payable to the Holders of such
Securities of record as of the close of business on the relevant Regular Record
Date or Special Record Date referred to on the face hereof. Securities (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
In the event of redemption or repurchase of this Security in
accordance with the Indenture in part only, a new Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal
amount of all the Securities may be declared due and payable in the manner and
with the effect provided in the Indenture.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders and certain amendments
which required the consent of all of the Holders) as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the Guarantors and the rights of the Holders under the Indenture and
the Securities and the Guarantees at any time by the Company and the Trustee
with the consent of the Holders of at least a majority in aggregate principal
amount of the Securities at the time Outstanding. The Indenture also contains
provisions permitting the Holders of at least a majority in aggregate principal
amount of the Securities (100% of the Holders in certain circumstances) at the
time Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company and the Guarantors with certain provisions of the
Indenture and the Securities and the Guarantees and certain past Defaults under
the Indenture and the Securities and the Guarantees and their consequences. Any
such consent or waiver by or on behalf of the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof whether or not notation of such consent or
waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Securities (in the event such Guarantor or
such other obligor is obligated to make payments in respect of the Securities),
which is absolute and unconditional, to pay the principal of, and premium, if
any, and interest on, this Security at the times, place, and rate, and in the
coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Security Registrar duly executed by,
the Holder hereof or its attorney duly authorized in writing, and thereupon one
or more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
Certificated securities shall be transferred to all beneficial holders
in exchange for their beneficial interests in the Rule 144A Global Securities if
(x) the Depositary notifies the Company that it is unwilling or unable to
continue as depository for such Global Security and a successor depository is
not appointed by the Company within 90 days or (y) there shall have occurred and
be continuing an Event of Default and the Security Registrar has received a
request from the Depositary. Upon any such issuance, the
46
<PAGE>
Trustee is required to register such certificated Securities in the name of, and
cause the same to be delivered to, such Person or Persons (or the nominee of any
thereof).
Securities in certificated form are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof.
As provided in the Indenture and subject to certain limitations therein set
forth, the Securities are exchangeable for a like aggregate principal amount of
Securities of a differing authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, any Guarantor, the Trustee and any agent of the Company,
any Guarantor or the Trustee may treat the Person in whose name this Security is
registered as the owner hereof for all purposes, whether or not this Security is
overdue, and neither the Company, any Guarantor, the Trustee nor any such agent
shall be affected by notice to the contrary.
THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES THEREOF.
All terms used in this Security which are defined in the Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Indenture.
[The Transferee Certificate, in the form of Appendix II hereto, will
be attached to the Series B Security.]
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ARTICLE THREE
THE SECURITIES
Section 301. Title and Terms.
---------------
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to the aggregate
liquidation preference of the Exchange Preferred Stock, plus accumulated and
unpaid dividends on the date of exchange of the Exchange Preferred Stock, into
Securities (plus any additional Securities issued in lieu of cash interest as
described herein) and will mature on June 1, 2010, except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Section 303, 304, 305, 306,
307, 308, 906, 1012, 1014 or 1108.
The Securities shall be known and designated as the "13 1/2%
Subordinated Debentures due 2010" of the Company. The Stated Maturity of the
Securities shall be June 1, 2010, and the Securities shall each bear interest at
the rate of 13 1/2% per annum, and will be payable on June 1 and December 1 of
each year, commencing on the first such date after the issuance date of the
Securities, to Holders of record on the immediately preceding May 15 and
November 15. Interest payable on or prior to June 1, 2003 may be paid in the
form of additional Securities valued at the principal amount thereof. Interest
on the Securities will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from the date of issuance of the
Securities.
The principal of, premium, if any, and interest and Liquidated
Damages, if any, on, the Securities shall be payable at an office or agency of
the Company in The City of San Francisco maintained for such purposes (which
initially will be a corporate trust office of the Trustee located at
______________________________________); provided, however, that payment of
interest may be made at the option of the Company by check mailed to addresses
of the Persons entitled thereto as shown on the Security Register.
The Securities shall be subject to repurchase by the Company pursuant
to an Offer as provided in Section 1012.
Holders shall have the right to require the Company to purchase their
Securities, in whole or in part, in the event of a Change of Control pursuant to
Section 1014.
The Securities shall be redeemable as provided in Article Eleven and
in the Securities.
At the election of the Company, the entire Indebtedness on the
Securities or certain of the Company's obligations and covenants and certain
Events of Default thereunder may be defeased as provided in Article Four.
Section 302. Denominations.
-------------
The Securities shall be issuable only in fully registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
Section 303. Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Securities shall be executed on behalf of the Company by one of
its Chairman of the Board, its President, its Chief Executive Officer, its Chief
Financial Officer or one of its Vice Presidents under its corporate seal
reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signatures of any of these officers on the Securities may be
manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time
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the proper officers of the Company shall bind the Company, notwithstanding that
such individuals or any of them have ceased to hold such offices prior to the
authentication and delivery of such Securities or did not hold such offices at
the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company to
the Trustee (with or without Guarantees endorsed thereon) for authentication,
together with a Company Order for the authentication and delivery of such
Securities; and the Trustee in accordance with such Company Order shall
authenticate and make available for delivery such Securities as provided in this
Indenture and not otherwise.
Each Security shall be dated the date of its authentication.
No Security or Guarantee endorsed thereon shall be entitled to any
benefit under this Indenture or be valid or obligatory for any purpose unless
there appears on such Security a certificate of authentication substantially in
the form provided for herein duly executed by the Trustee by manual signature of
an authorized officer, and such certificate upon any Security shall be
conclusive evidence, and the only evidence, that such Security has been duly
authenticated and delivered hereunder and is entitled to the benefits of this
Indenture.
In case the Company or any Guarantor, pursuant to Article Eight,
shall, in a single transaction or through a series of related transactions, be
consolidated or merged with or into any other Person or shall sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of its
properties and assets to any Person, and the successor Person resulting from
such consolidation or surviving such merger, or into which the Company or such
Guarantor shall have been merged, or the successor Person which shall have
participated in the sale, assignment, conveyance, transfer, lease or other
disposition as aforesaid, shall have executed an indenture supplemental hereto
with the Trustee pursuant to Article Eight, any of the Securities authenticated
or delivered prior to such consolidation, merger, sale, assignment, conveyance,
transfer, lease or other disposition may, from time to time, at the request of
the successor Person, be exchanged for other Securities executed in the name of
the successor Person with such changes in phraseology and form as may be
appropriate, but otherwise in substance of like tenor as the Securities
surrendered for such exchange and of like principal amount; and the Trustee,
upon Company Request of the successor Person, shall authenticate and deliver
Securities as specified in such request for the purpose of such exchange. If
Securities shall at any time be authenticated and delivered in any new name of a
successor Person pursuant to this Section 303 in exchange or substitution for or
upon registration of transfer of any Securities, such successor Person, at the
option of the Holders but without expense to them, shall provide for the
exchange of all Securities at the time Outstanding for Securities authenticated
and delivered in such new name.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities on behalf of the Trustee. Unless limited by
the terms of such appointment, an authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Security Registrar or Paying
Agent to deal with the Company and its Affiliates.
If an officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates such Security such Security shall
be valid nevertheless.
Section 304. Temporary Securities.
--------------------
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and make
available for delivery, temporary Securities which are printed, lithographed,
typewritten or otherwise produced, in any authorized denomination, substantially
of the tenor of the definitive Securities in lieu of which they are issued and
with such appropriate insertions, omissions, substitutions and other variations
as the officers executing such Securities may determine, as
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conclusively evidenced by their execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for such purpose pursuant to Section 1002,
without charge to the Holder. Upon surrender for cancellation of any one or
more temporary Securities, the Company shall execute and the Trustee (in
accordance with a Company Order for the authentication of such Securities) shall
authenticate and make available for delivery in exchange therefor a like
principal amount of definitive Securities of authorized denominations. Until so
exchanged the temporary Securities shall in all respects be entitled to the same
benefits under this Indenture as definitive Securities.
Section 305. Registration, Registration of Transfer and Exchange.
---------------------------------------------------
The Company shall cause the Trustee to keep, so long as it is the
Security Registrar, at the Corporate Trust Office of the Trustee, or such other
office as the Trustee may designate, a register (the register maintained in such
office or in any other office or agency designated pursuant to Section 1002
being herein sometimes referred to as the "Security Register") in which, subject
to such reasonable regulations as the Security Registrar may prescribe, the
Company shall provide for the registration of Securities and of transfers of
Securities. The Trustee shall initially be the "Security Registrar" for the
purpose of registering Securities and transfers of Securities as herein
provided. The Company may change the Security Registrar or appoint one or more
co-Security Registrars without notice.
Upon surrender for registration of transfer of any Security at the
office or agency of the Company designated pursuant to Section 1002, the Company
shall execute, and the Trustee shall (in accordance with a Company Order for the
authentication of such Securities) authenticate and make available for delivery,
in the name of the designated transferee or transferees, one or more new
Securities of the same series of any authorized denomination or denominations,
of a like aggregate principal amount.
Furthermore, any Holder of a Global Security shall, by acceptance of
such Global Security, agree that transfers of beneficial interests in such
Global Security may be effected only through a book-entry system maintained by
the Holder of such Global Security (or its agent), and that ownership of a
beneficial interest in a Security shall be required to be reflected in a book
entry.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denomination or denominations, of a like aggregate
principal amount, upon surrender of the Securities to be exchanged at such
office or agency. Whenever any Securities are so surrendered for exchange, the
Company shall execute, and the Trustee shall (in accordance with a Company Order
for the authentication of such Securities) authenticate and make available for
delivery, Securities of the same series which the Holder making the exchange is
entitled to receive; provided that no exchange of Series A Securities issued and
outstanding, if any, for Series B Securities shall occur until an Exchange Offer
Registration Statement shall have been declared effective by the Commission and
that the Series A Securities exchanged for the Series B Securities shall be
canceled.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
Indebtedness, and entitled to the same benefits under this Indenture, as the
Securities surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer,
or for exchange, repurchase or redemption, shall (if so required by the Company
or the Trustee) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company and the Security Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made to a Holder for any registration of
transfer, exchange or
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redemption of Securities, except for any tax or other governmental charge that
may be imposed in connection therewith, other than exchanges pursuant to
Sections 303, 304, 305, 906, 1012, 1015 or 1108 not involving any transfer.
Neither the Company nor the Trustee shall be required (a) to issue,
register the transfer of or exchange any Security during a period beginning at
the opening of business 15 days before the mailing of a notice of redemption of
the Securities selected for redemption under Section 1104 and ending at the
close of business on the day of such mailing or (b) to register the transfer of
or exchange any Security so selected for redemption in whole or in part, except
the unredeemed portion of Securities being redeemed in part.
Every Security shall be subject to the restrictions on transfer
provided in the legend required to be set forth on the face of each Security
pursuant to Section 202, and the restrictions set forth in this Section 305, and
the Holder of each Security, by such Holder's acceptance thereof (or interest
therein), agrees to be bound by such restrictions on transfer.
Except as provided in the preceding paragraph, any Security
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, any Global Security, whether pursuant to this Section 305,
Section 304, 308, 906 or 1108 or otherwise, shall also be a Global Security and
bear the legend specified in Section 202.
Section 306. Book Entry Provisions for Global Securities.
-------------------------------------------
(a) Each Global Security initially shall (i) be registered in the name
of the nominee of the Depositary, (ii) be deposited with, or on behalf of, the
Depositary and (iii) bear legends as set forth in Section 202.
Members of, or participants in, the Depositary ("Participants") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depositary, or the Trustee as its custodian, or under such
Global Security, and the Depositary may be treated by the Company, the Trustee
and any agent of the Company or the Trustee as the absolute owner of such Global
Security for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Trustee or any agent of the Company or the
Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or shall impair, as between the
Depositary and its Participants, the operation of customary practices governing
the exercise of the rights of a holder of any Security.
(b) Notwithstanding any other provision in this Indenture, no Global
Security may be exchanged in whole or in part for Securities registered, and no
transfer of a Global Security in whole or in part may be registered, in the name
of any Person other than the Depositary for such Global Security or a nominee
thereof unless (i) such Depositary (A) has notified the Company that it is
unwilling or unable to continue as Depositary for such Global Security or (B)
has ceased to be a clearing agency registered as such under the Exchange Act,
and in either case the Company fails to appoint a successor Depositary, (ii) the
Company, at its option, executes and delivers to the Trustee a Company Order
stating that it elects to cause the issuance of the Securities in certificated
form and that all Global Securities shall be exchanged in whole for Securities
that are not Global Securities (in which case such exchange shall be effected by
the Trustee) or (iii) there shall have occurred and be continuing an Event of
Default or any event which after notice or lapse of time or both would be an
Event of Default with respect to such Global Security.
(c) If any Global Security is to be exchanged for other Securities or
canceled in whole, it shall be surrendered by or on behalf of the Depositary or
its nominee to the Trustee, as Security Registrar, for exchange or cancellation
as provided in this Article Three. If any Global Security is to be exchanged
for other Securities or canceled in part, or if another Security is to be
exchanged in whole or in part for a beneficial interest in any Global Security,
then either (i) such Global Security shall be so surrendered for exchange or
cancellation as provided in this Article Three or (ii) the principal amount
thereof shall be reduced or increased by an amount equal to the portion thereof
to be so exchanged or canceled, or equal to
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<PAGE>
the principal amount of such other Security to be so exchanged for a beneficial
interest therein, as the case may be, by means of an appropriate adjustment made
on the records of the Trustee, as Security Registrar, whereupon the Trustee, in
accordance with the Applicable Procedures, shall instruct the Depositary or its
authorized representative to make a corresponding adjustment to its records.
Upon any such surrender or adjustment of a Global Security, the Trustee shall,
subject to this Section 306(c) and as otherwise provided in this Article Three,
authenticate and deliver any Securities issuable in exchange for such Global
Security (or any portion thereof) to or upon the order of, and registered in
such names as may be directed by, the Depositary or its authorized
representative. Upon the request of the Trustee in connection with the
occurrence of any of the events specified in the preceding paragraph, the
Company shall promptly make available to the Trustee a reasonable supply of
Securities that are not in the form of Global Securities. The Trustee shall be
entitled to rely upon any order, direction or request of the Depositary or its
authorized representative which is given or made pursuant to this Article Three
if such order, direction or request is given or made in accordance with the
Applicable Procedures.
(d) Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any portion
thereof, whether pursuant to this Article Three or otherwise, shall be
authenticated and delivered in the form of, and shall be, a Global Security,
unless such Security is registered in the name of a Person other than the
Depositary for such Global Security or a nominee thereof.
(e) The Depositary or its nominee, as registered owner of a Global
Security, shall be the Holder of such Global Security for all purposes under the
Indenture and the Securities, and owners of beneficial interests in a Global
Security shall hold such interests pursuant to the Applicable Procedures.
Accordingly, any such owner's beneficial interest in a Global Security will be
shown only on, and the transfer of such interest shall be effected only through,
records maintained by the Depositary or its nominee or its Participants.
Section 307. Special Transfer and Exchange Provisions .
----------------------------------------
(a) Certain Transfers and Exchanges. Transfers and exchanges of
-------------------------------
Securities and beneficial interests in a Global Security shall be made only in
accordance with this Section 307.
A beneficial interest in a Global Security may be exchanged for a
Security that is not a Global Security as provided in Section 307(b),
provided that, if such interest is a beneficial interest in the Rule
--------
144A Global Security, then such interest shall bear the Private
Placement Legend (subject to Section 307(b)).
(b) Private Placement Legends.
-------------------------
Rule 144A Securities and their Successor Securities shall bear a
Private Placement Legend, subject to the following:
(i) subject to the following clauses of this Section 307(b), a
Security or any portion thereof which is exchanged, upon transfer or
otherwise, for a Global Security or any portion thereof shall bear the
Private Placement Legend borne by such Global Security while
represented thereby;
(ii) subject to the following clauses of this Section 307(b), a
new Security which is not a Global Security and is issued in exchange
for another Security (including a Global Security) or any portion
thereof, upon transfer or otherwise, shall bear the Private Placement
Legend borne by such other Security;
(iii) Series B Securities, and all other Securities sold or
otherwise disposed of pursuant to an effective registration statement
under the Securities Act, together with their
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<PAGE>
respective Successor Securities, shall not bear a Private Placement
Legend;
(iv) at any time after the Securities may be freely transferred
without registration under the Securities Act or without being subject
to transfer restrictions pursuant to the Securities Act, a new
Security which does not bear a Private Placement Legend may be issued
in exchange for or in lieu of a Security (other than a Global
Security) or any portion thereof which bears such a legend if the
Trustee has received an Unrestricted Securities Certificate
substantially in the form of Exhibit C hereto, satisfactory to the
Trustee and duly executed by the Holder of such legended Security or
his attorney duly authorized in writing, and after such date and
receipt of such certificate, the Trustee shall authenticate and
deliver such a new Security in exchange for or in lieu of such other
Security as provided in this Article Three;
(v) a new Security which does not bear a Private Placement Legend
may be issued in exchange for or in lieu of a Security (other than a
Global Security) or any portion thereof which bears such a legend if,
in the Company's judgment, placing such a legend upon such new
Security is not necessary to ensure compliance with the registration
requirements of the Securities Act, and the Trustee, at the direction
of the Company, shall authenticate and deliver such a new Security as
provided in this Article Three; and
(vi) notwithstanding the foregoing provisions of this Section
307(b), a Successor Security of a Security that does not bear a
particular form of Private Placement Legend shall not bear such form
of legend unless the Company has reasonable cause to believe that such
Successor Security is a "restricted security" within the meaning of
Rule 144, in which case the Trustee, at the direction of the Company,
shall authenticate and deliver a new Security bearing a Private
Placement Legend in exchange for such Successor Security as provided
in this Article Three.
By its acceptance of any Security bearing the Private Placement
Legend, each Holder of such a Security acknowledges the restrictions on transfer
of such Security set forth in this Indenture and in the Private Placement Legend
and agrees that it will transfer such Security only as provided in this
Indenture.
The Security Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 306 or this Section
307. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon the
giving of reasonable written notice to the Security Registrar.
Section 308. Mutilated, Destroyed, Lost and Stolen Securities.
------------------------------------------------
If (a) any mutilated Security is surrendered to the Trustee, or (b)
the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the
Company, any Guarantor or the Trustee, such security or indemnity, in each case,
as may be required by them to save each of them harmless, then, in the absence
of notice to the Company, any Guarantor or the Trustee that such Security has
been acquired by a bona fide purchaser, the Company shall execute and upon a
Company Request the Trustee shall authenticate and make available for delivery,
in exchange for any such mutilated Security or in lieu of any such destroyed,
lost or stolen Security, a replacement Security of like tenor and principal
amount, bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a replacement Security, pay such Security.
Upon the issuance of any replacement Securities under this Section,
the Company may
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<PAGE>
require the payment of a sum sufficient to pay all documentary, stamp or similar
issue or transfer taxes or other governmental charges that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Trustee) connected therewith.
Every replacement Security issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company and any Guarantor, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
Section 309. Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest on any Security which is payable, and is punctually paid or
duly provided for, on the Stated Maturity of such interest shall be paid to the
Person in whose name the Security (or any Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest payment.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on the Stated Maturity of such interest, and interest
on such defaulted interest at the then applicable interest rate borne by the
Securities, to the extent lawful (such defaulted interest and interest thereon
herein collectively called "Defaulted Interest"), shall forthwith cease to be
payable to the Holder on the Regular Record Date; and such Defaulted Interest
may be paid by the Company, at its election in each case, as provided in
Subsection (a) or (b) below:
(i) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities (or any relevant Predecessor
Securities) are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee
in writing of the amount of Defaulted Interest proposed to be paid on
each Security and the date (not less than 30 days after such notice)
of the proposed payment (the "Special Payment Date"), and at the same
time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the
Trustee for such deposit prior to the Special Payment Date, such money
when deposited to be held in trust for the benefit of the Persons
entitled to such Defaulted Interest as in this Subsection provided.
Thereupon the Trustee shall fix a Special Record Date for the payment
of such Defaulted Interest which shall be not more than 15 days and
not less than 10 days prior to the date of the Special Payment Date
and not less than 10 days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify the
Company in writing of such Special Record Date. In the name and at
the expense of the Company, the Trustee shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record
Date therefor to be mailed, first-class postage prepaid, to each
Holder at its address as it appears in the Security Register, not less
than 10 days prior to such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record
Date and Special Payment Date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons in whose names the
Securities are registered on such Special Record Date and shall no
longer be payable pursuant to the following Subsection (b).
(ii) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon
such notice as may be required by this Indenture not
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<PAGE>
inconsistent with the requirements of such exchange, if, after written
notice given by the Company to the Trustee of the proposed payment
pursuant to this Subsection, such payment shall be deemed practicable
by the Trustee.
Subject to the foregoing provisions of this Section 309, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
Section 310. CUSIP Numbers.
-------------
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and the Company, or the Trustee on behalf of the Company,
shall use CUSIP numbers in notices of redemption or exchange as a convenience to
Holders; provided, however, that any such notice shall state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of redemption or exchange and
that reliance may be placed only on the other identification numbers printed on
the Securities; and provided further, however, that failure to use CUSIP numbers
in any notice of redemption or exchange shall not affect the validity or
sufficiency of such notice.
Section 311. Persons Deemed Owners.
---------------------
Prior to due presentment of a Security for registration of transfer,
the Company, any Guarantor, the Trustee and any agent of the Company, any
Guarantor or the Trustee may treat the Person in whose name any Security is
registered as the owner of such Security for the purpose of receiving payment of
principal of, premium, if any, and (subject to Section 309) interest on, such
Security and for all other purposes whatsoever, whether or not such Security is
overdue, and neither the Company, any Guarantor, the Trustee nor any agent of
the Company, any Guarantor or the Trustee shall be affected by notice to the
contrary.
Section 312. Cancellation.
------------
All Securities surrendered for payment, purchase, redemption,
registration of transfer or exchange shall be delivered to the Trustee and, if
not already canceled, shall be promptly canceled by it. The Company and any
Guarantor may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company or such
Guarantor may have acquired in any manner whatsoever, and all Securities so
delivered shall be promptly canceled by the Trustee. No Securities shall be
authenticated in lieu of or in exchange for any Securities canceled as provided
in this Section 312, except as expressly permitted by this Indenture. All
canceled Securities held by the Trustee shall be returned to the Company. The
Trustee shall provide the Company a list of all Securities that have been
canceled from time to time as requested by the Company.
Section 313. Computation of Interest.
-----------------------
Interest on the Securities shall be computed on the basis of a 360-day
year comprised of twelve 30-day months.
ARTICLE FOUR
DEFEASANCE AND COVENANT DEFEASANCE
Section 401. Company's Option to Effect Defeasance or Covenant
-------------------------------------------------
Defeasance.
- ----------
The Company may, at its option by Board Resolution, at any time, with
respect to the Securities, elect to have either Section 402 or Section 403 be
applied to all of the Outstanding Securities (the
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<PAGE>
"Defeased Securities"), upon compliance with the conditions set forth below in
this Article Four.
Section 402. Defeasance and Discharge.
------------------------
Upon the Company's exercise under Section 401 of the option applicable
to this Section 402, the Company, each Guarantor and any other obligor upon the
Securities, if any, shall be deemed to have been discharged from its obligations
with respect to the Defeased Securities on the date the conditions set forth in
Section 404 below are satisfied (hereinafter, "defeasance"). For this purpose,
such defeasance means that the Company, each Guarantor and any other obligor
upon the Securities shall be deemed to have paid and discharged the entire
Indebtedness represented by the Defeased Securities, which shall thereafter be
deemed to be "Outstanding" only for the purposes of Section 405 and the other
Sections of this Indenture referred to in (a) and (b) below, and to have
satisfied all its other obligations under such Securities and this Indenture
insofar as such Securities are concerned (and the Trustee, at the expense of the
Company and upon Company Request, shall execute proper instruments acknowledging
the same), except for the following which shall survive until otherwise
terminated or discharged hereunder: (a) the rights of Holders of Defeased
Securities to receive, solely from the trust fund described in Section 404 and
as more fully set forth in such Section, payments in respect of the principal
of, premium, if any, and interest on, such Securities, when such payments are
due, (b) the Company's obligations with respect to such Defeased Securities
under Sections 304, 305, 308, 1002 and 1003, (c) the rights, powers, trusts,
duties and immunities of the Trustee hereunder, including, without limitation,
the Trustee's rights under Section 607, and (d) this Article Four. Subject to
compliance with this Article Four, the Company may exercise its option under
this Section 402 notwithstanding the prior exercise of its option under Section
403 with respect to the Securities.
Section 403. Covenant Defeasance.
-------------------
Upon the Company's exercise under Section 401 of the option applicable
to this Section 403, the Company and each Guarantor shall be released from its
obligations under any covenant or provision contained or referred to in Sections
1005 through 1022, inclusive, and the provisions of clauses (iii) and (v) of
Section 801(a) with respect to the Defeased Securities on and after the date the
conditions set forth in Section 404 below are satisfied (hereinafter, "covenant
defeasance"), and the Defeased Securities shall thereafter be deemed to be not
"Outstanding" for the purposes of any direction, waiver, consent or declaration
or Act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "Outstanding" for all other purposes
hereunder. For this purpose, such covenant defeasance means that, with respect
to the Defeased Securities, the Company and each Guarantor may omit to comply
with and shall have no liability in respect of any term, condition or limitation
set forth in any such Section, whether directly or indirectly, by reason of any
reference elsewhere herein to any such Section or by reason of any reference in
any such Section to any other provision herein or in any other document and such
omission to comply shall not constitute a Default or an Event of Default under
Section 501(c) but, except as specified above, the remainder of this Indenture
and such Defeased Securities shall be unaffected thereby.
Section 404. Conditions to Defeasance or Covenant Defeasance.
-----------------------------------------------
The following shall be the conditions to application of either Section
402 or Section 403 to the Defeased Securities:
(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders of such Securities, (1) cash in United States
dollars, (2) U.S. Government Obligations, or (3) a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants or a nationally recognized investment banking
firm expressed in a written certification thereof delivered to the Trustee, to
pay and discharge, and which shall be applied by the Trustee to pay and
discharge, the principal of, premium, if any, and interest on, the Defeased
Securities, on the Stated Maturity thereof (or on any date after June 1, 2003
(such date being referred to as the "Defeasance Redemption Date"), if at or
prior to electing to exercise either
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its option applicable to Section 402 or its option applicable to Section 403,
the Company has delivered to the Trustee an irrevocable notice to redeem the
Defeased Securities on the Defeasance Redemption Date). For this purpose, "U.S.
Government Obligations" means securities that are (I) direct obligations of the
United States of America for the timely payment of which its full faith and
credit is pledged or (II) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt;
(b) In the case of an election under Section 402, the Company shall
have delivered to the Trustee an Opinion of Independent Counsel in the United
States stating that (1) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (2) since the date
hereof, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such Opinion of Independent
Counsel in the United States shall confirm that, the Holders of the Outstanding
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred;
(c) In the case of an election under Section 403, the Company shall
have delivered to the Trustee an Opinion of Independent Counsel in the United
States to the effect that the Holders of the Outstanding Securities will not
recognize income, gain or loss for federal income tax purposes as a result of
such 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
such covenant defeasance had not occurred;
(d) No Default or Event of Default (other than a Default or Event of
Default under this Indenture resulting from the borrowing of funds to be applied
to such deposit) shall have occurred and be continuing on the date of such
deposit or insofar as Section 501(h) or (i) is concerned, at any time during the
period ending on the 91st day after the date of deposit (it being understood
that this condition shall not be deemed satisfied until the expiration of such
period);
(e) Such defeasance or covenant defeasance shall not cause the Trustee
for the Securities to have a conflicting interest for purposes of the Trust
Indenture Act with respect to any other securities of the Company or any
Guarantor;
(f) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a Default under, this Indenture or any
other material agreement or instrument to which the Company, any Guarantor or
any Restricted Subsidiary is a party or by which it is bound;
(g) Such defeasance or covenant defeasance shall not result in the
trust arising from such deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder;
(h) The Company shall have delivered to the Trustee an Opinion of
Independent Counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
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(i) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of the Securities or any Guarantee over the other
creditors of the Company or any Guarantor with the intent of defeating,
hindering, delaying or defrauding creditors of the Company, any Guarantor or
others;
(j) No event or condition shall exist that would prevent the Company
from making payments of the principal of, premium, if any, and interest on the
Securities on the date of such deposit or at any time ending on the 91st day
after the date of such deposit; and
(k) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Independent Counsel, each stating that all
conditions precedent provided for relating to either the defeasance under
Section 402 or the covenant defeasance under Section 403 (as the case may be)
have been complied with.
Opinions of Counsel or Opinions of Independent Counsel required to be
delivered under this Section shall be in form and substance reasonably
satisfactory to the Trustee may have qualifications customary for opinions of
the type required and counsel delivering such opinions may rely on certificates
of the Company or government or other officials customary for opinions of the
type required, which certificates shall be limited as to matters of fact,
including that various financial covenants have been complied with.
Section 405. Deposited Money and U.S. Government Obligations to Be
-----------------------------------------------------
Held in Trust; Other Miscellaneous Provisions.
- ---------------------------------------------
Subject to the provisions of the last paragraph of Section 1003, all
United States dollars and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee pursuant to Section 404 in respect of the
Defeased Securities shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any Paying Agent (excluding the Company or
any of its Affiliates acting as Paying Agent), as the Trustee may determine, to
the Holders of such Securities of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 404 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
imposed, assessed or for the account of the Holders of the Defeased Securities.
Anything in this Article Four to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any United States dollars or U.S. Government Obligations held by it as
provided in Section 404 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect defeasance or covenant defeasance.
Section 406. Reinstatement.
-------------
If the Trustee or Paying Agent is unable to apply any United States
dollars or U.S. Government Obligations in accordance with Section 402 or 403, as
the case may be, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the Company's obligations under this Indenture and the Securities and any
Guarantor's obligations under any Guarantee shall be revived and reinstated,
with present and prospective effect, as though no deposit had occurred pursuant
to Section 402 or 403, as the case may be, until such time as the Trustee or
Paying Agent is permitted to apply all such United States dollars or U.S.
Government Obligations in accordance with Section 402 or 403, as the case may
be; provided, however, that if the Company makes
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any payment to the Trustee or Paying Agent of principal of, premium, if any, or
interest on any Security following the reinstatement of its obligations, the
Trustee or Paying Agent shall promptly pay any such amount to the Holders of the
Securities and the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the United States dollars and U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE FIVE
REMEDIES
Section 501. Events of Default.
-----------------
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(a) there shall be a default in the payment of any interest on any
Security when it becomes due and payable, and such default shall continue for a
period of 60 days;
(b) there shall be a default in the payment of the principal of (or
premium, if any, on) any Security at its Maturity (upon acceleration, optional
or mandatory redemption, required repurchase or otherwise);
(c) (i) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under this Indenture, the
Registration Rights Agreement or any Guarantee (other than a default in the
performance, or breach, of a covenant or agreement which is specifically dealt
with in clause (a), (b) or in clause (ii), (iii) or (iv) of this clause (c)) and
such default or breach shall continue for a period of 30 days after written
notice has been given, by certified mail, (x) to the Company by the Trustee or
(y) to the Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the outstanding Securities; (ii) there shall be a default in
the performance or breach of the provisions of Article Eight; (iii) the Company
shall have failed to make or consummate an Offer in accordance with the
provisions of Section 1012; or (iv) the Company shall have failed to make or
consummate a Change of Control Offer in accordance with the provisions of
Section 1014;
(d) (i) any default by the Company or any Restricted Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with respect
to amounts in excess of $5.0 million under any agreement, indenture or
instrument evidencing Indebtedness when the same shall become due and payable in
full and such default shall have continued after any applicable grace period and
shall not have been cured or waived and, if not already matured at its final
maturity in accordance with its terms, the holder of such Indebtedness shall
have the right to accelerate such Indebtedness or (ii) any event of default as
defined in any agreement, indenture or instrument of the Company evidencing
Indebtedness in excess of $5.0 million shall have occurred and the Indebtedness
thereunder, if not already matured at its final maturity in accordance with its
terms, shall have been accelerated;
(e) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in full
force and effect and enforceable in accordance with its terms, except to the
extent contemplated by this Indenture and any such Guarantee;
(f) one or more judgments or orders for the payment of money in excess
of $5.0 million, either individually or in the aggregate, shall be rendered
against the Company not paid or covered by financially sound third-party
insurers, or any Restricted Subsidiary or any of their respective properties and
there shall not be discharged and there shall have been a period of 60
consecutive days during
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which a stay of enforcement of such judgment or order, by reason of an appeal or
otherwise, shall not be in effect;
(g) any holder or holders of at least $5.0 million in aggregate
principal amount of Indebtedness of the Company or any Restricted Subsidiary
after a default under such Indebtedness shall notify the Trustee of its
commencement of proceedings to foreclose on any assets of the Company or any
Restricted Subsidiary that have been pledged to or for the benefit of such
holder or holders to secure such Indebtedness or shall commence proceedings, or
take any action (including by way of set-off), to retain in satisfaction of such
Indebtedness or to collect on, seize, dispose of or apply in satisfaction of
Indebtedness, assets of the Company or any Restricted Subsidiary (including
funds on deposit or held pursuant to lock-box and other similar arrangements);
(h) there shall have been the entry by a court of competent
jurisdiction of (i) a decree or order for relief in respect of the Company or
any Restricted Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (ii) a decree or order adjudging the Company or any
Restricted Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Restricted Subsidiary under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Restricted Subsidiary or of any
substantial part of their respective properties, or ordering the winding up or
liquidation of their respective affairs, and any such decree or order for relief
shall continue to be in effect, or any such other decree or order shall be
unstayed and in effect, for a period of 60 consecutive days; or
(i) (i) the Company or any Restricted Subsidiary commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (ii) the Company or any
Restricted Subsidiary consents to the entry of a decree or order for relief in
respect of the Company or such Restricted Subsidiary in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, (iii) the Company or any
Restricted Subsidiary files a petition or answer or consent seeking
reorganization or relief under any applicable federal or state law, (iv) the
Company or any Restricted Subsidiary (1) consents to the filing of such petition
or the appointment of, or taking possession by, a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the Company
or such Restricted Subsidiary or of any substantial part of the Company's
Consolidated properties, (2) makes an assignment for the benefit of creditors or
(3) admits in writing its inability to pay its debts generally as they become
due or (v) the Company or any Restricted Subsidiary takes any corporate action
in furtherance of any such actions in this paragraph (i).
Section 502. Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default (other than an Event of Default specified in
Sections 501(h) and (i) with respect to the Company) shall occur and be
continuing with respect to this Indenture, the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Securities then Outstanding
may, and the Trustee at the request of such Holders shall, declare all unpaid
principal of, premium, if any, and accrued interest on all Securities to be due
and payable, by a notice in writing to the Company (and to the Trustee if given
by the Holders of the Securities) and upon any such declaration, such principal,
premium, if any, and interest shall become due and payable immediately. If an
Event of Default specified in clause (h) or (i) of Section 501 occurs with
respect to the Company and is continuing, then all the Securities shall ipso
facto become and be due and payable immediately in an amount equal to the
principal amount of the Securities, together with accrued and unpaid interest,
if any, to the date the Securities become due and payable, without any
declaration or other act on the part of the Trustee or any Holder. Thereupon,
the Trustee may, at its discretion, proceed to protect and enforce the rights of
the Holders of the Securities by appropriate judicial proceedings.
Notwithstanding the foregoing provisions of this paragraph, the obligations
under the Securities shall not be accelerated or otherwise become due and
payable under this paragraph prior to the Existing Senior Notes Maturity Date.
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If the date on which an Event of Default occurs is on or prior to the
Existing Senior Notes Maturity Date, then the remedy for such Event of Default
will be limited as set forth in this paragraph. Upon the acceleration of any
Designated Senior Debt by the holders thereof while any such Event of Default is
continuing, the interest rate payable with respect to the Securities will be
increased by one-half of one percent per annum for the 90-day period following
such Event of Default, which rate will further increase by one-half of one
percent per annum with respect to each subsequent 90-day period during which an
Event of Default is continuing, up to a maximum aggregate increase in interest
rate of two percent (2%) per annum. Any interest rate increase effected pursuant
to the foregoing shall only be effective during such time that such Event of
Default is continuing (or any other Event of Default is occurring while such
initial Event of Default is continuing) and prior to the Existing Senior Note
Maturity Date. If an Event of Default occurs prior to the Existing Senior Note
Maturity Date but is continuing past such date, then, upon the Existing Senior
Note Maturity Date, the interest rate will return to the stated rate and the
Trustee and Holders of the Securities will have the remedies described in the
preceding paragraph and as otherwise provided in this Indenture. In the event
that an Event of Default occurs prior to the Existing Senior Note Maturity Date
and the holders of Designated Senior Debt do not accelerate such Designated
Senior Debt, no remedy will exist for the Event of Default (unless such Event of
Default continues through the Existing Senior Note Maturity Date, in which case
the Trustee and holders of the Securities will have the remedies described in
the preceding paragraph and as otherwise provided in this Indenture effective
upon the Existing Senior Note Maturity Date).
After a declaration of acceleration, but before a judgment or decree
for payment of the money due has been obtained by the Trustee, the Holders of a
majority in aggregate principal amount of the Securities Outstanding, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(i) all sums paid or advanced by the Trustee under this Indenture
and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel;
(ii) all overdue interest on all Outstanding Securities;
(iii) the principal of and premium, if any, on any Outstanding
Securities which have become due otherwise than by such declaration of
acceleration and interest thereon at a rate borne by the Securities;
and
(iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities;
and
(b) all Events of Default, other than the non-payment of principal of
the Securities which have become due solely by such declaration of acceleration,
have been cured or waived as provided in Section 513. No such rescission shall
affect any subsequent Default or impair any right consequent thereon.
Section 503. Collection of Indebtedness and Suits for Enforcement by
-------------------------------------------------------
Trustee.
- -------
The Company and each Guarantor covenant that if
(a) default is made in the payment of any interest on any Security
when such interest becomes due and payable and such default continues for a
period of 30 days, or
(b) default is made in the payment of the principal of or premium, if
any, on any Security at the Stated Maturity thereof,
the Company and such Guarantor will, upon demand of the Trustee, pay to it, for
the benefit of the Holders of
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such Securities, the whole amount then due and payable on such Securities for
principal and premium, if any, and interest, with interest upon the overdue
principal and premium, if any, and, to the extent that payment of such interest
shall be legally enforceable, upon overdue installments of interest, at the rate
borne by the Securities; and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If the Company or any Guarantor, as the case may be, fails to pay such
amounts forthwith upon such demand, the Trustee, in its own name and as trustee
of an express trust, may institute a judicial proceeding for the collection of
the sums so due and unpaid and may prosecute such proceeding to judgment or
final decree, and may enforce the same against the Company or any Guarantor or
any other obligor upon the Securities and collect the moneys adjudged or decreed
to be payable in the manner provided by law out of the property of the Company,
any Guarantor or any other obligor upon the Securities, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders under this Indenture or any Guarantee by such appropriate private or
judicial proceedings as the Trustee shall deem most effectual to protect and
enforce such rights, including seeking recourse against any Guarantor pursuant
to the terms of any Guarantee, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein or therein, or to enforce any other proper remedy, including,
without limitation, seeking recourse against any Guarantor pursuant to the terms
of a Guarantee, or to enforce any other proper remedy, subject however to
Section 512. No recovery of any such judgment upon any property of the Company
or any Guarantor shall affect or impair any rights, powers or remedies of the
Trustee or the Holders.
Section 504. Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor, including any
Guarantor, upon the Securities or the property of the Company or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of the Securities shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have made
any demand on the Company for the payment of overdue principal or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(a) to file and prove a claim for the whole amount of principal, and
premium, if any, and interest owing and unpaid in respect of the Securities and
to file such other papers or documents as may be necessary or advisable in order
to have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 607.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
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Section 505. Trustee May Enforce Claims without Possession of
------------------------------------------------
Securities.
- ----------
All rights of action and claims under this Indenture, the Securities
or the Guarantees may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name and as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, be
for the ratable benefit of the Holders of the Securities in respect of which
such judgment has been recovered.
Section 506. Application of Money Collected.
------------------------------
Any money collected by the Trustee pursuant to this Article or
otherwise on behalf of the Holders or the Trustee pursuant to this Article or
through any proceeding or any arrangement or restructuring in anticipation or in
lieu of any proceeding contemplated by this Article shall be applied, subject to
applicable law, in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal,
premium, if any, or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
607;
SECOND: To the payment of the amounts then due and unpaid upon the
Securities for principal, premium, if any, and interest, in respect of which or
for the benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the amounts due and payable on
such Securities for principal, premium, if any, and interest; and
THIRD: The balance, if any, to the Person or Persons entitled
thereto, including the Company, provided that all sums due and owing to the
Holders and the Trustee have been paid in full as required by this Indenture.
Section 507. Limitation on Suits.
-------------------
No Holder of any Securities shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture or the
Securities, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(b) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
trustee hereunder;
(c) such Holder or Holders have offered to the Trustee an indemnity
satisfactory to the Trustee against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 15 days after its receipt of such notice, request
and offer (and if requested, provision) of indemnity has failed to institute any
such proceeding; and
(e) no direction inconsistent with such written request has been given
to the Trustee during such 15-day period by the Holders of a majority in
principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by
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virtue of, or by availing of, any provision of this Indenture, any Security or
any Guarantee to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, any Security or any Guarantee,
except in the manner provided in this Indenture and for the equal and ratable
benefit of all the Holders.
Section 508. Unconditional Right of Holders to Receive Principal,
----------------------------------------------------
Premium and Interest.
- --------------------
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right based on the terms stated herein, which is
absolute and unconditional, to receive payment of the principal of, premium, if
any, and (subject to Section 309) interest on such Security on the respective
Stated Maturities expressed in such Security (or, in the case of redemption or
repurchase, on the Redemption Date or the repurchase date) and to institute suit
for the enforcement of any such payment, and such rights shall not be impaired
without the consent of such Holder.
Section 509. Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Guarantee and such proceeding
has been discontinued or abandoned for any reason, or has been determined
adversely to the Trustee or to such Holder, then and in every such case the
Company, any Guarantor, any other obligor on the Securities, the Trustee and the
Holders shall, subject to any determination in such proceeding, be restored
severally and respectively to their former positions hereunder, and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
Section 510. Rights and Remedies Cumulative.
------------------------------
No right or remedy herein conferred upon or reserved to the Trustee or
to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 511. Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 512. Control by Holders.
------------------
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities shall have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, provided
that
(a) such direction shall not be in conflict with any rule of law or
with this Indenture (including, without limitation, Section 507) or any
Guarantee, expose the Trustee to personal liability, or be unduly prejudicial to
Holders not joining therein; and
(b) subject to the provisions of Section 315 of the Trust Indenture
Act, the Trustee may take any other action deemed proper by the Trustee which is
not inconsistent with such direction.
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Section 513. Waiver of Past Defaults.
-----------------------
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities may on behalf of the Holders of all Outstanding
Securities waive any past Default hereunder and its consequences, except a
Default
(a) in the payment of the principal of, premium, if any, or interest
on any Security; or
(b) in respect of a covenant or a provision hereof which under this
Indenture cannot be modified or amended without the consent of the Holder of
each Security Outstanding affected by such modification or amendment.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
Section 514. Undertaking for Costs.
---------------------
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant, but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Securities,
or to any suit instituted by any Holder for the enforcement of the payment of
the principal of, premium, if any, or interest on, any Security on or after the
respective Stated Maturities expressed in such Security (or, in the case of
redemption, on or after the Redemption Date).
Section 515. Waiver of Stay, Extension or Usury Laws.
---------------------------------------
Each of the Company and the Guarantors covenants (to the extent that
it may lawfully do so) that it will not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury or other law wherever enacted, now or at any time
hereafter in force, which would prohibit or forgive the Company or any Guarantor
from paying all or any portion of the principal of, premium, if any, or interest
on the Securities contemplated herein or in the Securities or which may affect
the covenants or the performance of this Indenture; and each of the Company and
the Guarantors (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
Section 516. Remedies Subject to Applicable Law.
----------------------------------
All rights, remedies and powers provided by this Article Five may be
exercised only to the extent that the exercise thereof does not violate any
applicable provision of law in the premises, and all the provisions of this
Indenture are intended to be subject to all applicable mandatory provisions of
law which may be controlling in the premises and to be limited to the extent
necessary so that they will not render this Indenture invalid, unenforceable or
not entitled to be recorded, registered or filed under the provisions of any
applicable law.
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ARTICLE SIX
THE TRUSTEE
Section 601. Duties of Trustee.
-----------------
Subject to the provisions of Trust Indenture Act Sections 315(a)
through 315(d):
(a) if a Default or an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture and use the same degree of care and skill in its exercise
thereof as a prudent person would exercise or use under the circumstances in the
conduct of his own affairs;
(b) except during the continuance of a Default or an Event of Default:
(1) the Trustee need perform only those duties as are
specifically set forth in this Indenture and no covenants or
obligations shall be implied in this Indenture that are adverse to the
Trustee; and
(2) in the absence of bad faith or willful misconduct on its
part, the Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming to
the requirements of this Indenture. However, the Trustee shall
examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture;
(c) the Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) this Subsection (c) does not limit the effect of Subsection
(b) of this Section 601;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith, in accordance with a direction
of the Holders of a majority in principal amount of Outstanding
Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any
trust or power confirmed upon the Trustee under this Indenture;
(d) no provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it;
(e) whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to Subsections
(a), (b), (c) and (d) and (f) of this Section 601; and
(f) the Trustee shall not be liable for interest on any money or
assets received by it except as the Trustee may agree in writing with the
Company. Assets held in trust by the Trustee need not be segregated from other
assets except to the extent required by law.
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Section 602. Notice of Defaults.
------------------
Within 30 days after a Responsible Officer of the Trustee receives
notice of the occurrence of any Default, the Trustee shall transmit by mail to
all Holders and any other Persons entitled to receive reports pursuant to
Section 313(c) of the Trust Indenture Act, as their names and addresses appear
in the Security Register, notice of such Default hereunder known to the Trustee,
unless such Default shall have been cured or waived; provided, however, that the
Trustee shall be protected in withholding such notice if and so long as a trust
committee of Responsible Officers of the Trustee in good faith determines that
the withholding of such notice is in the interest of the Holders.
Section 603. Certain Rights of Trustee.
-------------------------
Subject to the provisions of Section 601 hereof and Trust Indenture
Act Sections 315(a) through 315(d):
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon receipt by it of any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of Indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) the Trustee may consult with counsel of its selection and any
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon in accordance with such
advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee security or indemnity satisfactory to the Trustee against
the costs, expenses and liabilities which might be incurred thereby;
(e) the Trustee shall not be liable for any action taken or omitted by
it in good faith and believed by it to be authorized or within the discretion,
rights or powers conferred upon it by this Indenture other than any liabilities
arising out of the negligence, bad faith or willful misconduct of the Trustee;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, approval,
appraisal, bond, debenture, note, coupon, security or other paper or document
unless requested in writing to do so by the Holders of not less than a majority
in aggregate principal amount of the Securities then Outstanding; provided that,
if the payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the Trustee by the
security afforded to it by the terms of this Indenture, the Trustee may require
reasonable indemnity against such expenses or liabilities as a condition to
proceeding; the reasonable expenses of every such investigation so requested by
the Holders of not less than 25% in aggregate principal amount of the Securities
Outstanding shall be paid by the Company or, if paid by the Trustee or any
predecessor Trustee, shall be repaid by the Company upon demand; provided,
further, the Trustee in its discretion may make such further inquiry or
investigation into such facts or matters as it may deem fit, and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company, personally
or by agent or attorney; provided, further, that no permissive power, right or
remedy conferred upon the Trustee under this Indenture shall be construed to
impose a duty to exercise such power, right or remedy; and
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(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
Section 604. Trustee Not Responsible for Recitals, Dispositions of
-----------------------------------------------------
Securities or Application of Proceeds Thereof.
- ---------------------------------------------
The recitals contained herein and in the Securities, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Securities, except that the Trustee represents that it is
duly authorized to execute and deliver this Indenture, authenticate the
Securities and perform its obligations hereunder and that the statements made by
it in any Statement of Eligibility and Qualification on Form T-1 supplied to the
Company are true and accurate subject to the qualifications set forth therein.
The Trustee shall not be accountable for the use or application by the Company
of Securities or the proceeds thereof.
Section 605. Trustee and Agents May Hold Securities; Collections;
etc..
The Trustee, any Paying Agent, Security Registrar or any other agent
of the Company, in its individual or any other capacity, may become the owner or
pledgee of Securities, with the same rights it would have if it were not the
Trustee, Paying Agent, Security Registrar or such other agent and, subject to
Trust Indenture Act Sections 310 and 311, may otherwise deal with the Company
and receive, collect, hold and retain collections from the Company with the same
rights it would have if it were not the Trustee, Paying Agent, Security
Registrar or such other agent.
Section 606. Money Held in Trust.
-------------------
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received,
but need not be segregated from other funds except to the extent required by
mandatory provisions of law. Except for funds or securities deposited with the
Trustee pursuant to Article Four, the Trustee shall be required to invest all
moneys received by the Trustee, until used or applied as herein provided, in
Cash Equivalents in accordance with the directions of the Company; provided,
however, that nothing herein shall be deemed to require the Trustee or any other
Person acting as Paying Agent to invest or pay interest on funds held for the
payment of any Securities after the Maturity thereof.
Section 607. Compensation and Indemnification of Trustee and Its
---------------------------------------------------
Prior Claim.
- -----------
The Company covenants and agrees to pay to the Trustee from time to
time, and the Trustee shall be entitled to, such compensation as the parties
shall agree in writing from time to time for all services rendered by it
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and the Company
covenants and agrees to pay or reimburse the Trustee and each predecessor
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by or on behalf of the Trustee in accordance with any of the
provisions of this Indenture (including the reasonable compensation and the
expenses and disbursements of its counsel and of all agents and other persons
not regularly in its employ) except any such expense, disbursement or advance as
may arise from its negligence, bad faith or willful misconduct. The Company
also covenants and agrees to indemnify the Trustee and each predecessor Trustee
for, and to hold it harmless against, any claim, loss, liability, tax,
assessment or other governmental charge (other than taxes applicable to the
Trustee's compensation hereunder) or expense incurred without negligence, bad
faith or willful misconduct on its part, arising out of or in connection with
the acceptance or administration of this Indenture or the trusts hereunder and
its duties hereunder, including enforcement of this Section 607 and also
including any liability which the
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Trustee may incur as a result of failure to withhold, pay or report any tax,
assessment or other governmental charge, and the costs and expenses of defending
itself against or investigating any claim or liability in connection with the
exercise or performance of any of its powers or duties hereunder. The
obligations of the Company under this Section 607 to compensate and indemnify
the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and
each predecessor Trustee for reasonable expenses, disbursements and advances
shall constitute an additional obligation hereunder and shall survive the
satisfaction and discharge of this Indenture and the resignation or removal of
the Trustee and each predecessor Trustee. As security for the performance of the
obligations of the Company under this Section 607, the Trustee shall have a lien
prior to the Securities upon all property and funds held or collected by the
Trustee as such, except funds held in trust for the benefit of the Holders of
particular Securities.
Section 608. Conflicting Interests.
---------------------
The Trustee shall comply with the provisions of Section 310(b) of the
Trust Indenture Act.
Section 609. Trustee Eligibility.
-------------------
There shall at all times be a Trustee hereunder which shall be
eligible to act as trustee under Trust Indenture Act Section 310(a) and which
shall have a combined capital and surplus of at least $10,000,000, to the extent
there is an institution eligible and willing to serve. If the Trustee does not
have a Corporate Trust Office in The City of New York, the Trustee may appoint
an agent in The City of New York reasonably acceptable to the Company to conduct
any activities which the Trustee may be required under this Indenture to conduct
in The City of New York. If such Trustee publishes reports of condition at
least annually, pursuant to law or to the requirements of federal, state,
territorial or District of Columbia supervising or examining authority, then for
the purposes of this Section 609, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section
609, the Trustee shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
Section 610. Resignation and Removal; Appointment of Successor
-------------------------------------------------
Trustee.
- -------
(a) No resignation or removal of the Trustee and no appointment of a
successor trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor trustee under Section 611.
(b) The Trustee, or any trustee or trustees hereafter appointed, may
at any time resign by giving written notice thereof to the Company. Upon
receiving such notice or resignation, the Company shall promptly appoint a
successor trustee by written instrument executed by authority of the Board of
Directors of the Company, a copy of which shall be delivered to the resigning
Trustee and a copy to the successor trustee. If an instrument of acceptance by
a successor trustee shall not have been delivered to the Trustee within 30 days
after the giving of such notice of resignation, the resigning Trustee may, or
any Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper, appoint
and prescribe a successor trustee.
(c) The Trustee may be removed at any time for any cause or for no
cause by an Act of the Holders of not less than a majority in aggregate
principal amount of the Outstanding Securities, delivered to the Trustee and to
the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of Trust
Indenture Act
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Section 310(b) after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Security for at least six
months,
(2) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Security for at
least six months, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of
its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) subject to Section 514, the Holder of any Security who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor trustee and
shall comply with the applicable requirements of Section 611. If, within 60
days after such resignation, removal or incapability, or the occurrence of such
vacancy, the Company has not appointed a successor Trustee, a successor trustee
shall be appointed by the Act of the Holders of a majority in principal amount
of the Outstanding Securities delivered to the Company and the retiring Trustee.
Such successor trustee so appointed shall forthwith upon its acceptance of such
appointment become the successor trustee and supersede the successor trustee
appointed by the Company. If no successor trustee shall have been so appointed
by the Company or the Holders of the Securities and accepted appointment in the
manner hereinafter provided, the Trustee or the Holder of any Security who has
been a bona fide Holder for at least six months may, subject to Section 514, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Securities as their names and addresses appear in the Security Register. Each
notice shall include the name of the successor trustee and the address of its
Corporate Trust Office or agent hereunder.
Section 611. Acceptance of Appointment by Successor.
--------------------------------------
Every successor trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee as if originally named as Trustee hereunder;
but, nevertheless, on the written request of the Company or the successor
trustee, upon payment of its charges pursuant to Section 607 then unpaid, such
retiring Trustee shall pay over to the successor trustee all moneys at the time
held by it hereunder and shall execute and deliver an instrument transferring to
such successor trustee all such rights, powers, duties and obligations. Upon
request of any such successor trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor trustee all such rights and powers.
No successor trustee with respect to the Securities shall accept
appointment as provided in this Section 611 unless at the time of such
acceptance such successor trustee shall be eligible to act as trustee under the
provisions of Trust Indenture Act Section 310(a) and this Article Six and shall
have a combined capital and surplus of at least $10,000,000 and have a Corporate
Trust Office or an agent selected in
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accordance with Section 609.
Upon acceptance of appointment by any successor trustee as provided in
this Section 611, the Company shall give notice thereof to the Holders of the
Securities, by mailing such notice to such Holders at their addresses as they
shall appear on the Security Register. If the acceptance of appointment is
substantially contemporaneous with the appointment, then the notice called for
by the preceding sentence may be combined with the notice called for by Section
610. If the Company fails to give such notice within 10 days after acceptance
of appointment by the successor trustee, the successor trustee shall cause such
notice to be given at the expense of the Company.
Section 612. Merger, Conversion, Consolidation or Succession to
--------------------------------------------------
Business.
- --------
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee (including the trust created by this Indenture) shall be
the successor of the Trustee hereunder, provided that such corporation shall be
eligible under Trust Indenture Act Section 310(a) and this Article Six and shall
have a combined capital and surplus of at least $100,000,000 and have a
Corporate Trust Office or an agent selected in accordance with Section 609,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any of the Securities shall have been
authenticated but not delivered, any such successor to the Trustee may adopt the
certificate of authentication of any predecessor Trustee and deliver such
Securities so authenticated; and, in case at that time any of the Securities
shall not have been authenticated, any successor to the Trustee may authenticate
such Securities either in the name of any predecessor hereunder or in the name
of the successor trustee; and in all such cases such certificate shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have; provided that the right to adopt
the certificate of authentication of any predecessor Trustee or to authenticate
Securities in the name of any predecessor Trustee shall apply only to its
successor or successors by merger, conversion or consolidation.
Section 613. Preferential Collection of Claims Against Company.
-------------------------------------------------
If and when the Trustee shall be or become a creditor of the Company
(or other obligor under the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor). A Trustee who has resigned or been
removed shall be subject to Trust Indenture Act Section 311(a) to the extent
indicated therein.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 701. Company to Furnish Trustee Names and Addresses of
-------------------------------------------------
Holders.
- -------
The Company will furnish or cause to be furnished to the Trustee
(a) semiannually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the names
and addresses of the Holders as of such Regular Record Date; and
(b) at such other times as the Trustee may reasonably request in
writing, within 30 days after receipt by the Company of any such request, a list
of similar form and content to that in subsection (a)
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hereof as of a date not more than 15 days prior to the time such list is
furnished;
provided, however, that if and so long as the Trustee shall be the Security
Registrar, no such list need be furnished.
Section 702. Disclosure of Names and Addresses of Holders.
--------------------------------------------
Holders may communicate pursuant to Trust Indenture Act Section 312(b)
with other Holders with respect to their rights under this Indenture or the
Securities, and the Trustee shall comply with Trust Indenture Act Section
312(b). The Company, the Trustee, the Security Registrar and any other Person
shall have the protection of Trust Indenture Act Section 312(c). Further, every
Holder of Securities, by receiving and holding the same, agrees with the Company
and the Trustee that neither the Company nor the Trustee or any agent of either
of them shall be held accountable by reason of the disclosure of any information
as to the names and addresses of the Holders in accordance with Trust Indenture
Act Section 312, regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of mailing
any material pursuant to a request made under Trust Indenture Act Section 312.
Section 703. Reports by Trustee.
------------------
(a) Within 60 days after May 15 of each year commencing with the first
May 15 after the issuance of Securities, the Trustee, if so required under the
Trust Indenture Act, shall transmit by mail to all Holders, in the manner and to
the extent provided in Trust Indenture Act Section 313(c), a brief report dated
as of such May 15 in accordance with and with respect to the matters required by
Trust Indenture Act Section 313(a). The Trustee shall also transmit by mail to
all Holders, in the manner and to the extent provided in Trust Indenture Act
Section 313(c), a brief report in accordance with and with respect to the
matters required by Trust Indenture Act Section 313(b)(2).
(b) A copy of each report transmitted to Holders pursuant to this
Section 703 shall, at the time of such transmission, be mailed to the Company
and filed with each stock exchange, if any, upon which the Securities are listed
and also with the Commission. The Company will notify the Trustee promptly if
the Securities are listed on any stock exchange.
Section 704. Reports by Company.
------------------
The Company and any Guarantor, as the case may be, shall:
(a) file with the Trustee, within 15 days after the Company or any
Guarantor, as the case may be, is required to file the same with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may from
time to time by rules and regulations prescribe) which the Company or any
Guarantor may be required to file with the Commission pursuant to Section 13 or
Section 15(d) of the Exchange Act; or, if the Company or any Guarantor, as the
case may be, is not required to file information, documents or reports pursuant
to either of said Sections, then it shall (i) deliver to the Trustee annual
audited financial statements of the Company and its Restricted Subsidiaries,
prepared on a Consolidated basis in conformity with GAAP, within 120 days after
the end of each fiscal year of the Company, and (ii) file with the Trustee and,
to the extent permitted by law, the Commission, in accordance with the rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 of the Exchange Act in respect of a security
listed and registered on a national securities exchange as may be prescribed
from time to time in such rules and regulations;
(b) file with the Trustee and the Commission, in accordance with the
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and
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reports with respect to compliance by the Company or any Guarantor, as the case
may be, with the conditions and covenants of this Indenture as are required from
time to time by such rules and regulations (including such information,
documents and reports referred to in Trust Indenture Act Section 314(a)); and
(c) within 15 days after the filing thereof with the Trustee, transmit
by mail to all Holders in the manner and to the extent provided in Trust
Indenture Act Section 313(c), such summaries of any information, documents and
reports required to be filed by the Company or any Guarantor, as the case may
be, pursuant to Section 1020 hereunder and subsections (a) and (b) of this
Section as are required by rules and regulations prescribed from time to time by
the Commission.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS
Section 801. Company and Guarantors May Consolidate, etc., Only on
-----------------------------------------------------
Certain Terms.
- -------------
(a) The Company will not, in a single transaction or through a series
of related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Restricted Subsidiaries to enter into
any such transaction or series of related transactions if such transaction or
series of related transactions, in the aggregate, would result in a sale,
assignment, conveyance, transfer, lease or disposition of all or substantially
all of the properties and assets of the Company and its Restricted Subsidiaries
on a Consolidated basis to any other Person or group of affiliated Persons,
unless at the time and after giving effect thereto:
(i) either (a) the Company will be the continuing corporation in
the case of a consolidation or merger involving the Company or (b) the
Person (if other than the Company) formed by such consolidation or
into which the Company is merged or the Person which acquires by sale,
assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the "Surviving
Entity") will be a corporation duly organized and validly existing
under the laws of the United States of America, any state thereof or
the District of Columbia and such Person expressly assumes, by a
supplemental indenture, in a form reasonably satisfactory to the
Trustee, all the obligations of the Company under the Securities, this
Indenture, and the Registration Rights Agreement, as the case may be,
and the Securities, this Indenture, and the Registration Rights
Agreement will remain in full force and effect as so supplemented;
(ii) immediately before and immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness
not previously an obligation of the Company or any of its Restricted
Subsidiaries which becomes the obligation of the Company or any of its
Restricted Subsidiaries as a result of such transaction as having been
incurred at the time of such transaction), no Default or Event of
Default will have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a
pro forma basis, the Company (or the Surviving Entity if the Company
is not the continuing obligor hereunder) could incur $1.00 of
additional Indebtedness under Section 1008;
(iv) at the time of the transaction, each Guarantor, if any,
unless it is the other party to the transactions described above, will
have by supplemental indenture confirmed that its Guarantee shall
apply to such Person's obligations under this Indenture and the
Securities;
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(v) at the time of the transaction if any of the property or
assets of the Company or any of its Restricted Subsidiaries would
thereupon become subject to any Lien, the provisions of Section 1011
are complied with; and
(vi) at the time of the transaction the Company or the Surviving
Entity will have delivered, or caused to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each to the effect
that such consolidation, merger, transfer, sale, assignment,
conveyance, transfer, lease or other transaction and the supplemental
indenture in respect thereof comply with this Indenture.
(b) Notwithstanding the foregoing, the Company (i) may merge or
consolidate with any of its Restricted Subsidiaries, and (ii) the Company may
merge or consolidate into any Person in a transaction designed solely for the
purpose of effecting a change in the jurisdiction of incorporation of the
Company within the United States of America.
Section 802. Successor Substituted.
---------------------
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in Section 801 in which the Company is not
the Surviving Entity, such Surviving Entity shall succeed to, and be substituted
for, and may exercise every right and power of, the Company, and the Company
shall be discharged from all obligations and covenants under this Indenture, the
Securities, and the Registration Rights Agreement.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
Section 901. Supplemental Indentures and Agreements without Consent of
---------------------------------------------------------
Holders.
- -------
Without the consent of any Holders, the Company, the Guarantors, if
any, and any other obligor under the Securities when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto or agreements or other instruments
with respect to any Guarantee, in form and substance satisfactory to the
Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company or a
Guarantor, and the assumption by any such successor of the covenants of the
Company or such Guarantor herein and in the Securities, the Registration Rights
Agreement, and in any Guarantee in accordance with Article Eight;
(b) to add to the covenants of the Company, any Guarantor or any other
obligor upon the Securities for the benefit of the Holders, or to surrender any
right or power conferred upon the Company or any Guarantor or any other obligor
upon the Securities, as applicable, herein, in the Securities or in any
Guarantee;
(c) to cure any ambiguity, or to correct or supplement any provision
herein or in any supplemental indenture, the Securities or any Guarantee which
may be defective or inconsistent with any other provision herein or in the
Securities or any Guarantee or to make any other provisions with respect to
matters or questions arising under this Indenture, the Securities or any
Guarantee; provided that, in each case, such provisions shall not adversely
affect the interest of the Holders;
(d) to comply with the requirements of the Commission in order to
effect or maintain
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the qualification of this Indenture under the Trust Indenture Act, as
contemplated by Section 905 or otherwise;
(e) to add a Guarantor pursuant to the requirements of Section 1013;
(f) to evidence and provide the acceptance of the appointment of a
successor trustee hereunder; or
(g) to mortgage, pledge, hypothecate or grant a security interest in
favor of the Trustee for the benefit of the Holders as additional security for
the payment and performance of the Company's or any Guarantor's Indenture
Obligations, in any property, or assets, including any of which are required to
be mortgaged, pledged or hypothecated, or in which a security interest is
required to be granted to the Trustee pursuant to this Indenture or otherwise.
Section 902. Supplemental Indentures and Agreements with Consent of
------------------------------------------------------
Holders.
- -------
Except as permitted by Section 901, with the consent of the Holders of
at least a majority in aggregate principal amount of the Outstanding Securities,
by Act of said Holders delivered to the Company, each Guarantor, if any, and the
Trustee, the Company and each Guarantor (if a party thereto) when authorized by
Board Resolutions, and the Trustee may (i) enter into an indenture or indentures
supplemental hereto or agreements or other instruments with respect to any
Guarantee in form and substance satisfactory to the Trustee, for the purpose of
adding any provisions to or amending, modifying or changing in any manner or
eliminating any of the provisions of this Indenture, the Securities or any
Guarantee (including but not limited to, for the purpose of modifying in any
manner the rights of the Holders under this Indenture, the Securities or any
Guarantee) or (ii) waive compliance with any provision in this Indenture, the
Securities or any Guarantee (other than waivers of past Defaults covered by
Section 513 and waivers of covenants which are covered by Section 1021);
provided, however, that no such supplemental indenture, agreement or instrument
shall, without the consent of the Holder of each Outstanding Security affected
thereby:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, or change to an earlier date any redemption date of, or waive a
default in the payment of the principal or interest on, any such Security or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the coin or currency in
which the principal of any Security or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof (or, in the case of redemption,
on or after the Redemption Date);
(b) amend, change or modify the obligation of the Company to make and
consummate an Offer with respect to any Asset Sale or Asset Sales in accordance
with Section 1012 or the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control in accordance with
Section 1014, including, in each case, amending, changing or modifying any
definitions relating thereto;
(c) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such supplemental
indenture, or the consent of whose Holders is required for any waiver or
compliance with certain provisions of this Indenture;
(d) modify any of the provisions of this Section 902 or Section 513 or
Section 1021, except to increase the percentage of such Outstanding Securities
required for any such actions or to provide that certain other provisions of
this Indenture cannot be modified or waived without the consent of the Holder of
each such Security affected thereby;
(e) except as otherwise permitted under Article Eight, consent to the
assignment or transfer by the Company or any Guarantor of any of its rights and
obligations hereunder; or
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(f) amend or modify any of the provisions of this Indenture in any
manner which subordinates the Securities issued hereunder in right of payment to
any other Indebtedness of the Company or which subordinates any Guarantee in
right of payment to any other Indebtedness of the Guarantor issuing such
Guarantee.
Upon the written request of the Company and each Guarantor, if any,
accompanied by a copy of Board Resolutions authorizing the execution of any such
supplemental indenture or Guarantee, and upon the filing with the Trustee of
evidence of the consent of Holders as aforesaid, the Trustee shall join with the
Company and each Guarantor in the execution of such supplemental indenture or
Guarantee.
It shall not be necessary for any Act of Holders under this Section
902 to approve the particular form of any proposed supplemental indenture or
Guarantee or agreement or instrument relating to any Guarantee, but it shall be
sufficient if such Act shall approve the substance thereof.
Section 903. Execution of Supplemental Indentures and Agreements.
---------------------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Trust
Indenture Act Sections 315(a) through 315(d) and Section 603 hereof) shall be
fully protected in relying upon, an Opinion of Counsel and an Officers'
Certificate stating that the execution of such supplemental indenture, agreement
or instrument is authorized or permitted by this Indenture. The Trustee may,
but shall not be obligated to, enter into any such supplemental indenture,
agreement or instrument which affects the Trustee's own rights, duties or
immunities under this Indenture, any Guarantee or otherwise.
Section 904. Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
Section 905. Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 906. Reference in Securities to Supplemental Indentures.
--------------------------------------------------
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article Nine may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Board of Directors, to any such supplemental indenture may be prepared and
executed by the Company and each Guarantor and authenticated and delivered by
the Trustee in exchange for Outstanding Securities.
Section 907. Notice of Supplemental Indentures.
---------------------------------
Promptly after the execution by the Company, any Guarantor and the
Trustee of any supplemental indenture pursuant to the provisions of Section 902,
the Company shall give notice thereof to the Holders of each Outstanding
Security affected, in the manner provided for in Section 106, setting forth in
general terms the substance of such supplemental indenture. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such supplemental
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indentrue.
ARTICLE TEN
COVENANTS
Section 1001. Payment of Principal, Premium and Interest.
------------------------------------------
The Company shall duly and punctually pay the principal of, premium,
if any, and interest on the Securities in accordance with the terms of the
Securities and this Indenture.
Section 1002. Maintenance of Office or Agency.
-------------------------------
The Company shall maintain an office or agency where Securities may be
presented or surrendered for payment. The Company also will maintain in The
City of New York an office or agency where Securities may be surrendered for
registration of transfer, redemption or exchange and where notices and demands
to or upon the Company in respect of the Securities and this Indenture may be
served. The office of the Trustee, at its Corporate Trust Office initially
located at 101 California Street, Suite 2725, San Francisco, CA 94111, will be
such office or agency of the Company, unless the Company shall designate and
maintain some other office or agency for one or more of such purposes. The
Company will give prompt written notice to the Trustee of the location and any
change in the location of any such offices or agencies. If at any time the
Company shall fail to maintain any such required offices or agencies or shall
fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the office of the
Trustee and the Company hereby appoints the Trustee such agent as its agent to
receive all such presentations, surrenders, notices and demands.
The Company may from time to time designate one or more other offices
or agencies (in or outside of The City of New York) where the Securities may be
presented or surrendered for any or all such purposes, and may from time to time
rescind such designation. The Company will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such office or agency.
The Trustee shall initially act as Paying Agent for the Securities.
Section 1003. Money for Security Payments to Be Held in Trust.
-----------------------------------------------
If the Company or any of its Affiliates shall at any time act as
Paying Agent, it will, on or before each due date of the principal of, premium,
if any, or interest on any of the Securities, segregate and hold in trust for
the benefit of the Holders entitled thereto a sum sufficient to pay the
principal, premium, if any, or interest so becoming due until such sums shall be
paid to such Persons or otherwise disposed of as herein provided, and will
promptly notify the Trustee of its action or failure so to act.
If the Company or any of its Affiliates is not acting as Paying Agent,
the Company will, on or before each due date of the principal of, premium, if
any, or interest on any of the Securities, deposit with a Paying Agent a sum in
same day funds sufficient to pay the principal, premium, if any, or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Company will promptly notify the Trustee of such action or
any failure so to act.
If the Company is not acting as Paying Agent, the Company will cause
each Paying Agent other than the Trustee to execute and deliver to the Trustee
an instrument in which such Paying Agent shall agree with the Trustee, subject
to the provisions of this Section, that such Paying Agent will:
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(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on the Securities in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company or any
Guarantor (or any other obligor upon the Securities) in the making of any
payment of principal, premium, if any, or interest on the Securities;
(c) at any time during the continuance of any such Default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and disabilities of
such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest on any Security and remaining unclaimed for two years after such
principal and premium, if any, or interest has become due and payable shall
promptly be paid to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Security
shall thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in the New York Times and The
-------------- ---
Wall Street Journal (national edition), and mail to each such Holder, notice
- -------------------
that such money remains unclaimed and that, after a date specified therein,
which shall not be less than 30 days from the date of such notification,
publication and mailing, any unclaimed balance of such money then remaining will
promptly be repaid to the Company.
Section 1004. Corporate Existence.
-------------------
Subject to Article Eight, the Company shall do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate
existence and related rights and franchises (charter and statutory) of the
Company and each Restricted Subsidiary; provided, however, that the Company
shall not be required to preserve any such right or franchise or the corporate
existence of any such Restricted Subsidiary if the Board of Directors of the
Company shall determine that the preservation thereof is no longer necessary or
desirable in the conduct of the business of the Company and its Restricted
Subsidiaries as a whole; and provided, further, however, that the foregoing
shall not prohibit a sale, transfer or conveyance of a Restricted Subsidiary or
any of the assets of the Company or any Restricted Subsidiary in compliance with
the terms of this Indenture.
Section 1005. Payment of Taxes and Other Claims.
---------------------------------
The Company shall pay or discharge or cause to be paid or discharged,
on or before the date the same shall become due and payable, (a) all taxes,
assessments and governmental charges levied or imposed upon the Company or any
of its Restricted Subsidiaries shown to be due on any return of the Company or
any of its Restricted Subsidiaries or otherwise assessed or upon the income,
profits or property of the Company or any of its Restricted Subsidiaries if
failure to pay or discharge the same could reasonably
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be expected to have a material adverse effect on the ability of the Company or
any Guarantor to perform its obligations hereunder and (b) all lawful claims for
labor, materials and supplies, which, if unpaid, would by law become a Lien upon
the property of the Company or any of its Restricted Subsidiaries, except for
any Lien permitted to be incurred under Section 1011, if failure to pay or
discharge the same could reasonably be expected to have a material adverse
effect on the ability of the Company or any Guarantor to perform its obligations
hereunder; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings properly instituted and diligently conducted and in
respect of which appropriate reserves (in the good faith judgment of management
of the Company) are being maintained in accordance with GAAP.
Section 1006. Maintenance of Properties.
-------------------------
The Company shall cause all material properties owned by the Company
or any of its Restricted Subsidiaries or used or held for use in the conduct of
its business or the business of any of its Restricted Subsidiaries to be
maintained and kept in good condition, repair and working order (ordinary wear
and tear excepted) and supplied with all necessary equipment and will cause to
be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the reasonable judgment of the Company may be
consistent with sound business practice and necessary so that the business
carried on in connection therewith may be properly conducted at all times;
provided, however, that nothing in this Section shall prevent the Company from
discontinuing the maintenance of any of such properties if such discontinuance
is, in the reasonable judgment of the Company, desirable in the conduct of its
business or the business of any of its Restricted Subsidiaries; and provided,
further, however, that the foregoing shall not prohibit a sale, transfer or
conveyance of a Restricted Subsidiary or any of its properties or assets in
compliance with the terms of this Indenture.
Section 1007. Maintenance of Insurance.
------------------------
The Company shall at all times keep all of its and its Restricted
Subsidiaries' properties which are of an insurable nature insured with insurers,
believed by the Company in good faith to be financially sound and responsible,
against loss or damage to the extent that property of similar character is
usually so insured by corporations similarly situated and owning like properties
in the same general geographic areas in which the Company and its Restricted
Subsidiaries operate, except where the failure to do so could not reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs or prospects of the Company and its
Restricted Subsidiaries, taken as a whole.
Section 1008. Limitation on Indebtedness.
--------------------------
(a) The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness (other
than the Securities); provided, however, that the Company may Incur
Indebtedness, and the Company or any Restricted Subsidiary may Incur Acquired
Indebtedness, if, at the time of such Incurrence, the Debt to Annualized
Operating Cash Flow Ratio would be less than or equal to 5.5 to 1.0 prior to
December 15, 2000, or less than or equal to 5.0 to 1.0 after December 15, 2000.
(b) The foregoing limitations of paragraph (a) of this Section 1008
will not apply to Incurrence of Indebtedness permitted under any of the
following ("Permitted Indebtedness"), each of which shall be given independent
effect:
(i) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (other than Acquired Indebtedness)
consisting of Capital Lease Obligations, Purchase Money Obligations,
mortgage financings or other obligations incurred for the purpose of
financing all or any part of the purchase price, cost of construction
or
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improvement of property, plant or equipment used in connection with
the Telecommunications Business or a credit facility or a master lease
arrangement entered into for the purpose of providing such financing,
provided that such Indebtedness does not exceed the lesser of the Fair
Market Value determined at the time of the consummation of the
purchase, construction or improvement of such property, plant or
equipment or the purchase price of such property, plant or equipment;
(ii) Indebtedness of the Company or any of its Restricted
Subsidiaries, and any renewals, extensions, substitutions,
refinancings or replacements of such Indebtedness, so long as the
aggregate principal amount of such Indebtedness shall not exceed $50
million outstanding at any one time in the aggregate;
(iii) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (other than secured Acquired
Indebtedness) in an aggregate principal amount not to exceed, at any
one time outstanding, 2.0 times the Net Cash Proceeds received by the
Company from the issuance and sale of any class or series of its
Capital Stock (other than Disqualified Stock) on and after the
Exchange Preferred Stock Issue Date plus the Fair Market Value of any
of its Capital Stock (other than Disqualified Stock) issued on and
after the Exchange Preferred Stock Issue Date in connection with the
acquisition of an equity interest in a Telecommunications Business or
assets used in a Telecommunications Business; provided that such
Indebtedness does not mature prior to the Stated Maturity of the
Exchange Debentures or have an Average Life to Stated Maturity that is
shorter than the period then remaining prior to the Stated Maturity of
the Securities;
(iv) Indebtedness of the Company or any Restricted Subsidiary
entered into in the ordinary course of business (a) pursuant to
Interest Rate Agreements designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates in
respect of Indebtedness of the Company or any Restricted Subsidiary as
long as the notional principal amount of such Interest Rate Agreements
do not exceed the aggregate principal amount of such Indebtedness then
outstanding, (b) under any Currency Hedging Arrangements designed to
protect the Company or any Restricted Subsidiary against fluctuations
in the value of any currency or (c) under any Commodity Price
Protection Agreements designed to protect the Company or any
Restricted Subsidiary against fluctuations in the price of any
commodity;
(v) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in respect of bid, performance or advance
payment bonds and appeal or surety bonds;
(vi) Indebtedness existing on the Exchange Preferred Stock Issue
Date;
(vii) the Incurrence of (a) Indebtedness of any Restricted
Subsidiary owed to and held by the Company or another Restricted
Subsidiary and (b) Indebtedness of the Company owed to and held by any
Restricted Subsidiary; and
(viii) any renewals, extensions, substitutions, refundings,
refinancings or replacements (collectively, a "refinancing") of any
Indebtedness described in clauses (i), (ii), (iii), (vi) and (vii) of
this paragraph (b) of this Section 1008, including any successive
refinancings so long as the borrower under such refinancing is the
Company or, if not the Company, the same as the borrower of the
Indebtedness being refinanced and the aggregate principal amount of
Indebtedness represented thereby is not increased by such refinancing
plus the lesser of (I) the stated amount of any premium or other
payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to
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refinance the Indebtedness, plus, in either case, the amount of
expenses of the Company incurred in connection with such refinancing
and, in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, such new Indebtedness is made subordinated
to the Securities at least to the same extent as the Indebtedness
being refinanced and such refinancing does not reduce the Average Life
to Stated Maturity or the Stated Maturity of such Subordinated
Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness
under this covenant, Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of Section 1013.
(d) For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness may be Incurred through the first paragraph
of this covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion, (i)
may classify such item of Indebtedness under and comply with either of such
paragraphs (or any of such definitions), as applicable, (ii) may classify and
divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such paragraphs
(or definitions), as applicable, in any order.
Section 1009. Limitation on Restricted Payments.
---------------------------------
(a) The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on
any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock
or in options, warrants or other rights to acquire shares of such
Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital
Stock of any Affiliate of the Company (other than Capital Stock of any
Wholly Owned Subsidiary of the Company) or options, warrants or other
rights to acquire such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any scheduled
principal payment, sinking fund payment or maturity, any Subordinated
Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital
Stock of any Restricted Subsidiary to any Person (other than (a) to
the Company or any of its Wholly Owned Restricted Subsidiaries or (b)
to all holders of Capital Stock of such Restricted Subsidiary on a pro
rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other than
cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Default or Event of Default shall
have occurred and be continuing; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company could
incur $1.00 of additional Indebtedness (other than "Permitted Indebtedness")
under the provisions described in Section 1008(a); and
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(3) after giving effect to the proposed Restricted Payment, the aggregate amount
of all such Restricted Payments declared or made after the date of the date
hereof, does not exceed the sum of the following (the "Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the
time of such Restricted Payment less (ii) 150% of cumulative
Consolidated Interest Expense determined for the period (treated as
one accounting period) commencing on the date of the original issue of
the Securities and ending on the last day of the most recent fiscal
quarter immediately preceding the date of such Restricted Payment for
which consolidated financial information of the Company is required to
be available;
(B) the sum of (i) (x) capital contributions to the Company
after the date of this Indenture or (y) the aggregate Net Cash
Proceeds received after the date of this Indenture by the Company from
the issuance or sale (other than to any of its Restricted
Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock
of the Company (except, in each case, to the extent such proceeds are
used to purchase, redeem or otherwise retire Capital Stock or
Subordinated Indebtedness as set forth below in clause (ii) or (iii)
of paragraph (b) below);
(C) the aggregate Net Cash Proceeds received after the date
of this Indenture by the Company (other than from any of its
Restricted Subsidiaries) upon the exercise of any options, warrants or
rights to purchase Qualified Capital Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date
of this Indenture by the Company from the conversion or exchange, if
any, of debt securities or Disqualified Stock of the Company or its
Restricted Subsidiaries into or for Qualified Capital Stock of the
Company plus, to the extent such debt securities or Disqualified Stock
were issued after the date of this Indenture, the aggregate of Net
Cash Proceeds from their original issuance; and
(E) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment, an amount equal to the
return of capital with respect to such Investment and the initial
amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii)
through (vi) below, so long as there is no Default or Event of Default
continuing, the foregoing provisions shall not prohibit the following actions
(each of clauses (i) through (vi) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a Permitted Payment for
purposes of the calculation required by paragraph (a) of this Section
1009;
(ii) the repurchase, redemption, or other acquisition or
retirement for value of any shares of any class of Capital Stock of
the Company in exchange for (including any such exchange pursuant to
the exercise of a conversion right or privilege in connection with
which cash is paid in lieu of the issuance of fractional shares or
scrip), or out of the Net Cash Proceeds of a substantially concurrent
issuance and sale for cash (other than to a Restricted Subsidiary) of,
other shares of Qualified Capital Stock of the Company; provided that
the Net Cash Proceeds from the issuance of such shares of Qualified
Capital Stock are excluded from clause (3)(B) of paragraph (a) of this
Section 1009;
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(iii) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness or Disqualified Stock in exchange for, or in an amount
not in excess of the Net Cash Proceeds of, a substantially concurrent
issuance and sale for cash (other than to any Restricted Subsidiary of
the Company) of any Qualified Capital Stock of the Company, provided
that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph
(a) of this Section 1009;
(iv) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of principal of any
Subordinated Indebtedness (other than Disqualified Stock) (a
"refinancing") through the substantially concurrent issuance of new
Subordinated Indebtedness of the Company, provided that any such new
Subordinated Indebtedness (1) shall be in a principal amount that does
not exceed the principal amount so refinanced (or, if such
Subordinated Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, then such lesser amount as of the date of
determination), plus the lesser of (I) the stated amount of any
premium or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being refinanced
or (II) the amount of premium or other payment actually paid at such
time to refinance the Indebtedness, plus, in either case, the amount
of expenses of the Company incurred in connection with such
refinancing; (2) has an Average Life to Stated Maturity greater than
the remaining Average Life to Stated Maturity of the Securities; (3)
has a Stated Maturity later than the Stated Maturity of the
Securities; and (4) is expressly subordinated in right of payment to
the Securities at least to the same extent as the Subordinated
Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of any Disqualified
Stock through the substantially concurrent issuance of new
Disqualified Stock of the Company, provided that any such new
Disqualified Stock (1) shall have an aggregate liquidation preference
that does not exceed the aggregate liquidation preference of the
amount so refinanced; (2) has an Average Life to Stated Maturity
greater than the remaining Average Life to Stated Maturity of the
Securities; and (3) has a Stated Maturity later than the Stated
Maturity of the Securities; and
(vi) the repurchase of shares of, or options to purchase shares
of, common stock of the Company or any of its Restricted Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Restricted Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by
the Board of Directors under which such individuals purchase or sell
or are granted the option to purchase or sell, shares of such common
stock; provided, however, that the aggregate amount of such
repurchases in any calendar year shall not exceed $1.0 million and
$5.0 million in the aggregate.
Section 1010. Limitation on Transactions with Affiliates.
------------------------------------------
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with or for the benefit of
any Affiliate of the Company (other than the Company or a Wholly Owned
Subsidiary) unless such transaction or series of related transactions is entered
into in good faith and in writing and (a) such transaction or series of related
transactions is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that would be reasonably
expected to be available in a comparable transaction in arm's-length dealings
with an unrelated third party, (b) with respect to any transaction or series of
related transactions involving aggregate value in excess of $3.0 million, the
Company delivers an Officers'
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Certificate to the Trustee certifying that such transaction or series of related
transactions complies with clause (a) above, and (c) with respect to any
transaction or series of related transactions involving aggregate value in
excess of $7.0 million, either (A) such transaction or series of related
transactions has been approved by a majority of the Disinterested Directors of
the Company, or in the event there is only one Disinterested Director, by such
Disinterested Director, or (B) the Company delivers to the Trustee a written
opinion of an investment banking firm of national standing or other recognized
independent expert with experience appraising the terms and conditions of the
type of transaction or series of related transactions for which an opinion is
required stating that the transactions or series of related transactions is fair
to the Company or such Restricted Subsidiary from a financial point of view;
provided, however, that this provision shall not apply to: (a) compensation and
employee benefit arrangements with any officer, director or employee of the
Company, including under any stock option or stock incentive plans, in the
ordinary course of business; (b) any transaction solely between or among the
Company and/or any Restricted Subsidiaries, if such transaction is otherwise in
compliance with this Indenture and is on fair and reasonable terms; (c) any
transaction otherwise permitted by the terms of the section of this Indenture
described in Section 1009; (d) the execution and delivery of or payments made
under any tax sharing agreement between or among any of the Company and any
Restricted Subsidiary; (e) licensing or sublicensing of use of any intellectual
property by the Company or any Restricted Subsidiary to any Restricted
Subsidiary of the Company; provided that the licensor shall continue to have
access to such intellectual property to the extent necessary for the conduct of
its respective business; (f) arrangements between the Company and any Restricted
Subsidiary of the Company for the purpose of providing services or employees to
such Restricted Subsidiary; (g) any transaction entered into for the purpose of
granting or altering registration rights with respect to the Capital Stock of
the Company; and (h) any transaction or series of related transactions entered
into prior to the date hereof.
Section 1011. Limitation on Liens.
-------------------
The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create, incur or affirm any Lien of any kind upon
any property or assets (including any intercompany notes) of the Company or any
Restricted Subsidiary owned on the date hereof, or acquired after the date
hereof, or any income or profits therefrom, unless the Securities are directly
secured equally and ratably with (or, in the case of Subordinated Indebtedness,
prior or senior thereto, with the same relative priority as the Securities shall
have with respect to such Subordinated Indebtedness) the obligation or liability
secured by such Lien except for any Permitted Liens.
Section 1012. Limitation on Sale of Assets.
----------------------------
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i) at
least 75% of the consideration from such Asset Sale is received in cash or other
comparable consideration (as described below), and (ii) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the shares or assets subject to such
Asset Sale (as determined by the board of directors of the Company and evidenced
in a board resolution). The following types of consideration shall be deemed
"comparable consideration" for the purposes of this Section 1012: (A) Cash
Equivalents, (B) liabilities (contingent or otherwise) of the Company or a
Restricted Subsidiary assumed by the transferee (or its designee) such that the
Company or such Restricted Subsidiary has no further liability therefor, and (C)
any securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are immediately converted by the
Company or such Restricted Subsidiary into cash.
(b) The Company or a Restricted Subsidiary may, within 365 days of the
Asset Sale invest the Net Cash Proceeds in properties and other assets that will
be used in Telecommunications Businesses or to repay any Senior Indebtedness of
the Company or any Restricted Subsidiary (including the repurchase of the
Securities). The amount of such Net Cash Proceeds not used or invested within
365 days of the Asset Sale as set forth in this paragraph constitutes "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an Excess Proceeds Offer in accordance with
the terms set forth under "Offer to Purchase with Excess Asset Sale Proceeds."
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Notwithstanding the foregoing, the Company shall have no obligation to make an
Excess Proceeds Offer until the Existing Senior Notes Maturity Date.
(c) When the aggregate amount of Excess Proceeds exceeds $10 million
or more, the Company will apply the Excess Proceeds to the repayment of the
Securities and any other Pari Passu Indebtedness outstanding with similar
provisions requiring the Company to make an offer to purchase such Indebtedness
with the proceeds from any Asset Sale as follows: (A) the Company will make an
offer to purchase (an "Offer") from all holders of the Securities in accordance
with the procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Securities that may be purchased out of
an amount (the "Security Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Securities, and the denominator of which is the sum of the
outstanding principal amount of the Securities and such Pari Passu Indebtedness
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined herein) of all Securities tendered) and (B) to the
extent required by such Pari Passu Indebtedness to permanently reduce the
principal amount of such Pari Passu Indebtedness, the Company will make an offer
to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess of
the Excess Proceeds over the Security Amount; provided that in no event will the
Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount
exceeding the principal amount of such Pari Passu Indebtedness. The offer price
for the Securities will be payable in cash in an amount equal to 100% of the
principal amount of the Securities plus accrued and unpaid interest, if any, to
the date (the "Offer Date") such Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth herein. To the extent that the
aggregate Offered Price of the Securities tendered pursuant to the Offer is less
than the Security Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu
Debt Amount, the Company will use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Securities and Pari
Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Securities to be purchased on a pro rata
basis. Upon the completion of the purchase of all the Securities tendered
pursuant to an Offer and the completion of a Pari Passu Offer, the amount of
Excess Proceeds, if any, shall be reset at zero. Notwithstanding the foregoing,
if the date on which any Offer otherwise would be required to be made is on or
prior to the Existing Senior Notes Maturity Date, the Company shall not be
required to make an Offer until the first date after the Existing Senior Notes
Maturity Date.
(d) If the Company becomes obligated to make an Offer pursuant to
clause (c) above, the Securities and the Pari Passu Indebtedness shall be
purchased by the Company, at the option of the holders thereof, in whole or in
part, in integral multiples of $1,000, on a date that is not earlier than 30
days and not later than 60 days from the date the notice of the Offer is given
to holders, or such later date as may be necessary for the Company to comply
with the requirements under the Exchange Act.
(e) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with an Offer.
Section 1013. Limitation on Issuances of Guarantees of Indebtedness.
-----------------------------------------------------
(a) The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Pari Passu Indebtedness or Subordinated Indebtedness of the
Company unless such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to this Indenture providing for a Guarantee of the
Securities on the same terms as the guarantee of such Indebtedness; provided,
however, that (A) such guarantee need not be secured unless required pursuant to
Section 1011 and (B) if such Indebtedness is by its terms expressly subordinated
to the Securities, any such assumption, guarantee or other liability of such
Restricted Subsidiary with respect to such Indebtedness shall be subordinated to
such Restricted Subsidiary's Guarantee of the Securities at least to the same
extent as such Indebtedness is subordinated to the Securities; provided that
this paragraph shall
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not apply to any guarantee or assumption of liability of Indebtedness permitted
under clauses (i), (ii), (iv), (v), (vii) and (viii) of paragraph (b) of Section
1008.
(b) Notwithstanding the foregoing, any Guarantee by a Restricted
Subsidiary of the Securities shall provide by its terms that it (and all Liens
securing the same) shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which transaction
is in compliance with the terms of this Indenture and such Restricted Subsidiary
is released from its guarantees of other Indebtedness of the Company or any
Restricted Subsidiaries.
Section 1014. Purchase of Securities upon a Change of Control.
-----------------------------------------------
(a) If a Change of Control shall occur at any time, then each Holder
shall have the right to require that the Company purchase such Holder's
Securities in whole or in part in integral multiples of $1,000, at a purchase
price (the "Change of Control Purchase Price") in cash, in an amount equal to
101% of the principal amount of such Securities or portion thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, to the date of purchase (the
"Change of Control Purchase Date"), pursuant to the offer described below in
this Section 1014 (the "Change of Control Offer") and in accordance with the
other procedures set forth in subsections (b), (c), (d) and (e) of this Section
1014.
(b) Within 30 days of any Change of Control, the Company shall give
written notice (a "Change of Control Purchase Notice") of such Change of Control
to each Holder, by first-class mail, postage prepaid, at his address appearing
in the Security Register, stating among other things:
(1) that a Change of Control has occurred, the date of such
event, and that such Holder has the right to require the Company to
repurchase such Holder's Securities at the Change of Control Purchase
Price;
(2) the circumstances and relevant facts regarding such Change of
Control;
(3) that the Change of Control Offer is being made pursuant to
this Section 1014 and that all Securities properly tendered pursuant
to the Change of Control Offer will be accepted for payment at the
Change of Control Purchase Price;
(4) the Change of Control Purchase Date, which shall be a
Business Day no earlier than 30 days and not later than 60 days from
the date such notice is mailed, or such later date as is necessary to
comply with requirements under the Exchange Act;
(5) the Change of Control Purchase Price;
(6) the names and addresses of the Paying Agent and the offices
or agencies referred to in Section 1002;
(7) that Securities must be surrendered on or prior to the Change
of Control Purchase Date to the Paying Agent at the office of the
Paying Agent or to an office or agency referred to in Section 1002 to
collect payment;
(8) that the Change of Control Purchase Price for any Security
which has been properly tendered and not withdrawn will be paid
promptly following the Change of Control Offer Purchase Date;
(9) the procedures that a Holder must follow to accept a Change
of Control Offer or to withdraw such acceptance;
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(10) that any Security not tendered will continue to accrue
interest; and
(11) that, unless the Company defaults in the payment of the
Change of Control Purchase Price, any Securities accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Purchase Date.
(c) Upon receipt by the Company of the proper tender of Securities,
the Holder of the Security in respect of which such proper tender was made shall
(unless the tender of such Security is properly withdrawn) thereafter be
entitled to receive solely the Change of Control Purchase Price with respect to
such Security. Upon surrender of any such Security for purchase in accordance
with the foregoing provisions, such Security shall be paid by the Company at the
Change of Control Purchase Price; provided, however, that installments of
interest whose Stated Maturity is on or prior to the Change of Control Purchase
Date shall be payable to the Holders of such Securities, or one or more
Predecessor Securities, registered as such on the relevant Regular Record Dates
according to the terms and the provisions of Section 309. If any Security
tendered for purchase in accordance with the provisions of this Section 1014
shall not be so paid upon surrender thereof, the principal thereof (and premium,
if any, thereon) shall, until paid, bear interest from the Change of Control
Purchase Date at the rate borne by such Security. Holders electing to have
Securities purchased will be required to surrender such Securities to the Paying
Agent at the address specified in the Change of Control Purchase Notice prior to
5:00 p.m. (New York time) at least one Business Day prior to the Change of
Control Purchase Date. Any Security that is to be purchased only in part shall
be surrendered to a Paying Agent at the office of such Paying Agent (with, if
the Company, the Security Registrar or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Security Registrar or the Trustee, as the case may be, duly executed by, the
Holder thereof or such Holder's attorney duly authorized in writing), and the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Security, without service charge to the Holder, one or more new
Securities of any authorized denomination as requested by such Holder in an
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Security so surrendered that is not purchased.
(d) The Company shall (i) not later than the Change of Control
Purchase Date, accept for payment Securities or portions thereof tendered
pursuant to the Change of Control Offer, (ii) not later than 12:00 a.m. (New
York time) on the Change of Control Purchase Date, deposit with the Trustee or
with a Paying Agent an amount of money in same day funds (or New York Clearing
House funds if such deposit is made prior to the Change of Control Purchase
Date) sufficient to pay the aggregate Change of Control Purchase Price of all
the Securities or portions thereof which are to be purchased as of the Change of
Control Purchase Date and (iii) not later than 12:00 a.m. (New York time) on the
Change of Control Purchase Date, deliver to the Paying Agent an Officers'
Certificate stating the aggregate principal amount of Securities or portions
thereof being purchased by the Company. The Paying Agent shall promptly mail or
deliver to Holders of Securities so accepted payment in an amount equal to the
Change of Control Purchase Price of the Securities purchased from each such
Holder, and the Company shall execute and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Security equal in
principal amount to any unpurchased portion of the Security surrendered. Any
Securities not so accepted shall be promptly mailed or delivered by the Paying
Agent at the Company's expense to the Holder thereof. The Company will publicly
announce the results of the Change of Control Offer on the Change of Control
Purchase Date. For purposes of this Section 1014, the Company shall choose a
Paying Agent which shall not be the Company.
(e) A tender made in response to a Change of Control Purchase Notice
may be withdrawn if the Company or its agent receives, not later than 5:00 p.m.
(New York time) one Business Day prior to the Change of Control Purchase Date, a
signed letter, delivered to the address specified in the change of Control
Purchase Notice specifying, as applicable:
(1) the name of the Holder;
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(2) the certificate number of the Security in respect of which
such notice of withdrawal is being submitted;
(3) the principal amount of the Security (which shall be $1,000
or an integral multiple thereof) delivered for purchase by the Holder
as to which such notice of withdrawal is being submitted;
(4) a statement that such Holder is withdrawing his election to
have such principal amount of such Security purchased; and
(5) the principal amount, if any, of such Security (which shall
be $1,000 or an integral multiple thereof) that remains subject to the
original Change of Control Purchase Notice and that has been or will
be delivered for purchase by the Company.
(f) Subject to applicable escheat laws, the Trustee and the Paying
Agent shall return to the Company any cash that remains unclaimed, together with
interest or dividends, if any, thereon, held by them for the payment of the
Change of Control Purchase Price; provided, however, that, (x) to the extent
that the aggregate amount of cash deposited by the Company pursuant to clause
(ii) of paragraph (d) above exceeds the aggregate Change of Control Purchase
Price of the Securities or portions thereof to be purchased, then the Trustee
shall hold such excess for the Company and (y) unless otherwise directed by the
Company in writing, promptly after the Business Day following the Change of
Control Purchase Date the Trustee shall return any such excess to the Company
together with interest, if any, thereon.
(g) The Company shall comply, to the extent applicable, with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with a Change
of Control Offer.
(h) Notwithstanding the foregoing, the Company will not be required to
make a Change of Control Offer if either (a) a third party makes the Change of
Control Offer, in the manner, at the times and otherwise in compliance with the
requirements set forth in this Indenture applicable to a Change of Control Offer
made by the Company and purchases all the Securities validly tendered and not
withdrawn under such Change of Control Offer or (b) the date on which such
Change of Control Offer would otherwise be required to be made is on or prior to
the Existing Senior Notes Maturity Date.
If the date on which a Change of Control Offer otherwise would be
required to be made is on or prior to the Existing Senior Notes Maturity Date,
then, in lieu of any such Change of Control Offer, Holders of two-thirds of the
Securities will be entitled to designate an Independent Financial Advisor (as
defined below) to determine, within 20 days of such designation, in the opinion
of such firm, the appropriate interest rate that the Securities should bear so
that, after such reset, the Securities would have a market value of 101% of the
aggregate principal amount thereof. If, for any reason and within 15 days of the
designation of an Independent Financial Advisor by the Holder, such Independent
Financial Advisor is unacceptable to the Company, the Company shall designate a
second Independent Financial Advisor to determine, within 15 days of such
designation, in its opinion, such an appropriate reset interest rate for the
Securities. In the event that the two Independent Financial Advisors cannot
agree, within 25 days of the designation of an Independent Financial Advisor by
the Holders of two-thirds of the Securities, on the appropriate reset interest
rate, the two Independent Financial Advisors shall, within 10 days of such 25th
day, designate a third Independent Financial Advisor, which, within 15 days of
designation, will determine, in its opinion, such an appropriate reset rate
which is between the two rates selected by the first two Independent Financial
Advisors; provided, however, that the reset rate shall in no event be less than
13 1/2% per annum nor greater than 15 1/2% per annum. The reasonable fees and
expenses, including reasonable fees and expenses of legal counsel, if any, and
customary indemnification, of each of the three above-referenced Independent
Financial Advisors shall be borne by the Company. Upon the determination of the
reset rate, the Securities shall accrue and cumulate interest at the reset rate
as of the date of occurrence of the Change of Control. "Independent Financial
Advisor" means a United States investment banking firm of national standing in
the United States which does
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not, and whose directors, officers and employees or affiliates do not, have a
direct or indirect financial interest in the Company.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Securities
to require that the Company repurchase or redeem the Securities in the event of
a takeover, recapitalization or similar transaction.
The term "all or substantially all" as used in the definition of
"Change of Control" has not been interpreted under New York law (which is the
governing law of this Indenture) to represent a specific quantitative test. As
a consequence, in the event the holders of the Securities elected to exercise
their rights under the Indenture and the Company elected to contest such
election, there could be no assurance as to how a court interpreting New York
law would interpret the phrase.
Section 1015. Limitation on Sale and Leaseback Transactions.
---------------------------------------------
The Company will not, and will not permit any Restricted Subsidiary of
the Company to, directly or indirectly, enter into any Sale and Leaseback
Transaction with respect to any property or assets (whether now owned or
hereafter acquired), unless (i) the sale or transfer of such property or assets
to be leased is treated as an Asset Sale and complies with the provisions of
Section 1012 and (ii) the Company or such Restricted Subsidiary would be
entitled under Section 1008 to incur any Indebtedness (with the lease
obligations being treated as Indebtedness for purposes of ascertaining
compliance with this covenant unless such lease is properly classified as an
operating lease under GAAP) in respect of such Sale and Leaseback Transaction.
The foregoing restriction does not apply to any sale-leaseback
transaction if: (i) the lease is for a period, including renewal rights, not in
excess of three years; (ii) the transaction is solely between the Company and
any Wholly Owned Subsidiary or any Wholly Owned Subsidiary and any other Wholly
Owned Subsidiary; or (iii) the transaction is consummated within 180 days of the
acquisition by the Company or its Restricted Subsidiary of the property or
assets subject to such sale-leaseback or entered into within 180 days after the
purchase or substantial completion of the construction of such property or
assets.
Section 1016. Limitation on Restricted Subsidiary Capital Stock.
-------------------------------------------------
The Company will not permit (a) any Restricted Subsidiary of the
Company to issue any Capital Stock, except for (i) Capital Stock issued or sold
to, held by or transferred to the Company or a Wholly Owned Subsidiary, and (ii)
Capital Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary, (B) such Person merges with or into a Restricted
Subsidiary or (C) a Restricted Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C); or (b) any Person (other than the Company or a Wholly Owned Subsidiary) to
acquire Capital Stock of any Restricted Subsidiary from the Company or any
Restricted Subsidiary, except, in the case of clause (a) or (b), (1) upon the
acquisition of all the outstanding Capital Stock of such Restricted Subsidiary
in accordance with the terms hereof, (2) if, immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary, and any Investment in such Person remaining after giving
effect to such issuance or sale would have been permitted to be made under the
provisions of Section 1009 if made on the date of such issuance or sale, (3)
issuances of director's qualifying shares, or sales to foreign nationals of
shares of Capital Stock of foreign Restricted Subsidiaries, to the extent
required by applicable law, (4) issuances or sales of common stock of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, in accordance with the provisions of this
Indenture to the extent applicable, (5) issuances after which the Company
maintains its direct or indirect percentage of beneficial and economic ownership
of such Restricted Subsidiary, or (6) issuances in connection with Acquisitions
for the primary purpose of minimizing tax liability to the Company, any of its
Restricted Subsidiaries, the Acquired Person or any shareholders of the Acquired
Person.
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Section 1017. Limitation on Dividends and Other Payment Restrictions
------------------------------------------------------
Affecting Restricted Subsidiaries.
- ---------------------------------
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) pay dividends or
make any other distribution on its Capital Stock, (ii) pay any Indebtedness owed
to the Company or any other Restricted Subsidiary, (iii) make any Investment in
the Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction, with respect to a Restricted
Subsidiary that is not a Restricted Subsidiary of the Company on the date of the
Indenture, in existence at the time such Person becomes a Restricted Subsidiary
of the Company and not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary; (b) encumbrances or restrictions (I) by
reason of applicable law, or (II) under this Indenture; (c) customary non-
assignment provisions of any contract or lease of any Restricted Subsidiary
entered into in the ordinary course of business; (d) encumbrances or
restrictions imposed pursuant to contracts entered into in connection with
Permitted Liens, but solely to the extent such encumbrances or restrictions
affect property or assets subject to such Permitted Lien; (e) any encumbrance or
restriction imposed pursuant to contracts for the sale of assets with respect to
the assets to be sold pursuant to such contract; and (f) any encumbrance or
restriction existing under any agreement that extends, renews, refinances or
replaces the agreements containing the encumbrances or restrictions in the
foregoing clauses (a) through (e), or in this clause (f), provided that the
terms and conditions of any such encumbrances or restrictions are no more
restrictive in any material respect than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced.
Section 1018. Limitations on Unrestricted Restricted Subsidiaries.
---------------------------------------------------
The Company will not make, and will not permit its Restricted
Subsidiaries to make, any Investment in Unrestricted Restricted Subsidiaries if,
at the time thereof, the aggregate amount of such Investments would exceed the
amount of Restricted Payments then permitted to be made pursuant to Section
1009. Any Investments in Unrestricted Restricted Subsidiaries permitted to be
made pursuant to this covenant will be treated as a Restricted Payment in
calculating the amount of Restricted Payments made by the Company.
Section 1019. Provision of Financial Statements.
---------------------------------
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange Act,
file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the Commission
pursuant to Sections 13(a) or 15(d) if the Company were so subject, such
documents to be filed with the Commission on or prior to the date (the "Required
Filing Date") by which the Company would have been required so to file such
documents if the Company were so subject. The Company will also in any event
(x) within 15 days of each Required Filing Date (i) transmit by mail to all
Holders, as their names and addresses appear in the Security Register, without
cost to such Holders and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to Sections 13(a) or 15(d) of the
Exchange Act if the Company were subject to either of such Sections and (y) if
filing such documents by the Company with the Commission is not permitted under
the Exchange Act, promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any
prospective Holder at the Company's cost. If any Guarantor's financial
statements would be required to be included in the financial statements filed or
delivered pursuant to this Indenture if the Company were subject to Section
13(a) or 15(d) of the Exchange Act, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to this Indenture. In
addition, so long as any of the Securities remain outstanding, the Company will
make available to any prospective purchaser of Securities or beneficial owner of
Securities in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act, until such time as the
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Company has either exchanged the Securities for securities identical in all
material respects which have been registered under the Securities Act or until
such time as the Holders thereof have disposed of such Securities pursuant to an
effective registration statement under the Securities Act.
Section 1020. Statement by Officers as to Default.
-----------------------------------
(a) The Company will deliver to the Trustee, on or before a date not
more than 120 days after the end of each fiscal year of the Company ending
after the date hereof, and 60 days after the end of each fiscal quarter ending
after the date hereof, a written statement signed by the principal executive
officer, principal financial officer or principal accounting officer of the
Company in his/her capacity as an officer of the Company, as to compliance
herewith, including whether or not, after a review of the activities of the
Company during such year and of the Company's and each Guarantor's performance
under this Indenture, to the best knowledge, based on such review, of the
signers thereof, the Company and each Guarantor have fulfilled all of their
respective obligations and are in compliance with all conditions and covenants
under this Indenture throughout such year and, if there has been a Default
specifying each Default and the nature and status thereof and any actions being
taken by the Company with respect thereto.
(b) When any Default or Event of Default has occurred and is
continuing, or if the Trustee or any Holder or the trustee for or the holder of
any other evidence of Indebtedness of the Company or any Restricted Subsidiary
gives any notice or takes any other action with respect to a claimed default,
the Company shall deliver to the Trustee by registered or certified mail or
facsimile transmission followed by an originally executed copy of an Officers'
Certificate specifying such Default, Event of Default, notice or other action,
the status thereof and what actions the Company is taking or proposes to take
with respect thereto, within five Business Days after the occurrence of such
Default or Event of Default.
Section 1021. Waiver of Certain Covenants.
---------------------------
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Sections 1006 through 1011, 1012(a), 1013 and
1015 through 1020, if, before or after the time for such compliance, the Holders
of not less than a majority in aggregate principal amount of the Securities at
the time Outstanding shall, by Act of such Holders, waive such compliance in
such instance with such covenant or provision, but no such waiver shall extend
to or affect such covenant or condition except to the extent so expressly
waived, and, until such waiver shall become effective, the obligations of the
Company and the duties of the Trustee in respect of any such covenant or
condition shall remain in full force and effect.
Section 1022. Limitation on Business.
----------------------
The Company will not, and will not permit any of the Restricted
Subsidiaries to, engage in a business which is not substantially a
Telecommunications Business.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
Section 1101. Rights of Redemption.
--------------------
(a) The Securities are subject to redemption at any time on or after
December 15, 2002, at the option of the Company, in whole or in part, subject to
the conditions, and at the Redemption Prices, specified in the form of Security,
together with accrued and unpaid interest, if any, to the Redemption Date
(subject to the right of Holders of record on relevant Regular Record Dates and
Special Record Dates to receive interest due on relevant Interest Payment Dates
and Special Payment Dates).
(b) In addition, at any time prior to December 15, 2000, the Company
may, at its
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option, use the net proceeds of one or more Public Equity Offering or the sale
of Common Stock (other than Disqualified Stock) of the Company to a Strategic
Investor in a single transaction or in a series of related transactions, to
redeem up to an aggregate of 35% of the aggregate principal amount of Securities
originally issued under this Indenture at a redemption price equal to 112 3/4%
of the of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the Redemption Date; provided that at least 65% aggregate
principal amount of Securities remains outstanding immediately after the
occurrence of such redemption. In order to effect the foregoing redemption, the
Company must mail a notice of redemption no later than 45 days after the closing
of the related Public Equity Offering and must consummate such redemption within
60 days of the closing of the Public Equity Offering.
Section 1102. Applicability of Article.
------------------------
Redemption of Securities at the election of the Company or otherwise,
as permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article Eleven.
Section 1103. Election to Redeem; Notice to Trustee.
-------------------------------------
The election of the Company to redeem any Securities pursuant to
Section 1101 shall be evidenced by a Company Order and an Officers' Certificate.
In case of any redemption at the election of the Company, the Company shall, not
less than 45 and not more than 60 days prior to the Redemption Date fixed by the
Company (unless a shorter notice period shall be satisfactory to the Trustee),
notify the Trustee in writing of such Redemption Date and of the principal
amount of Securities to be redeemed.
Section 1104. Selection by Trustee of Securities to Be Redeemed.
-------------------------------------------------
If less than all the Securities are to be redeemed, the particular
Securities or portions thereof to be redeemed shall be selected not more than 30
days prior to the Redemption Date. The Trustee shall select the Securities or
portions thereof to be redeemed pro rata, by lot or by any other method the
Trustee shall deem fair and reasonable. The amounts to be redeemed shall be
equal to $1,000 or any integral multiple thereof.
The Trustee shall promptly notify the Company and the Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Securities shall relate, in
the case of any Security redeemed or to be redeemed only in part, to the portion
of the principal amount of such Security which has been or is to be redeemed.
Section 1105. Notice of Redemption.
--------------------
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 days nor more than 60 days prior to the
Redemption Date, to each Holder of Securities to be redeemed, at its address
appearing in the Security Register.
All notices of redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Outstanding Securities are to be redeemed, the
identification of the particular Securities to be redeemed;
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(d) in the case of a Security to be redeemed in part, the principal
amount of such Security to be redeemed and that after the Redemption Date upon
surrender of such Security, new Security or Securities in the aggregate
principal amount equal to the unredeemed portion thereof will be issued;
(e) that Securities called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(f) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security or portion thereof to be redeemed, and that
(unless the Company shall default in payment of the Redemption Price) interest
thereon shall cease to accrue on and after said date;
(g) the names and addresses of the Paying Agent and the offices or
agencies referred to in Section 1002 where such Securities are to be surrendered
for payment of the Redemption Price;
(h) the CUSIP number, if any, relating to such Securities; and
(i) the procedures that a Holder must follow to surrender the
Securities to be redeemed.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's written request,
by the Trustee in the name and at the expense of the Company. If the Company
elects to give notice of redemption, it shall provide the Trustee with a
certificate stating that such notice has been given in compliance with the
requirements of this Section 1105.
The notice if mailed in the manner herein provided shall be
conclusively presumed to have been given, whether or not the Holder receives
such notice. In any case, failure to give such notice by mail or any defect in
the notice to the Holder of any Security designated for redemption as a whole or
in part shall not affect the validity of the proceedings for the redemption of
any other Security.
Section 1106. Deposit of Redemption Price.
---------------------------
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company or any of its Affiliates is
acting as Paying Agent, segregate and hold in trust as provided in Section 1003)
an amount of money in same day funds sufficient to pay the Redemption Price of,
and (except if the Redemption Date shall be an Interest Payment Date or Special
Payment Date) accrued interest on, all the Securities or portions thereof which
are to be redeemed on that date. The Paying Agent shall promptly mail or
deliver to Holders of Securities so redeemed payment in an amount equal to the
Redemption Price of the Securities purchased from each such Holder. All money,
if any, earned on funds held in trust by the Trustee or any Paying Agent prior
to the Redemption Date shall be remitted to the Company. For purposes of this
Section 1106, the Company shall choose a Paying Agent which shall not be the
Company.
Section 1107. Securities Payable on Redemption Date.
-------------------------------------
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Holders will be
required to surrender the Securities to be redeemed to the Paying Agent at the
address specified in the notice of redemption at least one Business Day prior to
the Redemption Date. Upon surrender of any such Security for redemption in
accordance with said notice, such Security shall be paid by the Company at the
Redemption Price together with accrued interest to the Redemption Date;
provided, however, that installments of interest whose Stated Maturity is on or
prior to the Redemption Date shall be payable to the Holders of such Securities,
or one or more Predecessor Securities, registered as such on the relevant
Regular Record Dates and Special Record Dates according to
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the terms and the provisions of Section 309.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and premium, if any, shall,
until paid, bear interest from the Redemption Date at the rate borne by such
Security.
Section 1108. Securities Redeemed or Purchased in Part.
----------------------------------------
Any Security which is to be redeemed or purchased only in part shall
be surrendered to the Paying Agent at the office or agency maintained for such
purpose pursuant to Section 1002 (with, if the Company, the Security Registrar
or the Trustee so requires, due endorsement by, or a written instrument of
transfer in form satisfactory to the Company, the Security Registrar or the
Trustee, as the case may be, duly executed by, the Holder thereof or such
Holder's attorney duly authorized in writing), and the Company shall execute,
and the Trustee shall authenticate and deliver to the Holder of such Security
without service charge, a new Security or Securities, of any authorized
denomination as requested by such Holder in aggregate principal amount equal to,
and in exchange for, the unredeemed portion of the principal of the Security so
surrendered that is not redeemed or purchased.
ARTICLE TWELVE
SATISFACTION AND DISCHARGE
Section 1201. Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall be discharged and shall cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
Securities as expressly provided for herein) as to all Outstanding Securities
hereunder, and the Trustee, upon Company Request and at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(a) either
(1) all the Securities theretofore authenticated and delivered
(other than (i) lost, stolen or destroyed Securities which have been
replaced or paid as provided in Section 308 or (ii) all Securities
whose payment has theretofore been deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust as provided in Section 1003) have been
delivered to the Trustee for cancellation; or
(2) all Securities not theretofore delivered to the Trustee for
cancellation (i) have become due and payable, (ii) will become due and
payable at their Stated Maturity within one year, or (iii) are to be
called for redemption within one year under arrangements reasonably
satisfactory to the Trustee for the giving of notice of redemption by
the Trustee in the name, and at the expense, of the Company; and the
Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount in United
States dollars sufficient to pay and discharge the entire Indebtedness
on the Securities not theretofore delivered to the Trustee for
cancellation, including the principal of, premium, if any, and accrued
interest on such Securities at such Maturity, Stated Maturity or
Redemption Date;
(b) the Company or any Guarantor has paid or caused to be paid all
other sums payable hereunder by the Company and any Guarantor; and
(c) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Independent Counsel, in form and substance reasonably
satisfactory to the Trustee, each stating that (i) all
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conditions precedent herein relating to the satisfaction and discharge hereof
have been complied with, and (ii) such satisfaction and discharge will not
result in a breach or violation of, or constitute a default under, this
Indenture or any other material agreement or instrument to which the Company,
any Guarantor or any Restricted Subsidiary is a party or by which the Company,
any Guarantor or any Restricted Subsidiary is bound.
Notwithstanding the satisfaction and discharge hereof, the obligations
of the Company to the Trustee under Section 606 and, if United States dollars
shall have been deposited with the Trustee pursuant to subclause (2) of
subsection (a) of this Section 1201, the obligations of the Trustee under
Section 1202 and the last paragraph of Section 1003 shall survive.
Section 1202. Application of Trust Money.
--------------------------
Subject to the provisions of the last paragraph of Section 1003, all
United States dollars deposited with the Trustee pursuant to Section 1201 shall
be held in trust and applied by it, in accordance with the provisions of the
Securities and this Indenture, to the payment, either directly or through any
Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the Persons entitled thereto, of the principal of,
premium, if any, and interest on, the Securities for whose payment such United
States dollars have been deposited with the Trustee.
ARTICLE THIRTEEN
SUBORDINATION
Section 1301. Agreement to Subordinate.
------------------------
The Company agrees, and each Holder by accepting a Security agrees,
that the Indebtedness evidenced by the Securities is subordinated in right of
payment, to the extent and in the manner provided in this Article 13, to the
prior payment in full of all Senior Debt (whether outstanding on the date hereof
or hereafter created, incurred, assumed or guaranteed), and that the
subordination is for the benefit of the holders of Senior Debt.
Section 1302. Liquidation; Dissolution; Bankruptcy.
------------------------------------
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities;
(1) the holders of Senior Debt shall be entitled to receive payment in
full of all Obligations due in respect of such Senior Debt (including
interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the Holders of the
Securities shall be entitled to receive any payment with respect to the
Securities; and
(2) until all Obligations with respect to Senior Debt are paid in
full, any distribution to which the Holders of the Securities would be
entitled but for this Article 13 shall be made to the holders of Senior
Debt.
Section 1303. Default on Designated Senior Debt.
---------------------------------
The Company may not make any payment upon or in respect of Securities
if:
(i) a default in the payment of the principal of, premium, if any, or
interest on
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Designated Senior Debt occurs and is continuing beyond any applicable grace
period; or
(ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the
Company or the holders of any Designated Senior Debt.
Payments on the Securities shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived, and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated.
No new period of payment blockage may be commenced unless and until
(i) 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice, and (ii) all scheduled payments of principal, premium,
if any, and interest on the Securities that have come due have been paid in full
in cash.
No more than one Payment Blockage Notice to the Trustee may be given
in any 360 day period. No nonpayment default with respect to Designated Senior
Debt that existed or was continuing on the date of the commencement of any
period of any payment blockage with respect to the Designated Senior Debt
initiating such period of payment blockage will be, or can be, made the basis of
the commencement of a second period of payment blockage, unless such default has
been cured for a period of not less than 30 consecutive days.
Section 1304. Acceleration of Securities.
--------------------------
If payment of the Securities is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Debt of the
acceleration.
Section 1305. When Distribution Must Be Paid Over.
-----------------------------------
In the event that the Trustee or any Holder receives any payment of
any Obligations with respect to the Securities at a time when the Trustee or
such Holder, as applicable, has actual knowledge that such payment is prohibited
by Section 1303 hereof, such payment shall be held by the Trustee or such
Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, upon written request, to the holders of Senior Debt as their
interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which such Senior Debt may have been issued, as
their respective interests may appear, for application to the payment of all
Obligations with respect to Senior Debt remaining unpaid to the extent necessary
to pay such Obligations in full in accordance with their terms, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 13, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders or the Company
or any other Person money or assets to which any holders of Senior Debt shall be
entitled by virtue of this Article 13, except if such payment is made as a
result of the willful misconduct or gross negligence of the Trustee.
Section 1306. Notice By Company.
-----------------
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to
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the Company that would cause a payment of any Obligations with respect to the
Securities to violate this Article 13, but failure to give such notice shall not
affect the subordination of the Securities to the Senior Debt as provided in
this Article 13.
Section 1307. Subrogation.
-----------
After all Senior Debt is paid in full and until the Securities are
paid in full, Holders of Securities shall be subrogated (equally and ratably
with all other Indebtedness pari passu in right of payment with the Securities)
to the rights of holders of Senior Debt to receive distributions applicable to
Senior Debt to the extent that distributions otherwise payable to the Holders of
Securities have been applied to the payment of Senior Debt. A distribution made
under this Article 13 to holders of Senior Debt that otherwise would have been
made to Holders of Securities is not, as between the Company and Holders, a
payment by the Company on the Securities.
Section 1308. Relative Rights.
---------------
This Article 13 defines the relative rights of Holders of Securities
and holders of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders of Securities, the
obligation of the Company, which is absolute and unconditional, to pay
principal of and interest on the Securities in accordance with their terms;
(2) affect the relative rights of Holders of Securities and creditors
of the Company other than their rights in relation to the holders of Senior
Debt; or
(3) prevent the Trustee or any holder of Securities from exercising
its available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt to receive distributions and
payments otherwise payable to Holders of Securities.
If the Company fails because of this Article 13 to pay principal of or
interest or Liquidated Damages on a Security on the due date, the failure is
still a Default or Event of Default.
Section 1309. Subordination May Not Be Impaired By Company.
--------------------------------------------
No right of any holder of Senior Debt to enforce the subordination of
the Indebtedness evidenced by the Securities shall be impaired by any act or
failure to act by the Company or any Holder or by the failure of the Company or
any Holder to comply with this Indenture.
Section 1310. Distribution or Notice to Representative.
----------------------------------------
Whenever a distribution is to be made or a notice given to holders to
Senior Debt, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article 13, the Trustee and the Holders of Securities shall be entitled
to rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such Representative or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the Holders
of Securities for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Debt and other
Indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto or
to this Article 13.
Section 1311. Rights of Trustee and Paying Agent.
----------------------------------
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Notwithstanding the provisions of this Article 13 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Securities, unless the Trustee shall have received at
its Corporate Trust Office at least five Business Days prior to the date of such
payment written notice of facts that would cause the payment of any Obligations
with respect to the Securities to violate this Article 10. Only the Company or
a Representative may give such notice. Nothing in this Article 13 shall impair
the claims of, or payments to, the Trustee under or pursuant to Section 607
hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may
do the same with like rights.
Section 1312. Authorization to Effect Subordination.
-------------------------------------
Each Holder of Securities, by the Holder's acceptance thereof,
authorizes and directs the Trustee on such Holder's behalf to take such action
as may be necessary or appropriate to effectuate the subordination as provided
in this Article 13, and appoints the Trustee to act as such Holder's attorney-
in-fact for any and all such purposes. If the Trustee does not file a proper
proof of claim or proof of debt in the form required in any proceeding referred
to in Section 504 hereof at least 30 days before the expiration of the time to
file such claim, a Representative of the Senior Debt is hereby authorized to
file an appropriate claim for and on behalf of the Holders of the Securities.
Section 1313. Amendments.
----------
The provisions of this Article 13 shall not be amended or modified
without the written consent of the holders of all Senior Debt.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed, all as of the day and year first above written.
CONCENTRIC NETWORK CORPORATION
By:
Name: Henry R. Nothhaft
Title: President and Chief Executive Officer
Attest:
Name:
Title:
------------------------
By:
Name:
Title:
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STATE OF ________________________)
) ss.:
COUNTY OF _______________________)
On the _____ day of _______, ____, before me personally came
___________, to me known, who, being by me duly sworn, did depose and say that
he resides at _________________________; that he is ___________________ of
__________________, a corporation described in and which executed the foregoing
instrument; and that he signed his name thereto pursuant to authority of the
Board of Directors of such corporation.
(NOTARIAL
SEAL)
-------------
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STATE OF ________________________)
) ss.:
COUNTY OF ______________________)
On the _____ day of ______, ____, before me personally came
___________, to me known, who, being by me duly sworn, did depose and say that
he resides at _________________________; that he is ___________________ of
__________________, a corporation described in and which executed the foregoing
instrument; and that he signed his name thereto pursuant to authority of the
Board of Directors of such corporation.
(NOTARIAL
SEAL)
------------
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EXHIBIT A
RESTRICTED SECURITIES CERTIFICATE
(For transfers pursuant to (S) 307(a) of the Indenture)
- --------------------------------------
- ---------------------------------
- ------------------------
Re: ______% Subordinated Debentures due 2010 of Concentric Network
Corporation (the "Securities")
-----------------------------------------
Reference is made to the Indenture, dated as of ___________, ____ (the
"Indenture"), among Concentric Network Corporation (the "Company") and
National Association, as Trustee. Terms used herein and defined in the
- --------------------
Indenture or in Rule 144A or Rule 144 under the U.S. Securities Act of 1933 (the
"Securities Act") are used herein as so defined.
This certificate relates to US$_____________ principal amount of
Securities, which are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No(s). ___________________________
ISIN No(s). If any. _______________________
CERTIFICATE No(s). ____________________
The person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". The Specified Securities are represented by a Global Security and are
held through the Depositary or an Agent Member in the name of the Undersigned,
as or on behalf of the Owner.
The Owner has requested that the Specified Securities be transferred
to a person (the "Transferee") who will take delivery in the form of a
Restricted Security. In connection with such transfer, the Owner hereby
certifies that, unless such transfer is being effected pursuant to an effective
registration statement under the Securities Act, it is being effected in
accordance with Rule 144A or Rule 144 under the Securities Act and all
applicable securities laws of the states of the United States and other
jurisdictions. Accordingly, the Owner hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) the Specified Securities are being transferred to a person
that the Owner and any person acting on its behalf reasonably believe
is a "qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a
102
<PAGE>
qualified institutional buyer; and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner
may be relying on Rule 144A in connection with the transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
------------------
Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the Specified Securities were last acquired from the
Company or from an affiliate of the Company, whichever is later, and
is being effected in accordance with the applicable amount, manner of
sale and notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
two years has elapsed since the Specified Securities were last
acquired from the Company or from an affiliate of the Company,
whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Company.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Initial Purchasers.
103
<PAGE>
Dated: _____________________________
(Print the name of the Undersigned, as such term is
defined in the third paragraph of this certificate.)
By:
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of
the Undersigned must be stated.)
104
<PAGE>
EXHIBIT B
UNRESTRICTED SECURITIES CERTIFICATE
(For removal of Securities Act Legends pursuant to (S) 307(b))
- --------------------------------------
- ---------------------------------
- -------------------------
Re: ______% Subordinated Debentures due 2010 of Concentric
Network Corporation (the "Securities")
------------------------------------------------
Reference is made to the Indenture, dated as of ___________, ____ (the
"Indenture"), among Concentric Network Corporation (the "Company") and
_____________________________________________________________, as Trustee.
Terms used herein and defined in the Indenture or in Rule 144 under the U.S.
Securities Act of 1933 (the "Securities Act") are used herein as so defined.
This certificate relates to US$_____________ principal amount of
Securities, which are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No(s). ___________________________
CERTIFICATE No(s). ____________________
The person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Security, they
are held through the Depositary or an Agent Member in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Security, they are registered in the name of the
Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Securities be exchanged for
Securities bearing no Private Placement Legend pursuant to Section 307(b) of the
Indenture. In connection with such exchange, the Owner hereby certifies that
the exchange is occurring after a holding period of at least two years (computed
in accordance with paragraph (d) of Rule 144) has elapsed since the Specified
Securities were last acquired from the Company or from an affiliate of the
Company, whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Company. The Owner also
acknowledges that any future transfers of the Specified Securities must comply
with all applicable securities laws of the states of the United States and other
jurisdictions.
105
<PAGE>
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Initial Purchasers.
Dated: _____________________________
(Print the name of the Undersigned, as such term is
defined in the third paragraph of this certificate.)
By:
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of
the Undersigned must be stated.)
106
<PAGE>
APPENDIX I
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- -----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)
- --------------------------------------------------------------------------------
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing
- --------------------------------------------------------------------------------
attorney to transfer such Security on the books of the Company with full power
of substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL CERTIFICATES FOR SERIES A SECURITIES
EXCEPT PERMANENT OFFSHORE PHYSICAL
CERTIFICATES]
In connection with any transfer of this Security occurring prior to the
date which is the earlier of the date of an effective Registration Statement or
___________, ____, the undersigned confirms that without utilizing any general
solicitation or general advertising that:
[Check One]
[ ] (a) this Security is being transferred in compliance with the
exemption from registration under the Securities Act of 1933, as
amended, provided by Rule 144A thereunder.
or
--
[ ] (b) this Security is being transferred other than in accordance with
(a) above and documents are being furnished which comply with the
conditions of transfer set forth in this Security and the Indenture.
107
<PAGE>
If none of the foregoing boxes is checked, the Trustee or other Security
Registrar shall not be obligated to register this Security in the name of any
Person other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in Section 307 of the Indenture
shall have been satisfied.
Date: _______________________
_______________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
Signature Guarantee: _____________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Security
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:__________________ _________________________________________
NOTICE: To be executed by an authorized signatory
108
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX II
FORM OF TRANSFEREE CERTIFICATE
I or we assign and transfer this Security to:
- --------------------------------------------
Please insert social security or other identifying number of assignee
- ---------------------------------------------------------------------
Print or type name, address and zip code of assignee and irrevocably appoint
_______________________________________________
[Agent], to transfer this Security on the books of the Company. The Agent may
substitute another to act for him.
Dated ____________________ Signed
(Sign exactly as name appears on the other side of this Security)
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17 Ad-15]
-109-
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 12.1
EXHIBIT 12.1--STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------
PROFORMA THREE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31,
---------------------------------------------- DECEMBER 31, ------------------
1993 1994 1995 1996 1997 1997(1) 1997 1998(1)
------- ------- -------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss before
extraordinary item..... $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
Interest expense........ 24 76 858 3,874 7,788 26,179 1,199 6,493
Interest portion of
rental expense......... -- 23 110 176 135 150 34 38
------- ------- -------- -------- -------- -------- -------- --------
Earnings................ $(1,221) $(4,191) $(21,040) $(62,331) $(47,659) $(57,749) $(13,448) $(16,738)
======= ======= ======== ======== ======== ======== ======== ========
Interest expense........ $ 24 $ 76 $ 858 $ 3,874 $ 7,788 $ 26,179 $ 1,199 $ 6,493
Interest portion of
rental charges......... -- 23 110 176 135 150 34 38
------- ------- -------- -------- -------- -------- -------- --------
Fixed charges........... $ 24 $ 99 $ 968 $ 4,050 $ 7,923 $ 26,329 $ 1,233 $ 6,531
======= ======= ======== ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges.......... -- -- -- -- -- -- -- --
======= ======= ======== ======== ======== ======== ======== ========
Deficiency of earnings
to cover fixed
charges................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $ 14,681) $(23,269)
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) The deficiency of earnings to cover fixed charges does not reflect the
Offering. Preferred stock dividends and accretion on a pro forma basis,
assuming the Offering occurred on January 1, 1997 would have been $21.8
million for the year ended December 31, 1997. Assuming the Offering
occurred on January 1, 1998 dividends and accretion on a pro forma basis
for the three months ended March 31, 1998 would have been $5.2 million.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and
"Selected Historical Consolidated Financial and Other Data" and to the use of
our report dated January 27, 1998, except for Note 12 as to which the date is
March 31, 1998, in the Registration Statement (Form S-4) and the related
Prospectus of Concentric Network Corporation for the registration of $150
million 13 1/2% Series B Senior Redeemable Exchangeable Preferred Stock due
2010.
/s/ Ernst & Young LLP
San Jose, California
July 1, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 26, 1998 on the financial statements of Internex
Information Services, Inc. for the year ended June 30, 1997 included in this
Form S-4. It should be noted that we have not audited any financial statements
of Internex Information Services, Inc. for any period subsequent to June 30,
1997 or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
June 30, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
CONCENTRIC NETWORK CORPORATION
OFFER TO EXCHANGE ITS
NEW 13 1/2% SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
PURSUANT TO THE PROSPECTUS
DATED JUNE , 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME ON , 1998 (UNLESS EXTENDED BY CONCENTRIC NETWORK
CORPORATION IN ITS SOLE DISCRETION) (SUCH TIME AND SUCH DATE, AND AS SUCH
TIME AND DATE MAY BE EXTENDED, THE "EXPIRATION DATE").
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
CHASEMELLON SHAREHOLDER SERVICES, LLC
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
ChaseMellon Shareholder Services, LLC
275 Montgomery Street, 23rd Floor
San Francisco, CA 94104
(Concentric Network Corporation)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(415) 489-5241
FACSIMILE TRANSMISSIONS:
(415) 743-1426
(Originals of all documents sent by facsimile should be sent promptly by
hand, overnight courier or registered or certified mail.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
1
<PAGE>
This Letter of Transmittal is to be completed by holders of Series A
Preferred (as defined below) either if Series A Preferred are to be forwarded
herewith or if tenders of Series A Preferred are to be made by book-entry
transfer to an account maintained by ChaseMellon Shareholder Services, LLC
(the "Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in "The Exchange Offer-Procedures for Tendering" in the
Prospectus.
Holders of Series A Preferred whose certificates (the "Certificates") for
such Series A Preferred are not immediately available or who cannot deliver
their Certificates and all other required documents to the Exchange Agent on
or prior to the Expiration Date (as defined in the Prospectus) or who cannot
complete the procedures for book-entry transfer on a timely basis, must tender
their Series A Preferred according to the guaranteed delivery procedures set
forth in "The Exchange Offer-Procedures for Tendering" in the Prospectus. See
Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Concentric Network Corporation, a Delaware
corporation (the "Company"), the aggregate principal amount of the Company's
13 1/2% Series A Preferred Senior Redeemable Exchangeable Preferred Stock due
2010 (the "Series A Preferred") described in Box 1 below, in exchange for a
like aggregate principal amount of the Company's new 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010 (the "Series B Preferred")
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), upon the terms and subject to the conditions set forth in
the Prospectus dated June , 1998 (as the same may be amended or supplemented
from time to time, the "Prospectus"), receipt of which is acknowledged, and in
this Letter of Transmittal (which, together with the Prospectus, constitutes
the "Exchange Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Series A Preferred tendered herewith in accordance with the
terms and conditions of the Exchange Offer (including, if the Exchange Offer
is extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or upon the
order of the Company all right, title and interest in and to such Series A
Preferred as are being tendered herewith. The undersigned hereby irrevocably
constitutes and appoints ChaseMellon Shareholder Services, LLC as the Exchange
Agent (the "Exchange Agent") as its agent and attorney-in-fact (with full
knowledge that the Exchange Agent is also acting as agent of the Company in
connection with the Exchange Offer) with respect to the tendered Series A
Preferred, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest), subject only to
the right of withdrawal described in the Prospectus, to (i) deliver
Certificates for Series A Preferred to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent,
of the Series A Preferred to be issued in exchange for such Series A Preferred
(ii) present Certificates for such Series A Preferred for transfer, and to
transfer the Series A Preferred on the books of the Company, and (iii) receive
for the account of the Company all benefits and otherwise exercise all rights
of beneficial ownership of such Series A Preferred, all in accordance with the
terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE SERIES
A PREFERRED TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE,
THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE
AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
SERIES A PREFERRED TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR
PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE
NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF
THE SERIES A PREFERRED TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH
ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS
READ AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Series A
Preferred tendered hereby should be printed in Box 1 below, if they are not
already set forth below, as they appear on the Certificates representing such
Series A Preferred. The Certificate number(s) and the Series A Preferred that
the undersigned wishes to tender should be indicated in the appropriate box
below.
If any tendered Series A Preferred are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted for more
Series A Preferred than are tendered or accepted for exchange, Certificates
for such nonexchanged or nontendered Series A Preferred will be returned (or,
in the case of Series A Preferred tendered by book-entry transfer, such Series
A Preferred will be credited to an account maintained at DTC), without expense
to the tendering holder, promptly following the expiration or termination of
the Exchange Offer.
3
<PAGE>
The undersigned understands that tenders of Series A Preferred pursuant to
any one of the procedures described in "The Exchange Offer-Procedures for
Tendering Series A Preferred" in the Prospectus and in the instructions hereto
will, upon the Company's acceptance for exchange of such tendered Series A
Preferred, constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Series A Preferred tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Series B
Preferred be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Series A Preferred, that such Exchange Notes be
credited to the account indicated below maintained at DTC. If applicable,
substitute Certificates representing Series B Preferred not exchanged or not
accepted for exchange will be issued to the undersigned or, in the case of a
book-entry transfer of Series A Preferred, will be credited to the account
indicated below maintained at DTC. Similarly, unless otherwise indicated under
"Special Delivery Instructions" (Box 8), please deliver Series B Preferred to
the undersigned at the address shown below the undersigned's signature.
BY TENDERING SERIES A PREFERRED AND EXECUTING THIS LETTER OF TRANSMITTAL,
THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT
AN "AFFILIATE" OF THE COMPANY, (ii) ANY SERIES B PREFERRED TO BE RECEIVED BY
THE UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS,
(iii) THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
SERIES B PREFERRED TO BE RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND
DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH SERIES B PREFERRED. BY TENDERING SERIES A PREFERRED
PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, A
HOLDER OF SERIES A PREFERRED WHICH IS A BROKER-DEALER REPRESENTS AND AGREES,
CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE
DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT SUCH SERIES A PREFERRED WERE ACQUIRED BY SUCH BROKER-
DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING SERIES A PREFERRED
IS HEREIN REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER
THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SERIES B
PREFERRED (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS,
SUCH PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE 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 SERIES B PREFERRED RECEIVED IN EXCHANGE FOR SERIES A PREFERRED,
WHERE SUCH SERIES A PREFERRED WERE ACQUIRED BY SUCH PARTICIPATING BROKER-
DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES, FOR A PERIOD ENDING 180 DAYS AFTER THE EXPIRATION DATE OR,
IF EARLIER, WHEN ALL SERIES B PREFERRED HAVE BEEN DISPOSED OF BY SUCH
PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER,
BY TENDERING SUCH SERIES A PREFERRED AND EXECUTING THIS LETTER OF TRANSMITTAL,
AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY
EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR
INCORPORATED
4
<PAGE>
BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES
THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY
WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF SERIES B PREFERRED PURSUANT TO THE PROSPECTUS
UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE SERIES B PREFERRED MAY BE RESUMED, AS THE
CASE MAY BE.
Each Series B Preferred will bear interest from the most recent date to
which interest has been paid or duly provided for on the Series A Preferred
surrendered in exchange for such Series B Preferred or, if no such interest
has been paid or duly provided for on such Series A Preferred, from June 1,
1998. Holders of the Series A Preferred whose Series A Preferred are accepted
for exchange will not receive accrued interest on such Series A Preferred for
any period from and after the last Interest Payment Date to which interest has
been paid or duly provided for on such Series A Preferred prior to the
original issue date of the Series B Preferred or, if no such interest has been
paid or duly provided for, will not receive any accrued interest on such
Series A Preferred, and will be deemed to have waived the right to receive any
interest on such Existing Notes accrued from and after such Interest Payment
Date or, if no such interest has been paid or duly provided for, from and
after June 1, 1998.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 9 HEREOF.
5
<PAGE>
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
BOX 1
- --------------------------------------------------------------------------------
DESCRIPTION OF SERIES A PREFERRED TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF BLANK,
PLEASE PRINT
NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S),
EXACTLY AS
NAME(S)
APPEAR(S) ON CERTIFICATE NUMBER OF SHARES
SERIES A NUMBER(S) OF NUMBER OF SHARES OF SERIES A
PREFERRED SERIES A OF SERIES A PREFERRED
CERTIFICATE(S): PREFERRED* PREFERRED TENDERED
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
TOTAL TOTAL AMOUNT
AMOUNT $ TENDERED $
- --------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** All Series A Preferred held shall be deemed tendered unless a lesser
number is specified this column. See Instruction 4.
BOX 2
- --------------------------------------------------------------------------------
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED SERIES A PREFERRED ARE BEING DELIVERED BY BOOK-
ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH
DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
6
<PAGE>
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED SERIES A PREFERRED ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holders(s) ________________________________________________
Window Ticket Number (if any) ________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed Delivery ________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer: _________________
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
BOX 4
RETURN OF NON-EXCHANGED SERIES A PREFERRED TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED SERIES A
PREFERRED ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH
ABOVE.
BOX 5
PARTICIPATING BROKER-DEALER
- --------------------------------------------------------------------------------
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE SERIES A PREFERRED
FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN
ADDITIONAL COPIES OF THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name: ________________________________________________________________________
Address: _____________________________________________________________________
7
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
- --------------------------------------------------------------------------------
Holder(s) Sign Here __________________________________________________________
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Series A Preferred hereby tendered or on a security
position listing, or by a person(s) authorized to become the registered
holder(s) by endorsements and documents transmitted herewith (including such
opinions of counsel, certifications and other information as may be required
by the Company or the Trustee for the Series A Preferred to comply with the
restrictions on transfer applicable to the Series A Preferred). If signature
is by an attorney-in-fact, executor, administrator, trustee, guardian,
officer of a corporation or another acting in a fiduciary capacity or
representative capacity, please set forth the signer's full title. See
Instruction 5 below.
______________________________
(Signature(s) of Holder(s))
Date ________________ , 1998
Name(s) ______________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
(Tax Identification or Social Security Number(s)) ____________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
______________________________
Authorized Signature
Name _________________________________________________________________________
(Please Print)
Date _________________, 1998
Capacity or Title ____________________________________________________________
Name of Firm _________________________________________________________________
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
8
<PAGE>
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 (SEE INSTRUCTIONS 1, 5 AND 6
BELOW) BELOW)
To be completed ONLY if the Se- To be completed ONLY if Series B
ries B Preferred are to be issued Preferred are to be sent to some-
in the name of someone other than one other than the registered
the registered holder of the Se- holder of the Series A Preferred
ries A Preferred whose name(s) whose name(s) appear(s) above, or
appear(s) above. to such registered holder(s) at
an address other than that shown
above.
Issue Series B Preferred to:
Name _____________________________ Mail Series B Preferred to:
(Please Print) Name______________________________
Address __________________________ (Please Print)
__________________________________ Address __________________________
(Include Zip Code) __________________________________
__________________________________ (Include Zip Code)
(Tax Identification or Social __________________________________
Security Number) (Tax Identification or Social
Security Number)
9
<PAGE>
BOX 9
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX
6
PAYER'S NAME: CHASEMELLON SHAREHOLDERS SERVICES, LLC
- --------------------------------------------------------------------------------
PART I--Please provide your TIN:
SUBSTITUTE TIN (either your social
security number or employer ----------------------
FORM W-9 identification number) in
the box to the right and
certify by signing and
dating below.
--------------------------------------------------------
DEPARTMENT OF PART II--Awaiting TIN [_]
THE TREASURY SIGN THIS FORM AND THE CERTIFICATION OF AWAITING
INTERNAL TAXPAYER IDENTIFICATION NUMBER BELOW.
REVENUE --------------------------------------------------------
SERVICE PART III--EXEMPT [_]
See enclosed Guidelines for additional information
and SIGN THIS FORM.
--------------------------------------------------------
Certification--Under penalties of
perjury, I certify that:
PAYER'S REQUEST (1) The number shown on this form is my correct
FOR TAXPAYER taxpayer identification number (or I am waiting
IDENTIFICATION for a number to be issued to me); and
NUMBER (TIN) (2) I am not subject to backup withholding because
AND CERTIFICATION (i) I am exempt from backup withholding, or (ii) I
have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup
withholding as a result of a failure to report all
interest or dividends, or (iii) the IRS has notified
me that I am no longer subject to backup
withholding.
(3) Any other information provided on this form is
true and correct.
-------------------------------------------------------
Certification Instructions--You must cross out item
(iii) in Part (2) above if you have been notified by
the IRS that you are subject to backup withholding
because of underreporting interest or dividends on
your tax return and you are no longer subject to
backup withholding.
Signature: _______________________ Date: __________
- --------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the Exchange
Notes shall be retained until I provide a taxpayer identification number to
the Exchange Agent and that, if I do not provide my taxpayer identification
number within 60 days, such retained amounts shall be remitted to the
Internal Revenue Service as backup withholding and 31% of all reportable
payments made to me thereafter will be withheld and remitted to the Internal
Revenue Service until I provide a taxpayer identification number.
Signature: ___________________________________________________________________
Date: ________________________________________________________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
10
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Series A Preferred directly to the
Company. Your Series A Preferred Certificates, together with your signed and
completed Letter of Transmittal and any required supporting documents should
be mailed in the enclosed addressed envelope, or otherwise delivered, to the
Exchange Agent, at either of the addresses indicated on the first page hereof.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Series A Preferred" in the Prospectus.
Certificates, or timely confirmation of a book-entry transfer of such Series A
Preferred into the Exchange Agent's account at DTC, as well as this Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address
set forth herein on or prior to 5:00 p.m., New York City time, on the
Expiration Date. Existing Holders may tender some or all of their shares of
Series A Preferred pursuant to the Exchange Offer.
Holders who wish to tender their Series A Preferred and (i) whose Series A
Preferred are not immediately available or (ii) who cannot deliver their
Series A Preferred, this Letter of Transmittal and all other required
documents to the Exchange Agent on or prior to the Expiration Date or (iii)
who cannot complete the procedures for delivery by book-entry transfer on a
timely basis, may tender their Series A Preferred by properly completing and
duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed
delivery procedures set forth in "The Exchange Offer--Procedures for Tendering
Series A Preferred" in the Prospectus and by completing Box 3 hereof. Pursuant
to such procedures: (i) such tender must be made by or through an Eligible
Institution (as defined below); (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form made available by the
Company, must be received by the Exchange Agent on or prior to the Expiration
Date; and (iii) the Certificates (or a book-entry confirmation (as defined in
the Prospectus)) representing all tendered Series A Preferred, in proper form
for transfer, together with a Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees
and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent within three New York Stock Exchange trading
days after the date of execution of such Notice of Guaranteed Delivery, all as
provided in "The Exchange Offer--Procedures for Tendering Series A Preferred"
in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Series A
Preferred to be properly tendered pursuant to the guaranteed delivery
procedure, the Exchange Agent must receive a Notice of Guaranteed Delivery on
or prior to the Expiration Date. As used herein, "Eligible Institution" means
a firm or other entity identified in Rule 17Ad-15 under the Exchange Act as
"an eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association, that is a participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchanges Medallion Program.
11
<PAGE>
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC
whose name appears on a security position listing as the owner of the
Series A Preferred) of Series A Preferred tendered herewith, unless such
holder(s) has completed either the box entitled "Special Exchange
Instructions" (Box 7) or the box entitled "Special Delivery Instructions"
(Box 8) above, or
(ii) such Series A Preferred are tendered for the account of a firm that
is an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Series A
Preferred" is inadequate, the Certificate number(s) and/or the principal
amount of Series A Preferred and any other required information should be
listed on a separate signed schedule which should be attached to this Letter
of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of all Series A Preferred will be accepted. If less than all the
Series A Preferred evidenced by any Certificate submitted are to be tendered,
fill in the amount of Series A Preferred which are to be tendered in Box 1
under the column "Amount of Series A Preferred Tendered". In such case, new
Certificate(s) for the remainder of the Series A Preferred that were evidenced
by your Existing Certificate(s) will only be sent to the holder of the Series
A Preferred, promptly after the Expiration Date. All Series A Preferred
represented by Certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Series A Preferred may be
withdrawn at any time prior to 5;00 pm., New York City time, to the Expiration
Date. In order for a withdrawal to be effective on or prior to that time, a
written, telegraphic, telex or facsimile transmission of such notice of
withdrawal must be timely received by the Exchange Agent at its address set
forth above or in the Prospectus on or prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Series A Preferred to be withdrawn (the "Depositor"), (ii) identify the
Series A Preferred to be withdrawn (including the certificate number(s) and
principal amount of such Series A Preferred, or, in the case of Series A
Preferred transferred by book-entry transfer, the name and number of the
account at DTC to be credited), (iii) be signed by the Existing Holder in the
same manner as the original signature on the Letter of Transmittal by which
such Series A Preferred were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee register the transfer of such Series A Preferred into the name of the
person withdrawing the tender and (iv) specify the name in which any such
Series A Preferred are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time or receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Series A
Preferred so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Series B Preferred will be issued with
respect thereto unless the Series A Preferred so withdrawn are validly
retendered. Any Series A Preferred which have been tendered but which are not
accepted for exchange will be returned to such Existing Holder without cost to
such Existing Holder as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Series A
Preferred may be retendered by following one of the procedures described above
under "--Procedures for Tendering" at any time prior to the Expiration Date.
12
<PAGE>
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give such notification. Any Series A Preferred which
have been tendered but which are withdrawn will be returned to the holder
thereof without cost to such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Existing Notes tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Series A Preferred tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Series A Preferred are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and, unless waived by the
Company, must submit proper evidence satisfactory to the Company, in its sole
discretion, of such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Series A Preferred listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Series B
Preferred are to be issued in the name of a person other than the registered
holder(s). However, if Series B Preferred are to be issued in the name of a
person other than the registered holder(s), signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Series A Preferred listed, the certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also
must be accompanied by such opinions of counsel, certifications and other
information as the Company or the Trustee for the Series A Preferred may
require in accordance with the restrictions on transfer applicable to the
Series A Preferred. Signatures on such Certificates or bond powers must be
guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Series B Preferred are to be issued in the name of a person other than
the signer of this Letter of Transmittal, or if Series B Preferred are to be
sent to someone other than the signer of this Letter of Transmittal or to an
address other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed (Box 7 and 8). Certificates for Series A
Preferred not exchanged will be returned by mail or, if tendered by book-entry
transfer, by crediting the account indicated above maintained at DTC. See
Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Series A Preferred, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for, may, in the view of
counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to
13
<PAGE>
applicable law, to waive any of the conditions of the Series B Preferred set
forth in the Prospectus under "The Exchange Offer-Certain Conditions to the
Exchange Offer" or any conditions or irregularity in any tender of Series A
Preferred of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will
be final and binding. No tender of Series A Preferred will be deemed to have
been validly made until all irregularities with respect to such tender have
been cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent, nor any other person shall be under any duty to
give notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange
Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter
of Transmittal (Box 9) and certify, under penalties of perjury, that such
number is correct and he or she is not subject to backup withholding. If the
Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Series A
Preferred exchanged pursuant to the Exchange Offer, or with respect to Series
B Preferred following the Exchange Offer, may be subject to 31% backup
withholding.
The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or
intends to apply for a TIN in the near future. If the box in Part 2 is
checked, the holder or other payee must also complete the Certificate of
Awaiting Taxpayer Identification Number below Substitute Form W-9 in order to
avoid backup withholding. Notwithstanding that the box in Part 2 is checked
and the Certificate of Awaiting Taxpayer Identification Number is completed,
the Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Series A Preferred or of the last transferee appearing on the transfers
attached to, or endorsed on, the Series A Preferred. If the Series A Preferred
are registered in more than one name or are not in the name of the actual
owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed
IRS Form W-8, signed under penalties of perjury, attesting to that holder's
exempt status. Please consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
14
<PAGE>
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Series A Preferred have been lost,
destroyed or stolen, the holder should promptly notify the Exchange Agent. The
holder will then be instructed as to the steps that must be taken in order to
replace the Certificate(s). This Letter of Transmittal and related documents
cannot be processed until the procedures for replacing lost, destroyed or
stolen Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Series A Preferred for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however,
Series B Preferred are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the Series A Preferred
tendered, or if a transfer tax is imposed for any reason other than the
exchange of Series A Preferred in connection with the Exchange Offer, then the
amount of any such transfer tax (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
15
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------------------------------------------------
GIVE THE GIVE THE EMPLOYER
SOCIAL SECURITY IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF-- FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- ------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C>
1. individual The individual 6. Sole proprietorship The owner(3)
2. Two or more individuals The actual owner 7. A valid trust, estate Legal entity(4)
(joint account) of the account or pension trust
or, if combined 8. Corporate The corporation
funds, the first 9. Association, club, The organization
individual on religious, charitable,
the account(1) educational or other
3. Custodian account of a The minor(2) tax-exempt
minor (Uniform Gift to organization
Minors Act) 10. Partnership The partnership
4. a The usual revocable The grantor- 11. A broker or registered The broker or
savings trust (grantor trustee(1) nominee nominee
is also trustee) 12. Account with the The public
b So-called trust account The actual Department of entity
that is not a legal or owner(1) Agriculture
valid trust under State
law
5. Sole proprietorship The owner(3)
- ------------------------------------------------- ---------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or
"doing business as" name. You may use either your Social Security number
or your employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to establish
that you are exempt. Check the box in Part 3 of the form, sign and date the
form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United
States or any of its agencies or instrumentalities; (4) A state, the District
of Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign
central bank of issue; (8) A dealer in securities or commodities required to
register in the U.S. or a possession of the U.S.; (9) A real estate investment
trust; (10) An entity or person registered at all times during the tax year
under the Investment Company Act of 1940; (11) A common trust fund operated by
a bank under section 584(a); (12) A financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form
SS-4, Application for Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply
for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be
16
<PAGE>
given the numbers whether or not payees are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
17
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
OF
CONCENTRIC NETWORK CORPORATION
THIS NOTICE OF GUARANTEED DELIVERY, OR ONE SUBSTANTIALLY EQUIVALENT TO THIS
FORM, MUST BE USED TO ACCEPT THE EXCHANGE OFFER (AS DEFINED BELOW) IF (I)
CERTIFICATES FOR THE COMPANY'S (AS DEFINED BELOW) 13 1/2% SERIES A SENIOR
REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010 (SERIES A PREFERRED) ARE NOT
IMMEDIATELY AVAILABLE, (II) SERIES A PREFERRED, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS CANNOT BE DELIVERED TO CHASEMELLON SHAREHOLDER
SERVICES, LLC (THE "EXCHANGE AGENT") ON OR PRIOR TO THE EXPIRATION DATE (AS
DEFINED IN THE PROSPECTUS REFERRED TO BELOW) OR (III) THE PROCEDURES FOR
DELIVERY BY BOOK-ENTRY TRANSFER CANNOT BE COMPLETED ON A TIMELY BASIS. THIS
NOTICE OF GUARANTEED DELIVERY MAY BE DELIVERED BY HAND, OVERNIGHT COURIER OR
MAIL, OR TRANSMITTED BY FACSIMILE TRANSMISSION, TO THE EXCHANGE AGENT. SEE
"THE EXCHANGE OFFER PROCEDURES FOR TENDERING" IN THE PROSPECTUS.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CHASEMELLON SHAREHOLDER SERVICES, LLC
BY MAIL, OVERNIGHT DELIVERY OR HAND:
CHASEMELLON SHAREHOLDER SERVICES, LLC
275 MONTGOMERY STREET, 23RD FLOOR
SAN FRANCISCO, CA 94104
(CONCENTRIC NETWORK CORPORATION)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(415) 489-5241
FACSIMILE TRANSMISSIONS:
(415) 743-1426
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
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Ladies and Gentlemen:
The undersigned hereby tenders to Concentric Network Corporation, a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated July , 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus") and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Series A Preferred
set forth below pursuant to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Exchange Offer-Procedures for Tendering
Series A Preferred."
DESCRIPTION OF SERIES A PREFERRED TENDERED
Name(s), Address(es) and Area Code(s) and Telephone
Number(s) of Registered Holder(s): Certificate Number(s) (if available):
Aggregate Principal Amount Tendered: $
Signature(s):
If Series A Preferred will be tendered by book-entry transfer, please provide
the following information:
Name of Tendering Institution:
DTC Account Number:
Date:
Transaction Code Number:
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i)a bank; (ii)a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii)a credit union; (iv)a national securities exchange,
registered securities association or clearing agency; or (v)a savings
association, that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program (each of the foregoing being referred to as an
"Eligible Institution"), hereby guarantees to deliver to the Exchange Agent,
at its address set forth above, either the Series A Preferred tendered hereby
in proper form for transfer, or confirmation of the book-entry transfer of
such Series A Preferred to the Exchange Agent's account at The Depository
Trust Company ("DTC"), pursuant to the procedures for book-entry transfer set
forth in the Prospectus, in either case together with one or more properly
completed and duly executed Letter(s) of Transmittal (or facsimile thereof)
and any other required documents within three New York Stock Exchange trading
days after the date of execution of this Notice of Guaranteed Delivery.
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The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Series A Preferred tendered hereby to the Exchange Agent
within the time period set forth above and that failure to do so could result
in a financial loss to the undersigned.
Name of Firm: Authorized Signature:
Address: Name (Please Print):
Capacity or Title:
Area Code and Telephone Number: Date:
NOTE: DO NOT SEND SERIES A PREFERRED WITH THIS NOTICE OF GUARANTEED
DELIVERY. ACTUAL SURRENDER OF SERIES A PREFERRED MUST BE MADE PURSUANT TO, AND
BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
the Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange of Series A
Preferred for Series B Preferred made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is
unlawful.
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