<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1996
REGISTRATION NO. 333-3984
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TELEPORT COMMUNICATIONS GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 13-3173139
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ONE TELEPORT DRIVE
STATEN ISLAND, NEW YORK 10311-1011
(718) 355-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN W. THOMSON, ESQ.
VICE PRESIDENT AND SECRETARY
TELEPORT COMMUNICATIONS GROUP INC.
ONE TELEPORT DRIVE
STATEN ISLAND, NEW YORK 10311-1011
(718) 355-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
----------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
KEVIN F. REED, ESQ. ROHAN S. WEERASINGHE, ESQ.
TIMOTHY J. KELLEY, ESQ. ROBERT EVANS III, ESQ.
DOW, LOHNES & ALBERTSON SHEARMAN & STERLING
1200 NEW HAMPSHIRE AVENUE, N.W. 599 LEXINGTON AVENUE
WASHINGTON, D.C. 20036-6802 NEW YORK, N.Y. 10022-6069
(202) 776-2000 (212) 848-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF SECURITIES TO MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
- - ------------------------------------------------------------------------------
<S> <C> <C>
9 7/8% Senior Notes and 11 1/8%
Senior Discount Notes............... $925,000,000 $318,966
</TABLE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(1) Estimated solely for purposes of determining the registration fee.
(2) $206,897 of the registration fee was paid at the time of the original
filing of the Registration Statement and $112,069 is being paid herewith.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
CROSS-REFERENCE SHEET
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------- ----------------------
<S> <C>
1.Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.......................... Outside Front Cover Page
2.Inside Front and Outside Back Cover
Pages of Prospectus................. Inside Front Cover Page; Outside
Back Cover Page
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.. Prospectus Summary; Risk Factors;
The Reorganization; Selected
Combined Financial Data
4.Use of Proceeds....................... Prospectus Summary; Use of Proceeds
5.Determination of Offering Price....... *
6.Dilution.............................. *
7.Selling Security Holders.............. *
8.Plan of Distribution.................. Outside Front Cover Page;
Underwriting
9.Description of Securities to be
Registered.......................... Outside Front Cover Page; Prospectus
Summary; Description of Notes
10.Interests of Named Experts and
Counsel............................. *
11.Information with Respect to the
Registrant
(a)Description of Business............. Prospectus Summary; Risk Factors;
The Reorganization; Pro Forma
Financial Information; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; The Local
Telecommunications Services
Industry; Business; Certain
Relationships and Related
Transactions; Description of
Certain Indebtedness
(b)Description of Property............. Business
(c)Legal Proceedings................... Business
(d)Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters....... *
(e)Financial Statements................ Pro Forma Financial Information;
Combined Financial Statements
(f)Selected Combined Financial Data.... Capitalization; Selected Combined
Financial Data
(g)Supplementary Financial
Information....................... *
(h)Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i)Changes in and Disagreements with
Accountants....................... *
(j)Directors and Executive Officers.... Management
(k)Executive Compensation.............. Management
(l)Security Ownership of Certain
Beneficial Owners and Management.. Principal Stockholders
(m)Certain Relationships and Related
Transactions...................... Management; Certain Relationships
and Related Transactions;
Underwriting
12.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... *
</TABLE>
- - --------
* Item is omitted because response is negative or item is inapplicable.
<PAGE>
PROSPECTUS
LOGO
JUNE 27, 1996
$1,373,606,000
TELEPORT COMMUNICATIONS GROUP INC.
$300,000,000 9 7/8% SENIOR NOTES DUE 2006
$1,073,606,000 11 1/8% SENIOR DISCOUNT NOTES DUE 2007
---------------
The Senior Notes due 2006 (the "Senior Notes") and the Senior Discount Notes
due 2007 (the "Senior Discount Notes" and, together with the Senior Notes, the
"Notes") are being offered hereby (the "Notes Offerings") by Teleport
Communications Group Inc. ("TCG" or the "Company"). The Senior Discount Notes
will be issued to generate gross proceeds to the Company of approximately $625
million and will be issued at a price of $582.15 per $1,000 principal amount
at maturity, representing a yield to maturity of 11 1/8% (computed on a semi-
annual bond equivalent basis) calculated from July 2, 1996.
The Company has also filed a registration statement with respect to the
offering of 23,500,000 shares of Class A Common Stock of the Company (together
with the Company's Class B Common Stock, the "Common Stock"), with 18,800,000
shares being offered in the United States and Canada (the "U.S. Offering") and
4,700,000 shares being offered in a concurrent offering outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Stock Offerings"), which Stock Offerings will be made by
separate prospectuses. The Notes Offerings and the Stock Offerings are
collectively referred to herein as the "Offerings." Consummation of the
Offerings is contingent on the acquisition by the Company of certain
partnership interests in Local Market Partnerships (as defined herein) it
manages and the consummation of certain other transactions. See "The
Reorganization."
The Senior Notes will bear interest at the rate of 9 7/8% per annum payable
in cash commencing January 1, 1997 and semiannually thereafter on January 1
and July 1 in each year. The Senior Notes will mature on July 1, 2006. Cash
interest on the Senior Discount Notes will not accrue prior to July 1, 2001;
provided however that at any time prior to July 1, 2001, the Company may elect
to commence the accrual of cash interest on an interest payment date, in which
case the outstanding principal amount at maturity of a Senior Discount Note
will be reduced to the Accreted Value of such Note as of such interest payment
date and cash interest will be payable on each interest payment date
thereafter. Commencing January 1, 2002, cash interest will be payable semi-
annually on January 1 and July 1 of each year. The Senior Discount Notes will
mature on July 1, 2007. See "Description of Notes--Terms of the Senior
Discount Notes" and "--Certain Definitions."
Senior Discount Notes aggregating up to $253 million in Accreted Value will
be subject to mandatory redemption at a redemption price of 101% of the
Accreted Value thereof as of the redemption date in the event that certain
state regulatory orders are not obtained within 270 days of the issuance date
of the Notes or the petitions for such orders are denied. Although the Company
has petitioned for such orders and expects to obtain them, there can be no
assurance that such approvals will be obtained. See "Risk Factors--Limitation
on Incurrence of Debt Under New York and New Jersey Regulatory Authorizations"
and "Description of Notes--Terms of the Senior Discount Notes--Special
Redemption."
Except as set forth below, the Notes will not be redeemable at the Company's
option prior to July 1, 2001. Thereafter, the Notes will be subject to
redemption, at the Company's option, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid interest. In addition, at any
time prior to July 1, 1999, the Company may redeem up to one-third of the
Notes at a redemption price of 110% of the principal amount in the case of the
Senior Notes and at a redemption price of 110% of the Accreted Value in the
case of the Senior Discount Notes with the net proceeds of one public or a
private sale of certain capital stock of the Company. Upon the occurrence of a
Change of Control, the Company will be required to make an offer to purchase
all of the Notes at a purchase price equal to, in the case of the Senior
Discount Notes, 101% of the Accreted Value thereof (if prior to July 1, 2001)
or, in the case of the Senior Notes and (if on or after July 1, 2001) the
Senior Discount Notes, 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon.
The Senior Notes and the Senior Discount Notes will each be senior unsecured
obligations of the Company ranking pari passu in right of payment with each
other and with all other existing and future senior unsecured obligations of
the Company. As of March 31, 1996, after giving effect to the Reorganization
and the Offerings, the Company had approximately $925.0 million of senior debt
outstanding. Since the Company conducts a substantial amount of its business
through subsidiaries, the Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities and commitments of the
Company's subsidiaries, including trade payables. Substantially all of such
subsidiary indebtedness is, and is expected to be, secured by the assets of
the Company's subsidiaries or stock of the Company's subsidiaries. As of March
31, 1996, after giving effect to the Reorganization and the Offerings, such
subsidiaries had approximately $189.4 million of total liabilities, including
approximately $62.5 million of indebtedness.
The Notes will not be listed on any securities exchange, and there can be no
assurance that there will be a secondary market therefor.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SENIOR NOTE ..................... 100.000% 2.450% 97.550%
TOTAL ............................... $300,000,000 $ 7,350,000 $292,650,000
- - --------------------------------------------------------------------------------
PER SENIOR DISCOUNT NOTE............. 58.215% 2.750% 56.614%
TOTAL................................ $624,999,733 $17,187,493 $607,812,240
</TABLE>
- - -------------------------------------------------------------------------------
(1) Plus accretion or accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses of the Notes Offerings payable by the Company,
estimated at $1,967,000.
The Notes are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of the Notes will be made in New York,
New York on or about July 2, 1996, in book-entry form through the facilities
of the Depository Trust Company, against payment thereof in same day funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY & CO. INCORPORATED
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES (USA) INC.
<PAGE>
[MAP APPEARS HERE]
TCG's advanced Network Management Center operates twenty-four hours a day,
seven days a week, providing network monitoring, surveillance and diagnostic
support for TCG's local telecommunications services, including basic local
telephone services, enhanced switched services, dedicated services, high speed
data services and video channel transmission services.
----------------
WITH RESPECT TO SALES OF THE NOTES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, AS OF THE DATE OF THIS PROSPECTUS, SUCH NOTES MAY BE SOLD ONLY TO:
(1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER THE
SECURITIES ACT OF 1933, (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST
COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT-SHARING TRUSTS,
CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER
ENTITY'S AFFILIATES WHICH ARE UNDER COMMON CONTROL, HAVE A NET WORTH ON A
CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL
STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY
OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE
FOREGOING, (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF
PURCHASING THE NOTES OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000
AGGREGATE AMOUNT OF THE NOTES OFFERED HEREBY OR (4) ANY PERSON WHO (A) HAS AN
INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF
$500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL
AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE NOTES OFFERED HEREBY
WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR OTHERWISE TRANSFER SUCH
NOTES TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE TRANSFEREE OF THIS
CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE DEEMED TO BE BOUND BY
THE SAME RESTRICTIONS ON RESALE.
----------------
IN CONNECTION WITH THE NOTES OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
the information set forth in this Prospectus gives effect to the transactions
described herein under "The Reorganization," and "TCGI" refers to Teleport
Communications Group Inc. and its consolidated subsidiaries and "TCG" and the
"Company" refer to TCGI and its consolidated partnerships after giving effect
to such transactions. Unless otherwise indicated, the information set forth in
this Prospectus does not give effect to the exercise of the Underwriters' over-
allotment options in the Stock Offerings. See "Glossary" for definitions of
certain other terms used in this Prospectus.
THE COMPANY
Teleport Communications Group Inc., the first and largest competitive local
exchange carrier in the United States, offers a wide range of local
telecommunications services in major metropolitan markets nationwide. The
Company competes with incumbent local exchange carriers as "The Other Local
Phone Company" SM by providing high quality, integrated local
telecommunications services, primarily over fiber optic digital networks, to
meet the voice, data and video transmission needs of its customers. TCG's
customers are principally telecommunications-intensive businesses, long
distance carriers and resellers, and wireless communications companies. TCG
offers these customers technologically advanced local telecommunications
services, as well as superior customer service, flexible pricing and vendor and
route diversity.
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. The Company currently operates high capacity
state-of-the-art digital networks in 48 metropolitan markets, including 17 of
the 20 largest metropolitan areas. The Company operates networks in
metropolitan New York/New Jersey, Los Angeles, Chicago, San Francisco, Boston,
Detroit, Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft. Lauderdale,
Seattle, San Diego, St. Louis, Pittsburgh, Phoenix, Denver, Milwaukee,
Indianapolis, Hartford and Omaha, and is developing networks in Cleveland,
Portland (Oregon), Salt Lake City, Nashville, Chattanooga, Knoxville and
Birmingham. As of March 31, 1996, the Company's networks spanned over 5,500
route miles, contained over 257,000 fiber miles and served approximately 5,300
buildings.
TCG has grown rapidly over the last several years, expanding its existing
networks, developing new networks and increasing its service offerings. On a
pro forma basis, after giving effect to the Reorganization, the Company's
revenues were approximately $184.9 million for 1995, substantially all of which
were derived from the provision of local telecommunications services.
Total revenues from the local telecommunications market in the United States
were estimated to have been approximately $96 billion in 1995. In the past,
competitive access providers, including the Company, were limited to serving
only the dedicated services portion of this market, which was estimated to have
been approximately $5 billion in 1995, whereas the local switched services
portion of this market for business customers was estimated to have been
approximately $55 billion. The Company has expanded into the switched services
market in a number of states over the last five years by constructing switched
networks and obtaining the necessary regulatory authorizations and
interconnection arrangements. With the passage of the Telecommunications Act of
1996 (the "1996 Act"), the Company believes that it is well positioned to
address a significantly larger portion of the local telecommunications market
and to improve its operating margins in the switched and dedicated services
markets by expanding its networks, installing additional high capacity digital
switches and offering new products and services.
3
<PAGE>
TCG has benefited substantially from its relationships with the parents of
its four stockholders, TCI Communications, Inc. (together with its consolidated
subsidiaries, "TCI"), Cox Communications, Inc. (together with its consolidated
subsidiaries, "Cox"), Comcast Corporation (together with its consolidated
subsidiaries, "Comcast") and Continental Cablevision, Inc. (together with its
consolidated subsidiaries, "Continental") (collectively, the "Cable
Stockholders"), which are among the largest cable television companies in the
United States. Through such relationships, the Company has been able to utilize
rights-of-way, obtain fiber optic facilities and share the cost of building new
fiber optic networks, thereby allowing the Company to achieve significant
economies of scale and scope through capital efficiencies in extending its
existing networks in a rapid, efficient and cost-effective manner. As of March
31, 1996, after giving pro forma effect to the Reorganization, the Cable
Stockholders had invested approximately $770 million in the Company. See "The
Reorganization."
The Company believes that it has several advantages that enable it to compete
successfully in the new competitive local telecommunications marketplace,
including (i) extensive, technologically advanced networks located in major
metropolitan markets nationwide, (ii) strategic relationships with cable
television operators, (iii) state-of-the-art information systems and (iv) an
experienced management team with significant operational, technical, financial
and regulatory expertise in the local telecommunications industry.
BUSINESS STRATEGY
As a premier competitive local telecommunications carrier, the key elements
of the Company's business strategy are to:
. PROVIDE A WIDE RANGE OF LOCAL TELECOMMUNICATIONS SERVICES. The Company
provides a broad array of local telecommunications services to meet the
voice, data and video transmission needs of its customers, including basic
local exchange telephone services, enhanced switched services, dedicated
services, high speed switched data services and video channel transmission
services. In 1995, approximately 36% of the Company's revenues were
generated from switched services. The Company expects a growing portion of
its revenues to be derived from basic local exchange telephone services,
enhanced switched services and high speed switched data services as it
deploys digital switches in all of its markets. As of March 31, 1996, the
Company had 21 digital telephone switches and 27 asynchronous transfer mode
("ATM") switches in operation. On a pro forma basis, after giving effect to
the Reorganization, the Company's revenues from switched services, which
include local dial tone and local calling, grew by approximately 59% to
$63.9 million in 1995 from $40.2 million in 1994.
. FOCUS ON BUSINESS CUSTOMERS AND TELECOMMUNICATIONS CARRIERS. The Company's
networks serve large metropolitan markets, which have significant
concentrations of telecommunications-intensive businesses. The Company's
customers in these markets include financial services firms, media and
health care companies, long distance carriers and resellers, Internet
service providers, wireless communications companies and an increasing
number of small and medium-sized business customers. The national scope of
the Company's local networks allows it to offer high volume business
customers and long distance carriers uniformity of services, pricing,
quality standards and customer service. In addition, the Company has
arrangements with other telecommunications providers, including shared
tenant services providers, cable television companies and long distance
carriers, to resell TCG's services. Currently, certain major long distance
carriers are conducting trials of the resale of TCG's local exchange
services under such long distance carriers' brand names. In 1995,
approximately 62% of the Company's revenues were generated from business
customers and approximately 38% were generated from long distance carrier
customers.
. EXPAND GEOGRAPHIC REACH AND DENSITY OF EXISTING NETWORKS AND ENTER NEW
MARKETS. The Company plans to increase the geographic reach and density of
its existing networks by deploying additional fiber optic rings and
connecting additional customers to its networks. The Company anticipates
that making significant capital expenditures over the next several years to
expand its existing networks and to develop
4
<PAGE>
new networks will lead to significant increases in revenue opportunities.
As a facilities-based carrier, the Company utilizes a variety of means to
expand geographically, including rights-of-way, easements, poles, ducts and
conduits that are available from cable television operators, incumbent
local exchange carriers, railways and subways, electric, gas and water
utilities and municipal, state and federal street and highway authorities.
In the course of expanding its networks, the Company also has the ability
to reach TCG customers by reselling a portion of the telecommunications
services offered by certain incumbent local exchange carriers. However, the
Company believes that the extensive geographic reach and density of its
networks make it less reliant than other competitive local exchange
carriers on the networks of the incumbent local exchange carriers. In
addition, where appropriate, the Company has the ability to link customers
to its network through the use of microwave, including 38 GHz milliwave,
services. The Company plans to expand into additional metropolitan markets,
which the Company believes will further broaden its customer base and
enhance its ability to attract national business accounts for its services.
. BENEFIT SUBSTANTIALLY FROM RELATIONSHIPS WITH CABLE TELEVISION
OPERATORS. As of December 31, 1995, the cable television facilities of the
Cable Stockholders collectively passed approximately 47% of the country's
94 million homes passed by cable television facilities. Through its
relationships with cable television operators, the Company has been able to
utilize existing rights-of-way, obtain fiber optic facilities and share the
cost of building new fiber optic networks, thereby allowing the Company to
achieve significant economies of scale and scope through capital
efficiencies in extending its existing networks in a rapid, efficient and
cost-effective manner. The Company is currently engaged in technical trials
with certain cable television operators, including Cable Stockholders, for
the provision of residential telephony services over the cable television
operators' hybrid fiber-coaxial networks with TCG providing switching, call
processing, calling features and ancillary services. The Company believes
such trials will evolve into commercial offerings by cable companies and
that TCG may become a provider of switching, call processing and other
services to such cable companies.
. OFFER HIGH QUALITY NETWORKS AND SUPERIOR CUSTOMER SERVICE. TCG believes
that it offers cost and service quality advantages over the incumbent local
exchange carriers as a result of its integrated operations, customer
support, network monitoring and management systems and state-of-the-art
technology deployed in the Company's digital networks. TCG consults closely
with its customers to develop competitively priced telecommunications
services that are tailored to their particular needs. The Company's
centrally managed customer support operations are also designed to
facilitate the processing of orders for changes and upgrades in services.
TCG believes that it provides greater attention and responsiveness to its
customers than do the incumbent local exchange carriers.
. SPEARHEAD REGULATORY REFORM. As the first and largest competitive local
exchange carrier, TCG has been at the forefront of industry efforts for
over a decade to introduce competition to the local telecommunications
market. The Company has aggressively pursued the goal of making competitive
local exchange services economically, technically and operationally
feasible by working for legislative and regulatory reform and through
negotiations with incumbent local exchange carriers. The Company will
continue its regulatory reform activities in an effort to ensure that the
1996 Act is implemented and interpreted in a manner that promotes fair
competition for local exchange services.
. CAPITALIZE ON MANAGEMENT TEAM EXPERIENCE. TCG's management team is
comprised of executives who are recognized as leaders in the development of
the competitive local telecommunications industry. This management team has
extensive operational, technical, financial and regulatory expertise as
well as a proven track record in a rapidly changing marketplace.
The Company was incorporated in the State of Delaware in 1983. The Company's
principal executive offices are located at One Teleport Drive, Staten Island,
New York 10311-1011, and its telephone number is (718) 355-2000.
5
<PAGE>
THE REORGANIZATION
Teleport Communications Group Inc. or "TCGI" is the issuer of the Notes
offered hereby. Prior to the Offerings, the local telecommunications business
managed by TCGI has been owned by the Cable Stockholders (TCI (30%), Cox (30%),
Comcast (20%), and Continental (20%)). The business was operated through TCGI
and, beginning in 1992, TCG Partners, which is a New York general partnership
owned by the Cable Stockholders in the same percentages as TCGI and managed by
TCGI. TCG Partners was formed for tax purposes to invest, with TCGI, the Cable
Stockholders and other cable operators, in partnerships (the "Local Market
Partnerships") to develop and operate local telecommunications networks. The 14
Local Market Partnerships are managed by TCGI, and each Local Market
Partnership is owned by TCGI, TCG Partners, the Cable Stockholders which have
cable operations in the particular market and in some cases other cable
operators in the market. To simplify this complex ownership structure, TCGI and
the Cable Stockholders have agreed to consolidate the ownership of TCG Partners
and of the Local Market Partnerships as subsidiaries of TCGI. As part of this
process, certain of the other cable operators agreed to sell their interests in
Local Market Partnerships to TCGI directly or through a Cable Stockholder.
Ownership and Organization of the Business of TCG Prior to the Reorganization.
As of June 3, 1996, the ownership and organization of TCGI, TCG Partners and
the Local Market Partnerships was as set forth below:
[ORGANIZATIONAL CHART HERE]
Reorganization Transactions Prior To or In Connection With the Offerings.
In connection with the Offerings, TCGI and the Cable Stockholders have
entered into a reorganization agreement (the "Reorganization Agreement")
pursuant to which TCGI, TCG Partners and the Local Market Partnerships will be
reorganized (the "Reorganization"). The principal transactions comprising the
Reorganization that will occur prior to or in connection with the consummation
of the Offerings are:
. the acquisition by TCGI of TCG Partners in exchange for Class B Common Stock
issued to the Cable Stockholders,
6
<PAGE>
. the acquisition by TCGI of all of the interests in 12 of the 14 Local Market
Partnerships in exchange for Class B Common Stock issued to the Cable
Stockholders and Class A Common Stock issued to other cable operators,
. the contribution to TCGI of $269.0 million aggregate principal amount of
indebtedness, plus accrued interest from May 1995, owed by TCGI to the Cable
Stockholders (except that TCI will retain a $26 million subordinated note of
TCGI) in exchange for Class B Common Stock issued to the Cable Stockholders,
and
. in connection with Continental's recently announced proposed merger with U S
WEST, Inc., the redemption by TCGI of 7,807,881 shares (out of 25,761,330
shares) of Class B Common Stock owned by Continental (7,975,738 shares if the
over-allotment options of the Underwriters of the Stock Offerings are
exercised in full) at a price per share equal to the initial public offering
price of the Class A Common Stock offered in the Stock Offerings, less the
applicable underwriting discount and a pro rata portion of the registration
fees (representing an aggregate redemption price of $118.5 million ($121.0
million if the over-allotment options of the Underwriters of the Stock
Offerings are exercised in full)).
Consummation of the Offerings is contingent on the consummation of the above
described transactions, except that the redemption of Continental's shares will
be consummated shortly after the Offerings with a portion of the net proceeds
thereof.
In consideration of the transfer by each of the Cable Stockholders of its
interests in TCG Partners and the Local Market Partnerships and the
contribution to TCGI of the indebtedness described above, the Company will
issue immediately prior to the Offerings 69,250,230 shares of Class B Common
Stock to the Cable Stockholders.
Immediately prior to the consummation of the Offerings, the ownership and
organization of TCGI, TCG Partners and the Local Market Partnerships will be as
set forth below:
[ORGANIZATIONAL CHART HERE]
7
<PAGE>
Upon consummation of the Offerings and the principal transactions comprising
the Reorganization that will occur prior thereto or in connection therewith,
the ownership and organization of TCGI, TCG Partners and the Local Market
Partnerships will be as set forth below:
[ORGANIZATIONAL CHART HERE]
Reorganization Transactions After the Offerings.
Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local Market
Partnerships will become wholly owned subsidiaries of TCGI. In addition, TCI
has agreed to transfer its interests in TCG Seattle and TCG San Francisco to
the Company at the earliest time such transfers can be accomplished, which in
each case is January 1, 1997. Furthermore, TCI has entered into an agreement to
acquire the 22.9% and 22.2% minority partnership interests in TCG San Francisco
and TCG Seattle, respectively, held by Viacom Telecom, Inc., which interests
TCI will be required to transfer to TCGI upon acquisition. The issuance of
shares of Class B Common Stock to TCI assumes that, subsequent to the
Offerings, TCI will contribute its current partnership interests in TCG Seattle
and TCG San Francisco, and that TCI will acquire and contribute to TCGI the
partnership interest of Viacom Telecom, Inc. in TCG Seattle and TCG San
Francisco, respectively. In the event TCI does not subsequently acquire and
contribute to TCGI the partnership interests currently held by Viacom Telecom,
Inc., TCI will be required, at its option, to return shares of Class B Common
Stock or to make certain payments to TCGI. See "The Reorganization."
Alternatively, TCGI has entered into letters of intent with Viacom Telecom,
Inc. which (after giving effect to the Reorganization) would permit TCGI to
acquire all of the partnership interests in TCG Seattle and to increase its
partnership interest in TCG San Francisco to 95.8%, if TCI is unable to acquire
such interests. If a definitive agreement were entered into with Viacom
Telecom, Inc., TCGI's purchase price would be approximately $32.1 million and
$15.2 million for TCG San Francisco and TCG Seattle, respectively, calculated
based on the product of 2.5 multiplied by the amount Viacom Telecom, Inc. had
invested in each of TCG San Francisco and TCG Seattle.
In addition, TCI will be issued 638,862 shares of Class A Common Stock in
consideration for the transfer to TCGI of the partnership interests which TCI
acquired from MicroNet, Inc. in TCG San Francisco. TCI has an agreement to
acquire a 4.2% partnership interest in TCG San Francisco from InterMedia
Partners. TCI also has informed TCGI that it expects to acquire such
partnership interest by the end of
7--1
<PAGE>
July 1996, subject to normal closing conditions and the consent of local
franchising authorities. If TCI acquires such partnership interest, TCI is
required to transfer it to TCGI in consideration of the issuance to TCI of
372,666 shares of Class A Common Stock upon such transfer.
The Offerings will not be conditioned upon the acquisition by TCGI of the
remaining partnership interests in TCG San Francisco and TCG Seattle.
After giving effect to the Reorganization and the Offerings, TCI, Cox,
Comcast and Continental will own 37.1%, 29.7%, 19.5% and 13.7%, respectively,
of the Company's Class B Common Stock, representing 36.5%, 29.2%, 19.1% and
13.4%, respectively, of the combined voting power of the Company's Common
Stock, and the ownership and organization of TCGI, TCG Partners and the Local
Market Partnerships will be as set forth below:
[ORGANIZATIONAL CHART HERE]
See "Risk Factors--Limitations on Acquiring Certain Local Market
Partnerships," "Risk Factors--Control by Principal Stockholders; Conflicts of
Interest; Possible Competition" and "The Reorganization" for a more detailed
description of certain matters relating to the Reorganization.
7--2
<PAGE>
THE NOTES OFFERINGS
THE SENIOR NOTES
Maturity Date................. July 1, 2006.
Interest......................
9 7/8% per annum, payable semi-annually in
arrears on January 1 and July 1, commencing
January 1, 1997 .
THE SENIOR DISCOUNT NOTES
Maturity Date.................
July 1, 2007.
Yield and Interest............
11 1/8% per annum (compounded on a semi-annual
bond equivalent basis) calculated from July 2,
1996. Cash interest will not accrue prior to
July 1, 2001; provided, however, that at any
time prior to July 1, 2001, the Company may
elect to commence the accrual of cash interest
on an interest payment date. Commencing January
1, 2002, cash interest will be payable semi-
annually on January 1 and July 1.
Issue Price...................
$582.15 per $1,000 principal amount at maturity
of Senior Discount Notes.
Original Issue Discount.......
Each Senior Discount Note is being offered at
an original issue discount for federal income
tax purposes. Thus, although cash interest is
not expected to accrue on the Senior Discount
Notes prior to July 1, 2001 and there are not
expected to be any periodic payments of
interest on the Senior Discount Notes prior to
January 1, 2002, original issue discount (i.e.,
the difference between the stated redemption
price at maturity and the issue price of such
Notes) will accrue from the issue date of such
Notes up to July 1, 2001 and will be includable
as interest income periodically in a holder's
gross income for federal income tax purposes in
advance of receipt of the cash payments to
which the income is attributable. See "Certain
Federal Income Tax Considerations--Original
Issue Discount."
Special Redemption....... Senior Discount Notes aggregating up to $253
million in Accreted Value will be subject to
mandatory redemption at a redemption price of
101% of the Accreted Value thereof as of the
redemption date in the event that certain state
regulatory orders are not obtained within 270
days of the issuance date of the Notes or the
petitions for such orders are denied. See "Risk
Factors--Limitations on Incurrence of Debt
Under New York and New Jersey Regulatory
Authorizations" and "Description of Notes--
Terms of the Senior Discount Notes--Special
Redemption."
ADDITIONAL TERMS OF NOTES
Optional Redemption...........
Except as set forth below, the Notes will not
be redeemable at the Company's option prior to
July 1, 2001. Thereafter the Notes will be
subject to redemption at the option of the
Company, in whole or in part, at the redemption
prices set forth herein. In addition, at any
time prior to July 1, 1999, the Company may
redeem up to one-third of the Notes at a
redemption price of 110% of the principal
amount in the case of the Senior Notes and at a
redemption price of 110% of Accreted Value
thereof in the
8
<PAGE>
case of the Senior Discount Notes with the net
proceeds of (a) a Public Equity Offering for
gross proceeds of $150 million or more or (b) a
sale or series or related sales by the Company
of its Capital Stock (other than Disqualified
Stock) to Strategic Equity Investors for an
aggregate purchase price of $150 million or
more. See "Description of Notes--Optional
Redemption" and "--Certain Definitions."
Change of Control.............
Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
purchase all of the Notes at a purchase price
equal to, in the case of the Senior Discount
Notes, 101% of the Accreted Value thereof (if
prior to July 1, 2001) or, in the case of the
Senior Notes and (if on or after July 1, 2001)
the Senior Discount Notes, 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest thereon (if on or
after July 1, 2001). There can be no assurance
that the Company will have sufficient funds to
complete any such purchase. See "Description of
Notes-- Change of Control." The Revolving
Credit Agreement (as defined herein) also
provides for an event of default upon a change
of control as defined therein. See "Description
of Certain Indebtedness." The Revolving Credit
Agreement limits the ability of the Company to
distribute cash from TCG New York, Inc. to
purchase Notes upon a Change of Control. For
the definition of the term "Change of Control"
under the Notes, see "Description of Notes--
Certain Definitions."
Ranking.......................
The Senior Notes and the Senior Discount Notes
will each rank senior in right of payment to
all subordinated indebtedness of the Company
and pari passu in right of payment with each
other and with all other senior indebtedness of
the Company. The Company is a holding company
that conducts a substantial amount of its
business through subsidiaries. The Notes will
be effectively subordinated to all current and
future indebtedness of the Company's
subsidiaries, including trade payables.
Substantially all of such subsidiary
indebtedness is, and is expected to be, secured
by the assets of the Company's subsidiaries or
stock of the Company's subsidiaries. As of
March 31, 1996, after giving effect to the
Reorganization and the Offerings, the Company
had approximately $925.0 million of senior debt
outstanding. As of March 31, 1996, after giving
effect to the Reorganization and the Offerings
and the use of proceeds thereof, the Company's
subsidiaries had approximately $189.4 million
of total liabilities, including approximately
$62.5 million of indebtedness, and TCG New York
Inc. had approximately $230 million of
availability under the Revolving Credit
Agreement. See "Description of Certain
Indebtedness."
Certain Covenants............. The Indentures relating to the Notes (the
"Indentures") will contain certain covenants
that will restrict, among other things, the
ability of the Company and its restricted
subsidiaries to incur certain indebtedness, to
pay dividends and make certain other restricted
payments, to create liens, to permit other
restrictions on
9
<PAGE>
dividend and other payments by restricted
subsidiaries of the Company, to issue and sell
capital stock of restricted subsidiaries to
guarantee certain indebtedness, to sell assets,
to enter into transactions with affiliates and
to merge, consolidate or transfer substantially
all of the assets of the Company. The covenants
require the Company to make an offer to
purchase specified amounts of Notes in the
event of certain asset sales. There can be no
assurance that the Company will have sufficient
funds to complete any purchase of Notes upon a
sale of assets of the Company. See "Description
of Notes--Certain Covenants--Limitation on
Asset Sales."
Use of Proceeds...............
The net proceeds of the Notes Offerings,
together with the net proceeds of the Stock
Offerings, are estimated to be $1,253.2
million. The Company intends to use such
proceeds (i) to redeem up to 7,807,881
(7,975,738 shares if the over-allotment options
of the Underwriters of the Stock Offerings are
exercised in full) shares of the Company's
Class B Common Stock held by a subsidiary of
Continental for $118.5 million ($121.0 million
if the over-allotment options of the
Underwriters of the Stock Offerings are
exercised in full), representing a price per
share equal to the initial public offering
price of the Class A Common Stock being offered
pursuant to the Stock Offerings, less the
applicable underwriting discounts and a pro
rata portion of the registration fees, (ii) to
repay approximately $155.0 million of bank
indebtedness of a subsidiary of the Company,
which amounts may be reborrowed, (iii) to
expand and develop existing and new networks
and for other general corporate and working
capital purposes, which may include
acquisitions; provided, however, that in the
event of a Special Redemption Event (as defined
in the Indenture for the Senior Discount Notes)
with respect to certain regulatory
authorizations, up to approximately $256
million of the net proceeds of the Offerings
will be used to redeem a portion of the Senior
Discount Notes. See "Risk Factors--Limitation
on Incurrence of Debt Under New York and New
Jersey Regulatory Authorizations," "Description
of Notes--Terms of Senior Discount Notes--
Special Redemption" and "Use of Proceeds."
Concurrent Stock Offerings.... The Company has also filed a registration
statement with respect to the offering of
23,500,000 shares of Class A Common Stock. The
closing of the Notes Offerings is expected to
occur concurrently with the closing of the
Stock Offerings.
For additional information concerning the Notes, see "Description of Notes."
RISK FACTORS
Prospective purchasers of the Notes should consider all of the information
contained in this Prospectus before making an investment in the Notes. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
10
<PAGE>
SUMMARY COMBINED FINANCIAL AND OTHER OPERATING DATA
The following tables present summary combined financial data derived from the
audited historical financial statements of TCGI for 1991, and from the audited
historical financial statements of TCGI and TCG Partners for 1992. Historical
summary combined financial data set forth below for the years 1993, 1994 and
1995 have been derived from the combined audited historical financial
statements of TCGI and TCG Partners, which have been audited by Deloitte &
Touche LLP, independent auditors, whose report thereon appears elsewhere in
this Prospectus. The following tables also present summary combined financial
data for the three months ended March 31, 1995 and March 31, 1996 derived from
the unaudited combined financial statements of TCGI and TCG Partners. In
addition, the following tables present summary combined financial data relating
to TCGI's and TCG Partners' unaudited results, as adjusted to give pro forma
effect to the Reorganization and the Offerings for the year 1995 and the three
months ended March 31, 1996 and as of March 31, 1996. In the opinion of
management, the unaudited combined financial statements have been prepared on
the same basis as the audited combined financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the full
year.
The summary unaudited pro forma combined financial data do not purport to
represent what TCGI's and TCG Partners' combined results of operations or
financial condition would actually have been if the transactions that give rise
to the pro forma adjustments had occurred on the dates assumed. The following
information should be read in conjunction with "Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and TCGI's and TCG Partners' historical combined
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
FOR THE FOR THE
REORGANIZATION REORGANIZATION
AND OFFERINGS AND OFFERINGS
1991 1992 1993 1994 1995 1995 1995 1996 1996
------- ------- -------- -------- -------- -------------- -------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications
services............ $47,380 $57,256 $ 82,374 $ 99,983 $134,652 $ 184,852 $ 29,855 $ 39,553 $ 58,122
Management and
royalty fees from
Local Market
Partnerships(1)..... -- -- 1,555 20,691 31,517 -- 6,937 10,882 --
------- ------- -------- -------- -------- --------- -------- -------- --------
Total revenues....... 47,380 57,256 83,929 120,674 166,169 184,852 36,792 50,435 58,122
Operating expenses.... 22,728 31,876 48,224 60,255 73,743 101,089 17,124 22,520 32,467
Selling, general and
administrative(2).... 12,782 16,569 40,275 56,306 69,850 83,172 16,070 20,197 24,677
Depreciation and
amortization......... 9,550 12,035 16,197 19,933 37,837 62,531 7,297 12,849 21,556
------- ------- -------- -------- -------- --------- -------- -------- --------
Operating profit
(loss)............... 2,320 (3,224) (20,767) (15,820) (15,261) (61,940) (3,699) (5,131) (20,578)
------- ------- -------- -------- -------- --------- -------- -------- --------
Interest:
Interest income...... 636 446 1,072 1,711 4,067 4,822 1,106 1,190 981
Interest expense..... (885) (1,508) (1,407) (5,079) (23,331) (112,359) (4,600) (8,148) (28,540)
------- ------- -------- -------- -------- --------- -------- -------- --------
Net interest
expense............. (249) (1,062) (335) (3,368) (19,264) (107,537) (3,494) (6,958) (27,559)
------- ------- -------- -------- -------- --------- -------- -------- --------
Minority interest(3).. (98) (142) 796 1,395 663 2,673 201 150 855
Equity in loss of
unconsolidated affiliates.. -- -- (2,114) (11,763) (19,541) (1,368) (4,211) (6,528) (332)
------- ------- -------- -------- -------- --------- -------- -------- --------
Income (loss) before
taxes................ 1,973 (4,428) (22,420) (29,556) (53,403) (168,172) (11,203) (18,467) (47,614)
Income tax benefit
(provision).......... 484 -- 4,149 (433) (401) (401) (335) (225) (225)
------- ------- -------- -------- -------- --------- -------- -------- --------
Net income (loss)..... $ 2,457 $(4,428) $(18,271) $(29,989) $(53,804) $(168,573) $(11,538) $(18,692) $(47,839)
======= ======= ======== ======== ======== ========= ======== ======== ========
OTHER DATA:
EBITDA(4)............. $11,870 $ 8,811 $ (4,570) $ 4,113 $ 22,576 $ 591 $ 3,598 $ 7,718 $ 978
Capital expenditures.. 32,047 47,505 155,184 143,276 154,807 281,600 50,793 31,153 54,044
Ratio of earnings to
fixed charges(5)..... 3.23 -- -- -- -- -- -- -- --
Pro forma net income
(loss) per share..... -- -- -- -- -- (1.20) -- -- (0.34)
Dividends per share... -- -- -- -- -- -- -- -- --
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------ --------------------------------
PRO FORMA
FOR THE REORGANIZATION
AND OFFERINGS
1991 1992 1993 1994 1995 1996 1996
-------- -------- ---------- ---------- ---------- -------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 4,208 $ 3,563 $ 31,716 $ 26,000 $ 11,862 $ 16,805 $1,019,721
Working capital......... (10,905) (12,507) (15,278) (32,719) (47,083) (42,015) 918,145
Fixed assets--at cost... 146,250 193,650 329,686 422,964 545,643 576,806 1,000,084
Total assets............ 136,727 171,583 365,202 486,983 614,793 658,906 1,988,727
Long-term debt
(including capital
lease obligations)..... 13,884 49,679 29,689 200,462 368,464 434,903 967,412
Minority interest(3).... 3,247 6,201 12,661 2,903 4,409 4,847 16,116
Stockholders' equity and
partners' capital
(deficit).............. 81,799 77,371 209,141 179,152 125,348 106,656 829,260
<CAPTION>
AS OF MARCH 31,
1996
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(6):
Metropolitan areas
served.................. 8 10 18 33 48 48
Route miles............. 400 891 1,952 3,902 5,428 5,542
Fiber miles............. 20,238 42,902 90,700 167,314 253,285 257,041
Voice grade circuits.... 513,520 659,810 1,101,317 1,759,058 2,870,837 3,037,676
Digital telephone
switches................ 2 2 4 6 21 21
ATM switches............ -- -- -- -- 14 27
Employees............... 229 316 725 1,125 1,499 1,559
</TABLE>
- - --------
(1) Under the terms of various management services arrangements among TCGI and
its unconsolidated Local Market Partnerships and certain other affiliates,
TCGI provides operating and administrative support services to such
entities, for which it earns management fees. Upon consummation of the
Reorganization, these fees will no longer be reflected as revenues.
(2) Included in selling, general and administrative expenses are expenses
incurred for services provided to the Local Market Partnerships, in the
amounts of $1.4 million, $19.4 million, $29.6 million, $6.5 million and
$10.2 million for the years 1993, 1994 and 1995 and the three months ended
March 31, 1995 and March 31, 1996, respectively.
(3) Minority interest reflects Fidelity Communications Inc.'s equity interest
in Teleport Communications Boston for 1991, 1992, 1993 and 1994; a Cox
affiliate's interest in TCG San Diego for 1993 and 1994; and TCI and
Continental affiliates' interests in TCG St. Louis for 1994 and 1995 and
the three months ended March 31, 1995 and March 31, 1996. On a pro forma
basis, after giving effect to the Reorganization and the Offerings, the
minority interest reflects Viacom Telecom, Inc.'s equity interests of 22.2%
and 22.9% in TCG Seattle and TCG San Francisco, respectively, and
InterMedia Partners' equity interest of 4.2% in TCG San Francisco.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization, minority interest and equity in losses of
unconsolidated affiliates. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. Additionally, certain covenants contained in
the Indentures are based on EBITDA. EBITDA is not intended to represent
cash flows for the period. See the Combined Statements of Cash Flows
contained elsewhere in this Prospectus.
(5) The ratio of earnings to fixed charges is computed by dividing pretax
income from operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized and that portion of rental
expense the Company believes to be representative of interest. For the
years 1992, 1993, 1994 and 1995 and the three months ended March 31, 1995
and March 31, 1996, earnings were insufficient to cover fixed charges by
$4.4 million, $23.2 million, $31.0 million, $54.1 million, $11.4 million
and $18.6 million, respectively. On a pro forma basis, earnings would have
been insufficient to cover fixed charges by $170.8 million for 1995 and
$48.5 million for the three months ended March 31, 1996.
(6) Operating data in all periods reflect operations of TCGI, TCG Partners and
the Local Market Partnerships and are derived from unaudited non-financial
records which were prepared by the Company.
12
<PAGE>
RISK FACTORS
Prior to purchasing any of the Notes offered hereby, prospective investors
should consider carefully the following factors in addition to the other
information contained in this Prospectus.
NEGATIVE CASH FLOW AND OPERATING LOSSES
The capital expenditures of TCG associated with the acquisition,
installation, development and expansion of its existing and new
telecommunications networks are substantial, and a significant portion of
these expenditures generally are incurred before any revenues are realized.
These expenditures, together with associated initial operating expenses,
generally result in negative cash flow and operating losses until an adequate
customer base and revenue stream for these networks have been established. The
Company expects to incur net losses for the foreseeable future as it continues
to acquire, install, develop and expand its existing and new
telecommunications networks. There can be no assurance that an adequate
revenue base will be established in each of the Company's networks or that the
Company will achieve or sustain profitability or generate sufficient positive
cash flow to service its debt, including the Notes.
SIGNIFICANT CAPITAL REQUIREMENTS
The development and expansion of the Company's existing and new networks and
services will require significant additional capital expenditures. The Company
will continue to evaluate additional revenue opportunities in each of its
markets and, as additional opportunities develop, the Company plans to make
additional capital investments in its networks that are required to pursue
such opportunities. TCG has historically been funded by capital contributions
and advances from the Cable Stockholders. Upon completion of the
Reorganization, however, the Cable Stockholders will no longer have any
obligation to make additional equity investments in or loans to TCG. See "The
Reorganization."
The Company expects to meet its capital needs with the proceeds of the
Offerings and internally generated cash flow, together with the proceeds from
existing and future credit facilities and other borrowings, and the proceeds
from sales of additional debt and equity securities. TCG New York, Inc., a
wholly owned subsidiary of TCGI ("TCNY"), has a Credit Agreement (the
"Revolving Credit Agreement"), pursuant to which certain financial
institutions have agreed to lend to TCNY up to $250 million to be used in part
to fund the Company's expansion and development of its networks. The ability
of TCNY to make distributions to the Company and to borrow the undrawn portion
of the commitment under the Revolving Credit Agreement is subject to the
compliance by TCNY with the covenants contained therein.
The incurrence of long-term indebtedness by TCGI in an amount in excess of
$1 billion is subject to certain state regulatory approvals in New York and
New Jersey. The Company has filed petitions for orders from such state
regulatory authorities that will permit TCGI to expand TCGI's borrowing
authority to $2 billion. The Company expects that the proceeds of the
Offerings and internally generated cash flow will be sufficient to meet its
capital needs until such state regulatory approvals have been obtained. Senior
Discount Notes aggregating up to $253 million in Accreted Value will be
subject to mandatory redemption, on a pro rata basis, at a redemption price of
101% of the Accreted Value thereof as of the redemption date in the event that
such state regulatory approvals are not obtained within 270 days of the
issuance date of the Notes or the petitions for such approvals are denied. In
addition to the $1 billion long-term debt borrowing authorization at the TCGI
level, both the New York and New Jersey regulatory authorities permit TCNY to
borrow an additional $1 billion; provided, however, that the New York
regulatory authority has interpreted its authorization as permitting TCGI and
TCNY to incur long-term debt not to exceed $1.75 billion in the aggregate. See
"--Limitation on Incurrence of Debt Under New York and New Jersey Regulatory
Authorizations," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description
of Certain Indebtedness."
There can be no assurance that TCG will be successful in generating
sufficient cash flow or raising debt or equity capital in sufficient amounts
on terms acceptable to it. The failure to generate sufficient cash flow or to
raise sufficient funds may require the Company to delay or abandon some or all
of its development and expansion plans, which could have a material adverse
effect on TCG's growth, its ability to compete in the telecommunications
services industry and its ability to service its debt, including the Notes.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
SUBSTANTIAL LEVERAGE; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The Company will be highly leveraged after consummation of the Notes
Offerings. As of March 31, 1996, after giving pro forma effect to the
Reorganization and the application of the net proceeds from the Offerings, TCG
would have had approximately $968.3 million of consolidated total debt and
$829.3 million of consolidated stockholders' equity. The degree to which the
Company is leveraged could have a material adverse effect upon the Company.
For example: (i) the Company's ability to obtain additional financing in the
future for capital expenditures, acquisitions, working capital or general
corporate or other purposes may be limited, (ii) a substantial portion of
TCG's cash flow from operations will be dedicated to the payment of the
principal of, and interest on, its debt and (iii) TCG's substantial leverage
may make it more vulnerable to economic downturns, limit its ability to
withstand competitive pressures and reduce its flexibility in responding to
changing business and economic conditions. In addition, a failure to comply
with the covenants and other provisions of its debt
13--1
<PAGE>
instruments could result in events of default under such instruments, which
could permit acceleration of the debt under such instruments and in some cases
acceleration of debt under other instruments that contain cross-default or
cross-acceleration provisions.
After giving pro forma effect to the Reorganization, the Offerings and the
application of the net proceeds therefrom as if such transactions had occurred
at the beginning of the respective periods, the Company's earnings would have
been insufficient to cover its fixed charges by $170.8 million for the year
ended December 31, 1995 and $48.5 million for the three months ended March 31,
1996. Although TCG believes that it will be able to generate sufficient cash
flow from operations to meet its debt service obligations as they become due,
if it is unable to do so, it could face liquidity problems. In such
circumstances, the Company may be required to renegotiate the terms of the
instruments relating to its long-term debt or to refinance all or a portion of
its long-term debt. There can be no assurance, however, that TCG will be able
successfully to renegotiate such terms or refinance its indebtedness on terms
acceptable to it. If the Company were unable to refinance its indebtedness or
obtain new financing under these circumstances, TCG would have to consider
various other options such as the sale of certain assets to meet its required
debt service, the sale of additional equity, negotiations with its lenders to
restructure applicable indebtedness or other options available to it under
law.
HOLDING COMPANY STRUCTURE
TCG conducts a substantial amount of its business through its subsidiaries
and derives a substantial portion of its operating cash flow from its
subsidiaries. TCG intends to loan or contribute a portion of the net proceeds
from the Offerings to its subsidiaries. See "Use of Proceeds." The Notes are
not secured by any of the assets of the Company and will not initially be
guaranteed by any of the Company's subsidiaries (although under certain
circumstances the Company's subsidiaries may be required to guarantee the
Notes). See "Description of Notes--Certain Covenants--Limitation on Guarantees
of Indebtedness by Restricted Subsidiaries." The holders of any indebtedness,
and other creditors, of the Company's subsidiaries will be entitled to payment
of their indebtedness or other claims prior to the payment to the holders of
any general unsecured obligations of TCG, including the Notes. The Notes will
rank pari passu with any other unsecured obligations of the Company that are
not expressly subordinated to the Notes. TCG's ability to make interest and
principal payments when due to holders of the Notes is dependent upon the
receipt of sufficient funds from its subsidiaries and the receipt of
management fees, which may be limited by law or the terms of any debt
agreements to which the subsidiaries are a party. In addition, TCG intends to
borrow in the private debt markets through its subsidiaries. Since TCG's
subsidiaries do not generally guarantee the payment of principal or interest
on the Notes, the claims of holders of the Notes effectively will be
subordinated to the claims of creditors of such entities. Furthermore, TCG
contemplates that debt agreements that may be entered into between its
subsidiaries and financial institutions may prohibit the subsidiaries from
making dividend payments to TCG if an event of default exists under such debt
agreements or if the subsidiaries do not maintain specified financial ratios.
The Revolving Credit Agreement provides that TCNY is not permitted to pay
dividends to TCGI at any time prior to June 30, 1997, and may pay dividends to
TCGI thereafter only if (a) no default under the Revolving Credit Agreement
exists, (b) the ratio of the debt of TCNY to the product of two times its
operating cash flow for the prior two quarters is less than 5.0 to 1.0 and (c)
such dividend is not paid from the proceeds of any sale of assets. The
percentage of the Company's revenues and net income derived from TCNY was 65%
and 4%, respectively, for the year ended December 31, 1995 and 60% and 7%,
respectively, for the three months ended March 31, 1996.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Senior Discount Notes will be issued with original issue discount within
the meaning of Section 1273(a) of the Internal Revenue Code of 1986, as
amended. Holders of obligations issued with original issue discount must
include such original issue discount in gross income for federal income tax
purposes as it accrues, in advance of the receipt of the cash attributable to
such income, under a method that takes into account the compounding of
interest. See "Certain Federal Income Tax Considerations."
RISKS OF EXPANSION
The Company's continued expansion and development of its networks will
depend on, among other things, the Company's ability to assess markets, design
fiber network backbone routes, install facilities, acquire rights-
14
<PAGE>
of-way and building access, obtain any required governmental authorizations
and permits and implement interconnection with local exchange carriers, all in
a timely manner, at reasonable costs and on terms and conditions acceptable to
TCG. The Company's ability to manage this expansion effectively will require
it to continue to implement and improve its operational and financial systems
and to expand, train and manage its employee base. TCG's inability to expand
its existing networks or install new networks or manage effectively such
expansion and installation could have a material adverse effect upon the
Company's business strategy, financial condition and results of operations. In
addition, to the extent that the Company's expansion is carried out through
acquisitions, there can be no assurance that any desired acquisition could be
made in a timely manner on terms and conditions acceptable to the Company or
that any such acquisition could be successfully integrated into the Company's
operations.
Currently, TCG's services are predominantly local. However, TCG has examined
from time to time, and will continue to examine, opportunities to expand into
other related telecommunications services. If the Company were to expand into
new categories of telecommunications services, it could incur certain
additional risks in connection with such expansion, including technological
compatibility risks, legal and regulatory risks and possible adverse reaction
by some of its current customers.
LIMITATIONS ON ACQUIRING CERTAIN LOCAL MARKET PARTNERSHIPS
TCG Partners and 12 of the 14 Local Market Partnerships will become wholly
owned subsidiaries of TCGI. In addition, the Cable Stockholders have agreed to
transfer their interests in the remaining two Local Market Partnerships to the
Company at the earliest time such transfers can be accomplished. The remaining
interests held in TCG San Francisco are held by Viacom Telecom, Inc. (22.9%)
and InterMedia Partners (4.2%), and the remaining interest held in TCG Seattle
is held by Viacom Telecom, Inc. (22.2%). TCI has entered into agreements to
acquire, subject to the satisfaction of certain conditions, the partnership
interests held by such unaffiliated minority partners in TCG San Francisco and
TCG Seattle. Pursuant to the Reorganization Agreement, if TCI acquires such
interests, it is required to transfer them to TCG; if TCI determines that it
is unable to acquire such interests, it will notify TCG, and TCG shall pursue
the acquisition of such partnership interests. There can be no assurance that
TCI or TCG will be able to acquire such interests. See "The Reorganization."
DEPENDENCE UPON INTERCONNECTION WITH ILECS; SUBSTANTIAL COMPETITION
The Company operates in an increasingly competitive environment. Services
substantially similar to those offered by the Company are also offered by the
incumbent local exchange carriers ("ILECs") serving the metropolitan markets
currently served or intended to be served by the Company. ILECs have long-
standing relationships with their customers, have financial and technical
resources substantially greater than those of the Company, have the potential
to subsidize services of the type offered by the Company from service revenues
not subject to effective competition and benefit from federal and state laws
and regulations that, TCG believes, generally favor the ILECs over competitive
access providers ("CAPs") and competitive local exchange carriers ("CLECs").
Under certain circumstances, the FCC and state regulatory authorities provide
the ILECs with an ability to lower selectively the price of certain services
within the areas in which the Company operates. In addition, as a result of
the 1996 Act, ILECs are likely to obtain additional pricing flexibility with
regard to services that compete with those offered by the Company. Increased
price competition from ILECs could have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Competition;--Government Regulation." Also, under the 1996 Act, ILECs formerly
subject to restrictions on the provision of cable television service and
interLATA (interexchange) long distance services are no longer restricted from
entry into these businesses, subject to certain requirements in the 1996 Act
and rules and policies to be implemented by the FCC and the states. The FCC
may authorize a Regional Bell Operating Company ("RBOC") to provide interLATA
services in a state when the RBOC enters into a state utility commission-
approved agreement with one or more facilities-based competitors which provide
business and residential local exchange service and such agreements satisfy 14
specified interconnection requirements. Alternatively, if no such
15
<PAGE>
facilities-based competitors achieve such interconnection, the RBOC may obtain
authority from the FCC to provide interLATA services if the RBOC obtains state
utility commission approval of a statement of generally available terms and
conditions of interconnection that satisfies the requirements. When an RBOC
obtains authority to provide interLATA services, it will be able to offer
customers local and long distance telephone services. Given the market power
the RBOCs currently possess in the local exchange market, the ability to
provide both local and long distance services could make the RBOCs very strong
competitors.
To the extent TCG interconnects with and uses the ILECs' networks to service
the Company's customers, TCG is dependent upon the technology and capabilities
of the ILECs to meet certain telecommunications needs of the Company's
customers and to maintain its service standards. TCG will become increasingly
dependent on interconnection with ILECs as switched services become a greater
percentage of the Company's business. TCG has experienced increasing
difficulties in obtaining high quality, reliable and reasonably priced service
from certain ILECs over the last 18 months, and the attractiveness of the
Company's services to customers may be impaired as a result. The 1996 Act
imposes interconnection obligations on ILECs, but there can be no assurance
that the Company will be able to obtain the services it requires at rates, and
on terms and conditions, that permit the Company to offer switched services at
rates that are both profitable and competitive.
In most of the metropolitan areas in which TCG operates, at least one (and
in many markets several) other CAPs or CLECs offer many of the same local
telecommunications services provided by the Company, generally at similar
prices. Potential and actual new market entrants in the local
telecommunications services business include other CAPs and CLECs, ILECs
entering new geographic markets, cable television companies, electric
utilities, long distance and international carriers, microwave carriers,
wireless telephone system operators and private networks built by large end
users, many of which may have financial, personnel and other resources
substantially greater than those of TCG. In addition, the current trend of
business combinations and alliances in the telecommunications industry,
including mergers between RBOCs, may create significant new competitors for
the Company.
The 1996 Act also will increase competition in the local telecommunications
business. The 1996 Act requires all local exchange providers, including new
entrants, to offer their services for resale and requires ILECs to offer their
network facilities on an unbundled basis. There can be no assurance that any
unbundled rates or facilities offered by ILECs to TCG will be economically
attractive or technically viable. See "Business--Government Regulation--
Telecommunications Act of 1996." These requirements facilitate entry by new
competitors without substantial capital risk or investment. See "Business--
Competition."
FEDERAL AND STATE REGULATION
The Company is subject to federal and state regulation. In most states, TCG
is subject to certification and tariff filing requirements with respect to
intrastate services. In some instances, the certificate obtained by the
Company in a particular state limits the services that it is permitted to
provide in that state. These current restrictions on the services that may be
provided by the Company should be eliminated as a result of the 1996 Act,
which prohibits states from imposing legal restrictions that effectively
prohibit the provision of any telecommunications service. States will,
however, under the 1996 Act, retain authority to impose on the Company and
other telecommunications carriers requirements to preserve universal service,
protect public safety, ensure quality of service and protect consumers. States
are also responsible under the 1996 Act for mediating and arbitrating
interconnection arrangements between CLECs and ILECs if the carriers fail to
agree on such arrangements.
TCG is required to file tariffs for interstate services with the FCC,
although such tariff requirements are less restrictive than those imposed on
ILECs offering similar services. These tariffs must contain the rates, terms
and conditions under which service is generally available from TCG. Challenges
by third parties to the Company's tariff filings or related contractual
arrangements may cause TCG to incur substantial legal and administrative
expenses.
16
<PAGE>
Under the 1996 Act, the Company will become subject to certain federal
regulatory obligations when it provides local exchange service in a market.
All local exchange carriers, including CLECs, must interconnect with other
carriers, make their services available for resale by other carriers, provide
nondiscriminatory access to rights-of-way, offer reciprocal compensation for
termination of traffic and provide dialing parity and telephone number
portability. In addition, the 1996 Act requires all telecommunications
carriers to ensure that their services are accessible to and usable by persons
with disabilities, and TCG and other CLECs may be required to contribute to a
universal service fund provided for in the 1996 Act but which has not yet been
established. Because the FCC has yet to adopt rules implementing the 1996 Act,
it is uncertain how burdensome these requirements will be for TCG.
The 1996 Act contains other provisions that may be subject to FCC rulemaking
and judicial interpretation, including a provision that limits the ability of
a cable television operator and its affiliates to acquire more than a 10%
financial interest or any management interest in a LEC which provides local
exchange service in such cable operator's franchise area. The Company
believes, based on an opinion from its FCC counsel, Dow, Lohnes & Albertson, a
Professional Limited Liability Company, that the 1996 Act does not limit the
acquisition of any of the interests contemplated to be acquired in the
Reorganization; however, there can be no assurance that the FCC or a court
would not reach a different determination as to one or more of such interests.
In addition, no assurance can be given that changes to current regulations
or the adoption of new regulations by the FCC or state regulatory authorities
or legislative initiatives would not have a material adverse effect on TCG.
See "Business--Government Regulation."
GOVERNMENTAL AND OTHER AUTHORIZATIONS
The development, expansion and maintenance of the Company's networks will
depend on, among other things, its ability to obtain rights-of-way and any
other required governmental authorizations and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. In some
of the cities or municipalities where TCG provides network services, it may
pay license or franchise fees, usually based on a percentage of gross revenues
or a per foot right-of-way fee. The 1996 Act permits municipalities to charge
such fees only if they are nondiscriminatory, but there can be no assurance
that municipalities that presently favor a particular carrier, typically the
ILEC, will conform their practices to the requirements of the 1996 Act in a
timely manner or without a legal challenge. Furthermore, there can be no
assurance that certain cities or municipalities that do not now impose fees
will not seek to impose fees, nor can there be any assurance that, following
the expiration of existing franchises, fees will remain at their current
levels or that the franchises will be renewed. Some of the Company's franchise
agreements also provide for increases or renegotiation of fees at intervals
prior to the expiration thereof.
In addition, TCG currently leases, and plans in the future to enter into
facility arrangements for, significant numbers of optical fibers from cable
television operators. There can be no assurance that municipalities which
regulate such cable television operators will not seek to impose additional
franchise fees or otherwise charge such cable television operators (subject to
reimbursement by TCG) in connection with such leases. There can also be no
assurance that such cable television systems or the Company will be able to
obtain all necessary permits, licenses, conduit agreements or pole attachment
agreements from governmental authorities or private rights-of-way providers
necessary to effectuate such lease transactions. As a result, there can be no
assurance that TCG will be able to expand its existing networks or develop new
networks successfully, which would have a material adverse effect on the
Company's growth and financial condition.
If any of the Company's existing franchise, license or similar agreements
for a particular metropolitan area were terminated prior to their expiration
dates or not renewed and TCG were forced to remove its fiber or abandon its
network in place, such termination would have a material adverse effect on the
Company's operations in that metropolitan area and could have a material
adverse effect on TCG.
17
<PAGE>
LIMITATION ON INCURRENCE OF DEBT UNDER NEW YORK AND NEW JERSEY REGULATORY
AUTHORIZATIONS
The incurrence of long-term indebtedness by TCGI is subject to approval by
the New York Public Service Commission (the "NYPSC") and the New Jersey Board
of Public Utilities (the "NJBPU"). In orders issued in 1993, both the NYPSC
and NJBPU authorized TCGI to issue long-term debt in amounts not to exceed $1
billion. Additionally, in 1995, both the NYPSC and NJBPU authorized the
Company's subsidiary, TCG New York Inc., to incur long-term debt in an amount
not to exceed an additional $1 billion; provided, however, that the NYPSC has
interpreted its authorization as permitting TCGI and TCNY to incur long-term
debt not to exceed $1.75 billion in the aggregate. The aggregate principal
amount of the Notes at maturity will be in excess of $1 billion, although the
accreted value of the Notes upon issuance will be $925 million.
The Company has received an opinion of its New Jersey regulatory counsel,
Smith, Don, Alampi, D'Argenio & Arturi, Englewood Cliffs, New Jersey, to the
effect that the proposed incurrence of indebtedness pursuant to the Notes
Offerings is authorized under the applicable statutes and rules governing the
authority of the NJBPU and that the Notes, once issued, will be valid and
enforceable to the extent governed by such statutes and rules. The Company has
filed a petition with the NJBPU to expand the borrowing authority of TCGI to
$2 billion, which the Company and its New Jersey regulatory counsel believe
will be approved in the ordinary course of business by the NJBPU.
The Company has received an opinion from its New York regulatory counsel,
Roland, Fogel, Koblenz & Carr, LLP, Albany, New York, to the effect that the
incurrence of indebtedness pursuant to the Notes Offerings is authorized under
the applicable statutes and rules governing the authority of the NYPSC and
that the Notes, once issued, will be valid and enforceable to the extent
governed by such statutes and rules. Such counsel's opinion is based in part
on an opinion from the Office of the General Counsel of the NYPSC. The Company
has submitted a request to the NYPSC for confirmation of the opinion of the
Office of General Counsel or, in the alternative, for authorization to incur
up to $2 billion in long-term debt, which the Company and its New York
regulatory counsel believe will be approved in the ordinary course of business
by the NYPSC.
While all past petitions by TCGI to the NYPSC and the NJBPU for
authorization to incur indebtedness have been approved routinely, there can be
no assurance that the Company's petitions before the NYPSC and the NJBPU will
be similarly approved. The Company will use its best efforts to obtain such
approval. In the event that (i) the Company fails to obtain confirmation from
the NYPSC of the opinion of its General Counsel or otherwise fails to obtain
approval for the issuance of the Notes, or fails to obtain authorization from
the NJBPU for the expansion of the borrowing authority of TCGI, within 270
days after the issuance date of the Notes or (ii) either the NYPSC or the
NJBPU has denied in a final order the petitions of TCGI referenced above, the
Company will redeem, on a pro rata basis, Senior Discount Notes with an
Accreted Value of up to $253 million, representing an aggregate principal
amount of Senior Discount Notes equal to the amount by which the aggregate
principal amount at maturity of TCGI's long-term debt exceeds $1 billion.
Although the Company will be required to redeem a portion of the Senior
Discount Notes in excess of $1 billion in principal amount in such event,
there can be no assurance that the NYPSC or the NJBPU will not take other
action, including fines, injunctions or other administrative or legal actions
against the Company or actions with respect to its authorization to provide
telecommunications services in New York and New Jersey.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. During 1995, the
Company's top 10 customers accounted for approximately 57% of TCG's total pro
forma revenues. AT&T Corp. ("AT&T") and Sprint Corporation ("Sprint") each
accounted for more than 10% of such revenues, although no customer accounted
for 15% or more of such revenues. A significant reduction in the level of
services TCG performs for any of these customers could have a material adverse
effect on the Company's results of operations or financial condition. Most of
the Company's customer arrangements are subject to termination on short notice
and do not provide TCG with guarantees that service quantities will be
maintained at current levels, and there can be no assurance that such
arrangements will be continued at the same service quantity levels. TCG
believes that certain of the major long distance carriers are pursuing
alternatives to their current practices with regard to obtaining local
telecommunications services, including construction of their own facilities.
This type of activity could accelerate as a result of the 1996 Act, which
limits the authority of
18
<PAGE>
states to impose legal restrictions that have the effect of prohibiting a
company, including an IXC, from providing any telecommunications service. In
addition, the 1996 Act requires ILECs to unbundle their network facilities and
to offer their services for resale by other companies at wholesale discounts.
Accordingly, long distance carriers soon will be able to provide local service
by reselling the facilities or services of an ILEC, which may be more cost-
effective for an IXC than using the services of the Company or another CAP or
CLEC. See "Business--Customers and Marketing."
CONTROL BY PRINCIPAL STOCKHOLDERS; CONFLICTS OF INTEREST; POSSIBLE COMPETITION
Immediately following the completion of the Stock Offerings and after giving
effect to the Reorganization, the Cable Stockholders, who will hold all the
Class B Common Stock, representing approximately 98.2% of the combined voting
power of the Company's outstanding Common Stock, generally will have the
collective ability to control all matters requiring stockholder approval,
including the nomination and election of directors. The disproportionate
voting rights of the Class B Common Stock relative to the Class A Common Stock
may make TCG a less attractive target for a takeover than it otherwise might
be, or render more difficult or discourage a merger proposal, a tender offer
or a proxy contest, even if such actions were favored by a majority of the
holders of the Class A Common Stock. See "Principal Stockholders,"
"Description of Capital Stock" and "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement."
All of the Cable Stockholders are in the telecommunications business and
may, now or in the future, provide services which are the same or similar to
those provided by TCG. No assurance can be given that the Cable Stockholders
will not compete with TCG in certain markets or in the provision of certain
telecommunications services. Continental has recently announced that it has
entered into an agreement pursuant to which it will merge with U S WEST, Inc.,
an ILEC and a competitor of the Company. Upon consummation of the Stock
Offerings, the directors designated by Continental will resign from the Board
of Directors of the Company. Although directors of TCG who are also directors,
officers or employees of the Cable Stockholders or any of their respective
affiliates have certain fiduciary obligations to TCG under Delaware law, such
directors and the Cable Stockholders, as the controlling stockholders of TCG,
are in positions that may create conflicts of interest with respect to certain
business opportunities available to and certain transactions involving the
Company. The Cable Stockholders have not adopted any special voting procedures
to deal with such conflicts of interest, and there can be no assurance that
any such conflict will be resolved in favor of TCG. In this regard, TCG's
Amended and Restated Certificate of Incorporation provides that TCG may not
provide certain (i) wireless communications services (other than products and
services delivered via point-to-point microwave and milliwave transmissions)
or (ii) telecommunications services to residences until, in each case, the
earlier of the date that is five years after the filing of the Amended and
Restated Certificate of Incorporation or the date on which the holders of
Class B Common Stock no longer represent at least 50% of the voting power of
the outstanding Common Stock of the Company, without the affirmative vote of
the holders of a majority of the Class B Common Stock, subject to certain
exceptions. See "Description of Capital Stock."
Affiliates of TCI, Cox and Comcast, which collectvely will designate a
majority of the directors of the Company, together with an affiliate of
Sprint, have formed Sprint Spectrum, a partnership created to provide certain
wireless telecommunications services. The investments by TCI, Cox and Comcast
in Sprint Spectrum and in the Company may encourage these companies to promote
arrangements between the Company and Sprint Spectrum. As recently as January
1996, TCI, Cox and Comcast expressed their intention to attempt to integrate
the business of the Company with the business of Sprint Spectrum. At present,
TCI, Cox and Comcast are not in any discussions with Sprint or Sprint Spectrum
with respect to the Company. However, the Company cannot predict whether TCI,
Cox and Comcast will attempt to achieve such an integration in the future or
whether they will be successful in doing so. The Company also cannot predict
the form that any such integration would take or its impact on the Company's
business.
POTENTIAL ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority, without any further vote
or action by the Company's stockholders, to issue up to 150,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
powers, preferences and relative, participating, optional or other rights
thereof, including without
19
<PAGE>
limitation, the dividend rate (and whether dividends are cumulative),
conversion rights, voting rights, rights and terms of redemption, redemption
price and liquidation preference. Although the Company has no current plans to
issue any shares of Preferred Stock, the rights of the holders of Common Stock
would be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. Issuance of
Preferred Stock could have the effect of delaying, deterring or preventing a
change in control of the Company, including the imposition of various
procedural and other requirements that could make it more difficult for
holders of Common Stock to effect certain corporate actions, including the
ability to replace incumbent directors and to accomplish transactions opposed
by the incumbent Board of Directors. See "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement" and "Description of Capital
Stock."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry has experienced and is expected to continue
to experience rapid and significant changes in technology. While TCG believes
that, for the foreseeable future, these changes will neither materially affect
the continued use of fiber optic cable or digital switches and transmission
equipment nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the Company's business
and operations cannot be predicted. Also, alternative technologies may develop
for the provision of services to customers. TCG may be required to select in
advance one technology over another; but it will be impossible to predict with
any certainty, at the time the Company is required to make its investment,
which technology will prove to be the most economic, efficient or capable of
attracting customer usage.
DEPENDENCE ON KEY PERSONNEL
The loss of the services of any of Robert Annunziata, John A. Scarpati,
Robert C. Atkinson, Alf T. Hansen or Stuart A. Mencher could have an adverse
impact on the Company. The Company has employment agreements with each of
Messrs. Annunziata, Scarpati, Atkinson, Hansen and Mencher. The Company does
not carry key man life insurance on any of such personnel. The Company
believes that the future success of TCG will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. See "Management."
ENVIRONMENTAL MATTERS
In connection with its management of The Teleport satellite earth station
complex in Staten Island, New York, TCG monitors electromagnetic radiation
levels in the vicinity of The Teleport facility on a quarterly basis. The
quarterly monitoring reports provided to TCG indicate that the type and level
of electromagnetic radiation being emitted into publicly accessible areas do
not violate any laws, rules or regulations of which TCG is aware. In addition,
the Company and its contractors are subject to various laws and regulations
governing hazardous or environmentally sensitive materials or conditions which
may occur in connection with the construction, installation, operation or
maintenance of the Company's facilities. There can be no assurance that
hazardous materials or conditions, including electromagnetic radiation emitted
from The Teleport satellite earth station complex or any of TCG's other
facilities, might not expose the Company to tort or other claims that could
have a material adverse effect on TCG.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are new issues of securities, and there is currently no public
market for the Notes. TCG does not intend to apply for listing of the Notes on
any securities exchange or to seek their admission to trading in any automated
quotation system. TCG has been advised by the Underwriters that, following
completion of the initial offering of the Notes, the Underwriters presently
intend to make a market in the Notes, although they are under no obligation to
do so and may discontinue any market-making activities at any time without
notice. Accordingly, there can be no assurances as to whether an active public
market for the Notes will develop or, if a public market develops, as to the
liquidity of the trading market for the Notes. See "Underwriting."
20
<PAGE>
THE REORGANIZATION
Teleport Communications Group Inc. or "TCGI" is the issuer of the Notes
offered hereby. Prior to the Offerings, the local telecommunications business
managed by TCGI has been owned by the Cable Stockholders (TCI (30%), Cox
(30%), Comcast (20%), and Continental (20%)). The business was operated
through TCGI and, beginning in 1992, TCG Partners, which is a New York general
partnership owned by the Cable Stockholders in the same percentages as TCGI
and managed by TCGI. TCG Partners was formed for tax purposes to invest, with
TCGI, the Cable Stockholders and other cable operators, in the Local Market
Partnerships to develop and operate local telecommunications networks in
various markets across the United States. The 14 Local Market Partnerships are
managed by TCGI, and each Local Market Partnership is owned by TCGI, TCGI
Partners, the Cable Stockholders which have cable operations in the particular
market and in some cases other cable operators in the market. To simplify this
complex ownership structure, TCGI and the Cable Stockholders have agreed to
consolidate the ownership of TCG Partners and of the Local Market Partnerships
as subsidiaries of TCGI. As part of this process, certain of the other cable
operators agreed to sell their interests in Local Market Partnerships to TCGI
directly or through a Cable Stockholder.
The following table sets forth for each Local Market Partnership the
ownership as of June 3, 1996, the ownership immediately prior to the
consummation of the Offerings and the ownership assuming consummation of the
Reorganization following the consummation of the Offerings:
<TABLE>
<CAPTION>
OWNERSHIP ASSUMING
LOCAL MARKET OWNERSHIP AS OF JUNE 3, OWNERSHIP IMMEDIATELY COMPLETE CONSUMMATION
PARTNERSHIP 1996 PRIOR TO OFFERINGS OF THE REORGANIZATION
- - ------------------- -------------------------- --------------------- ---------------------
<S> <C> <C> <C>
TCG Chicago TCGI, Continental and TCI TCG TCG
TCG Connecticut TCG Partners, Comcast, Cox TCG TCG
and TCI
TCG Dallas TCGI, TCG Partners, and TCG TCG
TCI
TCG Detroit(a) TCG Partners, Booth TCG TCG
Telecable, Inc., Time
Warner Entertainment-
Advance Newhouse
Partnership, TCI, Comcast
and Continental
TCG Illinois TCG Partners, Continental TCG TCG
and TCI
TCG Los Angeles TCGI, TCG Partners, TCG TCG
Comcast, Continental, Cox
and TCI
TCG Omaha TCG Partners and Cox TCG TCG
TCG Phoenix TCG Partners, Cox and TCI TCG TCG
TCG Pittsburgh TCG Partners and TCI TCG TCG
TCG San Diego TCG Partners and Cox TCG TCG
TCG San TCGI, TCG Partners, TCG, InterMedia TCG
Francisco(b) InterMedia Partners, Partners, Viacom
Viacom Telecom, Inc. and Telecom, Inc. and
TCI TCI
TCG Seattle(b) TCGI, TCI and Viacom TCG, TCI and Viacom TCG
Telecom, Inc. Telecom, Inc.
TCG South Florida TCGI, TCG Partners, TCG TCG
Comcast, Continental and
TCI
TCG St. Louis TCG Partners, Continental TCG TCG
and TCI
</TABLE>
- - --------
(a) The unaffiliated minority partners in TCG Detroit have agreed to transfer
their interests to TCGI upon consummation of the Stock Offerings.
(b) Certain transfers may require the consent of Viacom Telecom, Inc. and
InterMedia Partners. TCGI has entered into letters of intent with Viacom
Telecom, Inc. under which TCGI would be able to acquire, subject to
entering into definitive agreements, the 22.9% and 22.2% interests of
Viacom Telecom, Inc. in TCG San Francisco and TCG Seattle, respectively,
if TCI is unable to acquire such interests.
21
<PAGE>
Reorganization Transactions on or prior to the Offerings.
In connection with the Offerings, the Company and the Cable Stockholders
have entered into the Reorganization Agreement, pursuant to which the
Reorganization will be effected. The principal transactions comprising the
Reorganization that will occur on or prior to the consummation of the
Offerings are the following:
(i) Acquisition of TCG Partners. Prior to the consummation of the
Offerings, TCGI will acquire all of the partnership interests in TCG
Partners in exchange for Class B Common Stock issued to the Cable
Stockholders.
(ii) Acquisition of Additional Interests in Local Market Partnerships. On
or prior to the consummation of the Offerings, and in exchange for Class B
Common Stock issued to the Cable Stockholders and Class A Common Stock
issued to the other cable operators, TCGI will acquire all of the
partnership interests in the Local Market Partnerships other than TCG San
Francisco and TCG Seattle. Upon such acquisitions, these 12 Local Market
Partnerships will become wholly owned subsidiaries of TCGI.
The partnership interests held by the two partners in TCG Detroit that
are not affiliated with either TCG or the Cable Stockholders will be
acquired by TCG simultaneously with the closing of the Offerings in
consideration of the issuance to the current holders of such partnership
interests of Class A Common Stock with an aggregate value of $9.2 million.
The purchase price to be paid to such holders for their minority
partnership interests in TCG Detroit reflects a premium of approximately
$6.4 million over the aggregate book value of such partnership interests.
TCG has granted to such holders "piggy-back" registration rights with
respect to such Class A Common Stock.
On May 13, 1996, in connection with the Reorganization, TCGI purchased
the minority partnership interest of Hyperion Telecommunications, Inc. of
Florida in TCG South Florida for approximately $11.6 million, a purchase
price that reflected a premium of approximately $8.4 million over the book
value of such partnership interest.
(iii) Contribution of Indebtedness. As of March 31, 1996, the Company
owed the Cable Stockholders the aggregate principal amount of approximately
$269.0 million, plus accrued interest which, as of March 31, 1996, was
$16.4 million, pursuant to the Loan Agreement, dated as of May 5, 1993, as
amended, among TCGI and its stockholders (the "Stockholder Loan
Agreement"). Prior to the consummation of the Offerings, the Cable
Stockholders will contribute to TCGI all amounts outstanding under the
Stockholder Loan Agreement (except that TCI will retain a subordinated note
of TCG in the amount of $26 million, bearing interest at the rate of 7.5%
per annum, with principal and interest payable at maturity five years from
the date of consummation of the Reorganization) and the Stockholder Loan
Agreement will be terminated.
(iv) Amendment and Restatement of Certificate of Incorporation. Prior to
the consummation of the Offerings, TCGI's certificate of incorporation will
be amended and restated to provide for, among other things, the increase of
its authorized share capitalization and the division of its authorized
common stock into two classes of Common Stock with different voting rights,
with each share of Class A Common Stock having one vote per share, each
share of Class B Common Stock having 10 votes per share and each share of
Class B Common Stock being convertible at any time into one share of Class
A Common Stock. The Cable Stockholders will initially be the only holders
of the Class B Common Stock and will have approximately 98.2% of the
combined voting power of the Company's outstanding Common Stock. See
"Principal Stockholders" and "Description of Capital Stock."
(v) Amended Stockholders' Agreement. Prior to the consummation of the
Offerings, the Cable Stockholders and TCGI will enter into an Amended and
Restated Stockholders' Agreement (the "Amended Stockholders' Agreement")
which will provide for, among other things, the corporate governance of the
Company, certain demand registration rights and certain stock transfer
restrictions. With respect to corporate governance, the Amended
Stockholders' Agreement will provide that at each annual meeting of the
22
<PAGE>
Company's stockholders at which directors are elected, the holders of the
Class B Common Stock will vote their shares in favor of nominees for
director to be designated as follows: (i) the holders of the Class B Common
Stock will designate 10 nominees (with the right of a holder of Class B
Common Stock to designate one or more nominees depending on the percentage
of the Class B Common Stock held by it), (ii) the Chief Executive Officer
of the Company will be designated as a nominee and (iii) the Board of
Directors with the unanimous consent of the holders of Class B Common Stock
that have the right to designate nominees for director shall designate two
individuals who are neither employed by nor affiliated with TCGI or any
holder of Class B Common Stock as nominees for director. Under the Amended
Stockholders' Agreement, a holder of Class B Common Stock generally must
hold, together with its affiliates, at least nine percent of the Class B
Common Stock in order to have the right to designate a director nominee.
The holders of the Class A Common Stock will not have the right, as a
class, under the Company's Amended and Restated Certificate of
Incorporation and the Amended Stockholders' Agreement to nominate any
individuals for election to the Board of Directors. The ability of
Continental (or its successor) to designate any directors after the earlier
of the consummation of its merger with U S WEST, Inc. or the Stock
Offerings will be limited in accordance with the terms of the Amended
Stockholders' Agreement. The Amended Stockholders' Agreement will terminate
when the aggregate voting power of the Class B Common Stock represents less
than 30% of the combined voting power of all outstanding Common Stock. See
"Certain Relationships and Related Transactions--Amended Stockholders'
Agreement."
(vi) Redemption of Class B Common Stock. Continental has recently
announced that it has entered into an agreement pursuant to which it will
merge with and into U S WEST, Inc. The Department of Justice has informed
the Company that it is in discussions with Continental, in connection with
its proposed merger with U S WEST, Inc., to require Continental to divest
its interest in the Company within a time frame to be agreed upon, but
which would not be earlier than June 30, 1997. TCGI has agreed to purchase
from the Continental subsidiary that is a stockholder of TCGI 7,807,881
shares (7,975,738 shares if the over-allotment options of the Underwriters
of the Stock Offerings are exercised in full) of Class B Common Stock at a
price per share equal to the initial public offering price of the Class A
Common Stock offered hereby, less the applicable underwriting discount and
a pro rata portion of the registration fees. Continental paid approximately
$60 million for the shares of Common Stock originally issued to it on May
5, 1993 (which will be converted into 14,000,070 shares of Class B Common
Stock as part of the Reorganization prior to the consummation of the
Offerings). As part of the Reorganization, as noted below, Continental will
also receive an additional 11,761,260 shares of Class B Common Stock in
consideration of (a) its contribution of $53.8 million in principal amount,
plus accrued interest thereon (approximately $3.3 million as of March 31,
1996), owed to it under the Stockholder Loan Agreement and (b) its transfer
to TCG of its partnership interests in TCG Partners and the Local Market
Partnerships in which its subsidiaries are partners. Continental has
contributed an aggregate amount of $68.1 million as capital of TCG Partners
and such Local Market Partnerships. After giving effect to the
Reorganization (except for the redemption of Continental's shares of Class
B Common Stock), Continental's investment for its 25,761,330 shares of
Class B Common Stock amounts to approximately $185.3 million.
The consummation of the Offerings is contingent on the consummation of the
above-described transactions.
In consideration of the transfers and contributions of their interests in
TCG Partners, the Local Market Partnerships and the amounts outstanding under
the Stockholder Loan Agreement, the Company will issue to Comcast,
Continental, Cox and TCI 11,621,988 shares of Class B Common Stock, 11,761,260
shares of Class B Common Stock, 18,045,594 shares of Class B Common Stock and
27,821,388 shares of Class B Common Stock, respectively. No allocation of a
particular number of shares of Class B Common Stock has been made to any
particular partnership interest or to indebtedness under the Stockholder Loan
Agreement. In addition, TCI will hold the $26 million subordinated note
described above.
Reorganization Transactions After the Offerings.
TCGI will acquire the Cable Stockholders' interests in TCG San Francisco and
TCG Seattle at the earliest time that such acquisitions can be accomplished
without minority partner consent or upon receipt of the consent
23
<PAGE>
of such minority partners. Accordingly, as soon as practicable after January
1, 1997 (which is the first date on which, under the partnership agreement of
TCG San Francisco, TCG can acquire the partnership interests of the Cable
Stockholders without the consent of Viacom Telecom, Inc. and InterMedia
Partners), the Company's interest in TCG San Francisco will increase from
35.0% to 72.9%; and as soon as practicable after January 1, 1997 (which is the
first date on which, under the partnership agreement of TCG Seattle, TCG can
acquire the partnership interests of the Cable Stockholders without the
consent of Viacom Telecom, Inc.), the Company's interest in TCG Seattle will
increase from 35.0% to 77.8%.
TCI has entered into agreements to acquire the partnership interests held by
the unaffiliated minority partners in TCG San Francisco (Viacom Telecom, Inc.
and InterMedia Partners) and TCG Seattle (Viacom Telecom, Inc.), subject to
certain conditions. TCI has not informed the Company of the price it has
agreed to pay for such partnership interests. Pursuant to the Reorganization
Agreement, if TCI acquires such interests, it will be required to transfer
them to TCG; if TCI determines that it is unable to acquire such interests, it
will notify TCG, and TCG shall pursue the acquisition of such partnership
interests. TCGI has entered into letters of intent with Viacom Telecom, Inc.
under which TCGI may be able to acquire the 22.9% and 22.2% interests of
Viacom Telecom, Inc. in TCG San Francisco and TCG Seattle, respectively, if
TCI is unable to acquire such interests. If a definitive agreement were
entered into, TCGI's purchase price would be calculated based on the product
of 2.5 multiplied by the amount Viacom Telecom, Inc. had invested in each of
TCG San Francisco and TCG Seattle, or approximately $32.1 million and $15.2
million, respectively.
The 27,821,388 shares of Class B Common Stock that will be issued to TCI (as
described above) are based on the assumption that TCI will subsequently
acquire the partnership interests of Viacom Telecom, Inc. in TCG San Francisco
and TCG Seattle and transfer them to the Company. If TCI does not transfer
such partnership interests to the Company within two years of the initial
closing date of the Reorganization, then TCI must pay to the Company an amount
equal to the lesser of the amount paid by the Company to Viacom Telecom, Inc.
(if the Company acquires such partnership interests directly from Viacom
Telecom, Inc.) or approximately $32.1 million and $15.2 million for TCG San
Francisco and TCG Seattle, respectively (which amounts are the product of 2.5
multiplied by the amount Viacom Telecom, Inc. had invested in each of TCG San
Francisco and TCG Seattle, plus interest on such amount at the rate of 7.5%
per annum, compounded quarterly). Such amount may be paid, at TCI's option,
either in cash, by the cancellation of all or a portion of the $26 million
note TCI is receiving, or in shares of Class B Common Stock valued at the
market price for the publicly traded shares of Class A Common Stock. If TCI
elects to pay such amount in shares of Class B Common Stock, it is entitled to
a 15% discount on the amount otherwise payable.
In addition, TCI will be issued 638,862 shares of Class A Common Stock upon
its transfer to TCGI of a partnership interest in TCG San Francisco it has
acquired from MicroNet, Inc., and will be issued 372,666 shares of Class A
Common Stock upon its transfer to TCGI of the partnership interest of
InterMedia Partners in TCG San Francisco, which TCI has informed TCG it
expects to acquire by the end of July 1996, subject to normal closing
conditions and the consent of local franchising authorities.
The Offering will not be conditional upon the acquisition by TCGI of the
remaining partnership interests in TCG Seattle and TCG San Francisco. After
giving effect to the Reorganization and the Offerings, TCI, Cox, Comcast and
Continental will own 37.1%, 29.7%, 19.5% and 13.7%, respectively, of the
Company's Class B Common Stock, representing 36.5%, 29.2%, 19.1% and 13.4%,
respectively, of the combined voting power of the Company's Common Stock.
24
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Notes Offerings are approximately
$898.5 million after deducting underwriting discount and estimated expenses of
the Notes Offerings. The net proceeds to the Company from the Stock Offerings
are approximately $354.7 million (approximately $408.2 million if the
Underwriters' over-allotment options are exercised in full) after deducting
underwriting discount and estimated expenses of the Stock Offerings.
TCG intends to use the net proceeds of the Offerings (i) to redeem 7,807,881
shares (7,975,738 shares if the over-allotment options of the Underwriters of
the Stock Offerings are exercised in full) of Class B Common Stock held by a
subsidiary of Continental for $118.5 million ($121.0 million if the over-
allotment options of the Underwriters of the Stock Offerings are exercised in
full), representing a price per share equal to the initial public offering
price of the Class A Common Stock being offered pursuant to the Stock
Offerings, less the applicable underwriting discount and a pro rata portion of
the registration fee, (ii) to repay approximately $155.0 million outstanding
under the Revolving Credit Agreement, which amount may be reborrowed and (iii)
the remaining approximately $979.7 million to expand and develop existing and
new networks and for general corporate and working capital purposes, which may
include acquisitions; provided, however, that in the event of a Special
Redemption Event (as defined in the Indenture for the Senior Discount Notes)
with respect to certain regulatory authorizations, up to approximately $256
million of the net proceeds of the Offerings will be used to redeem a portion
of the Senior Discount Notes. See "Risk Factors--Limitation on Incurrence of
Debt Under New York and New Jersey Regulatory Authorizations" and "Description
of Notes--Terms of Senior Discount Notes--Special Redemption." A significant
portion of such proceeds will be contributed or advanced to the Company's
subsidiaries which own and operate the networks in the local markets. Expected
capital expenditures for the expansion, development and acquisition of
networks include (i) the purchase and installation of switches, electronics,
fiber and other additional technologies in existing networks and in networks
to be constructed in new markets and (ii) the acquisition and expansion of
networks currently owned and operated by other companies. Expected
expenditures for general corporate and working capital purposes include (i)
expenditures with respect to the Company's management information system and
corporate service support infrastructure and (ii) operating and administrative
expenses with respect to new networks and debt service.
The Company's expansion into additional markets is expected to be
accomplished primarily by the development of new networks and also by the
acquisition of existing networks. Many factors will influence the Company's
determination as to the use of the net proceeds of the Offerings. The Company
has no specific plans for a significant portion of the net proceeds of the
Offerings. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The Revolving Credit Agreement was entered into in May 1995, and the amounts
being repaid were used for expansion and development of the Company's networks
and for general corporate purposes. All loans outstanding under the Revolving
Credit Agreement must be paid in full no later than February 27, 2004. The
interest rate on the loans being repaid under the Revolving Credit Agreement
as of March 31, 1996 was approximately 6.3%. When needed by the Company, such
proceeds can be reborrowed under the Revolving Credit Agreement, subject to
satisfaction of customary conditions to borrowings. Toronto Dominion (Texas),
Inc. is the Administrative Agent under the Revolving Credit Agreement and The
Toronto-Dominion Bank is a lender under the Revolving Credit Agreement, and
each of them is an affiliate of Toronto Dominion Securities (USA) Inc., which
is one of the underwriters under the Notes Offerings. An amount equal to
approximately $14.0 million, plus interest accrued thereon, will be paid to
The Toronto-Dominion Bank from the proceeds of the Offerings as a payment on
the revolving credit facility. Chemical Bank is the Documentation Agent and a
lender under the Revolving Credit Agreement and is an affiliate of Chase
Securities Inc., which is one of the underwriters under the Offerings. An
amount equal to approximately $14.0 million, plus interest accrued thereon,
will be paid to Chemical Bank from the proceeds of the Offerings as a payment
on the revolving credit facility. See "Description of Certain Indebtedness"
and "Underwriting."
Pending the foregoing uses, the net proceeds of the Offerings will be
invested in short-term, interest bearing investment-grade securities.
25
<PAGE>
CAPITALIZATION
The following table sets forth the historical combined capitalization of the
Company as of March 31, 1996 and as adjusted to reflect the Reorganization and
the Offerings. This table should be read in conjunction with the Selected
Combined Financial Data, the Pro Forma Financial Information and the combined
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------------------
PRO FORMA FOR
PRO FORMA FOR THE REORGANIZATION
ACTUAL THE REORGANIZATION AND OFFERINGS
-------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents...... $ 16,805 $ 36,000 $1,019,721
======== ======== ==========
Current portion of capital
lease obligations............. $ 4,575 $ 18,694 $ 18,694
======== ======== ==========
Long-term debt:
Revolving Credit Agreement... $155,000 $155,000 $ --
Senior Notes due 2006........ -- -- 300,000
Senior Discount Notes due
2007........................ -- -- 625,000
Unamortized Notes issuance
costs....................... -- -- (26,504)
Subordinated debt to Cable
Stockholders................ 269,000 -- --
Long-term capital lease obli-
gations..................... 10,903 43,816 43,816
TCI Note..................... -- 26,000 26,000
-------- -------- ----------
Total long-term debt....... 434,903 224,816 968,312
-------- -------- ----------
Minority interest.............. 4,847 16,116 16,116
-------- -------- ----------
Stockholders' equity and part-
ners' capital (deficit):
Preferred Stock, $.01 par
value; no shares authorized
or outstanding; 150,000,000
shares authorized and no
shares outstanding on a pro
forma basis................. -- -- --
Common Stock, $1.00 par
value; 3,000 shares
authorized, 1,667 shares
issued and outstanding...... 2 -- --
Class A Common Stock, $.01
par value; 450,000,000
shares authorized, 1,215,125
and 24,715,125 shares issued
and outstanding on a pro
forma basis, respectively... -- 12 247
Class B Common Stock, $.01
par value; 300,000,000
shares authorized,
139,250,370 and 131,442,489
shares issued and outstand-
ing on a pro forma basis,
respectively................ -- 1,393 1,314
Additional paid-in capital... 195,388 768,591 1,123,131
Accumulated deficit.......... (76,290) (176,961) (176,961)
Partners' capital (deficit).. (12,444) -- --
-------- -------- ----------
106,656 593,035 947,731
Treasury stock, 7,807,881
shares of Class B Common
Stock, at cost.............. -- -- (118,471)
-------- -------- ----------
Total stockholders' equity
and partners' capital
(deficit)................... 106,656 593,035 829,260
-------- -------- ----------
Total capitalization....... $546,406 $833,967 $1,813,688
======== ======== ==========
</TABLE>
26
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following tables present selected combined financial data derived from
the audited historical financial statements of TCGI for 1991, and from the
audited historical financial statements of TCGI and TCG Partners for 1992.
Historical annual selected combined financial data set forth below for the
years 1993, 1994 and 1995 have been derived from the combined audited
historical financial statements of TCGI and TCG Partners, which have been
audited by Deloitte & Touche llp, independent auditors, whose report thereon
appears elsewhere in this Prospectus. The following tables also present
selected combined financial data for the three months ended March 31, 1995 and
March 31, 1996 derived from the unaudited combined financial statements of
TCGI and TCG Partners. In the opinion of management, the unaudited combined
financial statements have been prepared on the same basis as the audited
combined financial statements and include all adjustments, which consist only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
TCGI's and TCG Partners' historical combined financial statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- -------- -------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications
services.............. $47,380 $57,256 $ 82,374 $ 99,983 $134,652 $ 29,855 $ 39,553
Management and royalty
fees from Local Market
Partnerships(1)....... -- -- 1,555 20,691 31,517 6,937 10,882
------- ------- -------- -------- -------- -------- --------
Total revenues......... 47,380 57,256 83,929 120,674 166,169 36,792 50,435
Operating expenses...... 22,728 31,876 48,224 60,255 73,743 17,124 22,520
Selling, general and ad-
ministrative(2)........ 12,782 16,569 40,275 56,306 69,850 16,070 20,197
Depreciation and amorti-
zation................. 9,550 12,035 16,197 19,933 37,837 7,297 12,849
------- ------- -------- -------- -------- -------- --------
Operating profit
(loss)................. 2,320 (3,224) (20,767) (15,820) (15,261) (3,699) (5,131)
------- ------- -------- -------- -------- -------- --------
Interest:
Interest income........ 636 446 1,072 1,711 4,067 1,106 1,190
Interest expense....... (885) (1,508) (1,407) (5,079) (23,331) (4,600) (8,148)
------- ------- -------- -------- -------- -------- --------
Net Interest expense... (249) (1,062) (335) (3,368) (19,264) (3,494) (6,958)
------- ------- -------- -------- -------- -------- --------
Minority interest(3).... (98) (142) 796 1,395 663 201 150
Equity in loss of uncon-
solidated affiliates... -- -- (2,114) (11,763) (19,541) (4,211) (6,528)
------- ------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................. 1,973 (4,428) (22,420) (29,556) (53,403) (11,203) (18,467)
Income tax benefit (pro-
vision)................ 484 -- 4,149 (433) (401) (335) (225)
------- ------- -------- -------- -------- -------- --------
Net income (loss)....... $ 2,457 $(4,428) $(18,271) $(29,989) $(53,804) $(11,538) $(18,692)
======= ======= ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(4)............... $11,870 $ 8,811 $ (4,570) $ 4,113 $ 22,576 $ 3,598 $ 7,718
Capital expenditures.... 32,047 47,505 155,184 143,276 154,807 50,793 31,153
Ratio of earnings avail-
able to cover fixed
charges(5)............. 3.23 -- -- -- -- -- --
Pro forma net income
(loss) per share(6).... -- -- -- -- (1.20) -- (0.34)
Dividends per share..... -- -- -- -- -- -- --
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------- AS OF MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- -------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 4,208 $ 3,563 $ 31,716 $ 26,000 $ 11,862 $ 16,805
Working capital......... (10,905) (12,507) (15,278) (32,719) (47,083) (42,015)
Fixed assets--at cost... 146,250 193,650 329,686 422,964 545,653 576,806
Total assets............ 136,727 171,583 365,202 486,983 614,793 658,906
Long-term debt (includ-
ing capital lease
obligations)........... 13,884 49,679 29,689 200,462 368,464 434,903
Minority interest(3).... 3,247 6,201 12,661 2,903 4,409 4,847
Stockholders' equity and
partners' capital
(deficit).............. 81,799 77,371 209,141 179,152 125,348 106,656
</TABLE>
27
<PAGE>
- - --------
Footnotes to Selected Combined Financial Data
(1) Under the terms of various management services arrangements among TCGI and
its unconsolidated Local Market Partnerships and certain other affiliates,
TCGI provides operating and administrative support services to such
entities, for which it earns management fees. Upon consummation of the
Reorganization, these fees will no longer be reflected as revenues.
(2) Included in selling, general and administrative expenses are expenses
incurred for services provided to the Local Market Partnerships, in the
amounts of $1.4 million, $19.4 million, $29.6 million, $6.5 million and
$10.2 million for the years 1993, 1994 and 1995 and the three months ended
March 31, 1995 and March 31, 1996, respectively.
(3) Minority interest reflects Fidelity Communications Inc.'s equity interest
in Teleport Communications Boston for 1991, 1992, 1993 and 1994; a Cox
affiliate's interest in TCG San Diego for 1993 and 1994; and TCI and
Continental affiliates' interests in TCG St. Louis for 1994 and 1995 and
the three months ended March 31, 1995 and March 31, 1996.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization, minority interest and equity in losses of
unconsolidated affiliates. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding
the Company's operating results. Additionally, certain covenants contained
in the Indentures are based on EBITDA. EBITDA is not intended to represent
cash flows for the period. See the Combined Statements of Cash Flows
contained elsewhere in this Prospectus.
(5) The ratio of earnings to fixed charges is computed by dividing pretax
income from operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized and that portion of rental
expense the Company believes to be representative of interest. For the
years 1992, 1993, 1994 and 1995 and the three months ended March 31, 1995
and March 31, 1996, earnings were insufficient to cover fixed charges by
$4.4 million, $23.2 million, $31.0 million, $54.1 million, $11.4 million
and $18.6 million, respectively.
(6) The number of shares used in the computation of the pro forma net income
(loss) per share gives effect to the Reorganization and the use of
proceeds of the Offerings. See "Pro Forma Financial Information."
28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma condensed consolidated balance sheet and statements
of operations are presented for the Company as of March 31, 1996 and for the
year ended December 31, 1995 and the three months ended March 31, 1996. Such
pro forma results reflect the effects of the Reorganization and the
application of the proceeds of and other transactions related to the Offerings
as if they had occurred at the end of the period for the condensed
consolidated balance sheet and at the beginning of the period for the
condensed consolidated statement of operations. Such pro forma adjustments
have been applied to the condensed combined historical data.
The condensed consolidated pro forma financial information is provided for
informational purposes only and does not purport to represent what the
financial position and results of operations would actually have been if such
transactions had in fact occurred as described above and are not intended to
project the Company's financial position or results of operations for any
future period.
The condensed consolidated pro forma financial information gives effect to
pro forma adjustments which are described in the accompanying notes. The
condensed consolidated pro forma financial information and accompanying notes
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and TCGI's and TCG Partners'
historical combined financial statements and the notes thereto included
elsewhere in this Prospectus.
29
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1996
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED COMBINED LOCAL PRO FORMA FOR THE
TCGI AND MARKET REORGANIZATION FOR THE OFFERINGS REORGANIZATION
TCG PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2) REORGANIZATION ADJUSTMENTS(3) AND OFFERINGS
------------ --------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 16,805 $ 19,195 $ 36,000 $983,721 $1,019,721
Accounts receivable,
net.................. 33,568 12,128 $ (2,468) 43,228 -- 43,228
Prepaid expenses and
other current
assets............... 6,139 5,078 -- 11,217 -- 11,217
-------- -------- --------- ---------- -------- ----------
Total current as-
sets............... 56,512 36,401 (2,468) 90,445 983,721 1,074,166
-------- -------- --------- ---------- -------- ----------
Fixed assets--at cost... 576,806 423,278 -- 1,000,084 -- 1,000,084
Less accumulated de-
preciation and amor-
tization............. (126,273) (39,729) -- (166,002) -- (166,002)
-------- -------- --------- ---------- -------- ----------
Fixed assets--net..... 450,533 383,549 -- 834,082 -- 834,082
-------- -------- --------- ---------- -------- ----------
Investment in
unconsolidated
affiliates............. 118,985 -- (102,502) 16,483 -- 16,483
-------- -------- --------- ---------- -------- ----------
Goodwill................ 26,649 41,071 (13,561) 54,159 -- 54,159
-------- -------- --------- ---------- -------- ----------
Other assets............ 6,227 3,610 -- 9,837 -- 9,837
-------- -------- --------- ---------- -------- ----------
Total assets............ $658,906 $464,631 $(118,531) $1,005,006 $983,721 $1,988,727
======== ======== ========= ========== ======== ==========
LIABILITIES AND STOCK-
HOLDERS'
EQUITY AND PARTNERS'
CAPITAL (DEFICIT)
Current liabilities..... $ 98,527 $ 60,377 $ (6,883) $ 152,021 $ 4,000 $ 156,021
Non-current liabilities:
Revolving Credit
Agreement............ 155,000 -- -- 155,000 (155,000) --
Senior Notes due
2006................. -- -- -- -- 300,000 300,000
Senior Discount Notes
due 2007 (6)......... -- -- -- -- 625,000 625,000
Unamortized Notes
issuance costs....... -- -- -- -- (26,504) (26,504)
Subordinated debt to
Cable Stockholders... 269,000 (269,000) -- -- --
Capital lease obliga-
tions................ 10,903 32,913 -- 43,816 -- 43,816
TCI Note.............. -- -- 26,000 26,000 -- 26,000
Minority interest..... 4,847 -- 11,269 16,116 -- 16,116
Other................. 13,973 5,045 -- 19,018 -- 19,018
-------- -------- --------- ---------- -------- ----------
Total liabilities... 552,250 98,335 (238,614) 411,971 747,496 1,159,467
Stockholders' equity
and partners' capital
(deficit)............. 106,656 366,296 120,083 593,035 354,696 947,731
Treasury stock,
7,807,881 shares of
Class B Common Stock,
at cost............... -- -- -- -- (118,471) (118,471)
-------- -------- --------- ---------- -------- ----------
Total stockholders' eq-
uity and partners'
capital (deficit)..... 106,656 366,296 120,083 593,035 236,225 829,260
-------- -------- --------- ---------- -------- ----------
Total liabilities and
stockholders' equity
and partners' capital
(deficit).............. $658,906 $464,631 $(118,531) $1,005,006 $983,721 $1,988,727
======== ======== ========= ========== ======== ==========
</TABLE>
See notes to condensed consolidated pro forma financial information.
30
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
TCGI AND COMBINED LOCAL PRO FORMA FOR THE
TCG MARKET REORGANIZATION FOR THE OFFERINGS REORGANIZATION
PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2)(4) REORGANIZATION ADJUSTMENTS(3) AND OFFERINGS
-------- --------------- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications
services............. $134,652 $ 50,276 $ (76) $184,852 $184,852
Management and royalty
fees................. 31,517 -- (31,517) -- --
-------- -------- ------- ----------- --------- -----------
Total revenues...... 166,169 50,276 (31,593) 184,852 184,852
-------- -------- ------- ----------- --------- -----------
Expenses:
Operating............. 73,743 31,073 (3,727) 101,089 101,089
Selling, general and
administrative....... 69,850 41,195 (27,873) 83,172 83,172
Depreciation and amor-
tization............. 37,837 23,645 1,049 62,531 62,531
-------- -------- ------- ----------- --------- -----------
Total expenses...... 181,430 95,913 (30,551) 246,792 246,792
-------- -------- ------- ----------- --------- -----------
Operating loss.......... (15,261) (45,637) (1,042) (61,940) (61,940)
-------- -------- ------- ----------- --------- -----------
Interest income......... 4,067 2,393 (1,638) 4,822 4,822
Interest expense(6)..... (23,331) (5,622) 17,384 (11,569) $(100,790) (112,359)
-------- -------- ------- ----------- --------- -----------
(19,264) (3,229) 15,746 (6,747) (100,790) (107,537)
-------- -------- ------- ----------- --------- -----------
Loss before minority
interest, equity in
losses of
unconsolidated
affiliates and income
taxes.................. (34,525) (48,866) 14,704 (68,687) (100,790) (169,477)
Minority interest....... 663 -- 2,010 2,673 -- 2,673
Equity in losses of
unconsolidated
affiliates............. (19,541) -- 18,173 (1,368) -- (1,368)
-------- -------- ------- ----------- --------- -----------
Loss before taxes....... (53,403) (48,866) 34,887 (67,382) (100,790) (168,172)
Income tax provision.... (401) -- -- (401) -- (401)
-------- -------- ------- ----------- --------- -----------
Net loss................ $(53,804) $(48,866) $34,887 $(67,783) $(100,790) $(168,573)
======== ======== ======= =========== ========= ===========
Loss per share.......... $(0.48) $(1.20)
=========== ===========
Number of shares used
for
computation(5)......... 140,465,000 140,465,000
=========== ===========
</TABLE>
See notes to condensed consolidated pro forma financial information.
31
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
TCGI AND COMBINED LOCAL PRO FORMA FOR THE
TCG MARKET REORGANIZATION FOR THE OFFERINGS REORGANIZATION
PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2)(4) REORGANIZATION ADJUSTMENTS(3) AND OFFERINGS
-------- --------------- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications
services.............. $ 39,553 $ 18,594 $ (25) $58,122 $58,122
Management and royalty
fees.................. 10,882 -- (10,882) -- --
-------- -------- ------- ----------- -------- -----------
Total revenues........ 50,435 18,594 (10,907) 58,122 58,122
-------- -------- ------- ----------- -------- -----------
Expenses:
Operating.............. 22,520 11,148 (1,201) 32,467 32,467
Selling, general and
administrative........ 20,197 14,187 (9,707) 24,677 24,677
Depreciation and
amortization.......... 12,849 8,432 275 21,556 21,556
-------- -------- ------- ----------- -------- -----------
Total expenses........ 55,566 33,767 (10,633) 78,700 78,700
-------- -------- ------- ----------- -------- -----------
Operating loss.......... (5,131) (15,173) (274) (20,578) (20,578)
-------- -------- ------- ----------- -------- -----------
Interest income......... 1,190 534 (743) 981 981
Interest expense(6)..... (8,148) (1,818) 4,477 (5,489) $(23,051) (28,540)
-------- -------- ------- ----------- -------- -----------
(6,958) (1,284) 3,734 (4,508) (23,051) (27,559)
-------- -------- ------- ----------- -------- -----------
Loss before minority
interest, equity in
losses of
unconsolidated
affiliates and income
taxes.................. (12,089) (16,457) 3,460 (25,086) (23,051) 48,137
Minority interest....... 150 -- 705 855 -- 855
Equity in losses of
unconsolidated
affiliates............. (6,528) -- 6,196 (332) -- (332)
-------- -------- ------- ----------- -------- -----------
Loss before taxes....... (18,467) (16,457) 10,361 (24,563) (23,051) (47,614)
Income tax provision.... (225) -- -- (225) -- (225)
-------- -------- ------- ----------- -------- -----------
Net loss................ $(18,692) $(16,457) $10,361 $(24,788) $(23,051) $(47,839)
======== ======== ======= =========== ======== ===========
Loss per share.......... $(0.18) $(0.34)
=========== ===========
Number of shares used
for computation(5)..... 140,465,000 140,465,000
=========== ===========
</TABLE>
See notes to condensed consolidated pro forma financial information.
32
<PAGE>
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
(1) TCGI holds more than 50% of the partnership interests of TCG St. Louis
which, accordingly, is already consolidated with TCGI for financial
reporting and accounting purposes. Upon consummation of the
Reorganization, the remaining 13 Local Market Partnerships, which are
currently accounted for under the equity method, will become either wholly
owned or majority owned subsidiaries of TCG. As a result, the revenues,
expenses, assets and liabilities of these Local Market Partnerships will
be consolidated with those of TCGI for financial reporting and accounting
purposes.
(2) In connection with the Reorganization, the Cable Stockholders will
contribute to TCGI $269 million plus accrued interest ($16.4 million as of
March 31, 1996), which represents the amounts outstanding under the
Stockholder Loan Agreement (except that TCI will retain a subordinated
note of TCGI in the amount of $26.0 million, bearing interest at the rate
of 7.5% per annum, with principal and interest payable at maturity five
years from the date of consummation of the Reorganization) and the
Stockholder Loan Agreement will be terminated. Additionally, in
consideration of the transfers and contributions of their interests in TCG
Partners, the Local Market Partnerships and the amounts outstanding under
the Stockholder Loan Agreement, and for the recapitalization of their
shares of Common Stock, the Company will issue to Comcast, Continental,
Cox and TCI, collectively, 139,250,370 shares of Class B Common Stock.
Also in connection with the Reorganization, TCGI will acquire all of the
partnership interests in the Local Market Partnerships other than TCG San
Francisco and TCG Seattle. TCGI purchased the minority interest in TCG
South Florida of Hyperion Telecommunications, Inc. of Florida for $11.6
million, resulting in goodwill of $8.4 million being recorded.
Additionally, in consideration of the transfers of certain interests in TCG
San Francisco and TCG Detroit, TCGI will issue 1,215,125 shares of Class A
Common Stock, collectively, to various minority partners, resulting in
goodwill of $13.6 million being recorded. Excess credits, amounting to
$35.5 million, which represent the excess of the contributed capital, as
defined in the partnership agreements, over historical carrying value of
the net assets contributed by TCGI to various Local Market Partnerships,
have been eliminated.
Intercompany revenues, expenses, receivables and payables generated by
normal operations between and among the Local Market Partnerships and TCGI
were eliminated.
TCGI, as part of the Reorganization, would have incurred $1.0 million and
$0.3 million for the year ended December 31, 1995 and for the three months
ended March 31, 1996, respectively, of amortization expense, which relates
to the goodwill created upon the purchases of the minority interest of
Hyperion Telecommunications, Inc. of Florida in TCG South Florida and the
minority interests of various other partners in TCG San Francisco and TCG
Detroit.
Interest expense has been adjusted as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
DESCRIPTION 1995 1996
----------- ------------ ------------
(IN MILLIONS)
<S> <C> <C>
Elimination of interest expense on TCGI subor-
dinated debt owed to Cable Stockholders...... $17.8 $4.3
Increase of interest expense for the TCI
note......................................... (2.0) (.5)
Elimination of interest TCGI charged Local
Market Partnerships.......................... 1.6 .7
----- ----
Total adjustments........................... $17.4 $4.5
===== ====
</TABLE>
Adjustments were made to reflect the following remaining minority ownership
interests:
<TABLE>
<CAPTION>
LOCAL MARKET MINORITY
PARTNERSHIP OWNERSHIP INTERESTS
------------ -------------------
<C> <S>
22.9% Viacom Telecom, Inc.; 4.2% InterMedia
TCG San Francisco........... Partners
TCG Seattle................. 22.2% Viacom Telecom, Inc.
</TABLE>
33
<PAGE>
The net effect of the Reorganization and the Stock Offerings to pro forma
stockholders' equity is as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------
PRO FORMA
PRO FORMA FOR THE
FOR THE REORGANIZATION
REORGANIZATION AND STOCK OFFERINGS
-------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Class A Common Stock, $.01 par value;
450,000,000 shares authorized, 1,215,125
and 24,715,125 shares issued and
outstanding on a pro forma basis,
respectively............................. $ 12 $ 247
Class B Common Stock, $.01 par value;
300,000,000 shares authorized,
139,250,370 and 131,442,489 shares issued
and outstanding on a pro forma basis,
respectively............................. 1,393 1,314
Additional paid-in capital................ 768,591 1,123,131
Accumulated deficit....................... (176,961) (176,961)
--------- ----------
593,035 947,731
Treasury stock, 7,807,881 shares of Class
B Common Stock, at cost.................. -- (118,471)
--------- ----------
Total stockholders' equity.................. $ 593,035 $ 829,260
========= ==========
</TABLE>
33--1
<PAGE>
(3) Reflects the effects of the issuance of the Class A Common Stock and Notes
pursuant to the Offerings and the redemption of Class B Common Stock held
by Continental. Interest expense has been increased to reflect the
interest on the Senior Notes of 9 7/8% and accretion of the discount on
the Senior Discount Notes of 11 1/8% and decreased to reflect the
repayment of bank indebtedness of the Company under the Revolving Credit
Agreement. Interest expense adjustments related to the Offerings consist
of the following:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
(IN MILLIONS)
<S> <C> <C>
Interest expense on the Senior Notes and the Senior
Discount Notes.................................... $101.1 25.1$
Amortization of Notes issuance costs............... 2.7 .7
Reversal of interest expense on Revolving Credit
Agreement......................................... (3.0) (2.7)
------ -----
$100.8 25.1$
====== =====
</TABLE>
(4) No provision has been made for taxes, principally due to the use of net
operating losses.
(5) The number of shares used in the computation of the loss per share gives
effect to the Reorganization and the use of proceeds of the Offerings.
(6) In the event of a Special Redemption Event (as defined in the Indenture
for the Senior Discount Notes) with respect to certain regulatory
authorizations, certain amounts of the net proceeds of the Offerings may
be used to redeem a portion of the Senior Discount Notes. See "Risk
Factors--Limitation on Incurrence of Debt Under New York and New Jersey
Regulatory Authorizations." In the event of such redemption, which has not
been reflected in the pro forma financial statements, interest expense for
the year ended December 31, 1995 and for the three months ended March 31,
1996 would be reduced accordingly.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
TCGI's and TCG Partners' historical combined audited financial statements and
the notes thereto and the pro forma financial information included elsewhere
in this Prospectus.
OVERVIEW
TCG, the first and largest competitive local exchange carrier in the United
States, offers a wide range of local telecommunications services in major
metropolitan markets nationwide. The Company competes with ILECs as "The Other
Local Phone Company"SM by providing high quality, integrated local
telecommunications services, primarily over fiber optic digital networks, to
meet the voice, data and video transmission needs of its customers. The
Company's initial business in New York City was limited to dedicated private
line service and management of the telecommunications infrastructure at The
Teleport office park and satellite earth station complex located in Staten
Island, New York. TCG subsequently expanded, and continues to expand, its
service offerings as justified by market demand and as permitted by regulatory
reform. Concurrently with the expansion of its service offerings, TCG has
expanded geographically by developing local telecommunications networks in 48
metropolitan markets throughout the United States.
The costs associated with the initial installation and expansion of each
network, including development, installation, certain organizational costs and
early operating expenses, are significant and result in negative cash flow for
that market until an adequate customer base and revenue stream have been
established. In addition to capital expenditures, TCG begins to incur direct
operating costs upon commencement of the installation phase of a network for
such items as salaries and office rent. The exact amounts and timing of these
expenditures and costs are subject to a variety of factors which may vary
greatly by geographic market. As network installation progresses, TCG incurs
rights-of-way costs, increased sales and marketing expenses (including sales
commissions) and, in certain markets, franchise fees and taxes paid to local
governments based on revenue. Although the Company's revenues have increased
substantially, the Company's expenses associated with the expansion and
development of its local telecommunications networks has exceeded such
revenues. The Company expects its net losses to grow as it continues to expand
its networks. However, generally, after the network infrastructure is
established, the Company can add customers and revenues with less additional
expense. After a customer is added and the volume of such customer's
communications traffic handled by TCG grows, incremental revenues can be added
with minimal additional expense, providing significant contributions to
EBITDA.
As of December 31, 1995, the Company's combined financial statements for
TCGI and TCG Partners reflect the consolidated financial results of the
Company's wholly owned subsidiaries located in Baltimore, Boston, Cleveland,
Denver, Houston, Indianapolis, Milwaukee, metropolitan New York/New Jersey,
Portland (Oregon), Providence, Salt Lake City and Washington, D.C., and the
Local Market Partnership in St. Louis in which the Company owns 60.8% of the
partnership interests. Additionally, the combined financial statements for
TCGI and TCG Partners for 1995 reflect the Company's equity in losses of 13
unconsolidated Local Market Partnerships, as well as the Company's equity in
losses of Eastern TeleLogic Corporation, in which the Company retains an
approximate 25% indirect interest. Management fees and royalty fees charged to
the Local Market Partnerships by TCGI are recorded as revenue in the combined
financial statements and, under generally accepted accounting principles, may
not be netted against expenses.
To develop and operate the Local Market Partnerships, TCG Partners, a New
York general partnership, was created in December 1992. The establishment of
the Company's Local Market Partnerships resulted in the deconsolidation,
beginning in 1993, of certain entities which formerly were wholly owned. Under
generally accepted accounting principles, such unconsolidated entities are
accounted for under the equity method, and, accordingly, resulted in the Local
Market Partnerships' revenues, expenses, assets and liabilities being excluded
from the combined amounts. This accounting treatment may affect the
comparability of amounts from year to year.
35
<PAGE>
The pro forma financial information presented in this Prospectus reflects
the acquisition of all interests in 12 Local Market Partnerships as part of
the Reorganization, including TCG St. Louis, which is consolidated for
financial reporting and accounting purposes, and the acquisition of a majority
of the interests of the remaining two Local Market Partnerships (TCG Seattle
and TCG San Francisco). Adjustments relating to the Reorganization include
adjustments for consolidating the remaining 13 Local Market Partnerships that
were previously accounted for under the equity method of accounting.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Revenues
Total revenues increased to $50.4 million for the three months ended March
31, 1996 from $36.8 million for the three months ended March 31, 1995,
representing an increase of $13.6 million, or 37%. Telecommunications services
revenue increased to $39.6 million for the three months ended March 31, 1996
from $29.9 million for the three months ended March 31, 1995, an increase of
$9.7 million, or 32%. Revenue increases occurred in every revenue category,
most significantly in switched services. This increase in revenues is a result
of increased market penetration primarily in TCG's existing markets as well as
expansion into new markets.
Management and royalty fees from Local Market Partnerships increased to
$10.9 million for the three months ended March 31, 1996 from $6.9 million for
the three months ended March 31, 1995, an increase of $4.0 million, or 58%.
These fees are directly related to operating and administrative support
services provided by TCGI to unconsolidated Local Market Partnerships. The
increase in management fees revenue for the first quarter of 1996 compared to
the first quarter of 1995 is due to the continuing support provided to TCG's
unconsolidated Local Market Partnerships. Upon consummation of the
Reorganization, these fees will no longer be reflected as revenues. The impact
on revenues of not including the management fees received from the Company's
unconsolidated Local Market Partnerships would have been a decrease in total
revenues for the three months ended March 31, 1996 of $10.2 million, compared
to actual total revenues for such period.
On a pro forma basis, had telecommunications services revenue generated by
unconsolidated Local Market Partnerships been included for the combined
financial statements for TCGI and TCG Partners, total revenues would have
increased to $58.1 million for the three months ended March 31, 1996 from
$39.7 million for the three months ended March 31, 1995, reflecting an
increase of $18.4 million, or 46%. This revenue growth is a direct result of
increased market penetration of all telecommunications service offerings in
existing markets and the addition of new markets. On a pro forma basis,
annualized monthly recurring revenue increased to approximately $223.2 million
for March 1996 from $148.0 million for March 1995, an increase of $75.2
million, or 51%. Monthly recurring revenue represents monthly service charges
billable to telecommunications services customers for the month indicated, but
excluding non-recurring revenues for certain one-time services, such as
installation fees or equipment charges.
On a pro forma basis, switched revenue increased to $22.3 million for the
three months ended March 31, 1996 from $13.5 million for the three months
ended March 31, 1995, an increase of $8.8 million, or 65%. This increase is
primarily related to growth in switched services. Increased monthly line-
related revenue as well as sales growth in enhanced switched services products
to new customers have also contributed to overall switched services revenue
growth. On a pro forma basis, dedicated services revenue increased to $34.1
million for the three months ended March 31, 1996 from $25.2 million recorded
for the three months ended March 31, 1995, an increase of $8.9 million, or
35%.
Operating Expenses
Operating expenses increased to $22.5 million for the three months ended
March 31, 1996 from $17.1 million for the three months ended March 31, 1995,
an increase of $5.4 million, or 32%. This increase is directly related to the
costs associated with the expansion of TCG's networks throughout the country.
These expenses include costs associated specifically with network operations
including compensation costs for technical personnel, access, rights-of-way,
node, rent and maintenance expenses. On a pro forma basis, operating expenses
36
<PAGE>
increased to $32.5 million for the three months ended March 31, 1996 from
$22.7 million for the three months ended March 31, 1995, an increase of $9.8
million, or 43%. Operating expenses grew less than revenues, reflecting TCG's
operating leverage.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $20.2 million for
the three months ended March 31, 1996 from $16.1 million for the three months
ended March 31, 1995, an increase of $4.1 million, or 25%. This increase is
attributable to the costs required to maintain an infrastructure which
supports the continued expansion of the Company's networks, the introduction
of new services and the delivery of high levels of customer service. These
costs include compensation, occupancy, insurance, professional fees, and sales
and marketing expenses. On a pro forma basis, selling, general and
administrative expenses increased to $24.7 million for the three months ended
March 31, 1996 from $18.7 million recorded for the three months ended March
31, 1995, an increase of $6.0 million, or 32%.
EBITDA
EBITDA increased to $7.7 million for the three months ended March 31, 1996
from $3.6 million for the three months ended March 31, 1995, an increase of
$4.1 million, or 114%. This increase is primarily attributable to increases in
dedicated and switched services revenues as well as increased management fees
revenue from Local Market Partnerships for support services. Furthermore, TCG
has obtained increased efficiencies through greater automation and through
lower access costs. On a pro forma basis, EBITDA increased to $978,000 for the
three months ended March 31, 1996 from negative $1.7 million for the three
months ended March 31, 1995, an increase of $2.7 million. The Local Market
Partnerships, included in the pro forma financial data as a result of the
Reorganization, have negative EBITDA due to the start-up or rapid expansion of
the networks of such Local Market Partnerships.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $12.8 million for the
three months ended March 31, 1996 from $7.3 million for the three months ended
March 31, 1995, an increase of $5.5 million, or 75%. This increase is
primarily attributable to increased depreciation related to the expansion of
the local telecommunications networks throughout the country and to a change
in the estimated useful lives of certain electronic equipment, which was made
during 1995 in order to conform with industry standards. On a pro forma basis,
depreciation and amortization expense increased to $21.6 million for the three
months ended March 31, 1996 from $11.5 million for the three months ended
March 31, 1995, an increase of $10.1 million, or 88%.
Interest Income
Interest income increased to $1.2 million for the three months ended March
31, 1996 from $1.1 million for the three months ended March 31, 1995, an
increase of $0.1 million, or 9%.
Interest Expense
Interest expense increased to $8.1 million for the three months ended March
31, 1996 from $4.6 million for the three months ended March 31, 1995, an
increase of $3.5 million, or 76%. This resulted from borrowings under the
Revolving Credit Agreement and increased borrowings under the Stockholder Loan
Agreement, as well as increased capital lease obligations.
Equity in Loss of Unconsolidated Affiliates
Equity in loss of unconsolidated affiliates increased to $6.5 million for
the three months ended March 31, 1996 from $4.2 million for the three months
ended March 31, 1995, an increase of $2.3 million. This increase is directly
attributable to the development and operation of 13 Local Market Partnerships
and TCGI's equity share in the losses of ETC.
37
<PAGE>
Income Taxes
During the three months ended March 31, 1996 and March 31, 1995, TCGI
generated net operating losses and, accordingly, incurred a net tax benefit.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," such tax benefit was fully offset, each
quarter, by a valuation allowance. Each quarter's provision for income taxes,
which does not fluctuate substantially, resulted from state income taxes where
TCGI is required to file separate income tax returns.
TCG Partners is not subject to federal or state and local income taxes. The
distributive share of each partner in a Local Market Partnership of
partnership revenues, expenses and other items is computed on the basis of the
respective partner's capital interest in the partnership and is reported by
the partners in their respective federal or state and local income tax return.
Net Loss
The combined results of TCGI and TCG Partners reflected a net loss of $18.7
million for the three months ended March 31, 1996 compared to net loss of
$11.5 million for the three months ended March 31, 1995, an increase of $7.2
million, or 63%. This increase in net loss is attributable to the factors
discussed above. On a pro forma basis, the net loss increased to $47.8 million
for the three months ended March 31, 1996 from $11.1 million for the three
months ended March 31, 1995, an increase of $36.7 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Total revenues increased to $166.2 million for 1995 from $120.7 million for
1994, representing an increase of $45.5 million, or 38%. Telecommunications
services revenue increased to $134.7 million for 1995 from $100.0 million for
1994, an increase of $34.7 million, or 35%. Revenues increased in every
revenue category, most significantly in switched services. This increase
reflects increased sales of services in existing and new markets and growth of
TCG's customer base. Management and royalty fees from Local Market
Partnerships increased to $31.5 million for 1995, an increase of $10.8
million, or 52%, from $20.7 million for 1994. These fees are directly related
to operating and administrative support services provided by TCGI to
unconsolidated Local Market Partnerships. The increase in management fees
revenue in 1995 over 1994 is due to the increased support that was provided to
these unconsolidated Local Market Partnerships, specifically in developing
existing dedicated services businesses as well as in building new switched
businesses. Upon consummation of the Reorganization, these fees will no longer
be reflected as revenues. The impact on revenues of not including the
management fees received from the Company's unconsolidated Local Market
Partnerships would have been a decrease in total revenues for the year ended
December 31, 1995 of $29.6 million, compared to actual revenues for such
period.
On a pro forma basis, had telecommunication services revenue generated by
unconsolidated Local Market Partnerships been included in the combined
financial statements of TCGI and TCG Partners, total revenues would have
increased to $184.9 million for 1995 from $122.2 million for 1994, an increase
of $62.7 million, or 51%. This growth in revenues is a direct result of
increased market penetration of all telecommunications service offerings in
existing markets and the addition of new markets. On a pro forma basis,
annualized monthly recurring revenue increased to approximately $211.1 million
for December 1995 from $135.6 million for December 1994, an increase of $75.5
million, or 56%. Monthly recurring revenue represents monthly service charges
billable to telecommunications services customers for the month indicated, but
excluding non-recurring revenues for certain one-time services, such as
installation fees or equipment charges.
On a pro forma basis, switched revenue increased to $63.9 million for 1995
from $40.2 million for 1994, an increase of $23.7 million, or 59%. This
increase is due primarily to increases in switched, local and toll services
and IXC access usage volumes. Also contributing to this increase were
increased sales of additional enhanced switched service products to customers
in existing and new markets. On a pro forma basis, dedicated services revenue
increased to $116.5 million for 1995 from $78.8 million for 1994, an increase
of $37.7 million, or 48%.
38
<PAGE>
Operating Expenses
Operating expenses increased to $73.7 million for 1995 from $60.3 million
for 1994, an increase of $13.4 million, or 22%. This increase is primarily
attributable to costs associated with the expansion of networks throughout the
country, including technical personnel costs and access, rights-of-way, node,
rent and maintenance expenses. The increase in operating expenses is also
attributable to the access and maintenance expenses associated with the growth
of switched services in existing markets and the expansion into new markets.
On a pro forma basis, operating expenses increased to $101.1 million for 1995
from $74.0 million for 1994, an increase of $27.1 million, or 37%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $69.9 million for
1995 from $56.3 million for 1994, an increase of $13.6 million, or 24%. This
increase is a result of the continued expansion of network infrastructure to
support continued expansion of the Company's networks, including costs
associated with servicing the increased number of both dedicated and switched
services customers. These costs include expenses related to compensation,
occupancy, insurance and professional fees. On a pro forma basis, selling,
general and administrative expenses increased to $83.2 million for 1995 from
$62.3 million for 1994, an increase of $20.9 million, or 34%.
EBITDA
EBITDA increased to $22.6 million for 1995 from $4.1 million for 1994, an
increase of $18.5 million. This increase is primarily attributable to
increases in dedicated and switched services revenues as well as increased
management fees revenue from the Local Market Partnerships for support
services. Additionally, TCG has reduced its operating and administrative
expenses, as a percentage of revenues, primarily by obtaining lower unit
access costs through negotiation of, and participation in regulatory
proceedings relating to, various interconnection and reciprocal agreements
with ILECs across the country, and by obtaining greater efficiencies through
automation. On a pro forma basis, EBITDA increased to $591,000 for 1995 from
negative $14.0 million for 1994, an increase of $14.6 million. The Local
Market Partnerships, included in the pro forma financial data as a result of
the Reorganization, have negative EBITDA because of the rapid expansion of the
networks of such Local Market Partnerships.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $37.8 million for 1995
from $19.9 million for 1994, an increase of $17.9 million, or 90%. This
increase is primarily attributable to increased depreciation associated with
the expansion of the local telecommunications networks throughout the country
and a change in estimated useful lives of certain equipment which was made
during 1995 in order to conform with industry standards. On a pro forma basis,
depreciation and amortization expense increased to $62.5 million for 1995 from
$29.4 million for 1994, an increase of $33.1 million, or 113%.
Interest Income
Interest income increased to $4.1 million for 1995 from $1.7 million in
1994, an increase of $2.4 million, or 141%, due to a greater average balance
in cash and cash equivalents.
Interest Expense
Interest expense increased to $23.3 million for 1995 from $5.1 million in
1994, an increase of $18.2 million, or 357%. This increase is primarily
attributable to the interest due Cable Stockholders under the Stockholder Loan
Agreement as well as interest under the Revolving Credit Agreement which was
entered into in May 1995. Also contributing to the increased interest expense
is an increase of $15.2 million in capital lease obligations under
arrangements entered into with various Cable Stockholders.
39
<PAGE>
Equity in Loss of Unconsolidated Affiliates
Equity in loss of unconsolidated affiliates increased to $19.5 million for
1995 from $11.8 million for 1994, an increase of $7.7 million. This increase
is directly attributable to the development and operation of twelve
unconsolidated Local Market Partnerships for 1993 and 1994 as well as the
recording of TCG's equity in losses of TCG San Diego during a portion of 1994
and TCGI's equity share in the losses of ETC.
Income Taxes
In 1995 and 1994, TCGI generated net operating losses and, accordingly,
incurred a net tax benefit. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," such tax
benefit was fully offset, each year, by a valuation allowance. Both the 1995
and 1994 provisions for income taxes, which do not fluctuate substantially
year to year, resulted from state income taxes where TCGI is required to file
separate state income tax returns.
As of December 31, 1995, TCGI had operating loss carryforwards for tax
purposes of approximately $105.3 million, expiring principally in 2009 through
2011.
TCG Partners is not subject to federal, state or local income taxes. The
distributive share of each partner in a Local Market Partnership of
partnership revenues, expenses and other items is computed on the basis of the
respective partner's capital interest in the partnership and is reported by
the partners in their respective federal or state income tax returns.
Net Loss
The combined results of TCGI and TCG Partners reflected a net loss of $53.8
million for 1995, from a net loss of $30.0 million for 1994, an increase of
$23.8 million, or 79%. This increase in net loss is attributable to the
factors discussed above. On a pro forma basis, the net loss increased to
$168.6 million for 1995 from $30.1 million for 1994, an increase of $138.5
million.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues
Total revenues increased to $120.7 million for 1994 from $83.9 million for
1993, an increase of $36.8 million, or 44%. The increase in revenue for 1994
is primarily attributable to the increased penetration of existing markets and
customers, initiation of new market operations and management fees earned from
the newly established Local Market Partnerships for support services rendered.
Growth of the switched services revenue base also contributed to the overall
increase in telecommunications revenues for 1994 over 1993.
Management and royalty fees from Local Market Partnerships increased to
$20.7 million for 1994 from $1.6 million for 1993, an increase of $19.1
million. These fees are directly related to operating and administrative
services provided by TCGI to unconsolidated Local Market Partnerships. In
November 1993, six Local Market Partnerships were formed among TCGI and TCG
Partners and various cable operators. Prior to November 1993, these
unconsolidated affiliates had been wholly owned by TCGI and TCG Partners and
revenues recorded by these affiliates were included in operating revenue.
These fees will be eliminated in consolidation after the Reorganization. The
impact on revenues of not including the management fees received from the
Company's unconsolidated Local Market Partnerships would have been a decrease
in total revenues for the year ended December 31, 1994 of $19.4 million,
compared to actual revenues for such period.
Operating Expenses
Operating expenses increased to $60.3 million for 1994 from $48.2 million
for 1993, an increase of $12.1 million, or 25%. This increase is primarily
attributable to the additional operational costs incurred to support increased
dedicated and switched sales volume and network expansion, including off-
network access services purchased from ILECs.
40
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $56.3 million for
1994 from $40.3 million for 1993, an increase of $16.0 million, or 40%. This
increase resulted from the change to equity accounting beginning in November
1993 and which was continued through 1994, upon the development and operation
of the various Local Market Partnerships as well as overall increases in
administrative expenses for wholly owned and majority owned subsidiaries and
partnerships.
EBITDA
EBITDA increased to $4.1 million for 1994, from negative EBITDA of $4.6
million for 1993, an increase of $8.7 million. This increase is partly
attributable to increased telecommunications services revenues generated by
consolidated subsidiaries and partnerships, as well as the recording of equity
in losses of certain Local Market Partnerships for 1994, compared to the
recording of net losses for these same networks for 1993.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $19.9 million for 1994
from $16.2 million for 1993, an increase of $3.7 million, or 23%. The
expansion of the New York, Boston and Houston networks accounts for a
substantial portion of this increase. Also contributing to this increase is
the amortization of goodwill associated with the 1994 acquisition of the
remaining interest in Teleport Communications Boston.
Interest Income
Interest income increased to $1.7 million for 1994 from $1.1 million in
1993, an increase of $0.6 million, or 55%, due to a greater average balance in
cash and cash equivalents.
Interest Expense
Interest expense increased to $5.1 million for 1994 from $1.4 million in
1993, an increase of $3.7 million, or 264%. This increase is directly
attributable to the indebtedness incurred pursuant to the Stockholder Loan
Agreement in 1994 which was required in order to finance TCG's expansion
effort.
Equity in Loss of Unconsolidated Affiliates
Equity in loss of unconsolidated affiliates increased to $11.8 million for
1994 from $2.1 million for 1993, an increase of $9.7 million. This increase is
directly attributable to the formation of seven unconsolidated Local Market
Partnerships in 1993 and the formation of five unconsolidated Local Market
Partnerships in 1994.
Income Taxes
In 1994 and 1993, TCGI generated net operating losses and, accordingly,
incurred a net tax benefit. In accordance with SFAS No. 109, "Accounting for
Income Taxes," such benefit was partially offset in 1993 and fully offset in
1994 by a valuation allowance. The 1994 provision for income taxes resulted
from state income taxes where subsidiaries of TCG are required to file
separate state income tax returns.
Net Loss
The combined results of TCGI and TCG Partners reflected a net loss of $30.0
million for 1994, from a net loss of $18.3 million for 1993, an increase of
$11.7 million, or 64%. This increase in net loss is attributable to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, TCGI and TCG Partners had total combined assets of
$658.9 million, an increase of $522.2 million from $136.7 million as of
December 31, 1991. An additional $346.1 million of assets were accumulated
through the Local Market Partnerships with various cable television operators.
This growth has been funded by the Cable Stockholders and through $120.0
million of equity contributions to TCG, $30.0 million of
41
<PAGE>
equity contributions to TCG Partners and aggregate principal of $269.0 million
(plus accrued interest which, as of March 31, 1996, was $16.4 million)
borrowed by TCG under the Stockholder Loan Agreement. In addition, such growth
has been funded, since May 1995, through $155.0 million under the Revolving
Credit Agreement and $296.5 million of direct investment in the Local Market
Partnerships by the Cable Stockholders and other cable television operators as
of March 31, 1996. In the aggregate, after giving pro forma effect to the
Reorganization, the Cable Stockholders had invested approximately $770 million
in the Company, which includes approximately $75 million of paid-in capital at
the time of their original investment.
The Company has historically raised a significant amount of equity capital
through the creation of Local Market Partnerships with the Cable Stockholders
and other cable television operators. Through the Local Market Partnerships,
the participating cable television operators were encouraged to combine their
resources to build a local telecommunications infrastructure under the
direction of the Company. Such local market focus enabled the Company to
efficiently establish and expand its networks.
The Company has incurred significant net operating losses resulting from the
development and operation of new networks. TCG expects that such losses will
continue to increase as TCG emphasizes the development, construction and
expansion of its networks and builds its customer base and that while cash
provided by operations may be sufficient to fund modest incremental growth it
will not be sufficient to fund the extensive expansion and development of
networks as currently planned.
Net cash provided by financing activities for the three months ended March
31, 1996 was $67.2 million and for the year ended December 31, 1995 was $157.7
million comprised primarily of borrowings under the Revolving Credit Agreement
and the Stockholder Loan Agreement. Net cash provided by financing activities
for 1994 and 1993 was $171.6 million and $129.8 million, respectively. Net
cash provided by (used in) operating activities was $(1.7) million for the
three months ended March 31, 1996 and $36.1 million, $87.8 million and $45.4
million for 1995, 1994 and 1993, respectively. Net cash used for investing
activities was $60.6 million for the three months ended March 31, 1996 and
$208.0 million, $265.0 million and $147.1 million for 1995, 1994 and 1993,
respectively. As of March 31, 1996, cash and cash equivalents were $16.8
million and undrawn availability under the Revolving Credit Agreement was
$74.6 million.
TCGI and TCG Partners made capital expenditures of $31.2 million for the
three months ended March 31, 1996 and $154.8 million, $143.3 million and
$155.2 million in 1995, 1994 and 1993, respectively. Additional capital
expenditures made by the Local Market Partnerships aggregated $22.9 million
for the three months ended March 31, 1996 and $126.8 million, $131.1 million
and $32.6 million for 1995, 1994 and 1993, respectively. The Company
anticipates that capital expenditures will be approximately $400 million to
$425 million in the aggregate in 1996 and $450 million to $475 million in the
aggregate in 1997, primarily for the expansion, development and construction
of its networks, the acquisition and deployment of switches and expansion of
operating support systems. Actual capital expenditures will depend on numerous
factors beyond TCG's control or ability to predict, including the nature of
future expansion and acquisition opportunities, economic conditions, customer
demand, competition, regulatory developments and the availability of funding.
In May 1995, TCGI entered into a $250 million Revolving Credit Agreement. In
December 1995, the obligations under the Revolving Credit Agreement were
assumed by TCNY, a wholly owned subsidiary of TCGI. TCNY is permitted to loan
funds drawn under the Revolving Credit Agreement to TCGI and TCG Partners. The
Revolving Credit Agreement is secured by the pledge of the common stock and
partnership interests of the subsidiaries of TCNY. Interest on borrowings
under the Revolving Credit Agreement is at varying rates. The Revolving Credit
Agreement matures on February 27, 2004 and is subject to a quarterly reduction
of commitment commencing January 1, 1999. The availability of credit under the
Revolving Credit Agreement is subject to the maintenance of certain financial
ratios. The Company expects to repay all or a portion of the credit facility
under the Revolving Credit Agreement with the proceeds of the Offerings and to
utilize the credit facility under the Revolving Credit Agreement, as
necessary, to fund short-term financing requirements from time to time, as
well as having the availability under the Revolving Credit Agreement to fund
the continued growth of the New York network and for general corporate
purposes. Amounts borrowed by TCNY under the Revolving Credit Agreement may be
lent to TCGI for general corporate purposes, so long as such indebtedness is
evidenced by
42
<PAGE>
promissory notes executed by TCGI in favor of TCNY, and such promissory notes
are pledged to the lenders under the Revolving Credit Agreement. See
"Description of Certain Indebtedness."
The Company believes that the net proceeds from the Offerings and the amount
of credit available under the Revolving Credit Agreement will be adequate for
its 1996 and 1997 funding requirements. However, the Company's financing
strategy is to remain financially flexible to market opportunities which are
consistent with the Company's long-range growth plans.
The incurrence of long-term indebtedness by TCGI in an amount in excess of $1
billion is subject to certain state regulatory approvals in New York and New
Jersey. The Company has filed petitions for orders from such state regulatory
authorities that will permit TCGI to expand TCGI's borrowing authority to $2
billion. The Company expects that the proceeds of the Offerings and internally
generated cash flow will be sufficient to meet its capital needs until such
state regulatory approvals have been obtained. Senior Discount Notes
aggregating up to $253 million in accreted value will be subject to mandatory
redemption at a redemption price of 101% of the accreted value thereof as of
the redemption date in the event that such state regulatory approvals are not
obtained within 270 days of the issuance date of the Notes or the petitions for
such approvals are denied. In addition to the $1 billion long-term debt
borrowing authorization at the TCGI level, both the New York and New Jersey
regulatory authorities permit TCNY to borrow an additional $1 billion;
provided, however, that the New York regulatory authority has interpreted its
authorization as permitting TCGI and TCNY to incur long-term debt not to exceed
$1.75 billion in the aggregate. See "Risk Factors--Limitation on Incurrence of
Debt Under New York and New Jersey Regulatory Authorizations" and "Description
of Notes--Terms of Senior Discount Notes--Special Redemption."
The Company from time to time evaluates acquisitions and investments in light
of the Company's long range plans. The Company may have future opportunities
with certain of its Cable Stockholders to invest in additional markets as a
minority partner or shareholder as well as opportunities as a managing partner
or controlling shareholder in new or existing telecommunications ventures which
are consistent with the Company's business plans. See "Certain Relationships
and Related Transactions" for a discussion of such opportunities, including
certain contractual arrangements relating to a potential acquisition by the
Company of interests in Eastern TeleLogic Corporation. The Company expects to
continue to build on its existing relationships with cable television providers
and other strategic customers, suppliers and telecommunications carriers. Such
acquisitions, investments and/or strategic arrangements, if available, could
use a material portion of the Company's financial resources following the
Offerings and may accelerate the need for raising additional capital in the
future.
Earnings before fixed charges were insufficient to cover fixed charges for
the three months ended March 31, 1996 and 1995 by $18.6 million and $11.4
million respectively, and for 1995, 1994 and 1993 by $54.1 million, $31.0
million and $23.2 million, respectively. On a pro forma basis, the Company's
earnings would have been insufficient to cover fixed charges for the three
months ended March 31, 1996 by $48.5 million and by $170.8 million for 1995.
For a period of time, the Company may have excess liquidity as a result of
the Offerings. The Company expects to invest such excess funds in short-term,
interest bearing investment-grade securities until such funds are used to fund
the capital investments and operating needs of the Company's business.
EFFECTS OF NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement is effective for fiscal years
beginning after December 15, 1995. Management has evaluated the effect on its
financial condition and results of operations from the adoption of this
statement and does not believe an impairment of the long-lived assets has
occurred.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and
43
<PAGE>
adoption of the measurement and recognition provisions for non-employee
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for the issuance of stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are encouraged, but not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the method
chosen to measure and recognize compensation for employee stock-based
arrangements. TCG has elected to continue to account for such transactions
under APB No. 25. TCG has determined that if SFAS No. 123 had been adopted, its
impact on the combined statement of operations for the year ended December 31,
1995 would be insignificant.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's operations.
43--1
<PAGE>
THE LOCAL TELECOMMUNICATIONS SERVICES INDUSTRY
INDUSTRY HISTORY
On January 1, 1984, AT&T (then referred to as the "Bell System") divested
itself of the Bell Operating Companies (the "BOCs"), which were transferred to
seven holding companies (the Regional Bell Operating Companies). Following
this divestiture (the "Divestiture"), each BOC continued to conduct local
telephone and other telecommunications business in geographically defined
areas, referred to as "Local Access and Transport Areas" or "LATAs".
Prior to the Divestiture, the BOCs and "independent" local exchange
telephone companies not affiliated with the Bell System had government-
regulated monopolies for most local telephone services. The Divestiture
encouraged the growth of competition for long distance services and terminal
equipment by prohibiting the BOCs from entering these markets, but the BOCs
retained monopoly control over the market for local telephone services.
Competition in the long distance market accelerated dramatically and, by the
end of 1995, AT&T's long distance competitors had captured approximately 40%
of the interstate long distance market.
The Divestiture did not directly provide for competition in local markets.
After the Divestiture, however, a number of factors served to promote
competition in some local telecommunications market segments, including (i)
increasing customer desire for an alternative to the ILEC monopoly,
particularly among business customers, prompted in part by competition in the
long distance market, (ii) technological advances in the transmission of data
and video requiring greater capacity and reliability levels than copper-based
ILEC networks were able to accommodate, (iii) a monopoly position and rate of
return-based pricing structure which provided little incentive for the ILECs
to upgrade their networks or meet specialized customer needs, (iv) the
development of fiber optics and digital electronic technology, which combined
the ability to economically build a high-capacity digital network with the
ability to transmit voice, data and video signals at high speeds and (v) the
significant "access charges" that long distance carriers were required to pay
to the ILECs to originate and terminate long distance telephone calls on the
ILECs' networks.
The first competitors in the local market were designated as "competitive
access providers" or "CAPs" by the FCC because they provided special access
services (e.g., dedicated lines for local access links to long distance
networks). With the establishment of its New York City network in 1985, TCG
was the first CAP to offer a competitive service in a local market. Initially,
CAPs provided special access (dedicated access lines) by installing fiber
optic facilities connecting long distance carriers' "points of presence" (or
"POPs") within a metropolitan area and, in some cases, connecting end users
(primarily large businesses) to long distance carriers' POPs. CAPs also
provided private line services connecting multiple locations of a single end
user within a local market area with dedicated fiber optic lines. CAPs such as
TCG used the technological advantage and substantial capacity and economies of
scale inherent in fiber optic technology to offer customers service that
initially was generally less expensive and of higher quality than could be
obtained from the ILECs, due in part to the ILECs' more antiquated copper-
based facilities and higher overhead costs. In addition, CAPs generally
offered shorter installation and repair intervals and improved reliability in
comparison to the ILECs. In recent years, the ILECs steadily have been
increasing the amount of fiber used in their networks, thereby decreasing the
competitive advantage held by the CAPs in the special access and private line
markets.
As CAPs proliferated during the latter part of the 1980's, federal and some
state regulators issued rulings which permitted and sometimes encouraged local
competition and opened some local market segments to new entrants. These
rulings allowed CAPs to offer a number of new services, including, in certain
states, certain switched services (but not basic local exchange telephone
service). Beginning in 1994, a few states permitted CAPs to become
"competitive local exchange carriers" or "CLECs", and thus to begin providing
local exchange services, primarily to business customers. By the time the 1996
Act was adopted, approximately half the states had removed legal prohibitions
on the provision of competitive local exchange service. Legal and regulatory
restrictions in the remaining states will be significantly reduced by the 1996
Act.
While many companies have been organized over the last decade to provide CAP
or CLEC services, only a few have grown to significant size. These large CAPs
and CLECs operate in multiple local markets and have
44
<PAGE>
acquired a number of smaller CAPs. Recently, new CAPs or CLECs have been
created, primarily to serve small markets.
THE LOCAL TELECOMMUNICATIONS SERVICES MARKET
The national market for telecommunications services can be divided into two
basic segments: local services and long distance services. The Company
estimates, based on FCC data, that local telecommunications services accounted
for revenues of approximately $96 billion in 1995 and long distance services
generated revenues of approximately $70 billion. Revenues for both local and
long distance services include revenues received for local access charges
assessed by LECs to IXCs, which represent approximately 40% of long distance
revenues.
The various local telecommunications services are: (i) local services,
estimated to be approximately $55 billion, which generally include basic local
exchange services, (ii) dedicated services, estimated to be approximately $5
billion, which include private line and special access services, (iii) IXC
switched access services, estimated to be approximately $22 billion, which
consist of charges received by local exchange carriers from long distance
carriers and (iv) toll services, estimated to be approximately $13 billion,
which include intraLATA long distance calls. The Company estimates that the
local switched services market for business customers is approximately $55
billion, or approximately 62% of the aggregate of local services revenue, IXC
switched access services revenue and toll services revenue. The following
chart illustrates the estimated revenues derived in 1995 from each of these
service categories:
1995 ESTIMATED LOCAL TELECOMMUNICATIONS REVENUE (*)
[GRAPH APPEARS HERE]
- - ---------------
(*) Company estimates based on 1988-1994 FCC statistics.
CAPs initially entered the local telecommunications market by providing
dedicated services (special access or private line) only to customers directly
connected to the CAP network. A series of state public utility commission
decisions beginning in 1989 and FCC decisions beginning in 1991 requiring
expanded interconnection (or "colocation") permitted CAPs to interconnect
their networks with the largest ILECs' networks. This expanded interconnection
gave CAPs the option to access customers by either leasing facilities from an
ILEC through a colocation arrangement or installing extensions to the CAP's
own network, depending on the relative cost and other factors. The FCC
initiated an investigation of the ILECs' rates for colocation, which
investigation is still pending, and until that investigation has been
concluded there can be no assurances that expanded interconnection will have a
material effect on the Company's results of operations. If the FCC's
45
<PAGE>
investigation concludes favorably to the Company, TCG anticipates that these
expanded interconnection opportunities will create new business and service
opportunities for the Company and enhance the continued expansion of its
networks and customer base. Conversely, the FCC has stated that colocation
customers might be required to make limited additional payments to certain
ILECs in the event the FCC finds their originally proposed colocation rates
were appropriate. The Company does not believe that there would be any
significant potential financial impact on the Company from such a requirement
and, accordingly, the Company has not accrued for the possibility of such
retroactive payments. Additionally, future rates for colocation will be
established pursuant to the interconnection negotiations under the 1996 Act.
See "Business--Government Regulation."
In addition to the FCC's actions and proposals, an increasing number of
states have encouraged competition in various aspects of the intrastate local
telecommunications market. The intrastate local market consists of intrastate
access services, basic local exchange services and local private line special
access services. While the majority of state initiatives were originally
limited to intrastate private line and special access services, many states
are in the process of changing their statutes or regulations to permit
competition for switched services, including basic local exchange telephone
services. Those states that have not made these changes will be required to do
so under the 1996 Act. Entry into the market for switched local
telecommunications services expands significantly the size of the market that
can be served by CLECs such as TCG. As the Company captures customers' local
exchange business, it will also increase its revenues from switched access
charges collected from IXCs to reach these end users.
The 1996 Act further increases the opportunities available to CLECs by
requiring the ILECs to offer various network elements such as switching,
transport and loops (i.e., the facilities connecting a customer's premises and
a LEC central office) on an unbundled basis. ILECs also are required to offer
their retail services at wholesale rates for resale by other companies. In
conjunction with the removal of certain legal barriers to facilities-based
competitive local services, these unbundling and resale requirements will
provide the Company with the technical capability to provide any local
telephone service to any customer, regardless of where the customer is located
relative to the Company's network. As with expanded interconnection, however,
the pricing of these unbundled network elements and services will determine
whether service can be provided by TCG to off-network customers at rates that
are both competitive and profitable. In addition, competitors other than TCG,
including the major IXCs, will be able to take advantage of the unbundling and
resale requirements imposed on the ILECs under the 1996 Act, thereby
facilitating entry of competitors that have not invested in local distribution
facilities. See "Risk Factors--Dependence Upon Interconnection with ILECs;
Substantial Competition."
46
<PAGE>
BUSINESS
THE COMPANY
Teleport Communications Group Inc., the first and largest competitive local
exchange carrier in the United States, offers a wide range of local
telecommunications services in major metropolitan markets nationwide. The
Company competes with incumbent local exchange carriers as "The Other Local
Phone Company"SM by providing high quality, integrated local
telecommunications services, primarily over fiber optic digital networks, to
meet the voice, data, and video transmission needs of its customers. TCG's
customers are principally telecommunications-intensive businesses, long
distance carriers and resellers, and wireless communications companies. TCG
offers these customers technologically advanced local telecommunications
services, as well as superior customer service, flexible pricing and vendor
and route diversity.
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. The Company currently operates high capacity
state-of-the-art digital networks in 48 metropolitan markets, including 17 of
the 20 largest metropolitan areas. The Company operates networks in
metropolitan New York/New Jersey, Los Angeles, Chicago, San Francisco, Boston,
Detroit, Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft. Lauderdale,
Seattle, San Diego, St. Louis, Pittsburgh, Phoenix, Denver, Milwaukee,
Indianapolis, Hartford and Omaha, and is developing networks in Cleveland,
Portland (Oregon), Salt Lake City, Nashville, Chattanooga, Knoxville and
Birmingham. As of March 31, 1996, the Company's networks spanned over 5,500
route miles, contained over 257,000 fiber miles and served approximately 5,300
buildings.
TCG has grown rapidly over the last several years, expanding its existing
networks, developing new networks and increasing its service offerings. On a
pro forma basis, after giving effect to the Reorganization, the Company's
revenues were approximately $184.9 million for 1995, substantially all of
which were derived from the provision of local telecommunications services.
Total revenues from the local telecommunications market in the United States
were estimated to have been approximately $96 billion in 1995. In the past,
competitive access providers, including the Company, were limited to serving
only the dedicated services portion of this market, which was estimated to
have been approximately $5 billion in 1995, whereas the local switched
services portion of this market for business customers was estimated to have
been approximately $55 billion. The Company has expanded into the switched
services market in a number of states over the last five years by constructing
switched networks and obtaining the necessary regulatory authorizations and
interconnection arrangements. With the passage of the 1996 Act, the Company
believes that it is well positioned to address a significantly larger portion
of the local telecommunications market and to improve its operating margins in
the switched and dedicated services markets by expanding its networks,
installing additional high capacity digital switches and offering new products
and services.
TCG has benefited substantially from its relationships with the Cable
Stockholders, which are among the largest cable television companies in the
United States. Through such relationships, the Company has been able to
utilize rights-of-way, obtain fiber optic facilities and share the cost of
building new fiber optic networks, thereby allowing the Company to achieve
significant economies of scale and scope through capital efficiencies in
extending its existing networks in a rapid, efficient and cost-effective
manner. As of March 31, 1996, after giving pro forma effect to the
Reorganization, the Cable Stockholders had invested approximately $770 million
in the Company. See "The Reorganization."
The Company believes that it has several advantages that enable it to
compete successfully in the new competitive local telecommunications
marketplace, including (i) extensive, technologically advanced networks
located in major metropolitan markets nationwide, (ii) strategic relationships
with cable television operators, (iii) state-of-the-art information systems
and (iv) an experienced management team with significant operational,
technical, financial and regulatory expertise in the local telecommunications
industry.
47
<PAGE>
BUSINESS STRATEGY
As a premier competitive local telecommunications carrier, the key elements
of the Company's business strategy are to:
. PROVIDE A WIDE RANGE OF LOCAL TELECOMMUNICATIONS SERVICES. The Company
provides a broad array of local telecommunications services to meet the
voice, data and video transmission needs of its customers, including basic
local exchange telephone services, enhanced switched services, dedicated
services, high speed switched data services and video channel transmission
services. In 1995, approximately 36% of the Company's revenues were
generated from switched services. The Company expects a growing portion of
its revenues to be derived from basic local exchange telephone services,
enhanced switched services and high speed switched data services as it
deploys digital switches in all of its markets. As of March 31, 1996, the
Company had 21 digital telephone switches and 27 ATM switches in operation.
On a pro forma basis, after giving effect to the Reorganization, the
Company's revenues from switched services, which include local dial tone
and local calling, grew by approximately 59% to $63.9 million in 1995 from
$40.2 million in 1994.
. FOCUS ON BUSINESS CUSTOMERS AND TELECOMMUNICATIONS CARRIERS. The Company's
networks serve large metropolitan markets, which have significant
concentrations of telecommunications-intensive businesses. The Company's
customers in these markets include financial services firms, media and
health care companies, long distance carriers and resellers, Internet
service providers, wireless communications companies and an increasing
number of small and medium-sized business customers. The national scope of
the Company's local networks allows it to offer high volume business
customers and long distance carriers uniformity of services, pricing,
quality standards and customer service. In addition, the Company has
arrangements with other telecommunications providers, including shared
tenant services providers, cable television companies and long distance
carriers, to resell TCG's services. Currently, certain major long distance
carriers are conducting trials of the resale of TCG's local exchange
services under such long distance carriers' brand names. In 1995,
approximately 62% of the Company's 1995 revenues were generated from
business customers and approximately 38% were generated from long distance
carrier customers.
. EXPAND GEOGRAPHIC REACH AND DENSITY OF EXISTING NETWORKS AND ENTER NEW
MARKETS. The Company plans to increase the geographic reach and density of
its existing networks by deploying additional fiber optic rings and
connecting additional customers to its networks. The Company anticipates
that making significant capital expenditures over the next several years to
expand its existing networks and to develop new networks will lead to
significant increases in revenue opportunities. As a facilities-based
carrier, the Company utilizes a variety of means to expand geographically,
including rights-of-way, easements, poles, ducts and conduits that are
available from cable television operators, incumbent local exchange
carriers, railways and subways, electric, gas and water utilities and
municipal, state and federal street and highway authorities. In the course
of expanding its networks, the Company also has the ability to reach TCG
customers by reselling a portion of the facilities of incumbent local
exchange carriers. However, the Company believes that the extensive
geographic reach and density of its networks make it less reliant than
other competitive local exchange carriers on the networks of the incumbent
local exchange carriers. In addition, where appropriate, the Company has
the ability to link customers to its network through the use of microwave,
including 38 GHz milliwave, services. The Company plans to expand into
additional metropolitan markets, which the Company believes will further
broaden its customer base and enhance its ability to attract national
business accounts for its services.
. BENEFIT SUBSTANTIALLY FROM RELATIONSHIPS WITH CABLE TELEVISION
OPERATORS. As of December 31, 1995, the cable television facilities of the
Cable Stockholders collectively passed approximately 47% of the country's
94 million homes passed by cable television facilities. Through its
relationships with cable television operators, the Company has been able to
utilize existing rights-of-way, obtain fiber optic facilities and share the
cost of building new fiber optic networks, thereby allowing the Company to
achieve significant
48
<PAGE>
economies of scale and scope through capital efficiencies in extending its
existing networks in a rapid, efficient and cost-effective manner. The
Company is currently engaged in technical trials with certain cable
television operators, including Cable Stockholders, for the provision of
residential telephony services over the cable television operators' hybrid
fiber-coaxial networks with TCG providing switching, call processing,
calling features and ancillary services. The Company believes such trials
will evolve into commercial offerings by cable companies and that TCG may
become a provider of switching, call processing and other services to such
cable companies.
. OFFER HIGH QUALITY NETWORKS AND SUPERIOR CUSTOMER SERVICE. TCG believes that
it offers cost and service quality advantages over the incumbent local
exchange carriers as a result of its integrated operations, customer
support, network monitoring and management systems and the state-of-the-art
technology deployed in the Company's digital networks. TCG consults closely
with its customers to develop competitively priced telecommunications
services that are tailored to their particular needs. The Company's
centrally managed customer support operations are also designed to
facilitate the processing of orders for changes and upgrades in services.
TCG believes that it provides greater attention and responsiveness to its
customers than do the incumbent local exchange carriers.
. SPEARHEAD REGULATORY REFORM. As the first and largest competitive local
exchange carrier, TCG has been at the forefront of industry efforts for over
a decade to introduce competition to the local telecommunications market.
The Company has aggressively pursued the goal of making competitive local
exchange services economically, technically and operationally feasible by
working for legislative and regulatory reform and through negotiations with
incumbent local exchange carriers. The Company will continue its regulatory
reform activities in an effort to ensure that the 1996 Act is implemented
and interpreted in a manner that promotes fair competition for local
exchange services.
. CAPITALIZE ON MANAGEMENT TEAM EXPERIENCE. TCG's management team is comprised
of executives who are recognized as leaders in the development of the
competitive local telecommunications industry. This management team has
extensive operational, technical, financial and regulatory expertise as well
as a proven track record in a rapidly changing marketplace.
THE COMPANY'S SERVICES
The Company provides its customers with a wide array of local
telecommunications services, including basic local exchange telephone services,
enhanced switched services, dedicated services, high-speed switched data
services and video channel transmission services. Switched voice services
offered by the Company use primarily high-capacity digital switches to route
voice transmissions anywhere on the public switched telephone network. TCG's
dedicated services, which include private line and special access services, use
high-capacity digital circuits to carry voice, data and video transmissions
from point-to-point in multiple configurations. The Company provides its media
industry customers with point-to-point, broadcast-quality video channels for
video transmissions between two or more locations, including video link
services to all the major television networks as well as to other programmers.
The Company also provides private network management and systems integration
services for businesses that require combinations of various dedicated and
switched telecommunications services.
Switched Services
The Company's switched services provide customers with local dial tone and
local calling capabilities and connections to their interexchange carriers. The
Company's switched services include the following:
TCG Centrex(R) service gives voice and data customers a choice for analog,
digital voice-only and ISDN telephone lines to customers' desktops. With
TCG Centrex(R), TCG owns, houses, manages and maintains the switch. TCG
Centrex(R) allows customers to retain control over network configurations.
Lines can be added, deleted and moved as needed. Business customers can
utilize TCG as their primary Centrex provider, as a supplement to the
ILEC's Centrex service, or as an addition to a fully-utilized PBX.
49
<PAGE>
TeleXpress(R) service is utilized by PBX users to provide access to the
local, regional and long distance telephone networks. PBX customers may use
either the Company's telephone numbers or their ILEC-assigned telephone
numbers. Customer access to the Company's local exchange services is
accomplished by a DS-1 digital connection or analog trunks between the
customer's PBX port and the Company's switching centers.
Extended Area Service (EAS) provides customers with a competitive
alternative to ILEC service for intraLATA toll calls. It is a customized,
high-quality local calling plan available to TCG Centrex(R) and
TeleXpress(R) customers and PBX users. TCG works with customers to devise
cost-saving EAS programs based on actual usage and calling patterns.
Local Telephone Service is basic local exchange service which can be
tailored to a customer's particular calling requirements. Local telephone
service includes operator and directory assistance services, as well as an
optional intraLATA toll plan.
TCG Pay Phone Services provides full public pay telephone service to public
customers and dial tone services and access lines to other public pay
telephone providers. TCG is the primary provider of public pay phone
service for all properties of The Port Authority of New York and New
Jersey, including Kennedy, La Guardia and Newark airports.
Switched Access Services provide interexchange carriers with a switched
connection to their customers for the origination and termination of long
distance telephone calls.
Integrated Services Digital Network (ISDN) Services provide TCG's customers
with multiple voice and data communication services over a single
telecommunications line. The Company's ISDN services allow customers to
perform multiple functions such as simultaneous voice and computer links,
and enable the Company to offer customers value-added features. High speed
ISDN applications include desk top video conferencing, LAN-to-LAN
connection and Internet access.
Dedicated Services
The Company's dedicated services, which include special access and digital
private line services, use high-capacity digital circuits to carry voice, data
and video transmissions from point-to-point in flexible configurations
involving different standardized transmission speeds and circuit capacities,
including:
DS-O A dedicated service that accommodates business communications with
digital data transmission through a voice grade equivalent circuit with a
capacity of up to 64 kbps. This service offers a private line digital
channel for connecting telephones, fax machines, personal computers and
other telecommunications equipment. Multiple DS-O services are offered in a
variety of combinations, depending on the particular application and can
also provide voice grade analog connections.
DS-1 A high speed digital channel that typically links customer locations
to long distance carriers or other customer locations. Used for multiple
voice or data transmissions, access to the Internet and interconnection of
LANs, DS-1 services accommodate digital data transmission capacity of up to
1.544 mbps, the equivalent of 24 voice grade circuits.
European-Standard DS-1(E-1) The Company was the first U.S.-based local
carrier to offer this dedicated high capacity service, which allows
customers to accommodate their international traffic with a digital data
transmission capacity of up to 2.048 mbps, which is equivalent to 30 voice
grade equivalent circuits. This dedicated service offers international
business customers the flexibility to connect their United States locations
to international circuits that operate at the high capacity European
standard transmission speed.
DS-3 With digital data transmission capacity of up to 44.736 mbps, this
dedicated service provides a very high capacity digital channel, which is
equivalent to 28 DS-1 circuits or 672 voice grade equivalent circuits.
50
<PAGE>
This is a digital service used by long distance carriers for central office
connections and by some large corporate users to link multiple sites. It is
also used for data services applications.
TCG OmniLink A standard Optical Carrier (OC) service for those customers
requiring enhanced network survivability, advanced network architectures
and centralized network monitoring and management capabilities. With TCG
OmniLink, customers enjoy the benefit of dedicated private local OC3 or
OC12 SONET rings between various customer-designated sites and the
Company's nodes.
Data Services
The Company offers its customers a broad array of data services that enable
customers to create their own internal computer networks and access external
computer networks and the Internet. In 1992, TCG introduced its LANLINK native
speed LAN inter-networking data service which is used to connect workstations
and personal computer users on one or more LANs. LANLINK provides users with
transmission capacity for 10 mbps Ethernet, 4 and 16 mbps Token Ring and 100
mbps FDDI LAN interconnections. Native speed services avoid the bottleneck
problems that are frequently encountered with customary DS-1 connections by
providing the customer with a circuit that matches the transmission speeds of
its LAN. LANLINK provides dedicated circuits, guaranteed transmission capacity
and guaranteed bandwidth for virtually all LAN applications. Users can share
files and databases as if they were all working on the same computer, or
within the same LAN.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video and voice transmission within a single metropolitan area, or
between various company operations. The Company's switched data services offer
sophisticated switching technology over the Company's SONET/ATM backbone and
provide high standards in reliability and flexibility while enabling users to
reduce the costs associated with interconnecting various geographically
dispersed and architecturally diverse information systems. The Company's ATM
platform supports evolving high-speed applications, such as multimedia,
desktop video conferencing and medical imaging. TCG offers native connections
to both end users as well as interexchange data carriers. Customer connections
are provided for "early adopters" who interface directly with ATM connections,
as well as Ethernet, Token Ring, FDDI and Frame Relay architectures.
Additionally, the Company's services allow users to interconnect both high
speed and low speed LAN environments. Customers also benefit from flexible
billing, as well as detailed usage reports.
Video Services
TCG provides analog video link services to its media industry customers,
including all of the major television networks as well as to many cable
services and independent programmers. The Company's video services include
offering a broadcast quality, analog channel which can be provided on a point-
to-point or point-to-multipoint basis.
CUSTOMERS AND MARKETING
The Company's customers are principally telecommunications-intensive
businesses, long distance carriers and resellers, and wireless communications
companies. In 1985, the Company's customers were primarily long distance
carriers. While the Company's carrier business has continued to grow, in 1995
end user customers accounted for approximately 62% of the Company's revenues.
During 1995, the Company's top 10 customers accounted for approximately 57% of
TCG's total pro forma revenues. AT&T and Sprint each accounted for more than
10% of such revenues, and no customer accounted for 15% or more of such
revenues. See "Risk Factors--Dependence on Significant Customers."
Marketing itself as "The Other Local Phone Company,"SM the Company has
sought to establish "TCG(R)" as a recognized brand name for its services and
products. The Company's marketing emphasizes its state-of-the-art digital
networks, flexibly priced products and services, responsive customer service
orientation and integrated operations, customer support and network monitoring
and management systems. For large telecommunications-intensive businesses that
depend on accurate and reliable telecommunications, the Company promotes the
operational and strategic security achieved through vendor diversity. The
Company's centrally managed
51
<PAGE>
customer support operations are designed to facilitate the processing of
orders for changes and upgrades in TCG customer services. The Company seeks to
be among the first to introduce new telecommunications products and service,
thereby increasing usage among existing TCG customers and attracting new
customers to the Company's networks.
The Company generally offers its services in accordance with applicable
tariffs filed with the FCC (for interstate services) and the state public
utility commissions (for intrastate services). As a non-dominant carrier, TCG
does not have to cost-justify its rates and frequently enters into customer
and service specific arrangements. The services offered by TCG are typically
priced at a modest discount to the prices of the ILECs.
With a direct sales force in each of its markets, TCG targets the large
telecommunications-intensive businesses concentrated in the major metropolitan
markets served by its networks. The Company's customers in these markets
include financial services firms, media and health care companies, education
and governmental institutions and an increasing number of small and medium-
sized business customers. In addition, TCG markets its services through sales
agents, landlords, advertisements, trade journals, media relations, direct
mail and participation in trade conferences.
TCG also targets long distance carriers and resellers, Internet service
providers, wireless telephone companies through its national sales
organization. The Company has master services agreements (which generally set
forth technical standards, ordering processes, pricing methodologies and
service grade requirements, but do not guarantee any specified level of
business for TCG) with a significant number of the long distance carriers,
including eight of the largest. AT&T considers TCG a preferred national
supplier of dedicated and switched access services. By providing long distance
companies a local connection to their customers, the Company enables them to
avoid complete dependence on the ILECs for access and to obtain a high
quality, reliable local connection at a savings over the ILECs' charges. The
national scope of the Company's local networks allows it to offer high volume
business customers and long distance carriers uniformity of services, pricing,
quality standards and customer service. In addition, the Company has
arrangements with other telecommunications providers, including shared tenant
services providers, cable television companies and long distance carriers, to
resell TCG's services. TCG is currently engaged in technical trials pursuant
to which certain long distance carriers are reselling TCG local exchange
service and intraLATA toll service bundled with their long distance service.
These trials began in the second half of 1995, and as of March 31, 1996,
served a limited number of end-user customers. Because of the limited scope
and preliminary nature of these trials, the Company is unable to determine at
this time whether these services will be expanded. The Company believes that
it has been and will continue to be one of the largest providers of
competitive local access services for long distance carriers.
THE NETWORKS
The Company uses the latest technologies and network architectures to
develop a highly reliable infrastructure for delivering high-speed, quality
digital transmissions of voice, data and video telecommunications. The basic
transmission platform consists primarily of optical fiber equipped with high
capacity SONET equipment deployed in self-healing rings. These SONET rings
give TCG the capability of routing customer traffic simultaneously in both
directions around the ring thereby eliminating loss of service in the event of
a cable cut. The Company extends SONET rings or point to point links from
rings to each customer's premises over its own fiber optic cable, unbundled
facilities obtained from ILECs, microwave (including 38 GHz milliwave)
transmission facilities and other technologies. TCG also installs diverse
building entry points where a customer's security needs require such
redundancy. TCG then places necessary customer-dedicated or shared electronic
equipment at a location near or in the customer's premises to terminate the
link.
TCG serves its customers from one or more nodes or hubs strategically
positioned throughout its networks. The node houses the transmission and
switching equipment needed to interconnect customers with each other, the
interexchange carriers and other local exchange networks. Redundant
electronics, with automatic switching to the backup equipment in the event of
failure, protects against signal deterioration or outages. Continuous
monitoring of system components focuses on proactively avoiding problems
rather than just reacting upon failure.
52
<PAGE>
TCG adds switched, dedicated and data services to its basic fiber optic
transmission platform by installing sophisticated digital electronics at its
network nodes and at customer locations. TCG's advanced ISDN capable digital
telephone switches are connected to multiple ILEC and long distance carrier
switches to provide TCG's customers access to every telephone in the local
market as well as across the country and around the world. Similarly, TCG
provides ATM switched and LAN multiplexers at the customer's premises and in
its nodes to provide high speed LAN interconnection services.
The Company's strategy for adding customers is designed to maximize the
speed and impact of its marketing efforts while maintaining attractive rates
of return on capital invested to connect customers directly to its networks.
To initially serve a new customer, for example, TCG may use various
transitional links, such as reselling a portion of the ILEC's network and,
where appropriate, using alternative transmission services such as microwave,
including 38 GHz milliwave, transmission. Once the new customer's
communications volume and product needs are identified, the Company may build
its own fiber optic connection between the customer's premises and its network
to accommodate (i) the customer's needs and (ii) the Company's efforts to
maximize return on network investment.
In February 1996, the Company acquired a minority investment in BizTel
Communications, Inc., which, through a wholly owned subsidiary, BizTel, Inc.
("BizTel"), holds FCC licenses to provide telecommunications services
utilizing 38 GHz digital milliwave transmission in 156 geographic areas, which
have a population of approximately 175 million people, and including more than
80 of the largest 100 metropolitan markets and all markets where TCG operates.
BizTel also has 102 licenses pending FCC approval in geographic areas which
have a population of an additional 44 million people. The 38 GHz milliwave
facilities can be used by TCG to economically connect customers to the
Company's networks, to provide network redundancy, diverse routing or quick
temporary installations and to provide stand-alone facilities where the
Company does not have networks. In connection with such acquisition, TCG
entered into two agreements with BizTel regarding the use, construction and
maintenance of certain transmission facilities operated by BizTel. These
agreements are not material to the Company's business or operations taken as a
whole.
In determining which new markets to enter, the Company carefully analyzes
the potential customer base and competitive conditions within the market. The
Company is planning on building new facilities, entering into fiber leases and
other arrangements with cable television companies and other carriers,
acquiring existing telecommunications providers and exploiting new
technologies that have the potential to enhance network expansion (such as the
use of microwave radio facilities). The Company also seeks to utilize
relationships with the Cable Stockholders or other cable television operators
who have an existing presence in the market and with which the Company may be
able to develop a fiber optic network rapidly and efficiently. As a
facilities-based carrier, the Company utilizes a variety of means to expand
geographically, including rights-of-way, easements, poles, ducts and conduits
that are available from cable television operators, incumbent local exchange
carriers, railways and subways, electric, gas and water utilities and
municipal, state and federal street and highway authorities. TCG plans to
continue making selected acquisitions of existing local telecommunications
networks in markets in which it has existing local telecommunications
operations or which are geographically proximate to such markets, as well as
in markets that are otherwise attractive to TCG. See "Risk Factors--
Governmental and Other Authorizations."
53
<PAGE>
The following chart sets forth information regarding each of the Company's
active or currently planned local telecommunications networks as of March
31, 1996:
<TABLE>
<CAPTION>
DATE OF SERVICES
METROPOLITAN FIRST -----------------------
AREA METROPOLITAN MARKET(A) REVENUE DEDICATED SWITCHED DATA
------------ ---------------------- ----------- --------- -------- ----
<C> <S> <C> <C> <C> <C> <C>
New York/New Jersey.......... Bergen-Passaic Nassau-Suffolk 7/85 X X X
Jersey City New York
Middlesex-Somerset- Newark
Hunterdon Trenton
Boston....................... Boston Lawrence 5/89 X X X
Brockton Worcester
San Francisco(b)............. Oakland 4/90 X X X
San Francisco
San Jose
Chicago...................... Chicago 5/90 X X X
Gary
Los Angeles.................. Los Angeles-Long Beach 10/90 X X X
Orange County
Houston...................... Houston 5/91 X X X
Dallas....................... Dallas 6/91 X X X
Fort Worth-Arlington
Omaha........................ Omaha 1/93 X X
Seattle(b)................... Bellingham 1/93 X X
Seattle-Bellevue-Everett
Tacoma
San Diego.................... San Diego 2/93 X X X
Milwaukee.................... Kenosha 8/93 X X
Milwaukee-Waukesha
Racine
Detroit(b)................... Detroit 11/93 X X
Miami/Ft. Lauderdale......... Fort Lauderdale 12/93 X X
Miami
W. Palm Beach-Boca Raton
Phoenix...................... Phoenix-Mesa 3/94 X X
Hartford..................... Bridgeport New London-Norwich 3/94 X X X
Danbury New Haven-Meriden
Hartford Waterbury
St. Louis.................... St. Louis 3/94 X X
Indianapolis................. Indianapolis 10/94 X
Baltimore/Washington, D.C. .. Baltimore 10/94 X X
Washington, D.C.
Pittsburgh................... Pittsburgh 1/95 X X X
Denver....................... Boulder-Longmont 8/95 X X
Denver
Providence................... Providence-Fall River-Warwick 9/95 X
Cleveland.................... Cleveland-Lorain-Elyria in progress
Portland (Oregon)............ Portland-Vancouver in progress
Salt Lake City............... Salt Lake City-Ogden in progress
Birmingham................... Birmingham in progress
Chattanooga.................. Chattanooga in progress
Knoxville.................... Knoxville in progress
Nashville.................... Nashville in progress
</TABLE>
--------
(a) Consists of primary metropolitan statistical areas, metropolitan
statistical areas and New England consolidated metropolitan areas, as
defined by the U.S. Census Bureau.
(b) Local Market Partnerships with minority partners that are not affiliated
with either the Company or the Cable Stockholders.
54
<PAGE>
Information Systems Infrastructure
TCG uses state-of-the-art technology in its information systems
infrastructure. TCG also uses an integrated, nationwide client server platform
and coherent relational databases to increase employee productivity, link
itself electronically to its customers and develop real time data and
information. The architecture also enables TCG to rapidly and continually re-
engineer its processes and procedures to lower its costs and to respond
rapidly to changing industry conditions. The Company's information systems
deliver the necessary data at the network, regional or corporate level, and
also by customer and vendor. The Company's information systems enable the
delivery of superior customer service, real time support of network
operations, and on-line financial reporting. Using the latest open system
standards and architecture, TCG is positioned to either purchase or develop
its own information support systems as the situation demands.
Network Monitoring and Management
All elements of TCG's digital networks are integrated onto a single platform
and monitored on an end-to-end basis by TCG's Network Management Center
("NMC"). The NMC monitors and manages all of TCG's networks seven days a week,
24-hours a day and provides real-time alarm, status and performance
information for each circuit and piece of equipment in TCG's networks around
the country. The NMC also affords improved disaster recovery to customers
through remote circuit provisioning and cross-connect features.
Advanced Technology Integration Center
The Company's Advanced Technology Integration Center is a comprehensive
telecommunications technology, applications and services development
laboratory, equipped with state-of-the-art systems and equipment, including
those used by TCG in the operation of its local digital networks. The center
is designed to provide a self-contained testing and integration environment,
fully compatible with the Company's digital networks, for the purposes of (i)
verifying the technical and operational integrity of new equipment prior to
installation in the networks, (ii) developing new services and applications,
(iii) providing a realistic training environment for technicians, engineers
and others and (iv) providing a network simulation environment to assist in
fault isolation and recovery.
COMPETITION
The Company faces substantial competition in each of the metropolitan areas
it serves or plans to serve from entities that offer services similar to those
offered by TCG, including ILECs such as Ameritech, Bell Atlantic, BellSouth,
NYNEX, Pacific Telesis Group, SBC Communications, U S WEST, Inc. and GTE. The
Company believes that ILECs generally benefit from their long-standing
relationships with customers, substantial technical and financial resources
and federal and state regulations that could provide them with increased
pricing flexibility as competition increases. In addition, in most of the
metropolitan areas in which the Company currently operates, at least one, and
sometimes several, other CAPs or CLECs offer substantially similar services at
substantially similar prices to those of the Company. Other CLECs, CAPs, cable
television companies, electric utilities, long distance carriers, microwave
carriers, wireless telephone system operators and private networks built by
large end users may offer services similar to those offered by the Company.
The Company believes that the 1996 Act will provide increased business
opportunities by opening all local markets to competition and requiring ILECs
to provide increased direct interconnection. However, under the 1996 Act, the
FCC and some state regulatory authorities may provide ILECs with increased
flexibility to reprice their services as competition develops and as ILECs
allow competitors to interconnect to their networks. In addition, some new
entrants in the local market may price certain services to particular
customers or for particular routes below the prices charged by the Company for
services to those customers or for those routes, just as the Company may
itself underprice those new entrants for other services, customers or routes.
If the ILECs and other competitors lower their rates and can sustain
significantly lower prices over time, this may adversely affect revenues of
TCG if it is required by market pressure to price at or below the ILECs'
prices. If regulatory decisions permit the ILECs to charge CAPs/CLECs
substantial fees for interconnection to the ILECs'
55
<PAGE>
networks or afford ILECs other regulatory relief, such decisions could also
have a material adverse effect on the Company. However, the Company believes
that the negative effects of the 1996 Act may be more than offset by (i) the
increased revenues available as a result of being able to address the entire
local exchange market, (ii) mutual reciprocal compensation with the ILEC that
results in TCG terminating its local exchange traffic on the ILEC's network at
little or no net cost to TCG, (iii) obtaining access to off-network customers
through more reasonably priced expanded interconnection with ILEC networks and
(iv) a shift by IXCs to purchase access services from CAPs/CLECs instead of
ILECs. There can be no assurance, however, that these anticipated results will
offset completely the effects of increased competition as a result of the 1996
Act.
In addition, historically, the Company has been able to build new networks
and expand existing networks in a more timely and economical manner than most
CAP or CLEC competitors through strategic arrangements such as leasing fiber
optic cable from cable operators that already possess rights-of-way and have
facilities in place. The Company intends to use its experience and presence in
the telecommunications industry to further develop and expand its existing
telecommunications infrastructure.
GOVERNMENT REGULATION
Nationally, the recent trend has been for federal and state legislators and
regulators to permit and promote additional competition in the local
telecommunications industry, which the Company believes should contribute to
an increase in the market opportunities for TCG. Because these developments
require numerous implementation actions by individual federal and state
regulatory commissions, and are subject to particular legal, political and
economic conditions, it is not possible to predict the pace at which such
liberalization will occur.
Telecommunications Act of 1996
On February 8, 1996, President Clinton signed the Telecommunications Act of
1996, the most comprehensive reform of the nation's telecommunications laws
since the Communications Act of 1934 (the "Communications Act"). The Company
believes that the 1996 Act will result in substantial changes in the
marketplace that should be largely favorable for TCG.
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
This provision of the 1996 Act should enable TCG to provide a full range of
local telecommunications services in any state. States retain jurisdiction
under the 1996 Act to adopt regulations necessary to preserve universal
service, protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. States are
also responsible for mediating and arbitrating CLEC-ILEC interconnection
arrangements if voluntary agreements are not reached. Therefore, the degree of
state regulation of local telecommunications services may be substantial.
The 1996 Act imposes a number of access and interconnection requirements on
all local exchange providers, including CLECs, with additional requirements
imposed on ILECs. The 1996 Act requires CLECs and ILECs to first attempt to
resolve interconnection issues through negotiation for at least 135 days.
During these negotiations, the parties may submit disputes to state regulators
for mediation and, after the negotiation period has expired, the parties may
submit outstanding disputes to state regulators for arbitration. On February
8, 1996, TCG requested that the BOCs commence negotiations with respect to
interconnection negotiations. If the negotiations fail, TCG may request state
regulators to arbitrate between June 22, 1996 and July 17, 1996.
The 1996 Act provides a detailed list of items which are subject to these
interconnection negotiations, as well as a detailed set of duties for all
affected carriers. All local exchange carriers, including CLECs, have a duty
to (i) not unreasonably limit the resale of their services, (ii) provide
number portability if technically feasible, (iii) provide dialing parity to
competing providers, (iv) provide access to poles, ducts and conduits and (v)
establish reciprocal compensation arrangements for the transport and
termination of telecommunications. In addition to those general duties of all
LECs, ILECs have additional duties to (i) interconnect at any technically
56
<PAGE>
feasible point and provide service equal in quality to that provided to their
customers or the ILEC itself, (ii) provide unbundled access to network
elements at any technically feasible point, (iii) offer retail services at
wholesale prices for the use of competitors, (iv) provide reasonable public
notice of changes in the network or the information necessary to use the
network and (v) provide for physical colocation. The 1996 Act further imposes
various pricing guidelines for the provision of certain of these services. The
ILECs have a statutory duty to negotiate in good faith regarding these
arrangements, and the RBOCs, in particular, must successfully achieve
agreements, leading to the development of facilities based competition for
business and residential users, in order to enter the long distance markets
within their regions. To the extent that the Company cannot reach a successful
negotiated conclusion to these issues, it will be forced to engage in
arbitration before the state public utility commissions which, with respect to
the RBOCs, under the 1996 Act must be completed no later than November 8,
1996. However, because negotiated agreements are also subject to state public
utility commission approval, which must be completed within 90 days, the
likely effective date of negotiated agreements and arbitrated agreements will
be similar. The Company does not have sufficient information to predict the
likely results of such arbitrations, whether such arbitrations are likely to
provide superior agreements for the Company compared to those achievable
through negotiation, or what effect these arbitrated agreements might have on
the Company's business prospects. Moreover, the Company has previously
experienced numerous disputes with ILECs regarding interconnection issues, but
expects that the influence of the 1996 Act will be to reduce the degree of
such disputes. Finally, because the Company is presently operating in
virtually all of the states in which it holds CLEC authority pursuant to
interim interconnection arrangements or interim state public utility
commission interconnection rules and policies, which will be replaced in the
future by the agreements negotiated pursuant to the 1996 Act, the Company can
continue to operate as a CLEC during the pendency of these negotiations and
arbitrations.
As noted above, the Company, in those states in which it is a CLEC, is
subject to five obligations under the 1996 Act. Specifically, the Company must
(i) not unreasonably limit the resale of its services, (ii) provide number
portability if technically feasible, (iii) provide dialing parity to competing
providers, (iv) provide access to poles, ducts and conduits and (v) establish
reciprocal compensation arrangements for the transport and termination of
telecommunications. In those states in which it is a CLEC, the Company does
not restrict the resale of its services, engages in reciprocal compensation
arrangements, and provides dialing parity, satisfying three of the five
requirements. The Company generally leases poles, ducts and conduits, and
therefore owns few such rights of way subject to the requirement to make them
available to other carriers. Finally, while the Company has not been requested
to provide interim number portability, it believes that its switches are
currently capable of providing interim number portability so that this
capability can be provided at little or no cost.
The 1996 Act establishes procedures under which a BOC can provide interLATA
services within its telephone service area if it enters into a state-approved
interconnection agreement with one or more companies which provide local
exchange service to business and residential customers predominantly over such
companies' own facilities. The ability of the BOCs to provide interLATA
services will enable them to provide customers with a full range of local and
long distance telecommunications services. The provision of interLATA services
by BOCs may reduce the market share of the major long distance carriers, which
are among the Company's largest customers, but the Company believes it will
also encourage IXCs to use the Company's and other CLECs' services instead of
BOC services wherever possible. When BOCs provide long distance service
outside their telephone service area they will be potential customers for TCG
and other CAPs and CLECs.
The 1996 Act requires the FCC to establish an explicit mechanism for
subsidizing service to rural areas, low-income customers, schools and
libraries. Although the details will be determined by the FCC, all carriers
will be required to contribute, and carriers that serve eligible customers
will be able to receive subsidies. This subsidy mechanism may provide an
additional source of revenue to those ILECs and CLECs willing and able to
provide service to markets that traditionally have been considered less
desirable, either because of the high cost of providing service or the limited
revenues that might be available.
The 1996 Act contains other provisions that may be subject to FCC rulemaking
and judicial interpretation, including a provision that limits the ability of
a cable television operator and its affiliates to acquire more than a
57
<PAGE>
10% financial interest or any management interest in a LEC which provides
local exchange service in such cable operator's franchise area. The Company
believes, based on an opinion from its FCC counsel, Dow, Lohnes & Albertson, a
Professional Limited Liability Company, that the 1996 Act does not limit the
acquisition of any of the interests contemplated to be acquired in the
Reorganization; however, there can be no assurance that the FCC or a court
would not reach a different determination as to the acquisition of one or more
of such interests.
Federal Regulation
Through a series of regulatory proceedings, the FCC has established
different levels of regulation for "dominant carriers" and "nondominant
carriers." For domestic interstate telecommunications purposes, only the ILECs
are classified as dominant carriers, and all other carriers are classified as
nondominant carriers. As a nondominant carrier, the Company is required to
file tariffs and periodic reports with the FCC concerning the Company's
interstate circuits and deployment of network facilities. The FCC has proposed
eliminating this reporting requirement for interexchange carriers, and another
CAP has filed a petition with the FCC asking that it permit CAPs to dispense
with filing of FCC tariffs, at the option of the carrier. The FCC has not as
yet taken any substantive action on the petition, and the Company has no
information as to when the FCC is likely to act, and whether, even if the
petition is granted, such "permissive detariffing" will be extended to embrace
CLECs as well as CAPs. If the petition is granted and does extend to the
Company's interstate services and CLEC operations, it will improve the
Company's ability to adjust interstate prices and will reduce its interstate
regulatory compliance costs. The petition does not, however, impact the
Company's state public utility commission tariff requirements. Whether or not
it is subject to a tariff filing requirement, TCG must offer its interstate
services on a nondiscriminatory basis, at just and reasonable rates and is
subject to the complaint provisions of the Communications Act. For its current
offering of interstate services as a nondominant carrier, TCG is not subject
to rate of return or price cap regulation by the FCC and may install and
operate digital facilities for the transmission of interstate communications
without prior FCC authorization. Under the 1996 Act, TCG may become subject to
additional federal regulatory obligations when it provides local exchange
service in a market, such as the access and interconnection requirements that
are imposed on all local exchange providers. See "--Telecommunications Act of
1996."
State Regulation
Most state public utility commissions require carriers that wish to provide
local and other jurisdictionally intrastate common carrier services to be
authorized to provide such services. The Company's operating subsidiaries and
affiliates are authorized as common carriers in California, Colorado,
Connecticut, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan,
Missouri, Nebraska, New Jersey, New York, Ohio, Pennsylvania, Rhode Island,
Texas, Washington and Wisconsin. The authority held by the Company's
subsidiaries and affiliates varies in the scope of the intrastate services
permitted, ranging from certifications in, for example, California, Florida,
Illinois, New York, Pennsylvania, Texas and Washington, which permit the
provision or resale of all dedicated and switched services, including basic
local exchange services, to the certificates in Ohio and Rhode Island, for
example, which only permit the provision of intrastate private line services.
TCG works continuously to expand its intrastate service authority to cover
additional jurisdictions and additional services, a process which the Company
believes will be simpler following the recent enactment of the 1996 Act, which
prohibits states from imposing any legal requirement that has the effect of
prohibiting any company from providing any telecommunications service. TCG has
filed or expects to file applications for authority to provide local exchange
service in all of its markets in which it does not have such authority. TCG
typically is not subject to price regulation or to rate of return regulation
for its intrastate services. In most states, TCG is required to file tariffs
setting forth the terms, conditions and prices for intrastate services. In
some jurisdictions, the Company's tariff can list a rate range or set prices
on an individual customer basis. The Company may be subject to additional
regulatory burdens in some states, such as quality of service requirements and
universal service contributions.
The incurrence of long-term indebtedness by TCGI is subject to approval by
the NYPSC and the NJBPU. In orders issued in 1993, both the NYPSC and NJBPU
authorized TCGI to incur long-term debt in amounts not to exceed $1 billion.
Additionally, in 1995, both the NYPSC and NJBPU authorized the Company's
subsidiary, TCNY, to incur long-term debt in an amount not to exceed an
additional $1 billion; provided, however, that the NYPSC has interpreted its
authorization as permitting TCGI and TCNY to incur long-term debt not to
exceed $1.75 billion in the aggregate. The Company has filed petitions with
the NJBPU to expand the borrowing authority of TCGI to $2 billion. The Company
has submitted a request to the NYPSC for confirmation of an
58
<PAGE>
opinion of the Office of General Counsel that the incurrence of indebtedness
pursuant to the Notes Offerings is authorized under the laws of New York and
that the Notes, once issued, will be valid and enforceable or, in the
alternative, for authorization to incur up to $2 billion in long-term debt.
While all past petitions by TCGI to the NYPSC and NJBPU for authorization to
incur indebtedness have been approved routinely, there can be no assurance
that the Company's petitions before the NYPSC and the NJBPU will be similarly
approved. See "Risk Factors--Limitation on Incurrence of Debt Under New York
and New Jersey Regulatory Authorizations."
Local Government Authorizations
The Company may be required to obtain from municipal authorities street
opening and construction permits and other rights of way to install and expand
its digital networks in certain cities. In some cities, the Company's
affiliates or subcontractors may already possess the requisite authorizations
to construct or expand the Company's networks.
In some of the metropolitan areas where TCG provides network services, the
Company pays license or franchise fees based on a percent of gross revenues.
There can be no assurance that municipalities that do not currently impose
fees will not seek to impose fees in the future, nor is there any assurance
that, following the expiration of existing franchises, fees will remain at
their current levels. Under the 1996 Act, municipalities are required to
impose such fees on a nondiscriminatory basis. There can be no assurance,
however, that municipalities that currently favor the ILECs will conform their
practices in a timely manner or without legal challenges by the Company or
another CAP or CLEC.
If any of the Company's existing franchise or license agreements for a
particular metropolitan area were terminated prior to its expiration date and
TCG were forced to remove its fiber optic cables from the streets or abandon
its network in place, even with compensation, such termination could have a
material adverse effect on the Company's operation in that metropolitan area
and could have a material adverse effect on the Company.
Teleport Communications, a wholly owned subsidiary of TCNY, and the City of
New York entered into a Franchise Agreement, dated as of May 2, 1994 (the "New
York Franchise"), pursuant to which the City of New York granted to Teleport
Communications the non-exclusive right for a term of fifteen years to provide
Telecommunications Services (as defined in the New York Franchise) in the City
of New York. In addition to other payments specifically required by the New
York Franchise, the New York Franchise requires that Teleport Communications
pay to the City of New York as an annual franchise fee an amount based on a
percentage of Teleport Communications' gross revenues. The Company is
restricted under the terms of the New York Franchise from providing cable
service or mobile telecommunications services in the City of New York.
EMPLOYEES
As of March 31, 1996, the Company employed 1,559 full-time employees, none
of whom was represented by a union or covered by a collective bargaining
agreement. TCG believes that its relations with its employees are good. In
connection with the construction and maintenance of its digital networks and
the conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or
collective bargaining agreements. TCG believes that its success will depend in
part on its ability to attract and retain highly qualified employees.
PROPERTIES
The Company leases network hub sites and other facility locations and sales
and administrative offices in each of the cities in which it operates
networks. During the years 1994 and 1995, rental expense for such facilities
and offices totaled $12.5 million and $16.4 million, respectively. The Company
owns no material real estate. Management believes that its properties, taken
as a whole, are in good operating condition and are suitable and adequate for
the Company's business operations. The Company currently leases approximately
200,000 square feet of space at The Teleport complex in Staten Island, New
York, where its corporate headquarters are located.
LEGAL PROCEEDINGS
The Company is a party to various claims and legal proceedings arising in
the ordinary course of business. The Company does not believe that such claims
or proceedings, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.
59
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and
positions are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Annunziata....... 48 Chairman, President, Chief Executive Officer and
Chief Operating Officer
Robert C. Atkinson...... 45 Senior Vice President, Legal, Regulatory and
External Affairs
Joel D. Gross........... 41 Senior Vice President, Corporate Development
Alf T. Hansen........... 53 Senior Vice President, National Operations
J. Curt Hockemeier...... 47 Senior Vice President, Affiliate Services
Marvin L. Lindsey....... 55 Senior Vice President, Engineering and MIS
Stuart A. Mencher....... 57 Senior Vice President, National Sales and Marketing
John A. Scarpati........ 45 Senior Vice President and Chief Financial Officer
Kenneth A. Shulman...... 42 Senior Vice President, Technology
Maria Terranova-Evans... 40 Vice President and Controller
Wayne G. Fox............ 40 Vice President and Treasurer
John W. Thomson......... 48 Vice President and Secretary
W. Terrell Wingfield, 43 Vice President and General Counsel
Jr. ...................
</TABLE>
Robert Annunziata has been Chairman of the Board of the Company since 1990
and President and Chief Executive Officer since 1985. Prior to that, Mr.
Annunziata had been Senior Vice President and Chief Operating Officer since
1983. He has been a director of the Company since 1984. He has 29 years of
experience in the telecommunications industry, including 17 years in a variety
of operations and marketing positions with AT&T. He has served as President of
the World Teleport Association ("WTA") from 1987 to 1991 and remains a WTA
director. He currently serves on the New York State Governor's Advisory Board
on Telecommunications and the New York City Mayor's Alliance for International
Business.
Robert C. Atkinson has been Senior Vice President--Legal, Regulatory and
External Affairs since February 1990. Prior to that, he had been Vice
President--Regulatory and External Affairs since 1985. Prior to joining the
Company, Mr. Atkinson held various business development, regulatory and
government relations positions at ITT World Communications, Inc., Satellite
Business Systems, GTE Sprint and RCA Global Communications, Inc. He was a
founder and first President of the Association for Local Telecommunications
Services ("ALTS"), the CAP/CLEC trade association.
Joel D. Gross has been Senior Vice President--Corporate Development since
February 1993. Prior to that, he had been Vice President and Senior Securities
Analyst--Telecommunications for Donaldson, Lufkin & Jenrette Securities
Corporation since 1987 and Vice President and Senior Securities Analyst--
Telecommunications for Dean Witter since 1985. Prior to that, Mr. Gross worked
in a variety of management positions at AT&T.
Alf T. Hansen has been Senior Vice President--National Operations since
February 1993. Prior to that, he had been Vice President--National Operations
since March, 1990 and Vice President--Engineering and Operations since March
1989. Prior to joining the Company, Mr. Hansen worked at AT&T for 22 years in
various managerial positions.
J. Curt Hockemeier has been Senior Vice President--Affiliate Services since
January 1993. Prior to that, he had been Vice President and General Manager of
Cox Cable Oklahoma City since 1983.
Marvin L. Lindsey has been Senior Vice President--Engineering and MIS since
December 1993. Prior to that, he had been an independent telecommunications
consultant for various large international telecommunications companies since
July 1991. Mr. Lindsey was Service Vice President of AT&T's Business
60
<PAGE>
Communications organization from April 1987 to July 1991 and worked more than
28 years in various technical and operations positions with AT&T.
Stuart A. Mencher has been Senior Vice President--National Sales and
Marketing since February 1994. Prior to that, he had been Senior Vice
President--New York Operations since February 1993 and Vice President and
General Manager of TCNY since June 1992. From June 1991 until May 1992, Mr.
Mencher worked as an independent consultant in the international
telecommunications industry. From March 1987 to January 1990, Mr. Mencher
served as a Senior Vice President of MCI Telecommunications Corp., primarily
responsible for sales and marketing, and, from February 1990 to May 1991, he
served as Senior Vice President of the U.S. Distribution Division of
Motorola/Codex Corp. Prior to joining MCI, Mr. Mencher served in a variety of
senior sales and marketing management positions with AT&T Information Systems
following almost sixteen years of sales and marketing management experience
with IBM's Data Processing Division.
John A. Scarpati has been Senior Vice President and Chief Financial Officer
since March 1990. Mr. Scarpati has held various executive officer positions
since joining TCG in August 1984, including Vice President, Chief Financial
Officer, Treasurer and Controller. Mr. Scarpati is a director of Comcast CAP
of Philadelphia, Inc. He was a director of the Company in 1991. He is also a
Certified Public Accountant.
Kenneth A. Shulman has been Senior Vice President--Technology since August
1995. Prior to that, he had been Vice President of Applied Research and
Development since February 1994, Vice President of Technology and Network
Planning since October 1991, Director, Engineering and Technology since June
1990 and Director, Research and Technology since November 1989. Prior to
joining the Company in 1987, Mr. Shulman held positions as Director--Systems
Engineering at MCI International, as District Manager--Integrated Network
Evolution Planning at Bell Communications Research and as Supervisor--
Switching Systems Engineering at Bell Laboratories. Mr. Shulman is a director
of BizTel Communications, Inc.
Maria Terranova-Evans has been Vice President and Controller since February
1992. Mrs. Evans has held various managerial and executive financial positions
since joining TCG in September 1984 including accounting Manager, Controller,
and accounting Director/Controller. She is also a Certified Public Accountant.
Wayne G. Fox has been Vice President and Treasurer since June 1995. Prior to
that, he had been Vice President--Corporate Ventures since January 1993 and
Managing Director of Corporate Ventures since November 1992. Mr. Fox was a
director of the Company from April 1991 to November 1992. Prior to joining the
Company, he had been a Vice President and Director in the Mergers &
Acquisitions Group for Merrill Lynch Capital Markets. Mr. Fox is a director of
BizTel Communications, Inc.
John W. Thomson has been Vice President and Secretary since June 1984. Mr.
Thomson also served as General Counsel of TCG from June 1984 until February
1996, and as Senior Counsel for Merrill Lynch & Co., Inc. from 1981 to 1988.
W. Terrell Wingfield, Jr. has been Vice President and General Counsel since
March 1996. From March 1994 to February 1996, Mr. Wingfield served as Regional
Vice President--Central Region Operations, and from January 1993 to March 1994
as Counsel--Affiliate Services. Prior to that, Mr. Wingfield had been Senior
Counsel of Cox Enterprises, Inc. since 1989.
Messrs. Annunziata, Scarpati, Atkinson, Mencher and Hansen have entered into
employment agreements with the Company which are described below. See "--
Employment Agreements." The employment agreements with Messrs. Annunziata,
Scarpati, and Atkinson expire on December 31, 1998 and the employment
agreements with Messrs. Mencher and Hansen expire on December 31, 1999.
Messrs. Gross, Lindsey, Hockemeier and Shulman serve as officers pursuant to
employment agreements they have entered into with the Company. Mr. Gross'
agreement expires on June 30, 1998, and the agreements of Messrs. Lindsey,
Hockemeier and Shulman expire on June 30, 1999. All other executive officers
of the Company serve at the pleasure of the Board of Directors. Officers of
the Company are elected annually by the Board of Directors and hold office
until their successors are elected and qualified.
61
<PAGE>
DIRECTORS
The following persons (except for James Bruce Llewellyn and C.B. Rogers,
Jr.) are the directors of TCG. Following the execution of the Amended
Stockholders' Agreement and upon the consummation of the Offerings, the
Company anticipates that Messrs. Llewellyn and Rogers will be elected to the
Company's Board of Directors as independent directors.
Robert Annunziata has been Chairman of the Board since 1990 and a director
since 1984. See "--Executive Officers" for a description of Mr. Annunziata's
employment experience.
Brendan R. Clouston, age 43, has been a director since April 1996. Prior to
that time, he was a director of TCG from November 1992 to October 1995. Mr.
Clouston has been Executive Vice President of TCI since January 1994 and
President and Chief Executive Officer of TCI Communications, Inc. ("TCIC")
since October 1994. Prior to that, he had been Executive Vice President and
Chief Operating Officer of TCIC since March 1992 and Senior Vice President of
TCIC since December 1991. From 1987 through 1991, Mr. Clouston served in
various executive positions with United Artists Entertainment Company and its
predecessor United Artists Communications, Inc., most recently as Executive
Vice President and Chief Financial Officer. He is a director of C-Span, the
National Cable Television Association and TeleWest International.
Ronald H. Cooper, age 39, has been a director since February 1996. Mr.
Cooper has been Executive Vice President of Continental since 1995. Prior to
that, he had been Senior Vice President of Continental's Southern California
management region since 1988. He is a director of the New England Cable News
Channel.
John R. Dillon, age 54, has been a director since December 1991. Mr. Dillon
has been Senior Vice President and Chief Financial Officer of Cox Enterprises,
Inc. since 1990. He is also a director of Cox, Cox Enterprises, Inc. and the
Georgia Center for Advanced Telecommunications Technology.
Gerald W. Gaines, age 40, has been a director since November 1994. Mr.
Gaines has been Senior Vice President of Telephony Services for TCI since
1994. Prior to that, he had been President of GCG Inc., a management services
firm servicing the telecommunications industry, since 1991.
Nancy Hawthorne, age 45, has been a director since May 1993. Ms. Hawthorne
has been Senior Vice President and Chief Financial Officer of Continental
since 1992. Prior to December 1993, she had also been Treasurer for
Continental. Prior to December 1992, she was a Senior Vice President and the
Treasurer of Continental. She is a director of Optus Vision, Perini
Corporation and the New England Zenith Fund.
James O. Robbins, age 53, has been a director since April 1996. Mr. Robbins
has served as Chief Executive Officer of Cox since May 1994. Prior to that,
Mr. Robbins had been President of Cox since 1985. Mr. Robbins has been a
director of Cox since May 1994. Mr. Robbins is a member of the Executive
Committee of the National Cable Television Association.
Brian L. Roberts, age 36, has been a director since April 1996. Mr. Roberts
has been President of Comcast since 1990 and a director of Comcast since 1987.
He is also a director of Turner Broadcasting System, Inc., Comcast UK Cable
Partners Limited, Cablevision Investment of Detroit, Inc. and Storer
Communications, Inc. He is chairman as well as a member of the Executive
Committee of the National Cable Television Association.
Larry E. Romrell, age 56, has been a director since April 1996. Prior to
that time, he was a director of TCG from November 1992 to October 1995. Mr.
Romrell has been Executive Vice President of TCI since January 1994 and
President of TCI Technology Ventures since September 1994. Prior to that, he
had been Senior Vice President of TCIC from 1991 to October 1994. Mr. Romrell
previously held various executive positions with WestMarc Communications,
Inc., a subsidiary of TCI.
Lawrence S. Smith, age 48, has been a director since May 1993. Mr. Smith has
been Executive Vice President of Comcast since January 1996. Prior to that, he
had been Senior Vice President of Accounting and Administration for Comcast
for more than five years. Mr. Smith is a director of Comcast UK Cable Partners
Limited.
62
<PAGE>
David M. Woodrow, age 50, has been a director since November 1992. Mr.
Woodrow has been Senior Vice President of Broadband Services for Cox since
1994. Prior to that, he had been Senior Vice President of Operations for Cox
since 1989. He is a director of the Telecommunications Subcommittee of
CableLabs.
James Bruce Llewellyn, age 68, has been the Chairman of the Board of the
Philadelphia Coca-Cola Bottling Company since 1988. Prior to 1988, he was the
principal stockholder and chairman of the ABC television network affiliate in
Buffalo, New York and partner in the Washington, D.C. law firm of Dickstein,
Shapiro & Morin. He serves on the Board of Directors of Chase Manhattan
Corporation, Coors Brewing Company, Essence Communications, Inc. and Black
Shopping Network, Inc. From 1989 to 1994, he also served as the Chairman of
Garden State Cablevision, Inc.
C.B. Rogers, Jr., age 66, has been Chairman of Equifax, Inc. since 1992. He
was Chief Executive Officer of Equifax, Inc. from 1989 to January 1996. He is
Chairman of the Board of Directors and the Executive Committee of Equifax,
Inc. Mr. Rogers is a former Senior Vice President of International Business
Machines Corporation where he was employed for 33 years before joining
Equifax, Inc. in 1987. He also serves on the Board of Directors of Sears,
Roebuck & Co., Briggs & Stratton Corporation, Dean Witter Reynolds, Inc. and
Dean Witter, Discover & Co.
BOARD COMPOSITION
Directors are elected annually. The Amended Stockholders' Agreement provides
that the Board of Directors shall consist of 13 directors and that at each
annual meeting of the Company's stockholders at which directors are elected,
the holders of the Class B Common Stock (all of which is currently held by the
Cable Stockholders) will vote their shares in favor of nominees for director
to be designated as follows: (i) the holders of Class B Common Stock will
designate 10 nominees (with the right of a holder of Class B Common Stock to
designate one or more nominees depending on the percentage of the Class B
Common Stock held by it), (ii) the Board of Directors will designate the Chief
Executive Officer of the Company as a nominee and (iii) the Board of Directors
with the unanimous approval of the holders of Class B Common Stock that have
the right to designate nominees for director shall designate by unanimous
consent two individuals who are neither employed by nor affiliated with TCG or
any holder of Class B Common Stock as nominees for director. The holders of
the Class A Common Stock will not have the right, as a class, under the
Company's Amended and Restated Certificate of Incorporation or the Amended
Stockholders' Agreement to nominate any individuals for election to the Board
of Directors. Under the Amended Stockholders' Agreement, a holder of Class B
Common Stock generally is entitled to designate one director nominee for each
9% of the outstanding shares of Class B Common Stock held by it and its
affiliates. Pursuant to the Amended Stockholders' Agreement, subject to
certain exceptions, upon the consummation of the Stock Offerings, Continental
loses the right to designate any director nominees, and the right to designate
such director nominees will be reallocated among the other holders of Class B
Common Stock with each of Cox and TCI being entitled to designate an
additional director.
It is currently anticipated that directors who are officers of the Company
or of any of the holders of Class B Common Stock will receive no compensation
for their services as directors. Each director who is not an officer of the
Company or of any of the holders of Class B Common Stock is entitled to
receive an annual retainer of $25,000 (to be paid 50% in cash and 50% in Class
A Common Stock) and an additional $1,000 plus reasonable expenses for
attending each meeting of the Board of Directors. Each such director is also
entitled to be paid $1,000 annually for each committee of the Board of
Directors for which such director serves as chairman.
Messrs. Dillon, Robbins and Woodrow are designees of Cox. Messrs. Clouston,
Gaines and Romrell are designees of TCI. Messrs. Roberts and Smith are
designees of Comcast. Mr. Cooper and Ms. Hawthorne are designees of
Continental. Upon consummation of the Stock Offerings, each of Mr. Cooper and
Ms. Hawthorne will resign from the Board of Directors, and each of Cox and TCI
will designate an additional director. See "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement."
63
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of TCG has established the Compensation and Benefits
Committee (the "Compensation Committee") to address and make recommendations
with respect to the compensation of executive officers and the establishment
of compensation and benefit plans. Messrs. Cooper, Dillon, Gaines and Smith
currently constitute the Compensation Committee.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee to meet with and
consider suggestions from members of management and of the Company's internal
audit staff, as well as with the Company's independent accountants, concerning
the financial operations of the Company. The Audit Committee also has the
responsibility to review audited financial statements of the Company and
consider and recommend the employment of, and approve the fee arrangements
with, independent accountants for both audit functions and for advisory and
other consulting services. Messrs. Dillon, Gaines, Hawthorne and Smith are the
members of the Audit Committee.
EXECUTIVE COMPENSATION
The following table shows compensation paid to, deferred or accrued for the
benefit of the Company's President, Chief Executive Officer and Chief
Operating Officer and each of the four remaining most highly compensated
executive officers (the "Named Executive Officers") for all services rendered
to TCG during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND ALL OTHER
PRINCIPAL COMPENSA-
POSITION(a) YEAR SALARY(b) BONUS TION (c)
----------- ---- -------------------- ---------
<S> <C> <C> <C> <C>
Robert Annunziata....................... 1995 $240,000 $185,580 $27,879
President, Chief Executive Officer and
Chief Operating Officer
John A. Scarpati........................ 1995 159,931 115,020 20,088
Senior Vice President and Chief
Financial Officer
Robert C. Atkinson...................... 1995 156,711 90,455 13,549
Senior Vice President
Alf T. Hansen........................... 1995 148,462 95,250 13,168
Senior Vice President
Stuart A. Mencher....................... 1995 146,284 96,200 10,337
Senior Vice President
</TABLE>
- - --------
(a) As of the effective date of the Stock Offerings: (i) Mr. Annunziata will
be granted Par Options for 121,036 shares of Class A Common Stock and
Premium Options for 30,259 shares of Class A Common Stock; (ii) Mr.
Scarpati will be granted Par Options for 64,149 shares of Class A Common
Stock and Premium Options for 16,037 shares of Class A Common Stock; (iii)
Mr. Atkinson will be granted Par Options for 44,380 shares of Class A
Common Stock and Premium Options for 11,095 shares of Class A Common
Stock; (iv) Mr. Hansen will be granted Par Options for 34,294 shares of
Class A Common Stock and Premium Options for 8,573 shares of Class A
Common Stock; and (v) Mr. Mencher will be granted Par Options for 32,276
shares of Class A Common Stock and Premium Options for 8,069 shares of
Class A Common Stock. See "1993 Stock Option Plan" and "--Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values."
(b) Includes amounts deferred under the Teleport Communications Group Inc.
Retirement Savings Plan (the "Savings Plan") and Make-Up Plan of Teleport
Communications Group Inc. for the Retirement Savings Plan (the "Make-Up
Plan").
64
<PAGE>
(c) Includes amounts contributed by TCG to the Savings Plan, the Make-Up Plan
and the Basic and Supplemental Group Life Insurance Plans for each Named
Executive Officer as follows:
<TABLE>
<CAPTION>
SAVINGS MAKE-UP GROUP LIFE
PLAN PLAN PLAN
------- -------- ----------
<S> <C> <C> <C>
Mr. Annunziata................................... $ 6,750 $ 19,507 $ 1,622
Mr. Scarpati..................................... 8,063 11,521 504
Mr. Atkinson..................................... 5,438 7,651 460
Mr. Hansen....................................... 5,438 6,676 1,054
Mr. Mencher...................................... 4,125 4,900 1,312
</TABLE>
1993 STOCK OPTION PLAN
TCG established the Teleport Communications Group Inc. 1993 Stock Option
Plan (the "Option Plan") effective September 26, 1993. The Option Plan
provides for the issuance of incentive stock options ("ISOs") and non-
qualified stock options ("NQSOs") to key employees and consultants of TCG.
Under the Option Plan, an aggregate of 5,383,350 shares of Common Stock were
available for issuance, and as of December 31, 1995, 2,845,290 shares remained
available for additional grants. The Option Plan has been amended to increase
the number of shares available under the Option Plan to 7% of the aggregate
number of shares of Class A Common Stock and Class B Common Stock outstanding,
determined on a fully diluted basis as of the effective date of the Stock
Offerings. TCG intends to register the shares reserved under the Option Plan
with the SEC. The Option Plan provides for an adjustment of the number of
shares available for grant as options in the event of a stock split, stock
dividend, combination of shares, spin-off, spin-out or other similar change,
exchange or reclassification of the Common Stock at the discretion of the
Compensation Committee which administers the Option Plan. The Compensation
Committee has determined that the shares to be made available through the
options are shares of Class A Common Stock, and the Option Plan has been
amended accordingly. No individual may receive options (ISOs and NQSOs) for
more than 1,008,000 shares.
The Compensation Committee will be composed of two or more disinterested
members of the Company's Board of Directors (i.e., directors who have not
received an award of securities under the Option Plan during the year prior to
their appointment to the Compensation Committee). The Compensation Committee
currently consists of Messrs. Cooper, Dillon, Gaines and Smith.
The Compensation Committee has the discretion to determine which eligible
individuals will receive options, the number of shares to be covered by the
options, the exercise date of the options, whether the options should be ISOs
or NQSOs, and the terms and conditions of the options. The individuals
eligible for awards are key employees and consultants of TCG. The exercise
price of any option may not be less than the fair market value of the stock on
the date the option is granted. At the time an ISO is granted, the fair market
value of the Common Stock for which the ISO will vest in any year may not
exceed $100,000. Options awarded under the Option Plan generally are not
assignable or transferable except by the laws of descent and distribution. The
specific terms of any option awarded under the Stock Option Plan will be
reflected in a stock option agreement executed by TCG and the optionee. The
Compensation Committee has the discretion to amend an option to accelerate the
date upon which the option may be exercised. The Compensation Committee may
permit the exercise price to be paid in cash, through delivery of other shares
of Common Stock, by delivering irrevocable instructions to a financial
institution to deliver promptly to TCG the portion of sale or loan proceeds
sufficient to pay the exercise price, or through an election to have shares of
Common Stock withheld from the shares otherwise to be received by the
optionee.
Once vested, an option may remain exercisable until the earliest of: (i) 10
years from the date of grant, (ii) 30 days from the date on which the optionee
ceases to be employed by TCG or (iii) if the optionee's employment ceases by
reason of his or her death, disability, or retirement (under the terms of the
Savings Plan), the earlier of 10 years from the date of grant or one year
after the death, disability or retirement. If the optionee is terminated
without Cause or for Good Reason, after a Change in Control, all of his or her
options shall immediately vest and become exercisable for one year following
the Change in Control, but in no event beyond ten years from the
65
<PAGE>
date the option was granted. A "Change in Control" occurs if there is a direct
or indirect transfer of 50% or more of the legal or beneficial ownership of
the Common Stock, in one or more transactions, to any entity other than to any
of the Cable Stockholders or to any of their controlled subsidiaries. Cause
means the willful and continued failure by the optionee to substantially
perform his or her duties with TCG or the willful engaging by the optionee in
conduct that is materially injurious to TCG. "Good Reason" means a reduction
in compensation, a relocation of optionee's place of employment of more than
fifty miles or a reduction in the optionee's benefits. Optionees who are
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), must hold any options granted to them under the Option Plan
for at least six months from the date of the award. Only employees of TCG may
receive ISOs.
The Option Plan may be amended, suspended or terminated by the Board of
Directors of TCG in whole or in part at any time; provided that no such
amendment, suspension or termination of the Option Plan may adversely affect
the rights of or obligations to the optionees without such optionees' consent.
The Board of Directors of TCG also must obtain stockholder approval for any
change in the Option Plan that would materially increase the cost of the
Option Plan, materially increase the number of shares which may be issued
under the Option Plan or materially modify the requirements as to eligibility
for participation under the Option Plan.
The grant of an option under the Option Plan will not have any immediate
effect on the federal income tax liability of TCG or the optionee. If the
Compensation Committee grants an optionee a NQSO, then the optionee will
recognize ordinary income at the time he or she exercises the NQSO equal to
the difference between the fair market value of the Common Stock and the
exercise price paid by the optionee, and TCG will receive a deduction for the
same amount.
If the Compensation Committee grants an optionee an ISO then the optionee
generally will not recognize any taxable income at the time he or she
exercises the ISO but will recognize income only at the time he or she sells
the Common Stock acquired by exercise of the ISO. The optionee will recognize
income equal to the difference between the exercise price paid by the optionee
and the amount received for sale of the Common Stock, and such income
generally will be eligible for capital gain treatment. TCG generally is not
entitled to an income tax deduction for the grant of an ISO or as a result of
either the optionee's exercise of an ISO or the optionee's sale of the Common
Stock acquired through exercise of an ISO. However, if the optionee sells the
Common Stock within two years of the date of the grant to him or her of the
ISO or within one year of the date of the transfer to him or her of the Common
Stock following exercise of the ISO, the option is treated for federal income
tax purposes as if it were a NQSO: the income recognized by the optionee will
not be eligible for capital gain treatment and TCG will be entitled to a
federal income tax deduction equal to the amount of income recognized by the
optionee.
The Option Plan provides for put and call rights with respect to any Common
Stock acquired under the Option Plan so long as the Common Stock of TCG is not
listed on a national exchange or quoted on Nasdaq. An optionee has the right
to put the Common Stock he or she acquired under the Option Plan during the 60
days following the earlier of (i) his or her termination of employment or (ii)
the date the optionee has exercised all of his or her options (and met any
applicable holding period necessary to receive ISO treatment). TCG has the
right to call the Common Stock an optionee has acquired under the Option Plan,
upon thirty days' prior notice. The per share price paid for the Common Stock
under the put and call rights is based upon the appraised value of TCG as of
the preceding December 31.
The Compensation Committee has determined to grant certain executives and
employees awards of options to acquire an aggregate of 1,815,984 shares of
Class A Common Stock under the Option Plan as of the effective date of the
Stock Offerings in the form of (i) 10-year options for shares of Class A
Common Stock of the Company having an exercise price per share equal to the
price per share of the Class A Common Stock offered hereby (the "Stock
Offerings Price") (the "Par Options"); and (ii) 10-year options for shares of
Class A Common Stock having an exercise price per share equal to 135% of the
Stock Offerings Price per share (the "Premium Options").
66
<PAGE>
1992 UNIT APPRECIATION PLAN
TCG established the Teleport Communications Group Inc. 1992 Unit
Appreciation Plan (the "1992 UAP") effective January 1, 1992. The 1992 UAP
provides for the issuance to key employees of TCG and its affiliates of
incentive deferred compensation in the form of interests in the appreciation
in the fair market value of the Common Stock (a "Unit"). Each Unit has a value
equal to the fair market value of a share of Common Stock multiplied by 8.40
(as adjusted for dilutive events).
Under the 1992 UAP, Units were awarded to 26 employees of TCG. The awards
are subject to a five-year vesting schedule under which any employee who
terminated prior to December 31, 1994 would forfeit the entire award, any
employee who terminated between December 31, 1994 and December 30, 1995 would
be 60% vested, any employee who terminates between December 31, 1995 and
December 30, 1996 will be 80% vested and any employee who terminates on or
after December 31, 1996 will be fully vested in his or her Units.
Nevertheless, an employee who retires at normal retirement age would be fully
vested, an employee who retires at early retirement age would be 20% vested
for each full year elapsed since January 1, 1992 and any employee terminated
for Cause would forfeit all Units. Cause has the same meaning as in the Option
Plan. In the event an employee's employment is terminated without Cause or is
terminated for Good Reason following a Change in Control, the employee's
rights to his or her Units will immediately vest in full, and the employee
shall receive payment of his benefits within thirty days of the termination.
Good Reason has the same meaning as in the Option Plan. Change in Control
means the direct or indirect transfer of 50% or more of the legal or
beneficial ownership of TCG stock, in one or more transactions, to any entity
other than to Cox Enterprises, Inc. or TCI.
The value of the benefit to the employee under the 1992 UAP is equal to the
appreciation in the value of the Unit from January 1, 1992 until the earlier
of December 31, 1996, or the date the employee's employment with TCG
terminates. However, for those for whom the value of their Units is being
measured as of December 31, 1996, the value of their Units shall be the
greater of the value determined as described in the preceding sentence or the
average of the values on December 31, 1995 and December 31, 1996. The initial
base price of each Unit as of January 1, 1992 was $30.00, and the 1992 UAP
limits the amount of the appreciation to 200% of this value, or $60 for all
employees except Mr. Annunziata. Pursuant to Mr. Annunziata's employment
agreement, there is no limit on the appreciation he may receive under the 1992
UAP. See "--Employment Agreements." Benefits under the 1992 UAP are payable as
soon as practicable following the valuation of the Units, but not later than
March 31 following the end of the appreciation period. The Compensation
Committee has the discretion to pay benefits in cash or a combination of cash
and Common Stock. In the event TCG terminates the Plan, all Units will become
immediately 100% vested.
1993 UNIT APPRECIATION PLAN
TCG established the Teleport Communications Group Inc. 1993 Unit
Appreciation Plan (the "1993 UAP") effective January 1, 1993. The 1993 UAP
provides for the issuance to key employees of TCG and its affiliates of
incentive deferred compensation in the form of interests in the appreciation
in the fair market value of the Common Stock. The terms of the 1993 UAP are
substantially identical to the terms of the 1992 UAP, except that the initial
base price for each Unit as of January 1, 1993 is $34.85, the maximum benefit
per Unit is $69.70, and the vesting schedule and the maximum appreciation
period for a Unit is set forward one year. Under the 1993 UAP, Units were
awarded to 18 employees of TCG.
67
<PAGE>
The following table sets forth information as of December 31, 1995
concerning the value of stock option and UAP awards held by (i) each Named
Executive Officer, (ii) all executive officers as a group and (iii) all non-
executive officer employees as a group and concerning the value of stock
options awarded to the foregoing in 1996. No stock option or UAP awards were
made to any director who is not an executive officer. No stock options were
exercised by any Named Executive Officer in 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY- END(#)(a) FY-END($)(b)(c)
------------------------- -------------------------
NAME PLAN EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Robert Annunziata....... 1996 Par Options -- 121,036 -- $1,161,946
President, Chief 1996 Premium Options -- 30,259 -- 265,432
Executive Officer and 1993 Options 111,654 167,482 $ 961,072 1,441,610
Chief Operating Officer 1992 UAP 20,000 5,000 2,004,600 501,150
John A. Scarpati........ 1996 Par Options -- 64,149 -- $ 615,830
Senior Vice President 1996 Premium Options -- 16,037 -- 132,401
and Chief Financial 1993 Options 39,877 59,815 $ 343,240 514,861
Officer 1992 UAP 9,600 2,400 576,000 144,000
Robert C. Atkinson...... 1996 Par Options -- 44,380 -- $ 426,048
Senior Vice President 1996 Premium Options -- 11,095 -- 91,600
1993 Options 31,901 47,852 $ 274,592 411,889
1992 UAP 8,800 2,200 528,000 132,000
Alf T. Hansen........... 1996 Par Options -- 34,294 -- $ 329,222
Senior Vice President 1996 Premium Options -- 8,573 -- 70,779
1993 Options 27,116 40,674 $ 233,403 350,105
1992 UAP 5,200 1,300 312,000 78,000
Stuart A. Mencher....... 1996 Par Options -- 32,276 -- $ 309,850
Senior Vice President 1996 Premium Options -- 8,069 -- 66,618
1993 Options 20,736 31,104 $ 178,485 267,728
1992 UAP 5,200 1,300 312,000 78,000
Executive Officer 1996 Par Options -- 441,782 -- $4,241,107
Group.................. 1996 Premium Options -- 110,446 -- 911,842
1995 Options -- 5,782 -- 7,425
1994 Options -- 7,975 -- 40,815
1993 Options 302,264 588,977 $2,586,763 5,047,161
1993 UAP 2,820 1,880 196,554 131,036
1992 UAP 71,680 17,920 5,105,400 1,276,350
Non-Executive Officer
Employee Group......... 1996 Par Options(d) -- 1,030,613 -- $9,893,885
1996 Premium Options(d) -- 233,143 -- 1,924,828
1996 Options -- 25,122 -- 241,171
1995 Options -- 245,560 -- 315,334
1994 Options -- 268,967 -- 1,376,499
1993 Options -- 1,118,537 -- 9,594,144
1993 UAP 11,400 7,600 $ 794,580 529,720
1992 UAP 39,680 9,920 2,380,800 595,200
</TABLE>
- - --------
(a) SARs reported in the above table represent Units under the 1992 and 1993
UAP Plans. Each such Unit represents 8.4 shares of Class A Common Stock
subject to the limits described in "--1992 Unit Appreciation Plan" and "--
1993 Unit Appreciation Plan." For the 1992 and 1993 UAP Plans,
exercisable/ unexercisable means vested/unvested. All options granted,
except 1996 options to the President and all Senior Vice Presidents become
exercisable over a five-year period, with 20% of the option award becoming
exercisable as of each anniversary of the date of grant. 1996 options
granted to the President and all Senior Vice Presidents become exercisable
over a five-year period, with 40% of the options becoming exercisable
68
<PAGE>
as of the second anniversary of the date of grant and an additional 20%
becoming exercisable as of each anniversary thereafter. All options granted
to employees at the Vice President level and below become exercisable over a
five-year period, with 60% becoming exercisable as of the third anniversary
of the date of grant and an additional 20% becoming exercisable on the
fourth and fifth anniversary of the date of grant. All UAP awards vest over
a five-year period, with 20% of the award becoming vested as of each
anniversary of the date of grant.
(b) There were two tranches of options awarded in 1993 with exercise prices of
$6.90 and $7.84, respectively. The exercise prices per share for 1994 and
1995 options are $10.39 and $14.22, respectively. The base prices per Unit
for 1992 and 1993 UAP awards are $30.00 and $34.85 respectively. All UAP
awards, other than those granted to Mr. Annunziata, are limited to an
appreciation of 200% of the base price of the award. As of December 31,
1995, the fair market value per share of Common Stock, as determined by an
independent appraiser, was $15.50. The value of unexercised options awarded
in 1993, 1994 and 1995 were determined by multiplying the number of shares
underlying such options by the difference between the fair market value per
share of Common Stock as of December 31, 1995 and the exercise price per
share under the option.
(c) Par Options will have an exercise price per share equal to the Stock
Offerings price per share of Class A Common Stock offered hereby (the
"Stock Offerings Price"), and Premium Options will have an exercise price
per share equal to 135% of the Stock Offerings Price. Other options issued
in 1996, but prior to the Stock Offerings, have an exercise price equal to
the Stock Offerings price. The values of all options reflected in the table
as granted in 1996 are determined in accordance with the Black Scholes
model of valuing stock options.
(d) Individual 1996 option awards have not been finally determined for the non-
executive officer employee group. The Compensation Committee has determined
to grant 1996 Par Options for 1,472,395 shares and 1996 Premium Options for
343,589 shares to all executive officers and other employees in the
aggregate, and has determined to grant 1996 Par Options for 441,782 shares
and 1996 Premium Options for 110,446 shares to the executive officer group.
EMPLOYEE STOCK PURCHASE PLAN
TCG has adopted the Teleport Communications Group Inc. Employee Stock
Purchase Plan ("the Stock Purchase Plan"), effective as of the effective date
of the Stock Offerings. The Stock Purchase Plan is administered by a committee
designated by the Board of Directors (the "ESP Committee"). Each eligible
employee will be given an option to purchase up to a number of shares of Class
A Common Stock equal to 10% of his or her compensation plus bonus paid for the
calendar year preceding the year the option is awarded, divided by the purchase
price per share under the option. The Board of Directors has authorized the
issuance under the Stock Purchase Plan of a maximum number of shares of Class A
Common Stock equal to the maximum number of shares for which all eligible
employees as of the Stock Offerings could elect to be granted options for the
first offering period. Options relating to 745,000 shares of Class A Common
Stock will be available for issuance under the Stock Purchase Plan. TCG intends
to register the shares reserved under the Stock Purchase Plan with the SEC.
Options granted under the Stock Purchase Plan will expire 12 months after the
grant date. In no case may an employee receive an option which would permit him
or her to purchase more than $25,000 of shares, valued as of the grant date,
for each calendar year in which the option is outstanding. Eligible employees
are those individuals employed by TCG as of the grant date. The price of the
shares offered to employees under the Stock Purchase Plan will be 85% of the
fair market value of the Class A Common Stock on the grant date. Several
payment options are available under the Stock Purchase Plan (i) employees may
authorize TCG to withhold from their pay each payroll period during the
12 months succeeding the grant date, an amount to be applied toward the
purchase of shares, (ii) employees may provide TCG with a lump sum cash payment
five days prior to the exercise date, (iii) employees may elect a cashless
exercise whereby they agree to sell immediately upon exercise, through
irrevocable broker instructions provided to TCG, such portion of their option
shares as is necessary to
69
<PAGE>
satisfy the exercise price and to promptly remit such sale proceeds to TCG and
(iv) subject to the consent of the ESP Committee, employees may direct TCG to
withhold from their option shares such shares as are necessary to satisfy the
exercise price.
Generally, the employee does not recognize taxable income, and TCG is not
entitled to an income tax deduction, on the grant or exercise of an option
under the Stock Purchase Plan. If the employee sells the shares acquired upon
exercise of his or her option at least one year after the date he or she
exercised the option and at least two years after the date the option was
granted to him or her, then the discount between the fair market value of the
shares on the date of grant and the exercise price will be recognized as
ordinary income and the appreciation over the fair market value as of the date
of grant will be treated as a capital gain. TCG will be entitled to an income
tax deduction corresponding to the amount of ordinary income recognized by the
employee. If the employee sells the shares acquired upon the exercise of his
or her option at any time within (i) one year after the date of exercise of
the option, or (ii) two years after the date the option was granted, then the
employee will recognize ordinary income in an amount equal to the excess, if
any, of (x) the lesser of the sale price or the fair market value on the date
of exercise, over (y) the exercise price of the option. TCG will generally be
entitled to a deduction in an amount equal to the amount of ordinary income
recognized by the employee.
The Stock Purchase Plan may be amended, suspended or terminated by the Board
of Directors at any time, provided no such amendment, suspension or
termination of the Stock Purchase Plan may adversely affect the rights of or
obligations to the participants without such participants' consent, and any
such amendment, suspension or termination will be subject to the approval of
TCG stockholders to the extent required by any federal or state law or
regulation of any stock exchange.
1996 EQUITY INCENTIVE PLAN
TCG has established the Teleport Communications Group Inc. 1996 Equity
Incentive Plan (the "Equity Incentive Plan"), effective as of the effective
date of the Stock Offerings, to provide opportunities for select employees of
TCG to participate in the appreciation in the value of TCG after the initial
public offering. It is anticipated that the Board of Directors will authorize
the issuance of up to 637,792 shares of Class A Common Stock under the Equity
Incentive Plan. TCG intends to register such shares with the SEC. The Equity
Incentive Plan is administered by the Compensation Committee which has the
full and discretionary power to award shares under the Equity Incentive Plan.
Under the Equity Incentive Plan, each employee who has an award under the
1992 UAP or the 1993 UAP, whether or not he has elected to defer receipt of
the payment of benefits thereunder pursuant to the Deferred Compensation Plan
(as defined herein), and who is currently employed by TCG as of the effective
date of the Stock Offerings has the right to waive his interest in all or any
portion of his benefit in the 1992 UAP or 1993 UAP. In exchange therefor, the
employee will be granted such number of shares under the Equity Incentive Plan
that are equal to the value of the portion of the employee's benefit so waived
(determined as of the effective date of the Stock Offerings) multiplied by
120%, and divided by the initial public offering price per share of Class A
Common Stock. No employee may receive more than 54,000 shares under the Equity
Incentive Plan. A share under the Equity Incentive Plan is equivalent in value
to one share of Class A Common Stock. Thus, the value of the benefit payable
under the Equity Incentive Plan will increase with any appreciation of Class A
Common Stock. Messrs. Scarpati, Atkinson and Hansen intend to waive 25%, 85%
and 100% of their UAP benefits, respectively, in exchange for shares under the
Equity Incentive Plan. Mr. Mencher has not yet indicated the amount of his UAP
benefits, if any, which he may waive; his election is not due until July 1,
1996. Mr. Annunziata is not eligible to participate in the Equity Incentive
Plan.
Shares under the Equity Incentive Plan granted in exchange for 1992 UAP
benefits are subject to a two-year vesting schedule, with 70% of the shares
becoming vested as of the first anniversary of the Stock Offerings and the
remaining 30% becoming vested as of the second anniversary of the Stock
Offerings. Shares granted in exchange for the 1993 UAP benefits are subject to
a three-year vesting schedule, with 70% of the shares becoming vested as of
the second anniversary of the Stock Offerings and the remaining 30% becoming
vested as
70
<PAGE>
of the third anniversary of the Stock Offerings. A participant shall become
100% vested in his shares in the event of death, total disability or a Change
in Control. Change in Control has the same meaning as in the Option Plan. In
the event a participant's employment is terminated for Cause, his interest in
each and every share awarded under the Equity Incentive Plan shall be
forfeited. Termination for Cause has the same meaning under the Equity
Incentive Plan as it does under the 1992 UAP and 1993 UAP.
Shares under the Equity Incentive Plan will be paid to a participant either
in one lump sum cash payment or in shares of Class A Common Stock, as
determined in the discretion of the Compensation Committee, on the payment
date elected by the participant at the time he elects to participate in the
Equity Incentive Plan. In general, the payment date elected may be the last
business day of any calendar quarter during the period commencing June 30,
1998 and ending June 30, 2001.
RETIREMENT SAVINGS PLAN
TCG established the Savings Plan, a defined contribution plan which includes
a qualified cash or deferred arrangement under Section 401(k) of the Code,
effective January 1, 1992. Employees of TCG who have completed one year of
employment are eligible to participate in the Savings Plan, subject to certain
exceptions. An employee participating in the Savings Plan may elect to defer
and have contributed to the Savings Plan an amount up to 15% of such
employee's eligible compensation, on a pre-tax basis. The Savings Plan
provides for TCG to contribute a matching contribution to a participating
employee's account under the Savings Plan in an amount equal to 50% of the
amount of eligible compensation deferred and contributed to the employee's
account, up to 6% of such employee's eligible compensation, provided that the
maximum amount of such contribution shall not exceed $1,500 per participant
per year. In addition, the Savings Plan also provides for TCG to contribute to
each participating employee's account under the Savings Plan an amount equal
to a certain percentage of such participant's eligible compensation, which
percentage, limited to a maximum of 8%, is based on the employee's years of
employment with TCG and annual salary. Such contributions are allocated solely
to participating employees who have attained age twenty-one. TCG contributions
pursuant to the Savings Plan are subject to a five-year vesting schedule,
based upon each participating employee's years of employment with TCG.
Matching contributions vest at the rate of 20% per year of service such that
an employee's account will be fully (100%) vested after five years of service.
Other contributions made by TCG are subject to a five-year cliff vesting
schedule, with 0% vested for an employee with less than five years of service
and 100% vested for an employee with five or more years of service.
MAKE-UP PLAN FOR THE RETIREMENT SAVINGS PLAN
TCG established the Make-Up Plan, effective January 1, 1993. The President
of TCG and Senior Vice Presidents and Vice Presidents who are eligible to make
pre-tax salary deferrals to the Savings Plan are eligible for the Make-Up
Plan. The Make-Up Plan is an unfunded, non-qualified deferred compensation
plan which provides benefits to participants equal to those which would have
been provided under the Savings Plan but for the imposition of certain limits
under the Code and under the terms of the Savings Plan. For all participants,
the Make-Up Plan provides an additional matching contribution equal to the
amount which would have been contributed under the Savings Plan for such
participants, but for the $1,500 cap on matching contributions under the
Savings Plan. Senior Vice Presidents and the President of TCG are also
eligible for additional employer contributions under the Make-Up Plan equal to
the amount of employer contributions which would have been contributed to the
Savings Plan on their behalf, but for the limitation imposed by the Code on
compensation which may be taken into account in determining employer
contributions under the Savings Plan.
DEFERRED COMPENSATION PLAN
TCG established the Deferred Compensation Plan of Teleport Communications
Group Inc. (the "Deferred Compensation Plan"), effective as of January 1,
1996, to allow employees with UAP awards the opportunity to defer the payment
of such awards to a date later than that provided under the terms of the
awards. During each January, beginning with January 1996, with respect to any
UAP award that will become payable in the succeeding calendar year, a UAP
participant may elect to defer the payment of any portion of such UAP award,
71
<PAGE>
in increments of 25%, for a period of one to five years or until his
termination of employment; provided, however, that the Deferred Compensation
Plan's Administrative Committee must approve any deferral beyond five years.
Notwithstanding any election made by a participant, all amounts under the
Deferred Compensation Plan shall be paid as of the participant's termination
of employment. Payments under the Deferred Compensation Plan will be paid in a
lump sum.
The portion of any UAP award deferred under the Deferred Compensation Plan
will be contributed to a grantor trust established by TCG and shall be
invested thereunder in the same funds and in the same proportion that
contributions to the participant's account under the Savings Plan are
invested. The assets of the trust remain general assets of TCG, and the rights
of a participant in the Deferred Compensation Plan to the assets of the trust
are no greater than the rights of any other general unsecured creditor of TCG.
EMPLOYMENT AGREEMENTS
Robert Annunziata has entered into an employment agreement with TCG, dated
as of December 18, 1992 and as amended. The agreement provides that Mr.
Annunziata will be employed as Chairman of the Board of Directors, President
and Chief Executive Officer of TCG. The agreement establishes a base salary to
be paid to Mr. Annunziata each year which is subject to annual adjustment by
the Compensation Committee and increased at least 6% per year. For 1995, Mr.
Annunziata's base salary was $240,000. In addition, he is entitled to annual
bonuses in the range of 0% to 90% of his base salary, subject to the
attainment of certain performance objectives. The amount of the bonus is
determined at the discretion of the Compensation Committee. If the annual
goals set by the Compensation Committee are achieved, the target bonus is 60%
of Mr. Annunziata's base salary. Pursuant to the agreement, Mr. Annunziata
received 25,000 units under the Company's 1992 UAP. Mr. Annunziata would be
entitled to receive an award of comparable or greater economic opportunity
under any future unit appreciation plan adopted by TCG. In connection with
awards under the 1992 UAP, the agreement provides that the maximum
appreciation of 200% per Unit does not apply to Units awarded to him. In the
event of a direct or indirect transfer of 50% or more of the beneficial
ownership of the capital stock of TCG in one or more transactions to any
entity other than any of the Cable Stockholders and their respective
controlled subsidiaries (a "Change in Control"), all Units granted to Mr.
Annunziata under the 1992 UAP will fully vest and become payable. If TCG
terminates Mr. Annunziata's employment without Cause or if Mr. Annunziata
terminates his employment for Good Reason or within six months of a Change in
Control, then Mr. Annunziata is entitled to receive: (i) the continued payment
of his base salary, plus an annual bonus equal to no less than 50% of his base
salary, for a period of 30 months, (ii) immediate and full vesting of all
forms of deferred, contingent long-term compensation, including all UAP
awards, (iii) the greater of the options vested under the terms of his stock
option award as of the termination date or options for 89,722 shares of Common
Stock in the event of resignation for Good Reason or, in the event of
termination without Cause, of options for 167,481 shares of Common Stock and
(iv) the continuance of all benefits and perquisites for 30 months, or if
earlier, until the date Mr. Annunziata commences other employment providing
comparable benefits. Mr. Annunziata may be terminated for Cause if he
materially breaches his employment agreement by acting or willfully failing to
act with results that are materially and demonstrably injurious to the
business of TCG. Mr. Annunziata may terminate his employment for Good Reason
if (i) without his prior written consent, there is a material reduction in his
functions, duties and responsibilities as Chief Executive Officer, (ii)
without his consent, his office is relocated outside the Northeast Corridor or
(iii) there is a material breach of his employment agreement by TCG. If Mr.
Annunziata's employment agreement terminates for any reason he (or his estate)
will have the right to put any stock of TCG that was paid to him under any UAP
within 30 days after such termination at the appraised value of such stock
under such UAP. Mr. Annunziata has agreed not to compete with TCG for the term
of his employment with TCG and for an additional period of two years
thereafter in the local telecommunications business.
Each of the other Named Executive Officers also has entered into an
employment agreement with TCG, dated as of July 12, 1994. The terms of each of
these four agreements are substantially identical. The terms of the employment
agreements of Messrs. Scarpati and Atkinson expire on December 31, 1998, and
the employment agreements of Messrs. Hansen and Mencher expire on December 31,
1999. Each agreement
72
<PAGE>
specifies the base salary to be received by the executive, and provides for
annual adjustment of the base salary by the CEO, with the approval of the
Compensation Committee, provided that the annual increase must be at least 5%.
The following base salaries were provided for 1995: Mr. Scarpati--$159,931,
Mr. Atkinson--$156,711, Mr. Mencher--$146,284 and Mr. Hansen--$148,462. In
addition, each executive is entitled to annual bonuses in the range of 0% to
60% of his base salary, subject to the attainment of certain performance
objectives established by the CEO with the approval of the Compensation
Committee. The amount of the bonus is determined at the discretion of the
Compensation Committee. If the annual goals set by the Compensation Committee
are achieved, the target bonus must be at least 40% of the executive's base
salary. If TCG terminates the executive's employment without Cause or if,
following a Change in Control, the executive gives TCG at least six months
notice that he is terminating employment, then the executive is entitled to
receive (i) annual payments equal to his base salary, plus an annual bonus
equal to no less than 30% of his base salary, plus benefits, through the end
of the term of the agreement, but for no less than six months and (ii)
continued employment service credit, for the remaining term of the employment
agreement, for purposes of vesting under all forms of deferred compensation
and long-term incentive plans. The executive may be terminated for Cause if he
materially breaches his employment agreement by acting or willfully failing to
act with results that are materially and demonstrably injurious to the
business of TCG. With certain exceptions, a Change in Control is deemed to
occur if there is a direct or indirect transfer of 50% or more of the legal or
beneficial ownership of stock of TCG, in one or more transactions, to any
entity other than to any of the Cable Stockholders or any of their controlled
subsidiaries. Each agreement provides that during the six-month period
following his termination for any reason, the executive shall have the right
to require TCG to purchase from him any stock of TCG that he owns, at the then
appraised value or, if he terminates on or after July 1 of any year, at the
appraised value as of the following December 31. Each executive has agreed not
to compete with TCG during the term of his employment or while he is receiving
the severance benefits described above.
73
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recapitalization. Pursuant to the Reorganization Agreement, TCG and the
Cable Stockholders will effect the Reorganization, consisting of (i) the
acquisition by TCG of TCG Partners, (ii) the acquisition by TCG of additional
interests in the Local Market Partnerships, (iii) the contribution to TCG of
certain indebtedness owed by TCGI to the Cable Stockholders, (iv) the
amendment and restatement of the Certificate of Incorporation of TCGI, (v) the
amendment and restatement of the existing Stockholders' Agreement among TCGI
and its stockholders and (vi) redemption by the Company of 7,807,881 shares
(7,975,738 shares if the over-allotment options of the Underwriters of the
Stock Offerings are exercised in full) of Class B Common Stock held by a
subsidiary of Continental. See "The Reorganization."
Amended Stockholders' Agreement. In connection with the Reorganization, TCG
and the Cable Stockholders will enter into the Amended Stockholders'
Agreement. See "The Reorganization." The following summary description of the
Amended Stockholders' Agreement does not purport to be complete and is
qualified in its entirety by reference to the text of the Amended
Stockholders' Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Furthermore, there can be no
assurance that the Cable Stockholders will not cause the Amended Stockholders'
Agreement to be amended, modified or terminated or cause TCG to waive any
provision of the Amended Stockholders' Agreement.
The Amended Stockholders' Agreement provides that at each annual meeting of
the Company's stockholders at which directors are elected, the holders of the
Class B Common Stock will vote their shares in favor of nominees for director
to be designated as follows: (i) the holders of Class B Common Stock will
designate ten nominees (with the right of a holder of Class B Common Stock to
designate one or more nominees depending on the percentage of the Class B
Common Stock held by it), (ii) the Board of Directors of the Company will
designate by unanimous consent the Chief Executive Officer of the Company as a
nominee and (iii) the Board of Directors with the unanimous approval of the
holders of Class B Common Stock that have the right to designate nominees for
director shall designate two individuals who are neither employed by nor
affiliated with TCG or any holder of Class B Common Stock as nominees for
director. Under the Amended Stockholders' Agreement, a holder of Class B
Common Stock generally is entitled to designate one director nominee for each
9% of the outstanding shares of Class B Common Stock held by it and its
affiliates. The holders of the Class A Common Stock will not have the right,
as a class, under the Company's Amended and Restated Certificate of
Incorporation or the Amended Stockholders' Agreement to nominate any
individuals for election to the Board of Directors. The ability of Continental
Teleport (or its successor) to designate any directors after the earlier of
the consummation of its merger with U S WEST, Inc. or of the Stock Offerings
is limited in accordance with the terms of the Amended Stockholders'
Agreement. If Continental Teleport is not permitted to designate one or more
directors pursuant to certain contingencies described in the Amended
Stockholders' Agreement, the ability of the other holders of Class B Common
Stock to designate directors would be subject to adjustment in accordance with
the terms of the Amended Stockholders' Agreement.
The Amended Stockholders' Agreement prohibits any transfer of Class B Common
Stock held by the parties thereto, unless expressly permitted under the terms
thereof. Parties to the Amended Stockholders' Agreement have certain rights of
first offer and rights of first refusal thereunder with respect to proposed
sales of the Class B Common Stock.
Each holder of Class B Common Stock has the right to sell all or a part of
its Class B Common Stock upon receiving a bona fide offer from an unaffiliated
third party, subject to giving notice to the other holders of Class B Common
Stock who have designated at least one director, which notice shall contain an
offer to sell such stock to such other holders of Class B Common Stock on the
terms and conditions set forth in the offer from the third party. Subject to
certain limitations, the non-selling holders of Class B Common Stock have the
right to purchase pro rata all, but not less than all, of the Class B Common
Stock offered. If the non-selling holders of Class B Common Stock do not
purchase all of the Class B Common Stock offered, the offering holders of
Class B Common Stock may sell the Class B Common Stock to the third party on
the terms contained in the offer made to the other holders of Class B Common
Stock. However, unless the amount of Class B Common Stock is
74
<PAGE>
sufficient to entitle the transferee to designate a nominee for director under
the Amended Stockholders' Agreement (i.e., the total percentage of Class B
Common Stock that would be held by the transferee and certain of its
affiliates is at least nine percent) and the transferee agrees to become a
party to the Amended Stockholders' Agreement, any Class B Common Stock
included in the stock being sold must be converted to Class A Common Stock.
If any party desires to convert Class B Common Stock to Class A Common
Stock, it must first offer that stock to the other holders of Class B Common
Stock who have designated at least one director. If such other holders do not
elect to buy such stock, then such stock can be converted to Class A Common
Stock and sold by the selling stockholder free of restrictions under the
Amended Stockholders' Agreement. See "Description of Capital Stock."
The parties to the Amended Stockholders' Agreement will have demand
registration rights on the following terms: (i) no demand may be made for the
first six months after the Offerings, (ii) such parties collectively will have
the right to make one demand per year (with any such party having the right to
make such demand), (iii) the amount which can be sold pursuant to any demand
may be limited if the managing underwriter selected by the Company with the
approval of the party to the Amended Stockholders' Agreement that has included
the largest number of shares in the registration advises the Company that
marketing factors require a limitation of the number of shares to be
underwritten and (iv) if the amount determined pursuant to clause (iii) is
less than the aggregate amount which such parties want to sell in such
offering, each such party will have the right to sell its pro rata portion of
the maximum amount; provided, however, that during the period ending 42 months
after the date of the Offerings, if Continental is subject to a regulatory
requirement as a result of its merger with U S WEST, Inc. to reduce or
eliminate its investment in the Company, Continental will have a priority
claim in specified percentages on the amount specified in clause (iii) above
and the balance will be split proportionately among the other stockholders
which are a party to the Amended Stockholders' Agreement. The parties to the
Amended Stockholders' Agreement participating in the registration must
reimburse the Company for its out-of-pocket expenses incurred in connection
with any such demand registration.
The Amended Stockholders' Agreement will terminate when the aggregate voting
power of the Class B Common Stock represents less than 30% of the aggregate
voting power of all outstanding Common Stock.
Eastern TeleLogic Corporation and Comcast. In connection with the May 1993
issuance of TCG's stock to Comcast and Continental, TCG purchased from
Comcast, for approximately $6.5 million, 49% of the issued and outstanding
stock of Comcast CAP of Philadelphia, Inc. ("Comcast CAP"), which owns 51% of
the outstanding stock of Eastern TeleLogic Corporation ("ETC") on a fully-
diluted basis. ETC is a competitive access provider in the Philadelphia
metropolitan area. In connection with its purchase of stock of Comcast CAP,
TCG entered into a stockholders' agreement with Comcast Corporation and
Comcast CAP providing for, among other things, the corporate governance of
Comcast CAP, stock transfer restrictions, rights of first refusal and
preemptive rights.
Commencing on October 1, 1996, the minority shareholders of ETC will have
the right to require ETC to buy their shares, which right will be exercisable
during each 90-day period commencing on October 1 of each year. Similarly,
commencing on October 1, 1997, ETC will have the right to require the minority
shareholders of ETC to sell their shares to ETC, which right will be
exercisable during the 90-day period commencing on October 1 of each year. If
ETC does not make the required payment after the exercise of any put or call
right, the minority shareholders have the right to force a sale of the stock
or assets of ETC and may gain voting control of ETC. The purchase price to be
paid by ETC to the minority shareholders of ETC for the purchase of their
shares in ETC upon the exercise of the put or call right, which price would be
based on the fair market value of such shares, on a fully-diluted basis, as
determined by agreement among the parties or, in the absence of such
agreement, by the determination of independent investment banking firms.
In April 1996, TCG and Comcast entered into an agreement pursuant to which
TCG agreed that, upon exercise of put rights by the minority shareholders of
ETC, or in the event of any other sale (which must be approved by TCG) by the
minority shareholders of ETC to Comcast, TCG would acquire, on terms and for a
price yet to be negotiated (which must be approved by TCG), all of the direct
and indirect interests in ETC not
75
<PAGE>
currently owned by TCG. Any agreement between Comcast CAP or Comcast and the
minority shareholders of ETC regarding the acquisition of their shares must be
on terms and conditions acceptable to TCG. At the present time, Comcast has
not requested that TCG approve any agreement to purchase the interests of the
minority shareholders of ETC. In addition, since neither the put nor the call
periods have commenced under the ETC stockholders agreement, the valuation
mechanisms under that agreement have not been invoked. As a result, the
Company cannot predict what value would be determined for purposes of making
any put or call payments. While the Company cannot predict whether it will
acquire such interests or the price of such interests, the Company estimates
that the cost of acquiring all of the interests in ETC not currently owned by
it would exceed $100 million. In addition, in its agreement with Comcast, TCG
agreed to provide to Comcast, after acquisition of the ETC interests described
above, certain services on customary terms in the Philadelphia area, and
Comcast agreed to utilize exclusively TCG's wireline telecommunications
services in the Philadelphia area, subject to certain qualifications.
Operator Managed Ventures Services Agreements with Cox. Pursuant to the
terms of three Operator Managed Ventures Services Agreements between TCG and
certain affiliates of Cox, TCG has options to acquire up to a 35% interest in
the competitive access businesses conducted by such affiliates of Cox in New
Orleans, Oklahoma City and the Hampton Roads, Virginia area, respectively. To
the extent the Cox competitive access provider has derived revenue from any
contract entered into by TCG as a result of sales efforts engaged in by TCG on
behalf of such Cox operations, the purchase price shall be the ratio of the
annual TCG generated revenue to total annual revenue of the Cox operation
multiplied by the book value of the assets of the Cox operation. If such ratio
is less than 35%, TCG may purchase the balance, up to 35%, of that Cox
operation for the fair market value (as determined in accordance with the
Operator Managed Ventures Services Agreements) of the operation. There is no
cap or maximum purchase price under the terms of the Operator Managed Ventures
Services Agreements. The Company expects the fair market value of such Cox
operations to exceed the book value of the assets, so the maximum purchase
price TCG would pay for 35% of such operations is 35% of the fair market
value. If the formula required payment in excess of 35% of fair market value,
the Company would not exercise its option. Since the option to acquire the
Hampton Roads operation does not mature until November 1996, and the options
to acquire the New Orleans and Oklahoma City operations do not mature until
1999, the Company cannot predict whether it will acquire such interests or the
price of such interests, but would estimate that the maximum purchase price of
35% of the fair market value of such Cox operations today would not exceed $20
million.
TCG also provides management services to certain affiliates of Cox under
these agreements, including billing services, network monitoring and accounts
receivable functions. Under the terms of the agreements, TCG retains 8% of the
collected revenues from Cox customers as a royalty fee. Royalty fees recorded
from Cox were approximately $98,000, $27,000 and $0 for 1995, 1994 and 1993,
respectively, and are included in management and royalty fees in the
statements of operations. Included in accounts receivable-trade are
approximately $262,000 and $99,000 at December 31, 1995 and 1994,
respectively, for amounts owed by Cox customers.
Fidelity. In 1987, a subsidiary of TCG and a subsidiary of FMR Corp. created
a joint venture, Teleport Communications Boston. Pursuant to a series of
transactions consummated in October 1994, TCG acquired from a subsidiary of
FMR Corp. the 50% partnership interest in Teleport Communications Boston that
it did not own. As part of the transaction, TCG reimbursed the FMR Corp.
subsidiary for approximately $7 million of capital contributions paid by that
subsidiary to Teleport Communications Boston. The purchase price for the
partnership interest was $30.5 million which was paid by TCG's purchase of
stock of Continental valued at $30.5 million, and the delivery of that stock
to the FMR Corp. subsidiary. The purchase price for the purchase of the
Continental stock was paid by TCG's delivery to Continental of a promissory
note in the amount of $30.5 million, bearing interest at the rate of 7- 5/16%
per annum. The entire principal amount of the promissory note, plus accrued
interest in the amount of $105,320, was paid in November 1994. The promissory
note was cancelled upon such payment, and no amounts of principal or interest
remain outstanding thereunder. As a result of those transactions, Teleport
Communications Boston became a wholly owned subsidiary of TCG.
Residential Telephony Trials. At the request of certain cable television
operators, including Cable Stockholders, TCG is participating in residential
telephony trials in Arlington Heights, Illinois, Hartford, Connecticut and the
San Francisco Bay area. Although there are no agreements in effect, TCG
expects to be
76
<PAGE>
fully reimbursed for its costs incurred in connection with these trials. At
March 31, 1996, the amount due to TCG for reimbursement was $644,100, and is
included in miscellaneous accounts receivable.
Sales of Fiber Optic Cable. In 1994, TCG entered into agreements with
providers of fiber optic cable that contained discounts for certain volumes of
purchases. The agreements permitted TCG to purchase cable on
76_1
<PAGE>
behalf of affiliates, including minority partners in the local market
partnerships, and to apply those purchases toward the volume discounts. In
1995, TCG purchased cable on behalf of certain of the Cable Stockholders which
it then sold to them at cost. At March 31, 1996, the amount receivable from
the owners was approximately $3.4 million. TCG has purchased cable on behalf
of unaffiliated parties as well.
CAP Assets. In connection with the formation of the Local Market
Partnerships in Chicago, Dallas, Pittsburgh and Seattle, TCI has contributed
to the capital of such Local Market Partnerships certain businesses it owned
which provided local telecommunications services in the service area of such
Local Market Partnerships, in exchange for partnership interests in such Local
Market Partnerships. None of such businesses had a value in excess of $20.0
million, and each was valued based on the cost thereof. The agreed value of
the assets TCI contributed to TCG Chicago was approximately $4 million, for
which it received a 7.4% partnership interest (in addition to the 26.6%
interest it received for cash). The agreed value of the assets TCI contributed
to TCG Dallas was approximately $3.3 million, for which it received a 14.3%
partnership interest (in addition to the 40.8% interest it received for cash).
The agreed value of the assets TCI contributed to TCG Pittsburgh was
approximately $19 million, for which it received a 60% partnership interest.
The agreed value of the assets TCI contributed to TCG Seattle was
approximately $3.3 million, for which it received a 10.8% partnership interest
(in addition to the 32.0% interest it received for cash).
Facilities Arrangements. Affiliates of the Cable Stockholders have entered
into two types of arrangements with Local Market Partnerships and TCG pursuant
to which fiber optic and cable transmission facilities are made available to
them. Pursuant to the terms of one type of such arrangements, providing an
indefeasible right of use, the compensation payable by a Local Market
Partnership and TCG is based on the affiliate's cost of construction of such
facilities, generally payable over five years. For the year ended December 31,
1995, payments, representing principal plus interest, made to TCI, Cox,
Continental and Comcast pursuant to facilities lease arrangements with Local
Market Partnerships and TCG were approximately $8.3 million, $3.2 million,
$2.4 million and $394,000, respectively. For the year ending December 31,
1996, the approximate annual payments representing both principal and interest
expected to be made to TCI, Cox, Continental and Comcast pursuant to such
arrangements with the Local Market Partnerships and TCG are $10.3 million,
$4.8 million, $2.9 million and $1.9 million, respectively. Under the terms of
the other type of such arrangements, the Local Market Partnership or TCG
agrees to provide, install and maintain all customer premise and nodal
electronics equipment and provide 24-hour electronics maintenance and
monitoring with respect to the cable transmission service. The compensation
payable by such Local Market Partnership or TCG is based on a percentage of
the total monthly recurring amount which such Local Market Partnership or TCG
bills to its customers which are served through such affiliate's cable
transmission service. For the year ended December 31, 1995, the approximate
payments made to TCI and Continental pursuant to such arrangements with the
Local Market Partnerships and TCG were $414,000 and $597,000, respectively.
The Company believes that the terms of these arrangements are favorable to the
Company and were negotiated on an arm's-length basis.
The Company believes that the terms, taken as a whole, of the transactions
described under the headings "Eastern TeleLogic Corporation and Comcast,"
"Operator Managed Ventures Services Agreements with Cox," "Fidelity,"
"Residential Telephony Trials," "Sales of Fiber Optic Cable," "CAP Assets" and
"Facilities Arrangements," were no less favorable to the Company than could
have been obtained from unaffiliated parties.
77
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information, as of March 31, 1996, and as
adjusted to reflect the Reorganization, the purchase by the Company of
7,807,881 shares of Class B Common Stock held by Continental and the sale of
23,500,000 shares of Class A Common Stock by TCG in the Stock Offerings, with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by TCG to be the beneficial owner of more than 5% of any class of
the Company's voting securities, (ii) the Named Executive Officers and (iii)
all directors and executive officers as a group. Except as otherwise
indicated, the address of each holder is the same as the Company. Each holder
has sole voting and investment power with respect to all shares of stock
listed as owned by such person.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK PERCENT OF VOTE
------------- --------------- OF ALL CLASSES
NUMBER OF NUMBER OF OF COMMON
NAME SHARES % SHARES % STOCK
---- --------- --- ---------- ---- ---------------
<S> <C> <C> <C> <C> <C>
Cox(1)(6).................. -- -- 39,087,594 29.7% 29.2%
TCI(2)(6).................. 638,862 2.6% 48,779,388 37.1% 36.5%
Comcast(3)(6).............. -- -- 25,622,058 19.5% 19.1%
Continental(4)(6).......... -- -- 17,953,449 13.7% 13.4%
Robert Annunziata(7)....... 111,654 * -- -- *
John A. Scarpati(7)........ 39,877 * -- -- *
Robert C. Atkinson(7)...... 31,901 * -- -- *
Alf T. Hansen(7)........... 27,116 * -- -- *
Stuart A. Mencher(7)....... 20,736 * -- -- *
All directors and executive
officers as a group
(13 persons, including
those named above)(5)(7).. 302,264 1.2% -- -- *
</TABLE>
- - --------
* Less than 1%.
(1) Owned by Cox Teleport Partners, Inc., a wholly owned subsidiary of Cox, a
subsidiary of Cox Enterprises, Inc. The business address for Cox Teleport
Partners, Inc. and Cox Enterprises, Inc. is 1400 Lake Hearn Drive,
Atlanta, Georgia 30319.
(2) Owned by TCI Teleport, Inc., a wholly owned subsidiary of TCI. The
business address of TCI Teleport, Inc. and TCI is 5619 DTC Parkway,
Englewood, Colorado 80111-3000.
(3) Owned by Comcast Teleport, Inc., a wholly owned subsidiary of Comcast. The
business address of Comcast Teleport, Inc. and Comcast is 1500 Market
Street, Philadelphia, Pennsylvania 19102.
(4) Owned by Continental Teleport, Inc., a wholly owned subsidiary of
Continental. The business address of Continental Teleport, Inc. and
Continental is The Pilot House, Lewis Wharf, Boston, Massachusetts 02110.
(5) Except for the directors and executive officers named above, none of the
other directors of the Company beneficially own any shares of Class A
Common Stock or Class B Common Stock.
(6) Solely as a result of the agreement of the Cable Stockholders to vote in
favor of the others' director nominees under the Amended Stockholders'
Agreement, the Cable Stockholders may be deemed to share beneficial
ownership of the shares beneficially owned by each of them. See "Certain
Relationships and Related Transactions."
(7) Represents shares of Class A Common Stock beneficially owned by the
officer through vested rights to options issued under the 1993 Stock
Option Plan.
78
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
On May 22, 1995, the Company entered into a Loan Agreement (the "Revolving
Credit Agreement") with Toronto Dominion (Texas), Inc., as administrative
agent, Chemical Bank, as documentation agent, and the Banks (as defined in the
Revolving Credit Agreement) to finance capital expenditures and working
capital needs of the Company's subsidiaries and of the Local Market
Partnerships and to repay debt of the Company and its subsidiaries to the
Cable Stockholders. On December 19, 1995, pursuant to an Assumption Agreement,
all the rights and obligations of the Company pursuant to the Revolving Credit
Agreement were assumed by TCG New York, Inc. ("TCNY"), a wholly owned
subsidiary of TCGI, and the Company was released from any and all obligations
of TCNY under the Revolving Credit Agreement; provided, however, that TCG is
obligated to repay to TCNY an amount equal to the portion of the proceeds of
the loans which are provided to TCG or its other subsidiaries, and notes
evidencing such obligation must be collaterally assigned to the Banks as
security for the obligations of TCNY under the Revolving Credit Agreement.
The initial amount available to TCNY under the Revolving Credit Agreement
was $250 million; however, the available amount will be reduced according to a
prearranged progressive schedule until maturity at February 27, 2004. As of
March 31, 1996, $155 million was outstanding and TCNY had $74.6 million in
available capacity under the Revolving Credit Agreement.
At the option of TCNY, advances bear interest at a rate based on (i) the
Base Rate, which is the higher of (a) the Prime Rate of The Toronto-Dominion
Bank or (b) the Federal Funds Rate or (ii) the LIBOR. The interest rate on the
Revolving Credit Agreement as of March 31, 1996 was approximately 6.3%.
Interest on Base Rate advances is payable every calendar quarter. Interest on
LIBOR advances is payable at least every three months, or more frequently, at
the option of TCNY. In addition, TCNY must pay a commitment fee equal to
0.375% per annum on the unused commitment amount. The advances are guaranteed
by the subsidiaries of TCNY and secured by all the indebtedness of the
subsidiaries of TCNY to TCNY, the capital stock of the subsidiaries of TCNY
and the partnership interests of two of the subsidiaries of TCNY in Teleport
Communications New York, itself a subsidiary of TCNY and by the collateral
assignment of any notes evidencing loans made by TCNY to TCG or other
subsidiaries of TCG.
The Revolving Credit Agreement contains a number of covenants that restrict
TCNY and its subsidiaries from, among other things and except as specifically
provided in the Revolving Credit Agreement, incurring other indebtedness,
creating liens on their assets, liquidating, entering into merger or
consolidation transactions, disposing of assets outside the ordinary course of
business, providing guarantees, making certain investments and acquisitions,
entering into transactions with affiliates other than on an arms' length
basis, having unfunded ERISA Affiliates (as defined in the Revolving Credit
Agreement) and allowing the subsidiaries of TCNY to enter into transactions
limiting their ability to pay dividends to TCNY. The Revolving Credit
Agreement provides that TCNY is not permitted to pay dividends to TCGI at any
time prior to June 30, 1997, and may pay dividends to TCGI thereafter only if
(a) no default under the Revolving Credit Agreement exists, (b) the ratio of
the debt of TCNY to the product of two times its operating cash flow for the
prior two quarters is less than 5.0 to 1.0 and (c) such dividend is not paid
from the proceeds of any sale of assets. Amounts borrowed by TCNY under the
Revolving Credit Agreement may be lent to TCGI for general corporate purposes,
so long as such indebtedness is evidenced by promissory notes executed by TCGI
in favor of TCNY, and such promissory notes are pledged to the lenders under
the Revolving Credit Agreement. Finally, TCNY and its subsidiaries are
required to maintain certain levels of cash flow.
The Revolving Credit Agreement also contains customary events of default,
including, but not limited to, cross-default to other indebtedness of TCNY or
its subsidiaries, cross-acceleration to the indebtedness of TCG under the
Notes, certain decisions by the FCC, the loss of a Material License (as
defined in the Revolving Credit Agreement) and a Change of Control of TCNY
(which is defined as a change in the ownership of the stock of TCNY that
results in less than 50.1% of all voting rights relating to TCNY's capital
stock being owned, directly or indirectly, by one or more of the Cable
Stockholders, any of the Cable Stockholders and Sprint Corporation
79
<PAGE>
or any person owned by Sprint Corporation and any of the Cable Stockholders).
The occurrence of a payment default under, or the acceleration of, any
indebtedness for borrowed money of TCGI in excess of $50 million (including
the Notes) would be an event of default under the Revolving Credit Agreement.
The occurrence of an event of default would allow Toronto Dominion (Texas),
Inc., Chemical Bank and the Banks to accelerate the maturity of the
outstanding advances, call the guarantee of the subsidiaries of TCNY and
foreclose on the collateral.
Toronto Dominion (Texas), Inc. is the Administrative Agent under the
Revolving Credit Agreement and The Toronto-Dominion Bank is a lender under the
Revolving Credit Agreement, and each of them is an affiliate of Toronto
Dominion Securities (USA) Inc., which is one of the underwriters under the
Notes Offerings. An amount equal to approximately $14.0 million, plus interest
accrued thereon, will be paid to The Toronto-Dominion Bank from the proceeds
of the Offerings as a payment on the revolving credit facility. Chemical Bank
is the Documentation Agent and a lender under the Revolving Credit Agreement
and is an affiliate of Chase Securities Inc., which is one of the underwriters
under the Notes Offerings. An amount equal to approximately $14.0 million,
plus interest accrued thereon, will be paid to Chemical Bank from the proceeds
of the Offerings as a payment on the revolving credit facility. See
"Underwriting."
80
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Senior Notes will be issued pursuant to an Indenture (the "Senior Notes
Indenture") between the Company and United States Trust Company of New York,
as trustee (in such capacity, the "Senior Notes Trustee"). The Senior Discount
Notes will be issued pursuant to an Indenture (the "Senior Discount Notes
Indenture") between the Company and United States Trust Company of New York,
as trustee (in such capacity, the "Senior Discount Notes Trustee"). Any
references herein to a "Trustee" means the Senior Notes Trustee or the Senior
Discount Notes Trustee, as the context requires. The form and terms of the
Notes include those stated in the Indentures and those made part of the
Indentures by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders
of the Notes are referred to the Indentures and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the
Indentures does not purport to be complete and is qualified in its entirety by
reference to the Indentures, including the definitions therein of certain
terms used below. The proposed forms of the Indentures have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
The Notes will be unsecured obligations of the Company, ranking pari passu
in right of payment with all senior unsecured Indebtedness of the Company. On
a pro forma basis, after giving effect to the Reorganization, the Stock
Offerings and the sale of the Notes and the application of the net proceeds
therefrom (including the reduction of Indebtedness outstanding under the
Revolving Credit Agreement), at March 31, 1996, the Company would have had
approximately $968.3 million of Indebtedness outstanding (including $26
million of unsecured Indebtedness that will be subordinated to the Notes).
A significant portion of the operations of the Company is 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 Notes. As a result, the Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities and commitments of such
subsidiaries, including borrowings under the Revolving Credit Agreement. On a
pro forma basis, after giving effect to the Reorganization, the Stock
Offerings and the sale of the Notes and the application of the net proceeds
therefrom, at March 31, 1996, the subsidiaries of the Company would have had
approximately $189.4 million of total liabilities, including $62.5 million of
Indebtedness, and additional availability under the Revolving Credit Agreement
of $230 million.
TERMS OF THE SENIOR NOTES
The Senior Notes will be issued in an aggregate principal amount of $300
million and will mature on July 1, 2006. The Senior Notes will bear interest
at the rate of 9 7/8% per annum from July 2, 1996 or from the most recent
interest payment date to which interest has been paid or duly provided for,
payable in cash on January 1, 1997 and semiannually thereafter on July 1 and
January 1 in each year until the principal thereof is paid or duly provided
for, to holders of record on the immediately preceding June 15 and December
15, respectively. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Senior Notes will be payable as to principal, premium, if any, and
interest 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 may be made by check mailed to the holders of certificated
Senior Notes at their respective addresses set forth in the register of
holders of such Notes. 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 Senior Notes will be issued in registered
form, without coupons, and in denominations of $1,000 and integral multiples
thereof.
81
<PAGE>
Optional Redemption
Except as set forth below, the Senior Notes are not redeemable at the
Company's option prior to July 1, 2001. Thereafter, the Senior Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount thereof) set forth below plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 104.938%
2002........................................................... 103.292%
2003........................................................... 101.646%
2004 and thereafter............................................ 100.000%
</TABLE>
In addition, in the event of the first to occur after the Issuance Date and
prior to July 1, 1999 of (a) a Public Equity Offering for gross proceeds of
$150 million or more or (b) a sale or series of related sales by the Company
of its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150 million or more, the
Company may, at its option, within 60 days thereof, use up to 33% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Senior Notes originally issued at a
redemption price of 110% of the principal amount of the Senior Notes so
redeemed; provided that at least one-half of the aggregate principal amount of
such Senior Notes originally issued remains outstanding after such redemption.
Any such redemption may be effected only once and must be effected upon not
less than 30 nor more than 60 days' notice given within 30 days following such
Public Equity Offering or the most recent sale to a Strategic Equity Investor,
as the case may be. The Company will deliver to the Trustee a resolution of
its Board of Directors evidencing its election to redeem any Senior Notes,
along with an officers' certificate and an opinion of counsel stating that all
conditions precedent thereto have been complied with.
TERMS OF THE SENIOR DISCOUNT NOTES
The Senior Discount Notes will be issued at a discount to their principal
amount to generate aggregate gross proceeds to the Company of approximately
$625 million and will mature on July 1, 2007. The Senior Discount Notes will
accrete at a rate of 11 1/8%, compounded semiannually, to an aggregate
principal amount of $1,073,606,000 by July 1, 2001. Interest will not accrue
on the Senior Discount Notes prior to July 1, 2001. Thereafter, interest on
the Senior Discount Notes will accrue at the rate of 11 1/8% per annum and
will be payable in cash semiannually on January 1 and July 1 (each an
"Interest Payment Date"), commencing on January 1, 2002, to holders of record
on the immediately preceding December 15 and June 15, respectively; provided,
however, that at any time prior to July 1, 2001, the Company may elect to
commence the accrual of cash interest on an Interest Payment Date (from and
after such interest payment date), in which case the outstanding principal
amount at Stated Maturity of each Senior Discount Note will on such Interest
Payment Date be reduced to the Accreted Value of such Note as of such Interest
Payment Date and cash interest shall be payable with respect to such Note on
each Interest Payment Date thereafter. Except as otherwise described in this
paragraph, interest on the Senior Discount Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from July 1, 2001. Interest and Accreted Value will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
The Senior Discount Notes will be payable as to principal, premium, if any,
and interest 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 may be made by check mailed to the holders of
certificated Senior Discount Notes at their respective addresses set forth in
the register of holders of such Notes. 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 Senior Discount Notes will be issued
in registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof.
82
<PAGE>
Special Redemption
Senior Discount Notes aggregating up to $253 million in Accreted Value will
be subject to mandatory redemption at a redemption price of 101% of the
Accreted Value thereof as of the redemption date in the event that either (a)
within 270 days after the Issuance Date the Company has not received both
confirmation of the NYPSC of the opinion of its General Counsel or otherwise
received approval from the NYPSC of the issuance of the Notes and the approval
from the NJBPU to incur up to $2 billion of long-term debt or (b) either the
NYPSC or the NJBPU issues a final order denying the petition of the Company to
increase its borrowing authority to permit the issuance of the Notes and the
$26 million subordinated note of TCG to TCI (each event described in clause
(a) and (b), a "Special Redemption Event"). The redemption date (the "Special
Redemption Date") will be five Business Days after the occurrence of a Special
Redemption Event.
Upon occurrence of a Special Redemption Event, the Trustee shall mail a
notice to each holder of Senior Discount Notes stating, among other things,
that a Special Redemption Event has occurred, the amount of Senior Discount
Notes to be redeemed on the Special Redemption Date and the portion of such
holder's Senior Discount Notes that must be surrendered to the Paying Agent.
Optional Redemption
Except as set forth below, the Senior Discount Notes are not redeemable at
the Company's option prior to July 1, 2001. Thereafter, the Senior Discount
Notes will be subject to redemption at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount thereof
(subject to possible reduction as set forth above)) set forth below plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 105.563%
2002........................................................... 103.708%
2003........................................................... 101.854%
2004 and thereafter............................................ 100.000%
</TABLE>
In addition, in the event of the first to occur after the Issuance Date and
prior to July 1, 1999 of (a) a Public Equity Offering for gross proceeds of
$150 million or more or (b) a sale or series of related sales by the Company
of its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150 million or more, the
Company may, at its option, within 60 days thereof, use up to 67% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Senior Discount Notes originally issued at a
redemption price of 110% of the Accreted Value as of the redemption date of
the Senior Discount Notes so redeemed; provided that at least one-half of the
aggregate principal amount of such Senior Discount Notes originally issued
remains outstanding after such redemption. Any such redemption may be effected
only once and must be effected upon not less than 30 nor more than 60 days'
notice given within 30 days following such Public Equity Offering or the most
recent sale to a Strategic Equity Investor, as the case may be. The Company
will deliver to the Trustee a resolution of its Board of Directors evidencing
its election to redeem any Senior Discount Notes, along with an officers'
certificate and an opinion of counsel stating that all conditions precedent
thereto have been complied with.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
a purchase price (the "Purchase Price") equal to (a) in the case of the Senior
Notes, 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to such Change of Control Payment Date, or (b) in case of the Senior
Discount Notes, (i) 101% of the Accreted Value thereof on any Change of
Control Payment Date (as defined
83
<PAGE>
below) occurring prior to July 1, 2001, plus any accrued and unpaid interest
not otherwise included in the Accreted Value to such Change of Control Payment
Date or (ii) 101% of the principal amount thereof (subject to possible
reduction as set forth under "--Principal, Maturity and Interest") on any
Change of Control Payment Date occurring on or after July 1, 2001, in each
case in accordance with the procedures set forth in the applicable Indenture.
Within 30 days following any Change of Control, the Company will mail a
notice to each holder stating: (1) that the Change of Control Offer is being
made pursuant to the provisions of the applicable Indenture described herein
under "--Change of Control" and that all Notes duly and timely tendered will
be accepted for payment; (2) the Purchase Price and the purchase date (the
"Change of Control Payment Date"), which date shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed; (3) that any Notes
not tendered will continue to accrete and/or accrue interest, as the case may
be; (4) that, unless the Company defaults in the payment of the Purchase
Price, all Notes accepted for payment pursuant to the Change of Control Offer
shall cease to accrete and/or accrue interest, as the case may be, after the
Change of Control Payment Date; (5) that holders electing to have any Notes
purchased pursuant to a Change of Control Offer will be required to surrender
the Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (6) that holders will be
entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of Notes delivered
for purchase, and a statement that such holder is withdrawing his election to
have such Notes purchased; (7) that holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased portion must
be equal to $1,000 in principal amount or an integral multiple thereof; (8)
the instructions that the holders of Notes must follow in order to tender
their Notes; and (9) the circumstances and relevant facts regarding such
Change of Control.
The Company will 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 Notes in connection with a Change of Control.
The holders' right to require, subject to certain conditions, the Company to
repurchase its Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction that constitutes a Change of Control.
If a Change of Control Offer is made, there can be no assurance that the
Company will have sufficient funds to pay the Purchase Price for all of the
Notes that might be delivered by holders seeking to accept the Change of
Control Offer. In the event that a Change of Control Offer occurs at a time
when the Company does not have sufficient funds available to repurchase the
Notes or at a time when the Company is prohibited from repurchasing the Notes
under the terms of other Indebtedness (and the Company is unable either to
obtain the consent of holders of such other Indebtedness or to repay such
other Indebtedness), an Event of Default would occur under the Indentures.
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 the
holders of Notes to require the Company to repurchase such Notes as a result
of a sale, lease, transfer, conveyance or other disposition of less than all
of the assets of the Company and its subsidiaries to another Person may be
uncertain.
The Revolving Credit Agreement also provides for an event of default upon a
change of control as defined therein. See "Description of Certain
Indebtedness." The Revolving Credit Agreement limits the ability of the
Company to distribute cash from TCG New York, Inc. to purchase Notes upon a
Change of Control.
84
<PAGE>
SELECTION AND NOTICE
If less than all of the Senior Notes or the Senior Discount Notes, as the
case may be, are to be redeemed at any time, a selection of Notes for
redemption will be made by the relevant Trustee on a pro rata basis, subject
to the requirements of any national securities exchange on which such Notes
are listed, provided that no Note of $1,000 or less shall be redeemed in part.
Except with respect to a Special Redemption for which notice shall be mailed
upon occurrence of a Special Redemption Event, 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 Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, with
respect to the Notes or portions thereof called for redemption, discount will
cease to accrete or interest will cease to accrue, as the case may be.
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to (collectively, "incur") any Indebtedness (including, without
limitation, Acquired Indebtedness) other than Permitted Indebtedness, unless,
in the case of Indebtedness of the Company exclusively, (a) no Default or
Event of Default shall have occurred and be continuing at the time of the
proposed incurrence thereof or would occur as a result of such proposed
incurrence and (b) after giving effect to such incurrence on a pro forma basis
(i) with respect to such proposed incurrence of Indebtedness on or prior to
January 1, 2001, the Company's Indebtedness to Adjusted Total Equity Ratio
would not exceed 1.0 to 1.0, and (ii) with respect to such proposed incurrence
of Indebtedness thereafter, the Company's Indebtedness to EBITDA Ratio would
not equal or exceed 5.0 to 1.0.
Limitation on Restricted Payments
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment unless, at the time of such Restricted Payment and after
giving pro forma effect thereto:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the aggregate amount of all Restricted Payments subsequent to the
Issuance Date would not exceed the greater of:
(1) the sum of, without duplication :
(w) cumulative EBITDA of the Company and its Restricted
Subsidiaries less 1.4 times cumulative Consolidated Interest
Expense, in each case for the period (treated as one accounting
period) beginning on the first day of the Company's fiscal quarter
in which the Issuance Date occurs, and ending on the last day of the
Company's fiscal quarter immediately preceding such proposed
Restricted Payment; plus
(x) 100% of the net cash proceeds received by the Company from any
Person from the issuance and sale subsequent to the Issuance Date of
Equity Interests of the Company or of debt securities of the Company
that have been converted into such Equity Interests (other than
Equity Interests (or convertible debt securities) sold to a
Restricted Subsidiary and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock); minus
85
<PAGE>
(y) 100% of all Investments made pursuant to clause (d) of the
definition of "Permitted Investments" less any such amounts invested
in Local Market Partnerships that become Restricted Subsidiaries
prior to the first anniversary of the Issuance Date; minus
(z) the amount of any Investments in Joint Ventures pursuant to
clause (e)(ii) of the definition of "Permitted Investments" less the
Fair Market Value of the Company's interest in any Joint Ventures
that become Restricted Subsidiaries but not in excess of the amount
of any such Investments in such Joint Ventures pursuant to such
clause (e)(ii); and
(2) $10 million; and
(c) the Company would have been permitted to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
test set forth in clause (b) of the covenant entitled "Limitation on
Incurrence of Indebtedness."
The foregoing provisions of this covenant will not prohibit (i) the payment
of any dividend (or similar distribution with respect to Equity Interests)
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indentures; (ii) the redemption, purchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary in exchange
for, or out of the proceeds of the substantially concurrent sale (other than
to a Restricted Subsidiary) of, other Equity Interests (other than any
Disqualified Stock) of the Company; (iii) the redemption, purchase, retirement
or other acquisition of any Equity Interests of a Restricted Subsidiary in
exchange for, or out of the proceeds of the substantially concurrent sale
(other than to another Restricted Subsidiary) of, other Equity Interests
(other than Disqualified Stock) of such Restricted Subsidiary, (iv) the
redemption, purchase, defeasance, acquisition or retirement of Indebtedness
that is subordinated to the Notes (including premium, if any, and accrued and
unpaid interest, fees and expenses) in exchange for, or out of the proceeds of
the substantially concurrent sale (other than to a Restricted Subsidiary) of,
(A) Equity Interests (other than Disqualified Stock) of the Company or
(B) Refinancing Indebtedness permitted to be incurred under the covenant
entitled "Limitation on Incurrence of Indebtedness"; (v) any purchase,
redemption, retirement or acquisition, from minority partners in Local Market
Partnerships existing on the Issuance Date, of any Capital Stock of such Local
Market Partnership at the time or after it becomes a Restricted Subsidiary;
(vi) any distribution in respect of partners' income tax liability and any
other distribution that is required to be made pursuant to the terms of any
partnership agreement or similar operating agreement in effect as of the
Issuance Date governing any Local Market Partnership existing as of the
Issuance Date or, to the extent that it is pro rata or required under law, any
distribution that is required to be made pursuant to the terms of any other
similar partnership or similar operating agreement entered into after the
Issuance Date; (vii) the purchase, redemption, retirement or acquisition by
the Company of shares of Capital Stock of the Company from Continental
Teleport, Inc. pursuant to the Reorganization Agreement as described under
"Use of Proceeds"; (viii) the purchase, redemption or other acquisition or
retirement for value of Capital Stock, or options, warrants or rights to
purchase or acquire shares of Capital Stock, of the Company or any Restricted
Subsidiary, or similar securities, held by officers or employees or former
officers or employees of the Company or its Restricted Subsidiaries (or their
estates or beneficiaries under their estates), upon death, disability,
retirement or termination of employment in an aggregate amount not to exceed
$2 million per year; and (ix) Permitted Investments provided that no default
described in clauses (i) or (ii) of the first paragraph under "Events of
Default and Remedies" shall have occurred and are continuing at the time such
Permitted Investments are made or shall occur as a consequence thereof.
For purposes of this covenant, if a particular Restricted Payment involves a
non-cash payment, including a distribution of assets, then the amount of such
Restricted Payment shall be deemed to be an amount equal to the sum of the
cash portion of such Restricted Payment, if any, plus an amount equal to the
Fair Market Value of the non-cash portion of such Restricted Payment.
Not later than the date of making any Restricted Payment (other than those
described under clauses (v), (vi), (vii) or (viii) of the second preceding
paragraph), the Company shall deliver to the Trustee an Officers'
86
<PAGE>
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by clause (b), to the
extent applicable, of the covenant entitled "Limitation on Restricted
Payments" were computed, which calculations may be based upon the Company's
latest available financial statements.
Limitation on Liens
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or otherwise suffer to exist any Lien (other than Permitted Liens) on
any property or asset now owned or hereafter acquired, of the Company or any
such Restricted Subsidiary, unless (a) in the case of any Lien securing
Indebtedness that is expressly subordinated in right of payment to the Notes,
the Notes are secured by a Lien on such property or assets that is senior in
priority to such Lien for so long as such Indebtedness shall be so secured and
(b) in the case of any other Lien, the Notes are equally and ratably secured
with the obligation or liability secured by such Lien for so long as such
obligation or liability shall be so secured.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a) pay dividends,
in cash or otherwise, or make any other distributions on its Capital Stock or
with respect to any other interest or participation in, or measured by, its
profits owned by, or pay any Indebtedness owed to, the Company or any of its
Restricted Subsidiaries or (b) make loans or advances to the Company or any of
its Restricted Subsidiaries or (c) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except, in each case, for
such encumbrances or restrictions existing under or by reason of (i) the
Revolving Credit Agreement, provided that any such encumbrances or
restrictions, taken as a whole, are no more restrictive than those contained
in the Revolving Credit Agreement as in effect on the Issuance Date, (ii)
applicable law, (iii) any instrument governing Indebtedness or Capital Stock
of a Person acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, (iv) customary nonassignment provisions in leases,
rights-of-way agreements and other agreements entered into in the ordinary
course of business and consistent with past practices, (v) with respect to
clause (c) above, purchase money obligations for property acquired in the
ordinary course of business, (vi) Refinancing Indebtedness permitted to be
incurred under the covenant entitled "Limitation on Incurrence of
Indebtedness," provided that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced, (vii)
any other Indebtedness permitted to be incurred by a Restricted Subsidiary
under the covenant entitled "Limitation on Incurrence of Indebtedness,"
provided that the restrictions contained in the agreements governing such
Indebtedness are similar to those contained in the Revolving Credit Agreement
as in effect on the Issuance Date, (viii) provisions of the partnership
agreement or other operating agreement in effect as of the Issuance Date
governing any Local Market Partnership existing as of the Issuance Date, and
(ix) any agreement effecting the renewal, refundings, refinancing or extension
of any Indebtedness referred to in the preceding clause (iii), provided that
the restrictions contained in the agreements governing such new Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being extended, renewed, refinanced or replaced. For a
description of certain restrictions in the Revolving Credit Agreement relevant
to this covenant, see "Description of Certain Indebtedness."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Indentures will provide that the Company (a) will not permit any
Restricted Subsidiary to issue any Capital Stock (other than to the Company or
a Wholly Owned Restricted Subsidiary) and (b) will not permit any
87
<PAGE>
Person (other than the Company or a Restricted Subsidiary) to own any Capital
Stock of any Restricted Subsidiary; provided, however, that this covenant will
not prohibit (i) the sale or other disposition of all, but not less than all,
of the issued and outstanding Capital Stock of any Restricted Subsidiary owned
by the Company or any Restricted Subsidiary in compliance with the other
provisions of the Indentures, (ii) the ownership by directors of director's
qualifying shares or the ownership by foreign nationals of Capital Stock of
any Restricted Subsidiary, to the extent mandated by applicable law, (iii) the
ownership of Capital Stock of a Restricted Subsidiary issued and outstanding
either (A) as of the Issuance Date (including minority partnership interests
in Local Market Partnerships existing on the Issuance Date) or (B) prior to
the time that such Person becomes a Restricted Subsidiary so long as such
Capital Stock was not issued in contemplation of such Person's becoming a
Restricted Subsidiary of the Company or otherwise being acquired by the
Company or (iv) the issue or sale of Capital Stock of a Restricted Subsidiary
in a transaction not prohibited by the covenant entitled "Limitation on Asset
Sales," provided that such Restricted Subsidiary would remain a Restricted
Subsidiary after such transaction.
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries
The Indentures will provide that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee, assume or in any other
manner become liable for the payment of any Indebtedness of the Company unless
(i) (A) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the relevant Indenture providing for a Guarantee of
payment of the Senior Notes or Senior Discount Notes, as the case may be,
Notes by such Restricted Subsidiary and (B) with respect to any Guarantee of
subordinated Indebtedness of the Company by a Restricted Subsidiary, any such
Guarantee shall be subordinated to such Restricted Subsidiary's Guarantee with
respect to the relevant Notes at least to the same extent as such subordinated
Indebtedness is subordinated to the Notes and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Guarantee until
the relevant Notes have been paid in full. The incurrence by a Restricted
Subsidiary as a primary obligor of any Indebtedness that is guaranteed by the
Company will not be deemed a Guarantee of the Company's Indebtedness for
purposes of this covenant.
Notwithstanding the foregoing, any Guarantee of the relevant Notes or waiver
of rights created pursuant to the provisions described in the foregoing
paragraph will provide by their terms that they will be automatically and
unconditionally released and discharged upon the release by the holders of the
Indebtedness of the Company described in the preceding paragraph of their
Guarantee by such Restricted Subsidiary (including any deemed release upon
payment in full of all obligations under such Indebtedness, except by or as a
result of payment under such Guarantee), at a time when (A) no other
Indebtedness of the Company has been Guaranteed by such Restricted Subsidiary
or (B) the holders of all such other Indebtedness which is Guaranteed by such
Restricted
Subsidiary also release their Guarantee by such Restricted Subsidiary
(including any deemed release upon payment in full of all obligations under
such Indebtedness, except by or as a result of payment under such Guarantee).
Limitation on Asset Sales
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, cause, make or suffer to exist any
Asset Sale unless (a) the Company (or the applicable Restricted Subsidiary, as
the case may be) receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the assets or property sold or
otherwise disposed of and (b) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of
Eligible Cash Equivalents (or, if less than 75%, the remainder of such
consideration consists of Telecommunications Assets).
Within 365 days after any Asset Sale, the Company (or the applicable
Restricted Subsidiary, as the case may be) may apply (but shall not be
required to apply) the Net Proceeds from such Asset Sale (a) to permanently
reduce outstanding Indebtedness of the Company that is pari passu in right of
payment with the Notes or
88
<PAGE>
Indebtedness of any Restricted Subsidiary or (b) to invest or reinvest in
properties and assets that will be used in the Telecommunications Business.
Any Net Proceeds from any Asset Sale that are not used, invested or reinvested
at the end of such 365-day period as provided in the preceding sentence
constitute "Excess Proceeds." Pending final application of any Net Proceeds of
an Asset Sale, such Net Proceeds may only be invested in Eligible Cash
Equivalents or applied to pay Obligations under the Revolving Credit
Agreement. When the aggregate amount of Excess Proceeds exceeds $10 million,
the Company will be required to make an offer (an "Asset Sale Offer") to all
holders of the Notes to purchase on a pro rata basis the maximum principal
amount of Notes that may be purchased out of such Excess Proceeds at an offer
price in cash in an amount equal to (a) in the case of the Senior Notes, 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date fixed for the closing of such offer, or (b) in the case of the Senior
Discount Notes, 100% of the Accreted Value on the date fixed for closing of
such offer (if such date is prior to July 1, 2001) plus any accrued and unpaid
interest not otherwise included in the Accreted Value on such date, or 100% of
the principal amount thereof (subject to possible reduction as set forth under
"--Principal, Maturity and Interest") plus accrued and unpaid interest, if
any, to the date fixed for the closing of such offer (if such date is on or
after July 1, 2001) in accordance with the procedures set forth in the
Indentures. To the extent that the aggregate Accreted Value or principal
amount, as the case may be, of the Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds remaining after the consummation of any
required Asset Sale Offer to the holders of the Notes, the Company may use any
remaining Excess Proceeds for general corporate purposes not otherwise
prohibited by the Indentures. If the aggregate Accreted Value or principal
amount, as the case may be, of the Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, then the Trustee will select the Notes
to be purchased on the basis set forth under "--Selection and Notice" above.
Upon completion of any required Asset Sale Offer to the holders of the Notes,
the amount of Excess Proceeds will be reset at zero. The provisions of this
covenant shall not apply to any transaction that is permitted under the
provisions of the covenant described under "Limitation on Merger,
Consolidation or Sale of Assets" and to certain transactions that are not
"Asset Sales," including certain Restricted Payments. See "--Certain
Definitions" for the definition of Asset Sale.
Limitation on Transactions with Stockholders and Affiliates
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, render any
services to or receive any services from, conduct any business or enter into
or permit to exist any transaction or series of related transactions within
any twelve-month period (including, but not limited to, the purchase, sale,
exchange, lease, transfer or other disposition of any of its properties or
assets) or enter into any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is fair to
the Company or the relevant Restricted Subsidiary and on terms that are no
less favorable, taken as a whole, to the Company or the relevant Restricted
Subsidiary than those that could have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person (or, in the event that there are no comparable transactions involving
unrelated Persons to apply for comparative purposes, is otherwise on terms
that, taken as a whole, the Company has determined to be fair to the Company
or the relevant Restricted Subsidiary) and (b) the Company delivers to the
Trustee with respect to any Affiliate Transaction involving an aggregate
consideration in excess of $15 million, either (i) a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that each such
Affiliate Transaction complies with clause (a) above and which Board
Resolution shall have been approved by a majority of the directors on the
Board of Directors who are disinterested with respect to such transaction or
(ii) a written opinion from a nationally recognized investment banking firm
that each such Affiliate Transaction complies with clause (a) above (without
regard to the parenthetical clause thereof).
Notwithstanding the foregoing provisions, the following shall not be deemed
to be Affiliate Transactions: (A) any transaction (1) in the ordinary course
of business between the Company or any Restricted Subsidiary and any Affiliate
thereof engaged in the Telecommunications Business or (2) with respect to the
lease or sharing or other use of cable or fiber lines, equipment, transmission
capacity, rights-of-way or other access rights,
89
<PAGE>
between the Company or any Restricted Subsidiary and any other Person,
provided, however, in either case, that such transaction is on terms that are
no less favorable, taken as a whole, to the Company or the relevant Restricted
Subsidiary than those that could have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person (or, in the event that there are no comparable transactions involving
unrelated Persons to apply for comparative purposes, is otherwise on terms
that, taken as a whole, the Company has determined to be fair to the Company
or the relevant Restricted Subsidiary); (B) any transaction between the
Company and any Wholly Owned Restricted Subsidiary or between any Wholly Owned
Restricted Subsidiaries; (C) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary (including ordinary course transactions with officers or
directors with respect to compensation, bonus, employee benefit and severance
arrangements, and payments under indemnification arrangements existing as of
the Issuance Date or as may be permitted by law with any officer or director);
(D) transactions permitted by the provisions of the Indentures described above
under "Limitation on Restricted Payments"; (E) transactions undertaken
pursuant to contractual obligations in place as of the Issuance Date; (F)
purchases of goods and services, any service trials, market testing and new
product arrangements entered into in the ordinary course of business and on
terms consistent with past practice; and (G) all transactions necessary to
effect the Reorganization.
Limitation on Merger, Consolidation or Sale of Assets
The Indentures will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (i) the Company is the surviving corporation or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation, partnership or
limited liability company organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed
by or surviving any such consolidation or merger (if other than the Company)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company,
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee, under the Notes and the Indentures and, in the case of such surviving
Person that is a partnership, at least one subsidiary of such Person which
shall be a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia shall also assume the
Obligations of the Company under the Notes as a co-obligor with such surviving
Person; (iii) immediately before and after giving effect to such transaction
or series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or Event
of Default shall have occurred and be continuing or would result therefrom;
and (iv) immediately after giving effect to any such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions) as if such transaction
or series of transactions had occurred on the first day of the determination
period, the Company (or the surviving entity if the Company is not the
continuing obligor under the Notes) would be permitted to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant entitled "Limitation on Incurrence of Indebtedness."
REPORTS TO HOLDERS
The Company shall deliver to the Trustee and to the holders, within 30 days
after it files them with the Commission, copies of its annual and quarterly
reports which the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may
not be required to remain subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act or otherwise report on an annual and quarterly
basis on forms provided for such annual and quarterly reporting pursuant to
rules and regulations promulgated by the Commission, the Indentures will
require the Company to continue to file with the Commission and provide to the
Trustee and to the holders annual audited financial
90
<PAGE>
statements and quarterly unaudited financial statements, along in each case
with a "Management's Discussion and Analysis of Results of Operations and
Financial Condition," all in the form the Company would be required to file
were it subject to the Exchange Act reporting requirements. The Company shall
not be obligated to file any such reports with the Commission if the
Commission does not permit such filings.
EVENTS OF DEFAULT AND REMEDIES
The Indentures will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes or the Senior Discount Notes, as the case may be; (ii) default in
the payment when due of principal of or premium, if any, on the Senior Notes
or the Senior Discount Notes, as the case may be; (iii) failure by the Company
to comply with the provisions described under "--Change of Control" and in the
covenant entitled "Limitation on Asset Sales"; (iv) failure by the Company for
60 days after notice by the Trustee or the holders of 25% of the aggregate
principal amount of the outstanding Senior Notes or the Senior Discount Notes,
as the case may be, to comply with any covenants and agreements contained in
the relevant Indenture or Notes (other than a default in the performance, or
breach, of a covenant or agreement which is specifically dealt with in (i),
(ii) or (iii) above); (v) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries), whether such Indebtedness or guarantee now
exists, or is created after the Issuance Date, which default (a) is caused by
a failure to pay when due at stated maturity principal or interest on such
Indebtedness within the grace period (including any extension thereof granted
by the holders of such Indebtedness) provided in such Indebtedness (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $12 million or more; (vi) failure by
the Company or any Restricted Subsidiary to pay final judgments aggregating in
excess of $12 million (net of any amount as to which a reputable insurance
company has accepted liability), which judgments are not stayed or bonded
within 60 days after their entry; (vii) any Guarantee by a Guarantor of the
Senior Notes or the Senior Discount Notes, as the case may be, being held in
any judicial proceeding to be unenforceable or invalid, provided any other
Guarantee by such Guarantor giving rise to such obligation to Guarantee such
Notes is not held unenforceable, or failure of any Guarantee of the Senior
Notes or the Senior Discount Notes, as the case may be, to be in full force
and effect, or the assertion that such Guarantee is invalid or unenforceable
by any such Guarantor; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in aggregate principal amount of the outstanding Senior Notes
or the Senior Discount Notes, as the case may be, may declare all such Notes
to be due and payable immediately. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company or any Significant Subsidiary, all
outstanding Notes will become due and payable without further action or
notice. Holders of the Senior Notes or the Senior Discount Notes, as the case
may be, may not enforce the relevant Indenture or Notes except as provided in
such Indenture. Subject to certain limitations, holders of a majority in
aggregate principal amount of the then outstanding Senior Notes or the Senior
Discount Notes, as the case may be, may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from holders of the Senior Notes
or the Senior Discount Notes, as the case may be, notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium, if any, or interest) if it determines that
withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the outstanding
Senior Notes or Senior Discount Notes, as the case may be, by notice to the
Trustee may on behalf of the holders of all of such Notes waive any existing
Default or Event of Default and its consequences (including rescind any
acceleration of the Notes) under the relevant Indenture except a continuing
Default or Event of Default in the payment of interest or premium, if
91
<PAGE>
any, on or the principal of, such Notes or as a result of a failure to comply
with the provisions described under "--Change of Control" and in the covenant
entitled "Limitation on Asset Sales".
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, agent, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indentures or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each holder of the Notes by
accepting a Note irrevocably waives and releases all such liability. The
waiver and release are part of the consideration for the issuance of the
Notes. Such waiver may not be effective to waive liabilities under the Federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
Obligations discharged with respect to the outstanding Senior Notes or Senior
Discount Notes, as the case may be ("Legal Defeasance"), except for (i) the
rights of holders of outstanding Notes to receive payments solely from the
funds held in trust in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the relevant Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in
an Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the relevant Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment of such Notes, bankruptcy and
insolvency events) described under "--Events of Default" will no longer
constitute Events of Default with respect to such Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the relevant Notes, cash in U.S. dollars, non-callable U.S.
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the relevant outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, of such principal or installment of
principal of, premium, if any, or interest on such outstanding Notes; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably satisfactory to the
Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service or (B) since June, 1996, 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 counsel shall confirm that, the
holders of the relevant outstanding Notes will not recognize income, gain or
loss for federal income tax purposes solely as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the holders
of the relevant outstanding Notes will not recognize income, gain or loss for
federal income tax purposes solely 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 under the relevant Notes
from bankruptcy or insolvency events have occurred, at any time in the period
ending on the 91st day after the date of deposit; (v)
92
<PAGE>
such Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the relevant Indenture or any
other material agreement or instrument to which the Company is a party or by
which the Company is bound; (vi) the Company shall have delivered to the
Trustee an opinion of counsel 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
creditor's rights generally; (vii) 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 relevant Notes over
the other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and (viii) the
Company shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
CONCERNING THE TRUSTEE
The Trust Indenture Act 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, which provisions are incorporated
by reference in the Indentures. 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 or resign.
The holders of a majority in aggregate principal amount of the outstanding
Senior Notes or Senior Discount Notes, as the case may be, 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 Indentures will provide that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the exercise of
its power, to use the degree of care and skill 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 relevant
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indentures or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in aggregate principal amount of the relevant outstanding
Notes (including consents obtained in connection with a tender offer or
exchange offer for such Notes), and any existing default or compliance with
any provision of the relevant Indenture or such Notes may be waived with the
consent of the holders of a majority in aggregate principal amount of the
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for such Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any of the Senior Notes or Senior Discount Notes, as the case
may be, held by a non-consenting holder of such Notes) (i) reduce the
principal amount of such Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or premium on or change the
fixed maturity of any such Note or alter the provisions with respect to the
redemption of such Notes (other than provisions described above under "--
Change of Control" and the covenant entitled "Limitation on Asset Sales"),
(iii) reduce the rate of or change the time for payment of interest on any
such Note, (iv) waive a default in the payment of principal or premium, if
any, or interest on any such Note (except a rescission of acceleration of such
Notes by the holders of at least a majority in aggregate principal amount of
such Notes and a waiver of the payment default that resulted from such
acceleration), (v) make the principal of, or premium, if any, or interest on,
any such Note payable in money other than that stated in such Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal or
premium, if any, of interest on the Notes, (vii) waive a redemption payment
with respect to any such Note or (viii) make any change in the foregoing
amendment and waiver provisions.
93
<PAGE>
Notwithstanding the foregoing, without the consent of any holder of Senior
Notes or Senior Discount Notes, as the case may be, the Company and the
Trustee may amend or supplement the relevant Indenture or the relevant Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of the Notes in the case of
a merger, consolidation or sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of the Company's properties or
assets, to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not materially and adversely
affect the legal rights under the Indenture of any such holder, or to comply
with requirements of the Commission in order to maintain the qualification of
the Indenture under the Trust Indenture Act.
The holders of a majority in aggregate principal amount of the Senior Notes
or the Senior Discount Notes, as the case may be, may waive in advance
compliance with the restrictive covenants and provisions of the respective
Indentures described under "--Certain Covenants," "--Reports to Holders" and
"--Change of Control," as well as certain other covenants of the Company in
the Indentures, except for the covenant requiring payment of principal,
premium and interest and the provision permitting such waiver.
GLOBAL SECURITIES
Upon issuance, all Senior Notes will be represented by one or more global
securities and all Senior Discount Notes will be represented by one or more
global securities (each, a "Global Security"). Each Global Security will be
deposited with, or on behalf of, the Depository Trust Company (the
"Depositary") and registered in the name of a nominee of the Depositary. Notes
will not be exchangeable for certificated notes; provided that (i) if the
Depositary is at any time unwilling or unable to continue as Depositary and a
successor depositary is not appointed by the Company within 90 days or (ii) if
an Event of Default has occurred and is continuing with respect to the Senior
Notes or the Senior Discount Notes and holders of more than 25% in aggregate
principal amount of such Notes at the time outstanding represented by the
Global Security advise the Trustee that the continuation of a book-entry
system through the Depositary (or a successor thereto) with respect to such
Notes is no longer required, the Company will issue certificated notes in
exchange for the Global Security representing the Senior Notes or the Senior
Discount Notes, as the case may be. In addition, the Company may at any time
and in its sole discretion determine not to have the Senior Notes or the
Senior Discount Notes represented by a Global Security and, in such event,
will issue certificated notes in exchange therefor.
Upon the issuance of a Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the Senior Notes or the Senior Discount Notes, as the case may be,
represented by the Global Security to the accounts of institutions that have
accounts with the Depositary ("Participants"). The accounts to be credited
shall be designated by the Underwriters. Ownership of beneficial interests in
a Global Security will be limited to Participants or Persons that may hold
interests through Participants. Ownership of beneficial interests in a Global
Security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by the Depositary with respect to
Participants' interests or by the Participants or by Persons that hold through
Participants with respect to beneficial owners' interests. The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. Such ownership limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
Principal and interest payments on Senior Notes or Senior Discount Notes, as
the case may be, registered in the name of the Depositary or its nominee will
be made to the Depositary or its nominee, as the case may be, as the
registered owner of the Global Security representing such Notes. The Company
also expects that the Depositary, upon receipt of any payment of principal or
interest in respect of a Global Security, will immediately credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Security as shown on the records of the Depositary. The Company also expects
that payments by Participants to owners of beneficial interests in a Global
Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility
94
<PAGE>
of such Participants. None of the Company, the Trustee, any paying agent or
any registrar for the Senior Notes or the Senior Discount Notes will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Depository Trust Company, New York, New York, ("DTC") will be the
initial Depositary with respect to the Notes. DTC has advised the Company that
it is a limited-purpose trust company organized under the laws of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities of its Participants
and to facilitate the clearance and settlement of securities transactions
among its Participants in such securities through electronic book-entry
changes in accounts of the Participants, thereby eliminating the need for
physical movement of securities certificates. DTC's Participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations, some of whom
(and/or their representatives) own DTC. Access to DTC's book-entry system is
also available to others, such as banks, brokers, dealers and trust companies
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 DTC only through Participants.
LIMITATIONS ON RIGHTS OF BENEFICIAL OWNERS
As long as the Depositary, or its nominee, is the holder of a Global
Security, the Depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Security for all purposes under the relevant Indenture or such Global
Security. Except as set forth above, owners of beneficial interests in a
Global Security will not be entitled to have Notes represented by such Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of Senior Notes or Senior Discount Notes, as the case may
be, in definitive form and will not be considered the owners or holders
thereof under the Indenture governing such Notes or under such Global
Security. Accordingly, each person owning a beneficial interest in such Global
Security must rely on the procedures of the Depositary and, if such person is
not a Participant, on the procedures of the Participant through which such
person directly or indirectly owns its interest, to exercise any rights of a
holder under the relevant Indenture or such Global Security.
DTC has informed the Company that under existing DTC policies and industry
practices, if the Company requests any action of holders, or if any owner of a
beneficial interest in such Global Security desires to give any notice or take
any action that a holder is entitled to give or take under the relevant
Indenture or the relevant Global Security, DTC would authorize and cooperate
with each Participant to whose account any portion of the Senior Notes or the
Senior Discount Notes, as the case may be, represented by such Global Security
is credited on DTC's books and records to give such notice or take such
action. Any person owning a beneficial interest in such Global Security that
is not a Participant must rely on any contractual arrangements it has
directly, or indirectly through its immediate financial intermediary, with a
Participant to give such notice or take such action.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the relevant Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Accreted Value" means with respect to any Senior Discount Note, as of any
specified date on or prior to July 1, 2001, the amount provided below for each
$1,000 principal amount of Notes:
95
<PAGE>
(i) if the specified date occurs on one of the following dates (each a
"Semiannual Accrual Date"), the Accreted Value will equal the amount set forth
below for such Semiannual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMIANNUAL ACCRUAL DATE VALUE
----------------------- --------
<S> <C>
January 1, 1997................................................. $ 615
July 1, 1997.................................................... $ 649
January 1, 1998................................................. $ 685
July 1, 1998.................................................... $ 723
January 1, 1999................................................. $ 763
July 1, 1999.................................................... $ 805
January 1, 2000................................................. $ 850
July 1, 2000.................................................... $ 897
January 1, 2001................................................. $ 947
July 1, 2001.................................................... $1,000
</TABLE>
(ii) if the specified date occurs before the first Semiannual Accrual Date,
the Accreted Value will equal the sum of (a) $582.15 and (b) an amount equal
to the product of (1) the Accreted Value for the first Semiannual Accrual Date
less $582.15 multiplied by (2) a fraction, the numerator of which is the
number of days from the Issuance Date to the specified date, using a 360-day
year of twelve 30-day months, and the denominator of which is the number of
days from the Issuance Date to the first Semiannual Accrual Date, using a 360-
day year of twelve 30-day months; or
(iii) if the specified date occurs between two Semiannual Accrual Dates, the
Accreted Value will equal the sum of (a) the Accreted Value for the Semiannual
Accrual Date immediately preceding such specified date and (b) an amount equal
to the product of (1) the Accreted Value for the immediately following
Semiannual Accrual Date less the Accreted Value for the immediately preceding
Semiannual Accrual Date multiplied by (2) a fraction, the numerator of which
is the number of days from the immediately preceding Semiannual Accrual Date
to the specified date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180.
"Acquired Indebtedness" means (a) Indebtedness of any other Person existing
at the time such other Person merged with or into or became a Restricted
Subsidiary, including Indebtedness incurred in connection with or in
contemplation of such other Person merging with or into or becoming a
Restricted Subsidiary, (b) Indebtedness of any other Person assumed by the
Company or a Restricted Subsidiary in connection with the acquisition of
assets from such other Person, and (c) Indebtedness secured by a Lien
encumbering any asset acquired by the Company or a Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (a) any sale, lease, transfer, conveyance or other
disposition of any assets (including by way of a sale-leaseback) other than
the sale or transfer of inventory or goods (including equipment) held for sale
in the ordinary course of business (provided that the sale, lease, transfer,
conveyance or other disposition of all or substantially all of the assets of
the Company shall not be deemed to be an "Asset Sale" and shall be governed by
the provisions of the relevant Indenture described under "--Change of Control"
or the covenant entitled "Limitation on Merger, Consolidation or Sale of
Assets") or (b) any issuance, sale, lease, transfer, conveyance or other
disposition of any Equity Interests of any of the Company's Restricted
Subsidiaries (other than director's qualifying shares) to any Person.
Notwithstanding the foregoing, none of the following shall be deemed to be an
Asset Sale: (i) a swap or other exchange of cable, fiber line or other
equipment or transmission capacity or of networks or systems between the
Company or any Restricted Subsidiary and any other Person which is an exchange
at Fair Market Value, (ii) an issuance and sale of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary
including any such issuance in connection with
96
<PAGE>
the contribution to such Restricted Subsidiary of Telecommunications Assets,
(iii) any Asset Sale or Asset Sales which, in any calendar year, involve
assets with an aggregate Fair Market Value not in excess of $5 million, (iv)
any lease of cable, fiber optic or transmission capacity, any lease of
equipment or equipment space, any grant of indefeasible rights-of-use or
rights-of-access or similar rights and grants of nominal title to assets by
the Company or a Restricted Subsidiary entered into in the ordinary course and
consistent with past practices; (v) any sale or other disposition of any or
all of the capital stock or assets of an Unrestricted Subsidiary; and (vi) any
sale, transfer or conveyance of Eligible Cash Equivalents or Permitted
Temporary Investments. Additionally, the contribution of Telecommunications
Assets to an Unrestricted Subsidiary whereby the Company or a Restricted
Subsidiary receives an equity interest in such Unrestricted Subsidiary shall
be deemed not to be an Asset Sale and will be deemed to be a Restricted
Payment and be governed by the covenant entitled "Limitation on Restricted
Payments."
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means, with respect to any specified Person, any and all
shares, interests, participations, rights or other equivalents (however
designated) of capital stock, including, without limitation, partnership
interests of such Person.
"Change of Control" means (a) the sale, lease, transfer, conveyance or other
disposition of all or substantially all of the assets of the Company to any
"person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act)
other than Permitted Holders (except in connection with a liquidation or
dissolution of the Company that does not constitute a Change of Control under
clause (b) below), (b) the approval by the requisite stockholders of the
Company of a plan of liquidation or statutory dissolution (which shall not be
construed to include a plan of merger or consolidation) of the Company, unless
Permitted Holders "beneficially own" (as defined in Rule 13d-3 under the
Exchange Act) at least the same percentage of voting power after the
consummation of such plan as before or otherwise retain the right or ability,
by voting power, to control the Person that acquires the proceeds of such
liquidation or dissolution, (c) any "person" or "group" (within the meaning of
Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision
to either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule 13d-
5(b)(1) under the Exchange Act), other than Permitted Holders, becomes the
"beneficial owner" (as so defined) of more than 35% of the total voting power
of all classes of the voting stock of the Company and/or warrants or options
to acquire such voting stock, calculated on a fully diluted basis, provided
that Permitted Holders "beneficially own" (as so defined) in the aggregate a
percentage of such voting stock or warrants having a lesser percentage of
voting power than such other "person" or "group" and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Company's Board of Directors, or (d) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Company's Board of Directors (together with any new
directors whose election or appointment by such board or whose nomination for
election by the stockholders of the Company was approved by a vote of the
Permitted Holders or a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Company's Board of Directors then in office.
"Common Stock" means, with respect to the Company, the Class A Common Stock,
the Class B Common Stock or any similar common stock of the Company.
"Consolidated Interest Expense" means, with respect to the Company and its
Restricted Subsidiaries, for any period, the amount of interest in respect of
Indebtedness (including amortization of original issue discount, amortization
of debt issuance costs, and non-cash interest payments on any Indebtedness and
the interest portion of any deferred payment obligation and after taking into
account the effect of elections made under any Interest
97
<PAGE>
Rate Agreement, however denominated, with respect to such Indebtedness), the
net costs associated with Interest Rate Agreements, preferred stock dividends
of the Company (and of its Restricted Subsidiaries if paid to a Person other
than the Company or its Restricted Subsidiaries) and the interest component of
rentals in respect of any Capital Lease Obligation paid, in each case whether
accrued or scheduled to be paid or accrued by the Company and its Restricted
Subsidiaries during such period to the extent such amounts were deducted in
computing Consolidated Net Income, determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any period,
the aggregate net income of the Company and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the net income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid to the Company or a Restricted Subsidiary, (ii) the net income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iii) the cumulative effect of
a change in accounting principles shall be excluded, (iv) all items classified
as extraordinary gains or losses of the Company or a Restricted Subsidiary for
such period shall be excluded, (v) the net income of any Restricted Subsidiary
shall be included only to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time prohibited by the operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted Subsidiary, and (vi)
with respect to a non-Wholly Owned Restricted Subsidiary, any aggregate net
income (or loss) in excess of the Company's or such Restricted Subsidiary's
pro rata share of such non-Wholly Owned Restricted Subsidiary's net income (or
loss) shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date on which the relevant Notes mature.
"EBITDA" means, with respect to the Company and its Restricted Subsidiaries,
for any period, an amount equal to (A) the sum of (i) Consolidated Net Income
for such period (exclusive of any gain or loss realized in such period upon an
Asset Sale or upon transactions that are excluded from the definition of Asset
Sale pursuant to clauses (v) and (vi) of such definition and that involve
securities), plus (ii) the provision for taxes for such period based on income
or profits to the extent such income or profits were included in computing
Consolidated Net Income and any provision for taxes utilized in computing net
loss under clause (i) hereof, plus (iii) Consolidated Interest Expense for
such period, plus (iv) depreciation for such period on a consolidated basis to
the extent deducted in calculating Consolidated Net Income, plus (v)
amortization of intangibles for such period on a consolidated basis to the
extent deducted in calculating Consolidated Net Income, plus (vi) any other
non-cash item reducing Consolidated Net Income for such period, plus (vii) any
premium or penalty paid in connection with repurchasing, redeeming, retiring,
defeasing or acquiring any Indebtedness prior to maturity to the extent
deducted in calculating Consolidated Net Income, minus (B) all non-cash items
increasing Consolidated Net Income for such period, determined in accordance
with GAAP consistently applied.
"Eligible Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year and one day from the date of acquisition, (iii)
certificates of deposit and Eurodollar time deposits with maturities of one
year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any commercial bank(s) domiciled in the United States or in any member of
the OECD having capital and surplus in excess of $500 million and a Keefe Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper rated no
lower than P-2 or the equivalent thereof by Moody's Investors Service, Inc. or
no lower than A-2 or the equivalent thereof by Standard & Poor's Ratings Group
or corporate notes, bonds or medium term notes rated no lower than A-2 or the
equivalent thereof by Moody's Investors Service, Inc. or no lower than A or
the equivalent
98
<PAGE>
thereof by Standard & Poor's Ratings Group, and in each case maturing within
one year and one day after the date of acquisition, (vi) direct obligations
issued by any state of the United States or any political subdivision of any
such state or political instrumentality thereof maturing, or subject to tender
at the option of the holder thereof, within ninety (90) days after the date of
acquisition, having a rating of A from Standard & Poor's Ratings Group or A-2
from Moody's Investors Service, Inc., (vii) asset-backed securities with a
Weighted Average Life to Maturity equal to or less than one year and one day
from the time of acquisition and rated no lower than Aaa or the equivalent
thereof by Moody's Investors Service, Inc. or AAA or the equivalent thereof by
Standard & Poor's Ratings Group; (viii) variable rate securities with a reset
date equal to or less than 91 days from the time of acquisition, maturing
within two years and rated no lower than A-2 or the equivalent thereof by
Moody's Investors Service, Inc. or no lower than A or the equivalent thereof
by Standard & Poor's Ratings Group; and (ix) investments in money market funds
substantially all of whose assets comprise securities of the types described
in clauses (i) through (viii).
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any Indebtedness that is
convertible into, or exchangeable for, Capital Stock, except to the extent
such Indebtedness has been so converted or exchanged).
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combinations thereof, the principal purpose of
which is to provide protection against fluctuations in currency exchange
rates. An Exchange Rate Contract may also include an Interest Rate Agreement.
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries in existence on the Issuance Date, including Indebtedness
incurred under the Revolving Credit Agreement as in effect on the Issuance
Date, until such amounts are repaid.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under pressure or
compulsion to complete the transaction. Fair Market Value shall be determined
(i) for an amount not in excess of $15 million, by the Chief Financial Officer
of the Company, or (ii) for an amount of $15 million or more, by the Board of
Directors of the Company acting in good faith and shall be evidenced by a
Board Resolution, and in either case shall be set forth in an Officers'
Certificate delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting
profession, which may be in effect from time to time and are applied on a
consistent basis.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Restricted Subsidiary which is a guarantor of the
relevant Notes, including any Person that is required after the Issuance Date
to execute a guarantee of such Notes pursuant to the covenant entitled
"Limitations on Guarantees of Indebtedness by Restricted Subsidiaries" until a
successor replaces such party pursuant to the applicable provisions of the
relevant Indenture and, thereafter shall mean such successor.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or the balance deferred and unpaid of the purchase price
of any property (including pursuant to capital leases and Sale-Leaseback
Transactions) or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that
constitutes an accrued expense or trade payable or customer deposit received
in the ordinary course of business, if and to the extent any of the foregoing
indebtedness (other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement) would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, (ii) Indebtedness
99
<PAGE>
of others secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person), but, if such indebtedness is
otherwise non-recourse to such Person, only to the extent of the lesser of
(x) the Fair Market Value of such asset at the time of determination and (y)
the amount of such Indebtedness, (iii) to the extent not otherwise included,
the Guarantee of items defined in clauses (i) and (ii) above and (iv) the
maximum fixed redemption or repurchase price of Disqualified Stock of such
Person at the time of determination. For purposes of the preceding sentence,
(1) the maximum fixed repurchase price of Disqualified Stock that does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Disqualified Stock as if such Disqualified Stock were repurchased on
any date on which Indebtedness shall be required to be determined pursuant to
the Indenture; provided, however, that if such Disqualified Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Disqualified Stock, and (2) the amount outstanding at any time of any
Indebtedness issued with original issue discount is the accreted value of such
Indebtedness.
"Indebtedness to Adjusted Total Equity Ratio" means as of the date of
determination the ratio of (i) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis as at the date
of determination to (ii) the sum of (a) the total equity investments in the
Company as of July 2, 1996 adjusted to give effect to the Stock Offerings and
the repurchase of 7,975,738 shares of Class B Common Stock from Continental,
provided that any issuance of Equity Interests pursuant to the Reorganization
shall be included only to the extent actually issued and shall be treated as
if issued on or prior to the Issuance Date regardless of the date such Equity
Interests were actually issued (after giving effect to the Reorganization on a
pro forma basis, total equity investments is expected to be $1,057.0 million
including the over-allotment option), (b) two times the aggregate net cash
proceeds to the Company from the issuance of any Equity Interests (other than
Disqualified Stock) subsequent to the Issuance Date, (c) two times the
aggregate net cash proceeds to the Company from the sales of Disqualified
Stock of the Company or debt securities of the Company convertible into Equity
Interests of the Company, in either case upon conversion thereof into Equity
Interests (other than Disqualified Stock) of the Company subsequent to the
Issuance Date; provided, however, that, for purposes of calculation of the
Indebtedness to Adjusted Total Equity Ratio the net cash proceeds from the
sale of Capital Stock of the Company, including Capital Stock issued upon the
conversion of convertible Indebtedness, described in clause (b) or (c) above,
shall not be included if such proceeds have been utilized to make a (x)
Restricted Payment, (y) a Permitted Investment under clause (d) of the
definition of Permitted Investment (provided that such amounts shall be
included to the extent of such amounts invested in Local Market Partnerships
that become Restricted Subsidiaries prior to the first anniversary of the
Issuance Date) or (z) a Permitted Investment pursuant to clause (e)(ii) of the
definition of Permitted Investments (provided that such amounts shall be
included to the extent of the Fair Market Value of the Company's interest in
any Joint Ventures that become Restricted Subsidiaries but not in excess of
the amount of any such Investments in such Joint Ventures pursuant to such
clause (e)(ii)).
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis as at the date of
determination to (ii) the aggregate amount of EBITDA of the Company and its
Restricted Subsidiaries for the four preceding fiscal quarters for which
financial information is available immediately prior to the date of
determination; provided that any Indebtedness incurred or retired by the
Company or any of its Restricted Subsidiaries during the fiscal quarter in
which the determination date occurs shall be calculated as if such
Indebtedness was so incurred or retired on the first day of such four fiscal
quarter period; and provided further that (x) if the transaction giving rise
to the need to calculate the Indebtedness to EBITDA Ratio would have the
effect of increasing or decreasing Indebtedness or EBITDA in the future,
Indebtedness or EBITDA shall be calculated on a pro forma basis as if such
transaction had occurred on the first day of such four fiscal quarter period
preceding the date of determination, and (y) if during such four fiscal
quarter period, the Company or any of its Restricted Subsidiaries shall have
engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to
the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if
such Asset Sale and related retirement of Indebtedness had occurred on the
first day of such period and (z) if during such four fiscal quarter period the
Company or any of its Restricted Subsidiaries shall
100
<PAGE>
have acquired any material assets out of the ordinary course of business,
EBITDA shall be calculated on a pro forma basis as if such asset acquisition
and related financing had occurred on the first day of such period.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement the principal purpose of which is to protect the party
indicated therein against fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans
(including Guarantees, advances or capital contributions (excluding
commission, travel and similar advances and loans, in each case, made to
officers and employees) made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or
other securities and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. Investments
shall exclude accounts receivable and other extensions of trade credit on
commercially reasonable terms in accordance with the Company's normal trade
practice. In addition, the Fair Market Value of the net assets of any
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary shall be deemed to be an "Investment"
made by the Company in such Unrestricted Subsidiary at such time.
"Issuance Date" means the date on which the Notes are first authenticated
and issued.
"Joint Venture" means any Person engaged in the Telecommunications Business
in which the Company or any Restricted Subsidiary owns an Equity Interest and
which may be an Unrestricted Subsidiary.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of (a)
the direct costs relating to such Asset Sale (including, without limitation,
legal, title, recording, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, (b)
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), (c)
amounts required to be applied to the repayment of Indebtedness secured by a
Lien on the asset or assets that are the subject of such Asset Sale or in
order to obtain a consent necessary to effect such Asset Sale and (d) any
reserve for adjustment or indemnification in respect of the sale price of such
asset or assets (provided that any such reserves shall be added back to Net
Proceeds upon the release of such reserves) and required distributions to
holders of minority interests. Furthermore, the amount of (i) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any Restricted Subsidiary
that are assumed by the transferee of any assets sold in an Asset Sale and
(ii) any 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 Eligible Cash Equivalents,
shall be deemed to be Eligible Cash Equivalents (to the extent of the Eligible
Cash Equivalents received in such conversion) for purposes of clause (b) of
the covenant entitled "Limitation on Asset Sales."
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness (a) as to which none of the Company or any Restricted Subsidiary:
(i) provides credit support (including any undertaking, agreement or
instrument which would constitute Indebtedness); (ii) is directly or
indirectly liable; or (iii) constitutes the lender, and (b) no default with
respect to which (including any rights which the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
101
<PAGE>
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Holders" means Comcast Corporation, a Pennsylvania corporation,
Continental Cablevision Inc., a Delaware corporation, Cox Communications,
Inc., a Delaware corporation, Tele-Communications, Inc., a Delaware
corporation, U S WEST, Inc., a Delaware corporation, any successor (by merger,
consolidation, transfer or otherwise) (i) to all or substantially all of the
business or assets of any of the foregoing or (ii) to cable television systems
of any of the foregoing with at least five million cable television households
passed, and any Person at least 51% of the Capital Stock of which is owned,
directly or indirectly, by one or any group of the foregoing Permitted
Holders.
"Permitted Indebtedness" means: (1) for Indebtedness of either the Company
or any Restricted Subsidiary (a) Telecommunications Assets Indebtedness, (b)
Indebtedness owed by the Company to any Restricted Subsidiary (but only so
long as such Indebtedness is held by such Restricted Subsidiary) and
Indebtedness owed by a Restricted Subsidiary to the Company or any other
Restricted Subsidiary (but only so long as such Indebtedness is held by the
Company or such other Restricted Subsidiary); (c) Indebtedness under any
Exchange Rate Contract or Interest Rate Agreements, provided that the
obligations under such agreements are related to payment obligations on
Existing Indebtedness or Refinancing Indebtedness of the Company or a
Restricted Subsidiary, as applicable, or Indebtedness permitted to be incurred
pursuant to the covenant entitled "Limitation on Incurrence of Indebtedness";
(d) letters of credit or performance bonds or performance guarantees incurred
in the ordinary course of business and consistent with industry practice; (e)
Existing Indebtedness; (f) Indebtedness issued in exchange for or the proceeds
of which are used to extend, refinance, renew, replace or refund outstanding
Indebtedness that is incurred or outstanding pursuant to clauses (a), (e), (h)
or this clause (f) of this definition or clause (b) of the covenant entitled
"Limitation on Incurrence of Indebtedness" (the "Refinancing Indebtedness");
provided, however, that (i) the principal amount of, and any premium payable
in respect of, such Refinancing Indebtedness shall not exceed the principal
amount of Indebtedness so extended, refinanced, renewed, replaced or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) the Refinancing Indebtedness shall have a (A) Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
and (B) a stated maturity no earlier than the stated maturity of, the
Indebtedness being extended, refinanced, renewed, replaced or refunded; (iii)
the Refinancing Indebtedness shall rank in right of payment to the relevant
Notes on terms no less favorable to the holders of such Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced or refunded; and (iv) the Company shall incur
Refinancing Indebtedness only to refinance Indebtedness of the Company or of a
Restricted Subsidiary and a Restricted Subsidiary shall incur Refinancing
Indebtedness only to refinance Indebtedness of such Restricted Subsidiary or
any other Restricted Subsidiary; (g) Indebtedness represented by performance
bonds, surety or appeal bonds, or similar obligations incurred in the ordinary
course of business; (h) Indebtedness incurred in connection with a prepayment
or redemption of the Notes pursuant to a Change of Control, provided that such
Indebtedness is Indebtedness of the Company and the principal amount of such
Indebtedness does not exceed 101% of the principal amount of the Notes prepaid
or redeemed (plus the amount of reasonable expenses incurred in connection
therewith) and that such Indebtedness has (A) a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
and (B) a stated maturity no earlier than the Stated Maturity of, the relevant
Notes; (i) ordinary course Capital Lease Obligations or purchase money debt
for plant or equipment secured by a Lien on property acquired, constructed or
developed by the Company or any Restricted Subsidiary in an aggregate amount
not to exceed $20 million outstanding at any time; (j) Indebtedness or
Guarantee of Indebtedness under the Revolving Credit Agreement in an aggregate
amount not to exceed $400 million outstanding at any time; and (k) additional
Indebtedness in an aggregate principal amount not to exceed $50 million at any
one time outstanding; and (2) for Indebtedness of the Company, Indebtedness
evidenced by the Notes.
"Permitted Investments" means (a) any Investments in the Company or in a
Restricted Subsidiary (including through a purchase of Equity Interests in
such Restricted Subsidiary from another Person), provided that any purchase of
Equity Interests in a Restricted Subsidiary from any Person other than another
Restricted
102
<PAGE>
Subsidiary shall be a Permitted Investment only if such Restricted Subsidiary
is engaged in the Telecommunications Business; (b) any Investments in Eligible
Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary
in a Person (including through a purchase of Equity Interests in such Person
from another Person), if as a result of such Investment (i) such person
becomes a Restricted Subsidiary that is engaged in the Telecommunications
Business or (ii) such person is merged or consolidated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Restricted Subsidiary that is engaged in the
Telecommunications Business; (d) Investments up to an aggregate of $150
million in Local Market Partnerships existing at the Issuance Date, which
Investments are used to fund a Telecommunications Business, provided that no
such Investment in a Local Market Partnership pursuant to this clause (d) may
be made after the first anniversary of the Issuance Date; (e) Investments
after the Issuance Date in Joint Ventures in an aggregate amount not to exceed
the sum of (i) (1) for any Joint Venture, $200 million and (2) for Joint
Ventures in which the Company or any Restricted Subsidiary owns a 35% or
greater share of Equity Interests and is the managing partner, $200 million
plus any amount not invested pursuant to the preceding clause (1), plus (ii)
for any Joint Venture, the net cash proceeds received by the Company from any
Person from the issuance and sale subsequent to the Issuance Date of Equity
Interests of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Restricted Subsidiary and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock) subsequent to the Issuance Date, plus (iii) for any Joint
Venture, the Fair Market Value of the Company's interest in any Joint Ventures
that become Restricted Subsidiaries but not in excess of the amount of any
such Investments in such Joint Ventures pursuant to clause (e)(ii), provided,
that amounts added pursuant to this clause (iii) out of Investments originally
made pursuant to subclause (i)(2) of this clause (e) shall not be used for
Investments in Joint Ventures not described in such subclause (i)(2); (f)
loans and advances to employees made in the ordinary course of business and
consistent with past practice in an aggregate amount not to exceed $1 million
outstanding at any time; (g) bonds, notes, debentures, partnership or joint
venture interests, stock or other securities received as a result of Asset
Sales permitted under the covenant described in "Limitation on Asset Sales";
(h) any Investments in Permitted Temporary Investments of the proceeds from
the issuance of the Notes and from the Stock Offering; (i) any Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; and
(j) any Exchange Rate Contract or Interest Rate Contract.
"Permitted Liens" means (a) Liens in favor of the Company; (b) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary; provided that such
Liens were not granted in contemplation of such merger or consolidation and do
not secure any property or assets of the Company or any of its Restricted
Subsidiaries other than the property or assets subject to the Liens prior to
such merger or consolidation; (c) liens imposed by law, including restrictions
on transfer of governmental licenses, permits and authorizations and
carriers', warehousemen's, landlords' and mechanics' liens and other similar
liens arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or are being contested in good
faith and by appropriate proceedings; (d) Liens existing on the Issuance Date;
(e) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (f) easements, rights of way, restrictions
and other similar easements, licenses, restrictions on the use of properties
or minor imperfections of title, or other incidental Liens not incurred in
connection with the borrowing of money or the obtaining of advances or credit,
that in the aggregate, are not material in amount, and do not in any case
materially detract from the properties subject thereto or interfere with the
ordinary course of the business of the Company or its Restricted Subsidiaries;
(g) Liens securing Indebtedness incurred under the Revolving Credit Agreement;
(h) Liens securing Telecommunications Assets Indebtedness; (i) Liens of
utility companies and other Persons pursuant to pole attachment agreements or
other easement agreements, and restrictions on the transfer of rights under
franchises, pole attachment agreements or other easements, and any
encumbrances created in favor of franchising authorities and customers by
provisions or franchises on plant and equipment located in the areas covered
thereby; (j) Liens under capitalized leases or
103
<PAGE>
purchase money security interests relating to Indebtedness permitted to be
incurred under the "Limitation of Incurrence of Indebtedness" covenant; (k)
Liens incurred to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature incurred
in the ordinary course of business; (l) any Lien to secure obligations under
workmen's compensation laws or similar legislation including unemployment
insurance or social security laws; (m) Liens in the form of a pledge of
Capital Stock of a Restricted Subsidiary to secure Indebtedness of such
Restricted Subsidiary that is otherwise permitted to be incurred pursuant to
the covenant entitled "Limitation on Incurrence of Indebtedness"; (n) Liens
arising as a result of any grant of indefeasable rights-of-use or rights-of-
access or similar rights and grants of nominal title to assets entered into in
the ordinary course and consistent with past practice; and (o) Liens securing
Refinancing Indebtedness, provided that the Indebtedness being refinanced is
secured and such Liens encumber no additional assets than those pursuant to
the Indebtedness being refinanced.
"Permitted Temporary Investments" means (a) all Eligible Cash Equivalents,
except that each use of the term "one year" in such definition is changed to
"two years" and (b) debt securities issued by any Person which has outstanding
pari passu debt securities with an investment grade rating by Standard &
Poor's Ratings Group or Moody's Investors Service, Inc. and that mature within
two years and one day after the date of acquisition.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, trust, unincorporated organization or government or
any agency or political subdivision thereof.
"Public Equity Offering" means an underwritten public offering (other than
the Stock Offering) by the Company after the Issuance Date of Common Stock of
the Company pursuant to a registration statement filed pursuant to the
Securities Act of 1933, as amended.
"Reorganization" means all of the transactions that are described in this
Prospectus under the caption "The Reorganization" as constituting the
"Reorganization" which are to be effected pursuant to the Reorganization
Agreement.
"Reorganization Agreement" means the Reorganization Agreement, dated as of
April 18, 1996, among the Company, TCI Communications, Inc., Cox
Communications, Inc., Comcast Corporation and Continental Cablevision, Inc.
"Restricted Payment" means (a) any dividend or any distribution on any
Equity Interests (other than dividends or distributions in additional Equity
Interests (other than Disqualified Stock) of the Company or a Restricted
Subsidiary or dividends or distributions payable to the Company or any Wholly
Owned Restricted Subsidiary); (b) any purchase, redemption, acquisition or
retirement for value of any Equity Interests of the Company or any Restricted
Subsidiary or other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Restricted Subsidiary) that
is not a Permitted Investment; (c) any defeasance, purchase, redemption,
acquisition or retirement for value prior to final maturity of any
Indebtedness that is subordinated in right of payment (whether pursuant to its
terms or by operation of law) to the Notes or the guarantees thereof by the
Guarantors; and (d) any Investment that is not a Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company which is not an
Unrestricted Subsidiary.
"Revolving Credit Agreement" means the Loan Agreement dated as of May 22,
1995, as amended, among TCG New York Inc., the Banks, as defined in the Loan
Agreement, Toronto Dominion (Texas), Inc., and Chemical Bank, as such
agreement may be amended, modified, supplemented, refunded, refinanced or
replaced from time to time.
"Sale-Leaseback Transaction" means any direct or indirect arrangement, or
series of related arrangements, with any Person (other than the Company or a
Restricted Subsidiary) or to which any Person (other than the Company or a
Restricted Subsidiary) is a party, providing for the leasing to the Company or
to a Restricted Subsidiary of any property for an aggregate term exceeding
three years, whether owned by the Company or by
104
<PAGE>
any Subsidiary of the Company at the Issue Date or later acquired, which has
been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Significant Subsidiary" means any Restricted Subsidiary which is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act of 1933, as amended.
"Stated Maturity," when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the final date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investor" means a corporation or entity with an equity
market capitalization, a net asset value or annual revenues of at least $2
billion that owns and operates businesses in the telecommunications,
information systems, entertainment, cable or similar or related industries.
"Subsidiary" means, with respect to a specified Person, any corporation,
association or other business entity of which 50% or more of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more of the other Subsidiaries of that Person or a
combination thereof.
"Telecommunications Assets" means, with respect to any Person, any asset
that is utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration, operation, management or
provision of telecommunications systems and/or services, including without
limitation, any businesses or services in which the Company is currently
engaged and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall include stock, joint venture or
partnership interests where substantially all of the assets of the entity
being acquired consist of Telecommunications Assets.
"Telecommunications Assets Indebtedness" means Indebtedness incurred
(including in the case of discount or paid in kind Indebtedness any accretion
on such Indebtedness or notes payable in respect of such Indebtedness) by the
Company or a Restricted Subsidiary to finance the construction, expansion,
development or acquisition of Telecommunications Assets or the acquisition of
the Capital Stock of a Restricted Subsidiary substantially all the assets of
which are Telecommunications Assets, provided that the net cash proceeds from
the issuance of such Indebtedness do not exceed, as of the date of incurrence
of such Indebtedness, 100 percent of the lesser of cost or Fair Market Value
of such Telecommunications Assets so constructed or acquired; provided
further, however, that if an acquired Restricted Subsidiary has outstanding
previously incurred Indebtedness, such previously incurred Indebtedness will
also constitute Telecommunications Assets Indebtedness if such previously
incurred Indebtedness was not incurred in contemplation of such acquisition
and all such Indebtedness is Non-Recourse Indebtedness, except to the acquired
Restricted Subsidiary.
"Telecommunications Business" means the design, development, construction,
acquisition, installation, integration, management or provision of
telecommunications systems and/or services, including, without limitation, any
business or services in which the Company or any of its Restricted
Subsidiaries is engaged at the Issuance Date.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors of the Company as an Unrestricted
Subsidiary pursuant to a Board Resolution; but, in each case, only to the
extent that such Subsidiary (a) has no Indebtedness other than Non-Recourse
Indebtedness and (b) has not guaranteed any Indebtedness of the Company or any
of its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy
of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant entitled "Limitation on
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted
105
<PAGE>
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant entitled "Limitation on Incurrence of Indebtedness," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary as a Restricted
Subsidiary and such designation shall only be permitted if (i) the incurrence
of the Indebtedness of such Subsidiary is permitted under the covenant
entitled "Limitation on Incurrence of Indebtedness," and (ii) no Default or
Event of Default would be in existence following such designation. For so long
as any Subsidiary is an Unrestricted Subsidiary, all Subsidiaries of such
Unrestricted Subsidiary shall also be deemed to be Unrestricted Subsidiaries
and shall be required to meet the tests and comply with the restrictions set
forth above.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means, at any time, a Restricted
Subsidiary all of the Capital Stock of which (except directors' qualifying
shares) is at the time owned directly or indirectly by the Company.
106
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the consummation of the Offerings, TCG will amend its Amended and
Restated Certificate of Incorporation to change its authorized capital stock
to 900 million shares, including 450 million shares of Class A Common Stock,
$.01 par value per share, 300 million shares of Class B Common Stock, $.01 par
value per share, and 150 million shares of preferred stock, $.01 par value per
share (the "Preferred Stock"). Upon completion of the Stock Offerings, there
will be no preferred stock outstanding and Cox Teleport Partners, TCI
Teleport, Comcast Teleport and Continental Teleport will own of record all of
the outstanding shares of Class B Common Stock. See "Principal Stockholders."
The following summary description relating to the capital stock of the
Company does not purport to be complete. The rights of the holders of TCG's
capital stock will be set forth in TCG's Amended and Restated Certificate of
Incorporation, as so amended in accordance with the preceding paragraph, as
well as the Amended and Restated Stockholders' Agreement, the forms of both of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The summary set forth below is qualified by reference
to such exhibits and to the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
COMMON STOCK
The preferences and relative rights of the Class A Common Stock and Class B
Common Stock are substantially identical in all respects, except for voting
rights and conversion rights.
Voting Rights. Each share of Class A Common Stock entitles the holder to one
vote and each share of Class B Common Stock entitles the holder to 10 votes on
each matter to be voted upon by the holders of the Common Stock. The holders
of the shares of Class A Common Stock and Class B Common Stock vote as one
class on all matters to be voted on by stockholders, including, without
limitation, the election of directors and any proposed amendment to the
Amended and Restated Certificate of Incorporation of TCG that would increase
the authorized number of shares of Common Stock or any class thereof or any
other class or series of stock or decrease the number of authorized shares of
any class or series of stock (but not below the number thereof then
outstanding), except as required by the DGCL and except that, for a period of
five years from the date of the filing of TCG's Amended and Restated
Certificate of Incorporation, so long as the holders of Class B Common Stock
represent at least 50% of the voting power of the outstanding Common Stock,
the approval of the holders of a majority of the Class B Common Stock is
required for the Company to provide (i) wireless communications services that
use radio spectrum for cellular, personal communications service (PCS),
enhanced specialized mobile radio (ESMR), paging, mobile telecommunications
and any other voice or data wireless services whether fixed or mobile;
provided, however, that the Company may provide any brand telecommunications
products and services delivered via point-to-point microwave transmissions;
and (ii) telecommunications services to residences; provided, however, that
the Company may provide telecommunications services to residences to the
extent required by a regulatory authority having jurisdiction over the
Company's business, including requirements of the Company's local exchange
carrier certificates and common carrier obligations, if any, or in any
geographic area in which such services are offered as of July 1, 1996, but
only to the extent of the services then so offered.
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A Common Stock and Class B
Common Stock, see "Risk Factors--Control by Principal Stockholders; Conflicts
of Interest; Possible Competition."
Dividends. Each share of Common Stock is entitled to receive dividends from
funds legally available therefor if, as and when declared by the Board of
Directors of TCG. Class A Common Stock and Class B Common Stock share equally,
on a share-for-share basis, in any dividends declared by the Board of
Directors. If at any time a distribution of the Class A Common Stock or Class
B Common Stock is to be paid in shares of Class A Common Stock, Class B Common
Stock or any other securities of the Company or any other person,
107
<PAGE>
such dividends may be declared and paid only as follows: (1) a share
distribution consisting of Class A Common Stock to holders of Class A Common
Stock and Class B Common Stock, on an equal per share basis; or to holders of
Class A Common Stock only, but in such event there shall also be a
simultaneous share distribution to holders of Class B Common Stock consisting
of shares of Class B Common Stock on an equal per share basis; (2) a share
distribution consisting of Class B Common Stock to holders of Class B Common
Stock and Class A Common Stock, on an equal per share basis; or to holders of
Class B Common Stock only, but in such event there shall also be a
simultaneous share distribution to holders of Class A Common Stock consisting
of shares of Class A Common Stock on an equal per share basis; and (3) a share
distribution of shares of any class of securities of the Company or any other
person other than the Common Stock, either on the basis of a distribution of
identical securities, on an equal per share basis to the holders of Class A
Common Stock and Class B Common Stock, or on the basis of a distribution of
one class of securities to the holders of Class A Common Stock and another
class of securities to holders of Class B Common Stock, provided that the
securities so distributed do not differ in any respect other than relative
voting rights and related differences in designations, conversion and share
distribution provisions, with the holders of Class B Common Stock receiving
the class having the higher relative voting rights, provided that if the
securities so distributed constitute capital stock of a subsidiary of the
Company, such rights shall not differ to a greater extent than the
corresponding differences in voting rights, designations, conversion and
distribution provisions between Class A Common Stock and Class B Common Stock.
If the Company shall in any manner subdivide or combine the outstanding shares
of Class A Common Stock or Class B Common Stock, the outstanding shares of the
other class of Common Stock shall be proportionally subdivided or combined in
the same manner and on the same basis as the outstanding shares of Class A
Common Stock or Class B Common Stock, as the case may be, that have been
subdivided or combined.
Conversion. Under the Amended and Restated Certificate of Incorporation,
each share of Class B Common Stock is convertible at any time and from time to
time at the option of the holder thereof into one share of Class A Common
Stock. The Class A Common Stock has no conversion rights.
Other. Stockholders of TCG have no preemptive or other rights to subscribe
for additional shares. All holders of Common Stock, regardless of class, are
entitled to share equally on a share-for-share basis in any assets available
for distribution to stockholders on liquidation, dissolution or winding up of
TCG. No shares of the Common Stock are subject to redemption or a sinking
fund. All outstanding shares are, and all shares offered by this Prospectus
will be, when sold, validly issued, fully paid and nonassessable. TCG may not
subdivide or combine shares of Common Stock without at the same time
proportionally subdividing or combining shares of the other classes.
PREFERRED STOCK
The Company's Board of Directors is authorized to provide for the issuance
of Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which such
stockholder became an interested stockholder, unless (i) prior to such date,
the board of directors of the corporation approved such business combination
or the transaction which resulted in such stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in such
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the outstanding
108
<PAGE>
voting stock of the corporation or (iii) on or after such date the business
combination is approved by the board of directors of the corporation and
approved at a meeting (and not by written consent) by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. The term "business combination" is broadly defined to
include mergers, asset sales, other transfers, loans, guaranties and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. Each of Cox Teleport Partners, Inc., TCI Teleport,
Inc., Comcast Teleport, Inc. and Continental Teleport, Inc., has been an
"interested stockholder" of TCG for a period in excess of three years.
Corporations, pursuant to a provision in their certificate of incorporation,
may choose not to be governed by Section 203 of the DGCL. The Amended and
Restated Certificate of Incorporation of TCG does not contain such a
provision; thus, TCG is governed by Section 203 of the DGCL.
109
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of material United States federal income tax
consequences of the purchase, ownership and disposition of the Notes, but does
not purport to be a complete analysis of all potential tax effects. This
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. This
summary applies only to those persons who are the initial Holders of Notes,
who acquired the Notes for cash and who hold Notes as capital assets and does
not address the tax consequences to taxpayers who are subject to special rules
(such as financial institutions, tax-exempt organizations, insurance companies
and, except as discussed below under "Foreign Holders," persons who are not
citizens or residents of the United States, domestic corporations or estates
or trusts that are subject to United States federal income taxation on income
without regard to its source) or aspects of federal income taxation that may
be relevant to a prospective investor based upon such investor's particular
tax situation. Accordingly, purchasers of Notes should consult their own tax
advisors with respect to the particular consequences to them of the purchase,
ownership and disposition of the Notes, including the applicability of any
state, local or foreign tax laws to which they may be subject, as well as with
respect to the possible effects of changes in federal and other tax laws.
The Company has received an opinion from Dow, Lohnes & Albertson, a
Professional Limited Liability Company, counsel to the Company, that, based on
the assumptions and subject to the qualifications set forth therein, the
information in the following discussion represents their opinion of the
material United States federal income tax consequences of the purchase,
ownership and disposition of the Senior Notes and the Senior Discount Notes by
Holders who acquire the Notes in their original issuance, as a capital asset,
for a purchase price equal to the issue price of the Senior Discount Notes or
the stated principal amount of the Senior Notes. The opinion is based on
currently applicable authorities, which are subject to change, and on the
facts and circumstances existing on the date of the opinion. Such counsel has
relied upon representations by the Company and its officers with respect to
factual matters for purposes of such opinion. The opinion is not binding on
the Internal Revenue Service or on the courts, and no ruling will be requested
from the Internal Revenue Service on any issues described below. There can be
no assurance that the Internal Revenue Service will not take a different
position concerning the matters discussed below and that such positions of the
Internal Revenue Service would not be sustained.
SENIOR DISCOUNT NOTES--ORIGINAL ISSUE DISCOUNT
Because the Senior Discount Notes are being issued at a discount from their
"stated redemption price at maturity," the Senior Discount Notes will have
original issue discount ("OID") for federal income tax purposes. For federal
income tax purposes, OID on a Senior Discount Note will be the excess of the
stated redemption price at maturity of the Note over its issue price. The
issue price of the Senior Discount Notes will be the first price to the public
(excluding bond houses and brokers) at which a substantial amount of the
Senior Discount Notes is sold. For purposes of this discussion, it is assumed
that all initial Holders will purchase their Senior Discount Notes at the
issue price. The stated redemption price at maturity of a Senior Discount Note
will be the sum of all payments to be made on such Note, including all stated
interest payments, other than payments of "qualified stated interest."
Qualified stated interest is stated interest that is unconditionally payable
at least annually at a single fixed rate that appropriately takes into account
the length of the interval between payments. Because there will be no required
payment of interest on the Senior Discount Notes until January 1, 2002, none
of the interest payments on the Senior Discount Notes, under the stated
payment schedule, will constitute qualified stated interest. Therefore, each
Senior Discount Note will bear OID in an amount equal to the excess of (i) the
sum of its principal amount and all stated interest payments over (ii) its
issue price.
A Holder will be required to include OID in income periodically over the
term of a Senior Discount Note before receipt of the cash or other payment
attributable to such income, regardless of the Holder's method of tax
accounting. The amount of OID required to be included in a Holder's income for
any taxable year is the sum of the daily portions of OID with respect to the
Senior Discount Note for each day during the taxable year or portion of a
taxable year on which such Holder holds the Note. The daily portion is
determined by allocating to each
110
<PAGE>
day of any accrual period within a taxable year a pro rata portion of an
amount equal to the adjusted issue price of the Senior Discount Note at the
beginning of the accrual period multiplied by the yield to maturity of the
Note. For purposes of computing OID, the Company will use six-month accrual
periods that end on the days in the calendar year corresponding to the
maturity date of the Senior Discount Notes and the date six months prior to
such maturity date, with the exception of an initial short accrual period. The
adjusted issue price of a Senior Discount Note at the beginning of any accrual
period is the issue price of the Note increased by the amount of OID
previously includible in the gross income of the Holder, and decreased by any
payments previously made on the Note. The yield to maturity is the discount
rate that, when used in computing the present value of all payments of
principal and interest to be made on the Senior Discount Note, produces an
amount equal to the issue price of the Note. Under these rules, under the
stated payment schedule, Holders of Senior Discount Notes will have to include
in gross income increasingly greater amounts of OID in each successive accrual
period. A Holder's tax basis in a Senior Discount Note will be increased by
the amount of any OID includible in the Holder's income under the rules
discussed above and decreased by the amount of any payment (including payments
of stated interest) with respect to the Note.
The Company may elect to commence the accrual of cash interest on any
Interest Payment Date prior to July 1, 2001, in which case cash interest is
payable on each Interest Payment Date thereafter. Under the OID rules, solely
for purposes of determining the amount of OID that is includible in income by
a holder of a note, it is presumed that the issuer will exercise an option to
pay cash interest early if such exercise will lower the yield-to-maturity of
the note. The Company has determined that the exercise of its option to pay
interest early would not lower the yield-to-maturity of the Senior Discount
Notes. On these facts, the Company would not be presumed to exercise its
option to pay interest early. However, if, contrary to such presumption, the
Company exercises such option, then solely for purposes of the accrual of OID,
the yield and maturity of the Senior Discount Notes will be redetermined by
treating the Senior Discount Notes as reissued on such date for an amount
equal to the adjusted issue price on such date.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON OID
The Company may redeem the Senior Discount Notes, in whole or in part, at
any time on or after July 1, 2001, at redemption prices specified elsewhere
herein plus accrued interest to the date of redemption. The Treasury
Regulations contain rules for determining the "maturity date" and the stated
redemption price at maturity of an instrument that may be redeemed prior to
its stated maturity date at the option of the issuer. Under the OID rules,
solely for purposes of the accrual of OID, it is assumed that the issuer will
exercise any option to redeem a debt instrument if such exercise will lower
the yield-to-maturity of the debt instrument. The Company has determined that
the exercise of its right to redeem the Senior Discount Notes prior to their
stated maturity under these rules would not lower the yield-to-maturity of the
Senior Discount Notes. On these facts, the Company would not be presumed to
exercise its right to redeem the Senior Discount Notes prior to their stated
maturity under these rules.
In the event of certain registered offerings or sales of capital stock prior
to July 1, 1999, the Company at its option may redeem up to one-third of the
Senior Discount Notes then outstanding at redemption prices specified
elsewhere herein; provided that at least one-half of the aggregate principal
amount of the Senior Discount Notes originally issued remains outstanding
after such redemption. See "Description of the Notes--Terms of the Senior
Discount Notes--Optional Redemption." In the event of a Change of Control, as
defined in the Indenture, the Company will be required to offer to redeem all
of the Senior Discount Notes at redemption prices specified elsewhere herein.
See "Description of the Notes--Change of Control." Upon the occurrence of a
Special Redemption Event, the Company will be required to redeem a portion of
the Senior Discount Notes aggregating up to $353 million in Accreted Value at
redemption prices specified elsewhere herein. See "Description of the Notes--
Terms of the Senior Discount Notes--Special Redemption." Such redemption
rights and obligations will be treated by the Company as not affecting the
determination of the yield or maturity of the Senior Discount Notes. The
Treasury Regulations contain rules for determining the "maturity date" and the
stated redemption price at maturity of an instrument that may be redeemed
prior to its stated maturity date upon the occurrence of one or more
contingencies. Under such Treasury Regulations, if the timing and amounts of
the
111
<PAGE>
payments that comprise each payment schedule are known as of the issue date,
the "maturity date" and stated redemption price at maturity of such an
instrument are determined by assuming that payments will be made according to
the instrument's stated payment schedule, unless based upon all the facts and
circumstances as of the issue date, it is more likely than not that the
instrument's stated payment schedule will not occur. The Company has
determined that the stated maturity date and stated payment schedule of the
Senior Discount Notes is more likely than not to occur based on the facts and
circumstances known as of the issue date. On these facts, under these
regulations, the "maturity date" and stated redemption price at maturity of
the Senior Discount Notes would be determined on the basis of the stated
maturity and stated payment schedule.
If notwithstanding the foregoing, it is presumed that the Company will
exercise its option to redeem, then the maturity date of the Senior Discount
Notes for the purpose of calculating yield to maturity would be the exercise
date of such call option and the stated redemption price at maturity for each
Senior Discount Note would equal the amount payable upon such exercise. If
subsequently the call option is not exercised then, for purposes of the OID
rules, the issuer would be treated as having issued on the presumed exercise
date of the call option a new debt instrument in exchange for the existing
instrument. The new debt instrument deemed issued would have an issue price
equal to the call price. As a result, another OID computation would have to be
made with respect to the constructively issued new debt instrument.
SALE, EXCHANGE AND REDEMPTION OF SENIOR DISCOUNT NOTES
A sale, exchange or redemption of Senior Discount Notes will result in
taxable gain or loss equal to the difference between the amount of cash or
other property received and the Holder's adjusted tax basis in the Note. A
Holder's adjusted tax basis for determining gain or loss on the sale or other
disposition of a Senior Discount Note will initially equal the cost of the
Note to such Holder and will be increased by any amounts included in income as
OID, and decreased by the amount of any cash payments received by such Holder
regardless of whether such payments are denominated as principal or interest.
Gain or loss upon a sale, exchange, or redemption of a Senior Discount Note
will be capital gain or loss if the Note is held as a capital asset, and will
be long term capital gain or loss if the Note has been held by the Holder for
more than one year.
THE SENIOR NOTES
The Senior Notes were not issued with (and thus do not bear) original issue
discount. For purposes of this discussion, it is assumed that all the initial
Holders will purchase their Senior Notes at a price equal to the stated
principal amount.
Holders of Senior Notes will be required to include stated interest on the
Senior Notes in gross income for federal income tax purposes in accordance
with the Holder's method of accounting for tax purposes.
Upon a sale, exchange or redemption of a Senior Note, a Holder will
recognize gain or loss measured by the difference between the amount received
in exchange therefor (except to the extent the consideration received is
attributable to stated interest not previously taken into account, which
consideration is treated as interest income) and such Holder's adjusted tax
basis in the Senior Note. Any gain or loss recognized on the redemption, sale
or exchange of a Senior Note will be capital gain or loss if the Senior Note
is held as a capital asset and will be long term capital gain or loss if the
Senior Note has been held by a Holder for more than one year.
In certain circumstances, notes issued in connection with the same
transaction or related transactions may be treated as a single note for
purposes of the OID rules. The Company has determined that a substantial
portion of each of the Senior Notes and the Senior Discount Notes will be
issued to purchasers not related to the Company or to other purchasers and who
do not purchase both Senior Notes and Senior Discount Notes in connection with
the same transaction or related transactions. Assuming this is the case, the
aggregation rules will not apply.
112
<PAGE>
FOREIGN HOLDERS
The following discussion is a summary of certain United States federal income
tax consequences to a Foreign Person that holds a Note. The term "Foreign
Person" means a nonresident alien individual or foreign corporation, but only
if the income or gain on the Note is not "effectively connected with the
conduct of a trade or business within the United States," in which case the
nonresident alien individual or foreign corporation will be subject to tax on
such income or gain in essentially the same manner as a United States citizen
or resident or a domestic corporation, as discussed above, and in the case of a
foreign corporation, may also be subject to the branch profits tax.
Under the "portfolio interest" exception to the general rules for the
withholding of tax on interest and original issue discount paid to a Foreign
Person, a Foreign Person will not be subject to United States tax (or to
withholding) on interest or OID on a Note, provided that (i) the Foreign Person
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 and (ii)
the Company, its paying agent or the person who would otherwise be required to
withhold tax receives either (A) a statement (an "Owner's Statement") on the
Internal Revenue Service's Form W-8 signed under penalties of perjury by the
beneficial owner of the Note in which the owner certifies that the owner is not
a United States person and which provides the owner's name and address, or (B)
a statement signed under penalties of perjury by a financial institution
holding the Note on behalf of the beneficial owners, together with a copy of
the Owner's Statement. Regulations proposed in April, 1996 would retain these
procedures for certifying that a Holder is a Foreign Person and would add
several alternative certification procedures. A Foreign Person who does not
qualify for the "portfolio interest" exception would be subject to United
States withholding tax at a flat rate of 30% (or a lower applicable treaty
rate) on interest payments and payments (including proceeds from a sale,
exchange or retirement) attributable to OID on the Notes.
Gain recognized by a Foreign Person upon the redemption, sale or exchange of
a Note (including any gain representing accrued market discount) will not be
subject to United States tax unless the Foreign Person is an
113
<PAGE>
individual present in the United States for 183 days or more during the taxable
year in which the Note is redeemed, sold or exchanged, and certain other
requirements are met, in which case the Foreign Person will be subject to
United States Tax at a flat rate of 30% (unless exempt by applicable treaty).
Federal Estate and Gift Tax
A Note beneficially owned by an individual who at the time of death is not a
domiciliary of the United States will not be subject to United States federal
estate tax as a result of such individual's death, provided that such
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
within the meaning of Section 871(h)(3) of the Code and provided that the
interest payments with respect to such Note would not have been, if received at
the time of such individual's death, effectively connected with the conduct of
a United States trade or business by such individual.
Any individual will not be subject to United States federal gift tax on a
transfer of Notes, unless such person is a domiciliary of the United States.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to payments received with respect to the Notes. This
withholding applies if the Holder (i) fails to furnish his or her social
security or other taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) is notified by the Internal Revenue Service that he or she
has failed to report properly payments of interest and dividends and the
Internal Revenue Service has notified the Company that he or she is subject to
backup withholding, or (iv) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
his or her correct number and that he or she is not subject to backup
withholding. Any amount withheld from a payment to a Holder under the backup
withholding rules is allowable as a credit against such Holder's Federal income
tax liability, provided that the required information is furnished to the
Internal Revenue Service. Certain Holders (including, among others,
corporations and foreign individuals who comply with certain certification
requirements described above under "Foreign Holders") are not subject to backup
withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
114
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Underwriting Agreement") between the Company and Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), Chase Securities Inc. ("CSI") and Toronto Dominion Securities (USA)
Inc. ("TD," together, the "Underwriters"), the Company has agreed to sell to
the Underwriters, and each Underwriter has severally agreed to purchase from
the Company, the aggregate principal amount at maturity of Notes set forth
opposite its name below. The Underwriting Agreement provides that, subject to
the terms and conditions set forth therein, the Underwriters will be obligated
to purchase all of the Notes if any Notes are purchased.
<TABLE>
<CAPTION>
SENIOR NOTES SENIOR DISCOUNT NOTES
UNDERWRITERS PRINCIPAL AMOUNT PRINCIPAL AMOUNT AT MATURITY
------------ ---------------- ----------------------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation......... $120,000,000 $ 429,443,000
Merrill Lynch, Pierce, Fenner &
Smith
Incorporated........... 90,000,000 322,082,000
Morgan Stanley & Co.
Incorporated............. 60,000,000 214,721,000
Chase Securities Inc............ 21,000,000 75,152,000
Toronto Dominion Securities
(USA) Inc...................... 9,000,000 32,208,000
------------ --------------
Total...................... $300,000,000 $1,073,606,000
============ ==============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to certain conditions precedent. The Underwriting
Agreement also provides that the Company will indemnify the Underwriters
against certain liabilities and expenses, including those under the Securities
Act. The nature of the Underwriters' obligations is such that they are
committed to purchase all of the Notes if the Notes are purchased.
The Underwriters propose to offer the Notes directly to the public initially
at the price to the public set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of 0.40% of
the principal amount at maturity of the Notes. The Underwriters may allow, and
such dealers may reallow, a discount not in excess of 0.25% of the principal
amount at maturity of the Notes to certain other dealers. After the initial
offering of the Notes, the offering price and other selling terms may be
changed by the Underwriters.
The Company has been advised by the Underwriters that they presently intend
to make a market in the Notes in the secondary market, as permitted by
applicable laws and regulations, but that they are not obligated to do so and
may discontinue any such market making at any time without notice. The Notes
will not be listed on any securities exchange, and there can be no assurance
that a secondary market for the Notes will develop.
Certain Underwriters have from time to time provided customary brokerage and
investment banking services to the Company and expect in the future to provide
such services, for which they have received and will receive customary fees
and commissions.
Merrill Lynch & Co., Inc., an affiliate of one of the Underwriters, was the
majority owner of the Company from its inception until November 23, 1992.
Merrill Lynch & Co., Inc. was one of the Company's first customers and remains
one of its 10 largest customers. From March 3, 1983 to November 23, 1992, the
Company was included in the consolidated federal and combined income tax
returns for Merrill Lynch & Co., Inc. A Stockholders' Agreement among Cox
Teleport, Inc., Merrill Lynch Group, Inc. and TCG, dated December 11, 1991,
includes provisions governing the allocation and payment of taxes by TCG and
the Merrill Lynch affiliated group for the period from December 11, 1991,
through November 23, 1992. In addition, Merrill Lynch/WFC/L, Inc., an
affiliate of Merrill Lynch, has subleased portions of the Merrill Lynch
Headquarters, World Financial Center, New York, to TC Systems, Inc., a
subsidiary of TCG. In the fiscal year ended December 31, 1995, the Company
paid approximately $200,000 under such sublease.
Morgan Stanley & Co. Incorporated is also a long-standing and significant
customer for the Company's telecommunications services. Donaldson, Lufkin &
Jenrette Securities Corporation is also a customer of the Company. The
Company's provision of telecommunications services to Underwriters is on an
arm's-length basis.
115
<PAGE>
DLJ, Merrill Lynch and Morgan Stanley and certain of their affiliates have
been retained to act as underwriters in connection with the Stock Offerings.
CSI is an affiliate of the documentation agent and a lender under the
Revolving Credit Agreement. TD is an affiliate of the administrative agent and
a lender under the Revolving Credit Agreement.
Affiliates of CSI and TD will receive their proportionate share of the
repayment by the Company of amounts outstanding under the Revolving Credit
Agreement from the proceeds of the Offerings. See "Use of Proceeds" and
"Description of Certain Indebtedness."
116
<PAGE>
LEGAL MATTERS
The legality of the Notes offered hereby and certain other legal matters
will be passed upon for TCG by Dow, Lohnes & Albertson, a Professional Limited
Liability Company, Washington, D.C., and for the Underwriters by Shearman &
Sterling, New York, New York; provided, however, that certain state regulatory
matters relating to the issuance of the Notes will be passed upon for TCG by
Roland, Fogel, Koblenz & Carr, LLP, Albany, New York (with respect to New York
regulatory matters), and by Smith, Don, Alampi, D'Argenio & Arturi, Englewood
Cliffs, New Jersey (with respect to New Jersey regulatory matters).
EXPERTS
The combined financial statements of Teleport Communications Group Inc. and
its subsidiaries and TCG Partners as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995 and the combined
financial statements of Local Market Partnerships to be acquired by Teleport
Communications Group Inc. as of December 31, 1995 and 1994 and for each of the
three years in the period ended December 31, 1995 included in this Prospectus
have been audited by Deloitte & Touche llp, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
TCG has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 under the Securities Act with respect to
the Notes being offered in the Notes Offerings. For the purposes hereof, the
term "Registration Statement" means the original Registration Statement and
any and all amendments thereto, including the schedules and exhibits to such
original Registration Statement or any such amendment. This Prospectus does
not contain all of the information set forth in the Registration Statement, to
which reference hereby is made. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete
statement of its provisions.
TCG is not currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result
of the Offerings, TCG will become subject to the informational requirements of
the Exchange Act and in accordance therewith will file periodic reports, proxy
statements and other information relating to its business, financial
statements and other matters. Any interested party may inspect the
Registration Statement, the reports, proxy statements and other information
without charge, at the public reference facilities of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at its regional offices in Chicago (Northwestern Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60601), and in New York
(Seven World Trade Center, 13th Floor, New York, New York 10048). Any
interested party may obtain copies of all or any portion of the Registration
Statement, the reports, proxy statements and other information at prescribed
rates from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Company intends to distribute to all holders of the Notes offered hereby
annual reports containing audited consolidated financial statements and a
report thereon by its independent certified public accountants and quarterly
reports containing unaudited consolidated financial information for each of
the first three quarters of each fiscal year.
117
<PAGE>
GLOSSARY
Access charges--The fees paid by long distance carriers for the local
connections between the long distance carriers' networks and the long distance
carriers' customers.
ATM (asynchronous transfer mode)--A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits
of a standard fifty-three bit-long packet or cell. ATM-based packet transport
was specifically developed to allow switching and transmission of mixed voice,
data and video at varying rates. The ATM format can be used by many different
information systems, including LANs.
BOC (Bell Operating Company)--A telephone operating subsidiary of an RBOC;
an incumbent local exchange carrier.
CAP (competitive access provider)--A company that provides dedicated
services (private line, local transport and special access) telecommunications
services as an alternative to the ILEC.
Central offices--A telecommunications center where switches and other
telecommunications facilities are housed. CAPs may connect with ILEC networks
either at this location or through a remote location.
Centrex--A switched service that offers dial tone and other features similar
to those of Private Branch Exchange ("PBX"), except the switching equipment is
located at the carrier's premises and not at the customer's premises. These
features include direct dialing within a given telephone system, direct
dialing of outgoing telephone calls and automatic identification of incoming
telephone calls. This is a value-added service that carriers can provide to a
wide range of business customers.
Colocation--The ability of a telecommunications carrier to interconnect its
network to the ILEC's network by extending its facilities to the ILEC's
central office. Physical colocation occurs when the interconnecting carrier
places its network equipment within the ILEC's central offices. Virtual
colocation is an alternative to physical colocation under which the ILEC
permits a carrier to interconnect its network to the ILEC's network in a
manner which is technically, operationally and economically comparable to
physical colocation, even though the interconnecting carrier's network
connection equipment is not physically located within the central offices.
CLEC (competitive local exchange carrier)--A company that provides local
exchange services in competition with the incumbent local exchange carrier.
Dedicated--Telecommunications lines dedicated to, or reserved for use by, a
particular customer along predetermined routes (in contrast to links which are
temporarily established).
Digital--A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal. The precise digital numbers preclude any distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
Diverse routing--A telecommunications network configuration in which signals
are transmitted simultaneously along two different paths so that if one path
is cut or impaired, traffic can continue in the other direction without
interrupting service. The Company's networks generally provide diverse
routing.
DS-0, DS-1, DS-3--Standard North American telecommunications industry
digital signal formats, which are distinguishable by bit rate (the number of
binary digits (0 and 1) transmitted per second). DS-0 service has a bit rate
of 64 kilobits per second. DS-1 service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 44.736 megabits per second. A DS-0
can transmit a single uncompressed voice conversation.
118
<PAGE>
FCC--Federal Communications Commission.
Fiber Miles--The number of route miles of fiber optic cable installed
(excluding pending installations) along a telecommunications path multiplied
by the number of fibers in the cable. See the definition of "route mile"
below.
Fiber Optics--Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. Fiber optic
cable is the medium of choice for the telecommunications and cable industries.
Fiber is immune to electrical interference and environmental factors that
affect copper wiring and satellite transmission.
Hybrid fiber coaxial (HFC)--A new technology consisting of fiber optic
distribution facilities and coaxial cable deployed to the home or business.
This technology enables the operator to offer a wide variety of two-way
broadband services, including telecommunications and entertainment.
Interconnection decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the BOCs and other large ILECs to provide
interconnection in ILEC central offices to any CAP, long distance carrier or
end user requesting such interconnection to provide interstate special access
or switched transport services.
ILECs (incumbent local exchange carriers)--The local phone companies, either
a BOC or an independent (such as GTE) which provides local exchange services.
Internet--The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
ISDN (Integrated Services Digital Network)--ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission
line. ISDN permits video conferencing over a single line, for example, and
also supports a multitude of value-added switched service applications such as
Incoming Calling Line Identification. ISDN's combined voice and data
networking capabilities reduce costs for end users and result in more
efficient use of available facilities. ISDN combines standards for highly
flexible customer to network signaling with both voice and data within a
common facility.
IXC (interexchange carrier)--a long distance carrier.
Kbps (kilobits)--One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "thousands of bits
per second."
LANs (local area networks)--The interconnection of computers for the purpose
of sharing files, programs and peripheral devices such as printers and high-
speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
LATA (local access and transport area)--The geographical areas within which
a local telephone company may offer telecommunications services, as defined in
the divestiture order known as the Modified Final Judgment ("MFJ") unless and
until redefined by the FCC pursuant to the Telecommunications Act of 1996.
Local exchange--A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted
without toll charges to the calling or called party.
Local Exchange Service/Local Exchange Telephone Service--Basic local
telephone service, including the provision of telephone numbers, dial tone and
calling within the local exchange area.
119
<PAGE>
Long distance carriers (interexchange carriers or IXC)--Long distance
carriers providing services between LATAs, on an interstate or intrastate
basis. A long distance carrier may be facilities-based or offer service by
reselling the services of a facilities-based carrier.
Local transport services--Dedicated lines between the ILEC's central offices
and long distance carrier POPs used to carry switched traffic.
Mbps (megabit)--One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "millions of bits
per second."
Multiplexing--An electronic or optical process that combines a number of
lower speed transmission signals into one higher speed signal. There are
various techniques for multiplexing, including frequency division (splitting
the total available frequency bandwidth into smaller frequency slices), time
division (slicing a channel into timeslots and placing each signal into its
assigned timeslot), and statistical (wherein multiplexed signals share the
same channel and each transmits only when it has data to send).
Nodes--An individual point of origination and termination or intersection on
the network, usually where electronics are housed.
PBX (private branch exchange)--A customer owned and operated switch on
customer premises, typically used by large businesses with multiple telephone
lines.
PBX trunk--A transmission facility which connects a PBX to the Company's or
ILEC's central office switching center.
POPs (points of presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
telephone calls to, a network switching center of the same long distance
carrier.
Private line--A private, dedicated telecommunications link between different
customer locations (excluding long distance carrier POPs).
Public switched network--The switched network available to all users
generally on a shared basis (i.e., not dedicated to a particular user). The
local exchange telephone service networks operated by ILECs are the largest
and often the only public switched networks in a given locality.
PUC (public utility commission)--A state regulatory body, established in
most states, which regulates utilities, including telecommunications companies
providing intrastate services. In some states this regulatory body may have a
different name, such as public service commission ("PSC").
RBOC (Regional Bell Operating Company)--The holding company which owns a
BOC.
Reciprocal compensation--An arrangement in which two local exchange carriers
agree to terminate traffic originating on each other's networks in exchange
for a negotiated level of compensation.
Redundant electronics--A telecommunications facility that uses two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Route mile--The number of miles along which fiber optic cables are
installed.
SONET (synchronous optical network)--A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed
in optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors
120
<PAGE>
equipment. SONET benefits business customers by minimizing the equipment
necessary for various telecommunications applications and supports networking
diagnostic and maintenance features.
Special access services--The lease of private, dedicated telecommunications
lines or circuits on an ILEC's or a CAP's network which run to or from the
long distance carrier's POPs. Special access services do not require the use
of switches. Examples of special access services are telecommunications
circuits running between POPs of a single long distance carrier, from one long
distance carrier's POP to another long distance carrier's POP or from an end
user to its long distance carrier's POP.
Switch--A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users. Within this document, switches generally
refer to voice grade telecommunications switches unless specifically stated
otherwise.
Switched access services--The connection between a long distance carrier's
POP and an end user's premises through the switching facilities of a local
exchange carrier.
Toll services--Otherwise known as EAS or intra LATA toll services are those
calls that are beyond the free local calling area but originate and terminate
within the same LATA; such calls are usually priced on a measured basis.
Voice grade equivalent circuit--One DS-0. One voice grade equivalent circuit
is equal to 64 kilobits of bandwidth.
121
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-2
Combined Balance Sheets at December 31, 1995 and 1994................... F-3
Combined Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-4
Combined Statements of Changes in Stockholders' Equity and Partners'
Capital (Deficit) for the Years Ended December 31, 1995, 1994 and
1993................................................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-6
Notes to Combined Financial Statements.................................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Combined Balance Sheet at March 31, 1996................................ F-18
Combined Statements of Operations for the Three Months Ended March 31,
1996 and 1995.......................................................... F-19
Combined Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1995.......................................................... F-20
Notes to Combined Interim Financial Statements.......................... F-21
LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP
INC.:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-22
Combined Balance Sheets at December 31, 1995 and 1994................... F-23
Combined Statements of Operations and Partners' Capital for the Years
Ended December 31, 1995, 1994, and 1993................................ F-24
Combined Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-25
Notes to Combined Financial Statements.................................. F-26
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Combined Balance Sheet at March 31, 1996................................ F-31
Combined Statements of Operations for the Three Months Ended March 31,
1996 and 1995.......................................................... F-32
Combined Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1995.......................................................... F-33
Notes to Combined Interim Financial Statements.......................... F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Teleport Communications Group Inc. and
Partners of TCG Partners:
We have audited the accompanying combined balance sheets of Teleport
Communications Group Inc. and its subsidiaries and TCG Partners (collectively,
"TCG"), both of which are under common ownership and common management, as of
December 31, 1995 and 1994 and the related combined statements of operations,
changes in stockholders' equity and partners' capital (deficit), and cash
flows for the three years ended December 31, 1995, 1994 and 1993. These
financial statements are the responsibility of TCG'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, such combined financial statements present fairly, in all
material respects, the combined financial position of TCG at December 31, 1995
and 1994 and the combined results of their operations and their combined cash
flows for the three years ended December 31, 1995, 1994 and 1993 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 16, 1996
(April 24, 1996 as to Note 1,
May 13, 1996 as to Note 12 and
June 25, 1996 as to Note 6)
F-2
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 11,862 $ 26,000
--------- --------
Accounts receivable:
Trade--net of allowance for doubtful accounts ($1,161 in
1995 and $1,457 in 1994)................................ 26,196 19,535
Related parties.......................................... 4,640 6,264
Miscellaneous--net of allowance for doubtful accounts
($543 in 1995 and $747 in 1994)......................... 2,037 1,669
--------- --------
Accounts receivable--net............................... 32,873 27,468
--------- --------
Prepaid expenses......................................... 4,939 3,950
--------- --------
Other current assets..................................... 532 481
--------- --------
Total current assets..................................... 50,206 57,899
--------- --------
Fixed assets--at cost:
Communications network................................... 492,858 389,010
Other.................................................... 52,795 33,954
--------- --------
545,653 422,964
Less accumulated depreciation and amortization........... (113,202) (78,973)
--------- --------
Fixed assets--net...................................... 432,451 343,991
--------- --------
Investment in unconsolidated affiliates................... 99,299 53,958
--------- --------
Goodwill--net of accumulated amortization ($1,716 in 1995
and $279 in 1994)........................................ 27,008 28,445
--------- --------
Other assets.............................................. 5,829 2,690
--------- --------
Total assets............................................. $ 614,793 $486,983
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities................. $ 92,104 $ 62,015
Current portion of capital lease obligations ($3,338 in
1995 and $1,076 in 1994 with related parties)........... 4,354 1,845
Notes payable to unconsolidated affiliates............... -- 25,983
Other current liabilities................................ 831 775
--------- --------
Total current liabilities................................ 97,289 90,618
Capital lease obligations ($10,017 in 1995 and $2,634 in
1994 with related parties)............................... 11,964 2,962
Subordinated debt to parents.............................. 269,000 197,500
Long-term bank debt....................................... 87,500 --
Minority interest......................................... 4,409 2,903
Other liabilities......................................... 19,283 13,848
--------- --------
Total liabilities........................................ 489,445 307,831
--------- --------
Commitments and contingencies
Stockholders' equity and partners' capital (deficit):
Stockholders' equity (common stock, $1.00 par value;
authorized, 3,000 shares; outstanding, 1,667 shares)...... 129,742 162,129
Partners' capital (deficit)................................ (4,394) 17,023
-------- --------
Total stockholders' equity and partners' capital
(deficit)................................................. 125,348 179,152
-------- --------
Total liabilities and stockholders' equity and partners'
capital (deficit)......................................... $614,793 $486,983
======== ========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Telecommunications services.................... $134,652 $ 99,983 $ 82,374
Management and royalty fees from affiliates.... 31,517 20,691 1,555
-------- -------- --------
Total revenues............................... 166,169 120,674 83,929
-------- -------- --------
Expenses:
Operating...................................... 73,743 60,255 48,224
Selling, general and administrative............ 69,850 56,306 40,275
Depreciation and amortization.................. 37,837 19,933 16,197
-------- -------- --------
Total expenses............................... 181,430 136,494 104,696
-------- -------- --------
Operating loss................................... (15,261) (15,820) (20,767)
-------- -------- --------
Interest:
Interest income................................ 4,067 1,711 1,072
Interest expense ($18,763 in 1995, $4,998 in
1994 and $1,123 in 1993 with related
parties)...................................... (23,331) (5,079) (1,407)
-------- -------- --------
Total interest............................... (19,264) (3,368) (335)
-------- -------- --------
Loss before minority interest, equity in losses
of unconsolidated affiliates and income tax
(provision) benefit............................. (34,525) (19,188) (21,102)
Minority interest................................ 663 1,395 796
Equity in losses of unconsolidated affiliates.... (19,541) (11,763) (2,114)
-------- -------- --------
Loss before income tax (provision) benefit....... (53,403) (29,556) (22,420)
Income tax (provision) benefit................... (401) (433) 4,149
-------- -------- --------
Net loss......................................... $(53,804) $(29,989) $(18,271)
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------------------
TOTAL
STOCKHOLDERS'
EQUITY AND
ADDITIONAL RETAINED PARTNERS' PARTNERS'
COMMON PAID-IN EARNINGS CAPITAL CAPITAL
STOCK CAPITAL (DEFICIT) TOTAL (DEFICIT) (DEFICIT)
------ ---------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... $ 1 $ 75,348 $ 2,360 $ 77,709 $ (338) $ 77,371
Net loss.............. -- -- (13,240) (13,240) (5,031) (18,271)
Issuance of capital
stock................ 1 120,040 -- 120,041 -- 120,041
Capital
contributions........ -- -- -- -- 30,000 30,000
---- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1993................... 2 195,388 (10,880) 184,510 24,631 209,141
Net loss.............. -- -- (22,381) (22,381) (7,608) (29,989)
---- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1994................... 2 195,388 (33,261) 162,129 17,023 179,152
Net loss.............. -- -- (32,387) (32,387) (21,417) (53,804)
---- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1995................... $ 2 $195,388 $(65,648) $129,742 $ (4,394) $125,348
==== ======== ======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $ (53,804) $ (29,989) $ (18,271)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............. 37,837 19,933 16,197
Deferred income taxes..................... -- -- (4,149)
Equity in losses of unconsolidated
affiliates............................... 19,541 11,763 2,114
Amortization of deferred credits.......... (2,228) (1,886) (658)
Provision for losses on accounts
receivable............................... 877 768 549
Minority interest........................... (663) (1,395) (796)
(Increase) decrease in operating assets and
increase (decrease) in operating
liabilities:
Accounts receivable....................... (12,771) (8,958) (7,495)
Other assets.............................. (3,108) 592 (2,152)
Accounts payable and accrued liabilities.. 45,832 94,472 60,738
Deferred credits.......................... 4,628 2,453 (628)
--------- --------- ---------
Net cash provided by operating
activities............................. 36,141 87,753 45,449
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications net-
work....................................... (120,814) (118,924) (130,833)
Capital expenditures for other fixed as-
sets....................................... (18,842) (19,968) (5,135)
Acquisition of Diginet...................... -- -- (12,581)
Due to (from) related parties............... (6,707) (69,007) (8,689)
Purchase of minority interest in TCB........ -- (36,975) --
Investment in unconsolidated affiliates--
cash component............................. (61,604) (42,342) (9,487)
Advances to unconsolidated affiliate........ (3,400) -- --
Repayment of advances to unconsolidated af-
filiate.................................... 3,400 -- --
Reimbursement of funds advanced to unconsol-
idated affiliates.......................... -- 22,190 19,607
--------- --------- ---------
Net cash used for investing activities.. (207,967) (265,026) (147,118)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.... 159,000 172,500 55,400
Repayment of long-term debt................. -- -- (79,984)
Issuance of capital stock................... -- -- 120,041
Capital contributions from minority
partners................................... 2,168 6,058 5,756
Capital contribution........................ -- -- 30,000
Principal payments under capital lease
obligations................................ (3,480) (459) (1,391)
Repayments of short-term debt............... -- (6,542) --
--------- --------- ---------
Net cash provided by financing
activities............................. 157,688 171,557 129,822
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (14,138) (5,716) 28,153
CASH AND CASH EQUIVALENTS, JANUARY 1.......... 26,000 31,716 3,563
--------- --------- ---------
CASH AND CASH EQUIVALENTS, DECEMBER 31........ $ 11,862 $ 26,000 $ 31,716
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid during the year for
interest..................................... $ 8,675 $ 5,693 $ 1,099
========= ========= =========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND OPERATIONS
Teleport Communications Group Inc. ("TCGI"), incorporated in March 1983, and
TCG Partners, formed in December 1992, (collectively, "TCG") are each owned
30.05994 percent by wholly-owned subsidiaries of Cox Communications, Inc.
("Cox"), 29.93994 percent by wholly-owned subsidiaries of Tele-Communications,
Inc. ("TCI"), 20.00006 percent by wholly-owned subsidiaries of Comcast
Corporation ("Comcast"), and 20.00006 percent by wholly-owned subsidiaries of
Continental Cablevision, Inc. ("Continental").
TCGI and TCG Partners are affiliated through common ownership and
management.
TCG, the first and largest competitive local exchange carrier in the United
States, offers a wide range of local telecommunications services in major
metropolitan markets nationwide. TCG competes with incumbent local exchange
carriers as "The Other Local Phone Company"SM by providing high quality,
integrated local telecommunications services, primarily over fiber optic
digital networks, to meet the voice, data and video transmission needs of its
customers. TCG's customers are principally telecommunications-intensive
businesses, long distance carriers and resellers and wireless communications
companies. TCG offers these customers technologically advanced local
telecommunications services, as well as superior customer service, flexible
pricing and vendor and route diversity.
In connection with the proposed public offerings of Class A Common Stock and
Notes, TCGI and its owners entered into a reorganization agreement dated April
18, 1996 pursuant to which TCG Partners and certain of the unconsolidated
affiliates will become wholly owned subsidiaries of TCGI, and TCGI will
acquire the minority interests of certain of the owners of the remaining
unconsolidated affiliates.
On April 19, 1996 and April 24, 1996, TCGI filed registration statements
with the Securities and Exchange Commission for the registration of Class A
Common Stock and Senior Discount Notes, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination--The accompanying combined financial statements
include the accounts of TCGI and its subsidiaries and of TCG Partners.
Minority interest represents other partners' equity in TCG St. Louis in 1995
and 1994 and in Teleport Communications Boston, a Massachusetts partnership
("TCB"), in 1994 (until acquisition) and in 1993. In addition, TCG San Diego
was included in minority interest from June 1, 1993 (date of inception)
through May 31, 1994. Effective June 1, 1994, TCG San Diego became an
unconsolidated affiliate due to Times Mirror Inc. acquiring an interest in the
partnership. All significant intercompany transactions and balances have been
eliminated. Investments in which TCG holds less than a 50 percent interest are
accounted for under the equity method.
Basis of Accounting--The accompanying combined financial statements have
been prepared on the accrual basis of accounting.
Revenue Recognition--Revenue on dedicated line and switch services is
recognized in accordance with the terms of the underlying customer contracts
or tariffs and over the period in which the services are provided.
Depreciation and Amortization--Depreciation and amortization are computed on
the straight-line basis over the estimated useful lives of the assets or the
length of the lease, whichever is shorter. Estimated useful lives are 5 to 25
years for the communications network and 3 to 5 years for other fixed assets,
except for buildings which are 40 years.
During 1995, TCG completed a review of the useful lives of its fixed assets.
TCG determined that the lives of certain electronics equipment were longer
than industry standard, while the lives of other electronics equipment were
shorter than industry standard. Therefore, TCG adjusted the estimated useful
lives of certain
F-7
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
electronics equipment to conform with industry standard, effective December 1,
1995. The effect of these changes in estimate increased depreciation expense
for the year ended December 31, 1995 by approximately $700,000.
Goodwill--Goodwill represents the excess purchase price paid over the net
assets associated with the purchase of the remaining partnership interest in
Teleport Communications, a New York partnership, and TCB. Goodwill is
amortized on a straight line basis over 40 years for Teleport Communications
and 20 years for TCB. The goodwill amortization recorded in 1995, 1994 and
1993 was $1,437,000, $207,000 and $35,000, respectively.
The carrying value of intangible assets is periodically reviewed and
impairments will be recognized when the undiscounted expected future cash
flows, computed after interest expense derived from the related operations, is
less than their carrying value. Effective January 1, 1995, TCG changed its
estimate of the useful life of the goodwill associated with TCB to 20 years.
The effect of this change in estimate was to increase depreciation and
amortization expense by approximately $650,000.
Deferred Credits--Deferred credits principally represent advance payments
received from customers for long-term fiber optic service, and are amortized
into income over the life of the related contracts. The current portions,
$831,000 and $775,000 at December 31, 1995 and 1994, respectively, are
included in other current liabilities and the non-current portions, $5,392,000
and $3,216,000 at December 31, 1995 and 1994, respectively, are included in
other liabilities.
Income Taxes--TCGI accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, using enacted tax rates currently in effect.
State and local taxes are based on factors other than income.
TCG Partners is not subject to Federal or state and local income taxes. Each
partner's distributive share of partnership revenues, expenses and other items
is computed on the basis of the respective partner's capital interest in the
partnership and is reported by the partners in their respective Federal or
state income tax returns.
Financial Instruments--Financial instruments which potentially subject TCG
to concentration of credit risk consist of accounts receivable. Concentrations
of credit risk with respect to accounts receivable are limited due to the
dispersion of TCG's customer base among different industries and geographic
areas in the United States, by credit granting policies adopted by TCG, and by
remedies provided by terms of contracts, tariffs and statutes.
Cash Equivalents--TCG considers all highly liquid instruments readily
convertible to known amounts of cash to be cash equivalents.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets--In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement is effective for fiscal years beginning
after December 15, 1995. Management has evaluated the effect on its financial
condition and results of operations from the adoption of this statement and
does not believe an impairment of the long-lived assets has occurred.
Stock-Based Compensation--In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than fiscal years beginning after December 15,
1995 and adoption of the measurement and recognition provisions for non-
employee
F-8
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for the issuance of stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are encouraged, but are not required, to adopt the fair value
method of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and, per share amounts as if the company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the method
chosen to measure and recognize compensation for employee stock-based
arrangements. TCG has elected to continue to account for such transactions
under APB No. 25. TCGI has determined that if SFAS No. 123 had been adopted,
its impact to the combined statement of operations for the year ended December
31, 1995 would have been insignificant.
Presentation--Certain 1994 and 1993 amounts have been reclassified to
conform with the 1995 presentation.
3. INCOME TAXES
There are no current income taxes payable based on TCGI's operating loss.
The following temporary differences compose the net deferred income tax
liability (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax liabilities--depreciation,
amortization and excess credits...................... $ 23,294 $ 17,495
-------- --------
Deferred income tax assets:
Deferred revenue.................................... (2,089) (1,308)
Assets recorded for tax purposes.................... (1,301) (1,514)
Incentive compensation.............................. (3,303) (2,134)
Operating loss...................................... (35,233) (19,594)
Equity on investments............................... (710) (694)
Excess credits...................................... -- (684)
-------- --------
(42,636) (25,928)
Less valuation allowance............................ 20,264 9,355
-------- --------
Total deferred tax assets......................... (22,372) (16,573)
-------- --------
Deferred income taxes payable--net.................... $ 922 $ 922
======== ========
</TABLE>
In 1995, 1994 and 1993, the income tax benefits of approximately
$10,909,000, $7,782,000 and $5,722,000, respectively, have been offset by
increases in the valuation allowance of $10,909,000, $7,782,000 and
$1,573,000, respectively, due to the uncertainty of realizing the benefit of
the loss carryforwards.
F-9
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal income tax rate to TCGI's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income
tax rate............... 35.0 % 35.0 % (35.0)%
State and local taxes,
less federal benefit... 1.3 % 2.0 % 0.0 %
Unutilized tax benefit
due to net operating
loss................... (33.3)% (35.5)% 9.0 %
Permanent differences
and other.............. (1.7)% 0.5 % 2.1 %
----- ----- -----
Effective rate.......... 1.3 % 2.0 % (23.9)%
===== ===== =====
</TABLE>
At December 31, 1995, TCGI's had operating loss carryforwards for tax
purposes of approximately $105,300,000, expiring principally in 2009 through
2011.
4. RELATED PARTY TRANSACTIONS
In connection with the management of its unconsolidated partnerships and
certain other affiliates, TCGI has entered into management services
agreements. Under the terms of such agreements, TCGI provides certain
operating and administrative services to such entities, for which it earns
management fees. Management fees earned were approximately $29,638,000,
$19,403,000 and $1,380,000 in 1995, 1994 and 1993, respectively.
At the request of certain cable television operators, including Cable
Stockholders, TCG is participating in residential telephone trials in
Arlington Heights, Illinois, Hartford, Connecticut and the San Francisco Bay
area. TCG expects to be fully reimbursed for its costs incurred in connection
with these trials. At December 31, 1995, the amount due to TCG for this
reimbursement was $461,000, and is included in miscellaneous accounts
receivable.
TCG also provides management services to certain affiliates of Cox under
three Operator Managed Ventures Services Agreements, including billing
services, network monitoring and accounts receivable functions. Under the
terms of the agreements, TCG retains 8% of the collected revenues from Cox
customers as a royalty fee. Royalty fees recorded from Cox were approximately
$98,000, $27,000 and $0 for 1995, 1994 and 1993, respectively, and are
included in management and royalty fees in the statements of operations.
Included in accounts receivable--trade are approximately $262,000 and $99,000
at December 31, 1995 and 1994, respectively, for amounts owed by Cox
customers.
In 1995 TCG purchased cable on behalf of certain of its owners which it then
sold to them at cost. At December 31, 1995, the amount receivable from the
owners was $3,683,000.
Revenues earned from all services to the other partner of TCB and its
affiliates were approximately $3,709,000 and $771,000 for the years ended
December 31, 1994 and 1993, respectively.
5. EMPLOYEE BENEFIT PLANS
Teleport Communications Group Retirement Savings Plan. TCGI has a Retirement
Savings Plan with a 401(k) savings component and a retirement component
covering substantially all eligible employees of TCG with one or more years of
service. Under the 401(k) component of the plan, participants may make pre-tax
contributions and TCG matches 50 percent of the first 6 percent of annual
eligible compensation to a maximum company contribution of $1,500 per
employee. Under the retirement component of the plan, TCG contributes an
amount based on years of service and annual eligible compensation.
In 1995, 1994 and 1993, TCG made matching contributions of $735,963,
$456,259 and $257,709, respectively, as required by the 401(k) component and
$977,949, $606,390 and $288,838 respectively, under the retirement component
of the plan.
F-10
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
TCGI has established a nonqualified, unfunded, deferred compensation Make-Up
Plan of Teleport Communications Group Inc. (the "Make-Up Plan") for the
Teleport Communications Group Inc. Retirement Savings Plan (the "Retirement
Savings Plan"). The purpose of the Make-Up Plan is to provide certain eligible
participants benefits which would have been payable under the Retirement
Savings Plan, but were limited by the maximum company match of $1,500, as well
as compensation limits set forth by the IRS. Expenses incurred in connection
with the Make-Up Plan were insignificant.
Teleport Communications Group Unit Appreciation Plan. TCGI has established a
Teleport Communications Group Unit Appreciation Plan (the "UAP"). During the
years ended December 31, 1993 and 1992, TCGI made awards of deferred
compensation in the form of units (the "Units"), pursuant to the UAP, to
certain eligible employees of TCGI. The initial base price of each Unit as of
January 1, 1993 and 1992 was $34.85 and $30.00, respectively. Awards under the
UAP are subject to a five-year vesting schedule, pursuant to which the Units
granted will be partially vested commencing as of December 31, 1995 and
December 31, 1994, respectively, and fully vested no later than December 31,
1997 and December 31, 1996, respectively, subject to certain exceptions. The
terms of the UAP have been modified pursuant to employment agreements with
certain employees, as provided therein. In connection with the UAP, TCGI
recognized compensation expense of $2,474,845, $6,070,955 and $3,047,436 for
the years ended December 31, 1995, 1994 and 1993, respectively. In January
1996, TCGI adopted a plan which permits the awards under the UAP to be
deferred in whole or in part at the election of the participants for certain
periods.
The following table provides additional information concerning the Unit
Appreciation Plan awards:
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER
OF UNITS NUMBER OF VALUE OF UNITS OF UNITS OF UNITS VALUE OF UNITS
INITIAL OUTSTANDING AT UNITS VESTED AT VESTED AT OUTSTANDING AT VESTED AT VESTED AT
YEAR OF NUMBER DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
AWARD OF UNITS 1995 1995(1) 1995 1994(2) 1994 1994
------- -------- -------------- --------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993............ 36,000 23,700 14,220 $ 991,134 25,100 -- --
1992............ 170,850 139,200 111,360 7,486,200 156,850 94,110 $5,926,500
------- ------- ------- ---------- ------- ------ ----------
Total........... 206,850 162,900 125,580 $8,477,334 181,950 94,110 $5,926,500
======= ======= ======= ========== ======= ====== ==========
<CAPTION>
NUMBER
OF UNITS
OUTSTANDING AT
YEAR OF DECEMBER 31,
AWARD 1993
------- --------------
<S> <C>
1993............ 36,000
1992............ 160,350
--------------
Total........... 196,350
==============
</TABLE>
- - --------
(1) No Units awarded in 1993 were vested prior to December 31, 1995.
(2) No Units awarded in 1992 were vested prior to December 31, 1994.
Teleport Communications Group Stock Option Plan. TCGI established the
Teleport Communications Group Stock Option Plan (the "SOP") effective
September 26, 1993. TCGI has made long term incentive compensation awards in
the form of stock option grants pursuant to the SOP to eligible employees. The
SOP reserved 128.175000 shares for issuance pursuant to stock option grants.
Adjusted for the recapture of stock options issued to former employees, as of
February 16, 1996, stock options relating to 59.91685 shares were outstanding.
Stock options were granted at fair value and no compensation expense has been
recognized in connection with the options.
F-11
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table provides additional information concerning SOP awards.
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES OF SHARES OF SHARES
UNDERLYING RANGE OF EXERCISE UNDERLYING UNDERLYING UNDERLYING UNDERLYING
OPTIONS PRICES OF OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS
ISSUED ISSUED DURING OUTSTANDING AT EXERCISED CANCELLED EXERCISABLE AT
YEAR DURING YEAR YEAR YEAR-END DURING YEAR DURING YEAR YEAR-END
---- ----------- ----------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1995.................... 6.7880 $597,227 60.4300 .6456 5.1244 7.1967
1994.................... 7.7149 $436,217 59.4120 -- 5.2694 3.7503
1993.................... 56.9665 $289,643-$329,140 56.9665 -- -- --
</TABLE>
Employment Agreements. TCGI's employment agreements are with certain of its
executive officers and senior management personnel. These agreements are
effective through December 31, 1996, unless terminated earlier by the
executive or TCGI, and provide for annual salaries, cost-of-living
adjustments, additional compensation in the form of bonuses based on the
performance of TCGI and the executive, and participation in the various
benefit plans of TCGI. The agreements contain certain benefits to the
executive if TCGI terminates the executive's employment without cause or if
the executive terminated his employment as a result of change in ownership of
TCGI. The salary and bonus expense related to these executives for the year
ended December 31, 1995 approximated $2,133,000. TCGI's remaining aggregate
commitments for salaries under such agreements is approximately $1,480,000.
In the event the executive terminates his employment as a result of a change
in control, the agreements provide for the payment of a base salary plus an
annual bonus in a minimum amount equal to 30 percent of such base salary,
except for the President whose minimum annual bonus is 50% of base salary.
6. LONG-TERM DEBT
Long-term debt at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Subordinated debt to parents, weighted average rate
1995, 6.82% and 1994, 5.51% due through 2002........... $269,000 $197,500
Long-term bank debt, weighted average rate 6.80%, due
through 2004........................................... 87,500 --
-------- --------
Total................................................. $356,500 $197,500
======== ========
</TABLE>
The aggregate long-term debt maturing during the next five years is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- --------
<S> <C>
1996............................................................. $ --
1997............................................................. --
1998............................................................. --
1999............................................................. 12,500
2000............................................................. 50,000
Thereafter........................................................ 294,000
--------
$356,500
========
</TABLE>
TCGI has a loan agreement with Cox, Continental, Comcast and TCI aggregating
$349,600,000 ($269,000,000 and $197,500,000 outstanding at December 31, 1995
and 1994, respectively). Borrowings bear interest at 75 basis points above the
one-month London Interbank Offered Rate ("LIBOR").
F-12
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Total interest expense for this loan was $17,643,000, $5,477,000 and
$656,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
At December 31, 1995, $12,179,000 of such interest was included in accrued
expenses.
In May 1995, TCGI entered into a loan agreement (the "Revolving Credit
Agreement") with seventeen banks (the "Bank Group") for a total credit
facility of $250,000,000 ($87,500,000 outstanding at December 31, 1995).
Interest on borrowings under this agreement is at varying rates based, at
TCGI's option, on the prime rate of Toronto-Dominion Bank (the administrative
agent for the banks) or the LIBOR plus a spread based on certain financial
ratios. Commitment fees on the unused amount of the credit facility of 3/8 of
1 percent are payable under this agreement.
Additionally, TCGI entered into an agreement with Comcast, Continental, Cox
and TCI, whereby TCGI's debt to related parties was subordinated to the long-
term indebtedness from the Bank Group.
The shares of capital stock owned by TCGI in certain of the wholly owned
subsidiaries of TCGI (TC New York Holdings I, Inc., TC New York Holdings II,
Inc., TCG Payphones, Inc., and TC Systems, Inc., collectively the "Restricted
Subsidiaries") were pledged as collateral to secure the loan and may not be
pledged to any other party under the terms of the Revolving Credit Agreement.
In December 1995, the capital stock of the wholly owned Restricted
Subsidiaries of TCGI was transferred to TCG New York, Inc., a wholly owned
subsidiary of TCGI. TCG New York, Inc. assumed all obligations under the
Revolving Credit Agreement as of the date of transfer. TCG New York, Inc. is
permitted under the terms of the Revolving Credit Agreement to advance funds
to TCGI. When made, such advances are to be evidenced by notes from TCGI to
TCG New York, Inc. which will be pledged as collateral under the Revolving
Credit Agreement to the Bank Group.
The Revolving Credit Agreement contains various covenants and conditions,
including restrictions on additional indebtedness, maintenance of certain
financial ratios and limitations on capital expenditures. None of these
covenants negatively impact TCGI's liquidity or capital resources at this
time.
Subsequent to December 31, 1995, TCG New York Inc. increased its borrowing
under the Revolving Credit Agreement. Total borrowings under this agreement
were $250,000,000 as of June 25, 1996.
The total amount of interest paid on long-term debt in 1995, 1994 and 1993
was approximately $7,642,000, $5,477,000 and $656,000, respectively.
TCG's long-term debt had fair values that approximated their carrying
amounts.
7. FINANCIAL INSTRUMENTS
TCGI has entered into interest rate swap agreements to mitigate the impact
of changes in interest rates on its long-term bank debt. At December 31, 1995,
TCGI had interest rate swaps with commercial banks with a notional value of
$55,000,000. The average fixed interest rate is 5.93 percent. These agreements
effectively fix TCGI's interest rate exposure on various LIBOR based floating
rate notes (which range from 5.87 percent to 5.94 percent). TCGI is exposed to
credit loss in the event of nonperformance by the other parties to the
interest rate swap agreements; however, TCGI does not anticipate
nonperformance by the counterparts.
F-13
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. INVESTMENT IN UNCONSOLIDATED AFFILIATES
During 1995, TCG contributed cash ($12,114,000) for a 40 percent partnership
interest in TCG Pittsburgh. TCI holds the remaining 60 percent interest in the
Pittsburgh partnership.
During 1994, TCG contributed cash and certain other assets, or agreed to
contribute certain other assets, subject to certain liabilities, in exchange
for partnership interests in TCG Seattle (35 percent), TCG San Francisco (35
percent), TCG Los Angeles (35 percent), TCG Phoenix (35 percent), and TCG
Dallas Systems (44.9 percent). Such initial contributions of cash and net
assets aggregated $9,712,000 and $19,100,000, respectively. In addition, TCG
Partners reduced its partnership interest in TCG San Diego from 50 to 46.35
percent on June 1, 1994 as a result of Times Mirror Inc. acquiring an interest
in the partnership. TCI also holds a portion of all these new partnerships
formed in 1994. Cox, Comcast, Continental and various unrelated parties have
partnership interests in several of the partnerships.
In 1993, partnerships were formed for TCG Chicago (35 percent), TCG Illinois
(35 percent), TCG Detroit (44.9 percent), TCG Dallas (44.9 percent), TCG South
Florida (35 percent) and TCG Connecticut (35 percent). In connection with such
formation, TCG contributed cash of $13,601,000 and net assets of $24,700,000.
Subsequent to the partnerships' formation, the partnerships reimbursed TCG
for the pre-organization operating expenses and capital expenditures incurred
by the TCG subsidiaries prior to the formation of the partnerships. Such
amounts were included in the liabilities contributed by such subsidiaries to
the partnerships upon formation. The purpose of these partnerships is to
acquire, own, design, construct, operate, manage and sell certain local
telecommunications services in the respective metropolitan areas.
In connection with the establishment of these partnerships, local licensing
regulations, state regulatory requirements, and contractual restrictions did
not permit the transfer of title of fixed assets from certain TCG subsidiaries
to the local partnerships. At December 31, 1994, the obligations of TCG to
contribute the fixed assets once the appropriate approvals were received were
evidenced by noninterest-bearing notes aggregating approximately $25,983,000.
Depreciation of the related fixed assets, which remained recorded on the books
and records of the TCG subsidiary, was accounted for by a reduction of the
note payable. TCG transferred title of certain fixed assets from the TCG
subsidiary to the local partnership in 1994 and upon obtaining the necessary
approvals in 1995, TCG transferred title of the remaining fixed assets.
Additionally, the excess of the contributed capital, as defined in the
partnership agreement, over the historical carrying value of the net assets
contributed by the TCG subsidiaries (aggregating approximately $36,162,000 and
$39,500,000 at December 31, 1995 and 1994, respectively) is being amortized
over periods representing the average remaining useful lives of the
contributed assets, and is classified in the line item investments in
unconsolidated affiliates in the accompanying combined balance sheets as a
reduction to such account.
Summarized financial information for these investments, including Comcast
CAP (see Note 9), as of December 31, 1995 and 1994, and for the periods then
ended, is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total assets............................................. $501,094 $359,940
Total liabilities........................................ 151,562 32,533
Total revenues........................................... 68,389 35,404
Net loss................................................. (47,408) (31,955)
</TABLE>
F-14
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. ACQUISITIONS
Effective October 1, 1995, TC Systems, Inc., a wholly owned subsidiary of
TCG New York, Inc., entered into an assumption agreement with Local Area
Telecommunications, Inc. ("LOCATE") to acquire certain assets subject to
associated liabilities. Aggregate assets and associated liabilities at that
time were approximately $2.7 million. TC Systems is managing the assets and
funding the associated operating losses pending the closing of the transaction
which is expected to occur as of May 31, 1996.
Effective September 1, 1994, TCG Indiana, Inc., a wholly owned subsidiary of
TCG Partners, entered into an agreement with City Signal Inc. to purchase all
the assets of City Signal Inc. of Indianapolis for approximately $2.6 million,
representing the assets acquired subject to the liabilities assumed. The
results of operations related to City Signal Inc. are included in the
accompanying combined financial statements from September 1, 1994. The results
of operations prior to September 1, 1994 were insignificant.
On October 24, 1994, Teleport paid $6,978,433 to FMR Corp., representing a
return of Fidelity Communications Inc.'s share of TCB's capital calls received
from March 1993 to February 1994, including interest in the amount of
$503,433. On the same date, TCG Partners entered into a purchase agreement
with FMR Corp. to purchase 100 percent of the capital stock of Fidelity
Communications Inc. In accordance with the purchase agreement, TCG Partners
gave a promissory note in the amount of $30,500,000 to Continental Cablevision
Inc. ("Continental") in consideration of Continental issuing to Fidelity Non-
Profit Management Foundation 62,886 shares of Continental common stock and in
exchange for Fidelity Non-Profit Management Foundation transferring all of the
common stock of Fidelity to TCG Partners.
On November 9, 1994, TCGI, on behalf of TCG Partners, paid Continental
$30,605,320 in payment of TCG Partners' promissory note, including interest of
$105,320. TCG Partners' promissory note was canceled on November 15, 1994 and
subsequently all security interests of Continental in the stock of Fidelity
Communications Inc. were released.
In connection with the issuance of capital stock to Comcast and Continental
in 1993, TCGI purchased from the parent of Comcast, for approximately $6.5
million, 49 percent of the issued and outstanding stock of Comcast CAP, which
owns 51 percent of the outstanding capital stock of Eastern TeleLogic
Corporation ("ETC"), on a fully-diluted basis. Such purchase price was
evidenced by a note payable in one year from the date thereof with interest at
the LIBOR rate plus .75 percent per annum and was secured by a pledge to the
parent of Comcast of the capital stock of Comcast CAP. On June 30, 1994, this
note was repaid in full.
On August 24, 1994 and September 19, 1994, TCGI increased its investment in
Comcast CAP by approximately $3.2 million in the aggregate. These investments
primarily represented TCGI's 49 percent participation in Comcast CAP's
purchase of various issues of ETC's convertible subordinated debt. Such
investment is included in investments in unconsolidated affiliates in the
accompanying combined balance sheets. On October 3, 1995, ETC converted
principal and interest on these notes to Common Stock.
In March and July 1995, TCGI and Comcast CAP provided interim financing to
ETC for ETC to expand its network geographically. TCGI's portion of the
financing was approximately $3.4 million in the form of convertible
subordinated demand promissory notes. On October 3, 1995, ETC repaid these
notes plus interest.
During February 1993, Teleport Communications Chicago Inc., a wholly owned
subsidiary of TCGI, entered into an agreement by and among Communications
Credit Corporation, Northern Telecom Finance Corporation and Diginet, Inc. to
purchase substantially all of the assets of Diginet, Inc. ("Diginet"). Such
purchase was consummated on August 9, 1993, effective June 30, 1993, for
approximately $12.6 million,
F-15
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
representing the assets acquired subject to the liabilities assumed. The
results of operations of Diginet are included in the accompanying combined
financial statements from July 1, 1993. The results of operations prior to
July 1, 1993 were insignificant.
10. COMMITMENTS AND CONTINGENCIES
Under the terms of contracts with various parties, TCG is obligated to pay
franchise fees, office rents, node rents and right-of-way fees in connection
with its fiber optic network through 2022. These contracts provide for certain
scheduled increases and for possible escalation of basic rentals based on a
change in the cost of living or on other factors. TCG expects to enter into
other contracts for additional franchise fees, office rents, node rents,
rights-of-way, facilities, equipment, and maintenance services in the future.
A summary of such fixed commitments at December 31, 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996.............................................................. $12,030
1997.............................................................. 11,303
1998.............................................................. 11,071
1999.............................................................. 11,098
2000.............................................................. 10,822
Thereafter......................................................... 42,585
-------
Total............................................................ $98,909
=======
</TABLE>
Rent expense under operating leases was approximately $11,770,000,
$11,185,000 and $8,701,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
Communications network includes assets acquired under capital leases of
approximately $22,430,000 and $7,279,000 (including approximately $16,615,000
and $4,051,000 with related parties) at December 31, 1995 and 1994,
respectively. The related accumulated depreciation and amortization was
approximately $1,085,000 and $471,000, respectively.
The following is a schedule, by year, of future minimum payments under the
leases, together with the present value of the net minimum payments as of
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996............................................................. $ 5,878
1997............................................................. 5,114
1998............................................................. 4,474
1999............................................................. 3,519
2000............................................................. 1,173
-------
Total minimum lease payments...................................... 20,158
Less amount representing interest................................. 3,840
-------
Total obligations under capital leases............................ $16,318
=======
</TABLE>
Teleport Communications is subject to a revenue sharing agreement with The
Port Authority of New York and New Jersey (the "Port Authority"). Based on the
agreement, Teleport Communications is obligated to pay five percent of its
gross revenues, and may be required to pay a "net return rental fee," as
defined, to the extent its cumulative net return exceeds the entitlement
amount. Teleport Communications is also required to remit to the Port
Authority a minimum payment currently equal to $250,000 annually.
F-16
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Teleport Communications entered into a 15 year franchise agreement with the
City of New York during 1994, which among other things, requires a payment
based on certain gross revenues, as defined in the agreement. The franchise
provides for the payment of 10 percent of certain gross revenues in 1995 and
1996, six percent in 1997 and five percent thereafter, all subject to certain
set-offs, reductions and adjustments. The franchise also provides that
commencing with calendar year 1995, payment to the City will be no less than
$200,000 per year.
In the ordinary course of business, TCG is involved in various litigation
and regulatory matters, proceedings and claims. In the opinion of TCG's
management, after consultation with counsel, the outcome of such proceedings
will not have a materially adverse effect on TCG's combined financial
position, results of operations or cash flows.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash investing activities for the years ended December 31, 1995, 1994 and
1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Fixed assets acquired under capital leases........... $15,151 $4,384 $6,635
======= ====== ======
Right of way obtained in exchange for cable
installation........................................ $ 1,330 $ -- $ --
======= ====== ======
</TABLE>
12. SUBSEQUENT EVENTS
On February 2, 1996, TCGI entered into a Stock Purchase Agreement, subject
to Board approval, with all the shareholders of BizTel Communications, Inc.
for the eventual purchase by TCGI of certain capital stock of BizTel
Communications, Inc. and certain related transactions. Such purchase closed on
February 29, 1996.
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-17
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
COMBINED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents.......................................... $ 16,805
--------
Accounts receivable:
Trade--net of allowance for doubtful accounts of $2,362........... 26,041
Related parties................................................... 5,763
Miscellaneous--net of allowance for doubtful accounts of $910..... 1,764
--------
Accounts receivable--net........................................ 33,568
--------
Prepaid expenses................................................... 5,220
--------
Other current assets............................................... 919
--------
Total current assets.............................................. 56,512
--------
Fixed assets--at cost:
Communications network............................................. 518,861
Other.............................................................. 57,945
--------
576,806
Less accumulated depreciation and amortization..................... (126,273)
--------
Fixed assets--net............................................... 450,533
--------
Investment in unconsolidated affiliates............................. 118,985
--------
Goodwill--net of accumulated amortization of $2,076................. 26,649
--------
Other assets........................................................ 6,227
--------
Total assets...................................................... $658,906
========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<S> <C>
Current liabilities:
Accounts payable and accrued liabilities............................ $ 93,024
Current portion of capital lease obligation ($3,657 with related
parties)........................................................... 4,575
Other current liabilities........................................... 928
--------
Total current liabilities.......................................... 98,527
Capital lease obligations ($9,196 with related parties).............. 10,903
Subordinated debt to parents......................................... 269,000
Long-term bank debt.................................................. 155,000
Minority interest.................................................... 4,847
Other liabilities.................................................... 13,973
--------
Total liabilities.................................................. 552,250
--------
Commitments and contingencies
Stockholders' equity and partners' capital (deficit):
Stockholders' equity (common stock, $1.00 par value; authorized,
3,000 shares; outstanding,
1,667 shares)...................................................... 119,100
Partners' capital (deficit)......................................... (12,444)
--------
Total stockholders' equity and partners' capital (deficit)......... 106,656
--------
Total liabilities and stockholders' equity and partners' capital
(deficit)........................................................... $658,906
========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Telecommunications services............................. $ 39,553 $ 29,855
Management fees from affiliates......................... 10,882 6,937
-------- --------
Total revenues........................................ 50,435 36,792
-------- --------
Expenses:
Operating............................................... 22,520 17,124
Selling, general and administrative..................... 20,197 16,070
Depreciation and amortization........................... 12,849 7,297
-------- --------
Total expenses........................................ 55,566 40,491
-------- --------
Operating loss............................................ (5,131) (3,699)
-------- --------
Interest:
Interest income......................................... 1,190 1,106
Interest expense ($5,353 in 1996 and $4,077 in 1995 with
related parties)....................................... (8,148) (4,600)
-------- --------
Total interest........................................ (6,958) (3,494)
-------- --------
Loss before minority interest, equity in losses of
unconsolidated affiliates and income tax provision....... (12,089) (7,193)
Minority interest......................................... 150 201
Equity in losses of unconsolidated affiliates............. (6,528) (4,211)
-------- --------
Loss before income tax provision.......................... (18,467) (11,203)
Income tax provision...................................... (225) (335)
-------- --------
Net loss.................................................. (18,692) (11,538)
Stockholders' equity and partners' capital, beginning of
period................................................... 125,348 179,152
-------- --------
Stockholders' equity and partners' capital, end of
period................................................... $106,656 $167,614
======== ========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(18,692) $(11,538)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 12,849 7,297
Equity in losses of unconsolidated affiliates........... 6,528 4,211
Amortization of deferred credits........................ (561) (501)
Provision for losses on accounts receivable............. 428 181
Minority interest....................................... (150) (201)
(Increase) decrease in operating assets and increase
(decrease) in operating liabilities:
Accounts receivable.................................... 269 1,625
Due to (from) related parties.......................... 2,549 --
Other assets........................................... (1,150) 442
Accounts payable and accrued liabilities............... (4,186) 19,847
Deferred credits....................................... 437 1,419
-------- --------
Net cash provided by (used in) operating activities... (1,679) 22,782
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications network.......... (25,943) (45,188)
Capital expenditures for other fixed assets.............. (5,150) (4,565)
Due to (from) related parties............................ (3,950) --
Notes receivable......................................... -- (1,470)
Investment in unconsolidated affiliates--cash component.. (25,523) (18,416)
-------- --------
Cash used in investing activities..................... (60,566) (69,639)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................. 67,500 71,500
Capital contributions from minority partners............. 588 993
Principal payments under capital lease obligations....... (900) (567)
-------- --------
Net cash provided by financing activities............. 67,188 71,926
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 4,943 25,069
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 11,862 26,000
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 16,805 $ 51,069
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash
paid during the period for interest...................... $ 1,653 $ 4,083
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION--Fixed
assets acquired under capital leases..................... $ 60 $ 1,078
======== ========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. PRESENTATION
In the opinion of the management of Teleport Communications Group Inc.
("TCGI") and TCG Partners, the accompanying unaudited combined financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of March
31, 1996 and the results of operations and cash flows for the three month
periods ended March 31, 1996 and 1995. The results of operations for the three
months ended March 31, 1996 are not necessarily indicative of results that may
be expected for any other interim period or for the full year.
The financial statements should be read in conjunction with the combined
financial statements and notes thereto for the year ended December 31, 1995.
The accounting policies used in preparing these financial statements are the
same as those described in the December 31, 1995 combined financial
statements.
2. LONG-TERM DEBT
Long-term debt at March 31, 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Subordinated debt to parents.................................. $269,000
Long-term bank debt........................................... 155,000
--------
Total....................................................... $424,000
========
</TABLE>
The aggregate long-term debt maturing during the next five years is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1997......................................................... $ --
1998......................................................... --
1999......................................................... 12,500
2000......................................................... 50,000
2001......................................................... 90,000
Thereafter................................................... 271,500
--------
$424,000
========
</TABLE>
3. INVESTMENT IN UNCONSOLIDATED AFFILIATES
On February 2, 1996, TCGI entered into a Stock Purchase Agreement with all
the shareholders of Biztel Communications, Inc. (formerly Video/Phone Systems,
Inc.) for the purchase by TCGI of certain capital stock of Video/Phone
Systems, Inc. and certain related transactions. Subsequently, on February 29,
1996, the aforementioned transaction was consummated resulting in TCGI's
ownership of approximately 49% of the outstanding common stock of Biztel
Communications, Inc.
Summarized financial information for the investments in the Local Market
Partnerships, Comcast CAP and Biztel Communications, Inc. as of March 31, 1996
and for the three months then ended is as follows (in thousands):
<TABLE>
<S> <C>
Total assets.................................................. $522,549
Total liabilities............................................. 145,241
Total revenues................................................ 24,151
Net loss...................................................... (17,094)
</TABLE>
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Teleport
Communications Group Inc. and
Partners of TCG Partners:
We have audited the accompanying combined balance sheets of the Local Market
Partnerships, as defined in Note 1, as of December 31, 1995 and 1994 and the
related combined statements of operations and partners' capital and of cash
flows for the three years ended December 31, 1995, 1994 and 1993. These
financial statements are the responsibility of the Local Market Partnerships'
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, such combined financial statements present fairly, in all
material respects, the combined financial position of the Local Market
Partnerships at December 31, 1995 and 1994 and the combined results of their
operations and their combined cash flows for the three years ended December
31, 1995, 1994 and 1993 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
February 16, 1996 (May 13, 1996 as to Note 9)
F-22
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1995 1994
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 20,973 $ 22,987
-------- --------
Accounts receivable:
Trade--net of allowance for doubtful accounts ($359 in
1995 and $222 in 1994).................................. 7,774 5,373
Related parties.......................................... 2,079 896
Miscellaneous--net of allowance for doubtful accounts
($543 in 1995 and $747 in 1994)......................... 560 755
-------- --------
Accounts receivable--net............................... 10,413 7,024
-------- --------
Prepaid expenses.......................................... 2,934 1,696
-------- --------
Notes receivable.......................................... -- 25,983
-------- --------
Other current assets...................................... 790 422
-------- --------
Total current assets..................................... 35,110 58,112
-------- --------
Fixed assets--at cost:
Communications network.................................... 391,432 227,969
Other..................................................... 8,941 3,851
-------- --------
400,373 231,820
Less accumulated depreciation and amortization............ (32,086) (7,037)
-------- --------
Fixed assets--net...................................... 368,287 224,783
-------- --------
Goodwill--net of accumulated amortization ($5,033 in 1995
and $2,422 in 1994)....................................... 41,782 38,227
-------- --------
Other assets............................................... 3,459 2,776
-------- --------
Total assets............................................. $448,638 $323,898
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities.................. $ 49,462 $ 37,244
Current portion of capital lease obligations ($11,620 in
1995 and $7,831 in 1994 with related parties)............ 14,892 10,711
Due to Teleport Communications Group Inc.................. 1,789 6,857
Other current liabilities................................. 828 743
-------- --------
Total current liabilities................................ 66,971 55,555
Capital lease obligations ($30,503 in 1995 and $31,961 in
1994 with related parties)................................ 35,989 37,227
Other liabilities.......................................... 4,925 5,057
-------- --------
Total liabilities........................................ 107,885 97,839
-------- --------
Commitments and contingencies
Partners' capital.......................................... 340,753 226,059
-------- --------
Total liabilities and partners' capital.................. $448,638 $323,898
======== ========
</TABLE>
See notes to combined financial statements.
F-23
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY
TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Telecommunication services....................... $ 50,276 $ 23,752 $ 943
-------- -------- -------
Expenses:
Operating........................................ 31,073 16,842 537
Selling, general and administrative.............. 41,195 26,830 1,601
Depreciation and amortization.................... 23,645 10,216 185
-------- -------- -------
Total expenses................................ 95,913 53,888 2,323
-------- -------- -------
Operating loss.................................... (45,637) (30,136) (1,380)
Interest:
Interest income.................................. 2,393 1,908 68
Interest expense--($4,763 in 1995, $4,333 in
1994 and $67 in 1993 with related parties)...... (5,622) (4,783) (194)
-------- -------- -------
(3,229) (2,875) (126)
-------- -------- -------
Net loss.......................................... (48,866) (33,011) (1,506)
Partners' capital contributions................... 163,560 244,814 15,762
Partners' capital, January 1...................... 226,059 14,256 --
-------- -------- -------
Partners' capital, December 31.................... $340,753 $226,059 $14,256
======== ======== =======
</TABLE>
See notes to combined financial statements.
F-24
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY
TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ (48,866) $ (33,011) $ (1,506)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 23,645 10,216 185
Amortization of deferred credits........... (755) (256) --
Provision for losses on accounts receiv-
able...................................... 464 196 --
Gain on sale of fixed assets............... ( 3) -- --
(Increase) decrease in operating assets and
increase (decrease) in operating
liabilities:
Accounts receivable........................ (3,174) (4,798) (369)
Other assets............................... (1,908) (3,953) (46)
Deferred charges........................... (687) 50 --
Accounts payable and accrued liabilities... 11,157 10,590 1,152
Due to (from) Teleport Communications Group
Inc. ..................................... (5,811) 5,580 199
Deferred credits........................... 555 5,135 --
--------- --------- --------
Net cash used in operating activities..... (25,383) (10,251) (385)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications net-
work........................................ (99,032) (105,151) (5,078)
Capital expenditures for other fixed assets.. (5,090) (2,280) (356)
--------- --------- --------
Cash used in investing activities......... (104,122) (107,431) (5,434)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash transferred from managing partner....... -- 10,570 --
Partners' capital contributions--cash compo-
nent........................................ 138,683 170,786 14,998
Due to (from) Teleport Communications Group
Inc. ....................................... 6,706 (43,510) --
Principal payments under capital lease obli-
gations..................................... (17,898) (6,035) (321)
--------- --------- --------
Net cash provided by financing activi-
ties..................................... 127,491 131,811 14,677
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (2,014) 14,129 8,858
CASH AND CASH EQUIVALENTS, JANUARY 1.......... 22,987 8,858 --
--------- --------- --------
CASH AND CASH EQUIVALENTS, DECEMBER 31........ $ 20,973 $ 22,987 $ 8,858
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid during the year for
interest..................................... $ 5,413 $ 4,186 $ 194
========= ========= ========
</TABLE>
See notes to combined financial statements.
F-25
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY
TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND OPERATIONS
Teleport Communications Group Inc. ("TCGI") and TCG Partners ("TCGP")
(collectively, "TCG") together with the four owners of TCGI and TCGP, which
are wholly owned subsidiaries of Tele-Communications, Inc. ("TCI"), Cox
Communications, Inc. ("Cox"), Comcast Corporation ("Comcast") and Continental
Cablevision, Inc. ("Continental") (collectively the "Cable Stockholders"), and
certain other cable television operators formed 14 partnerships (the "Local
Market Partnerships") to develop and operate local telecommunications networks
in various markets across the United States. The following is a list of the
Local Market Partnerships:
TCG Chicago TCG Omaha
TCG Connecticut TCG Phoenix
TCG Dallas TCG Pittsburgh
TCG Dallas Systems TCG San Diego
TCG Detroit* TCG San Francisco*
TCG Illinois TCG Seattle*
TCG Los Angeles TCG South Florida*
* Local Market Partnerships with minority partners that are not affiliated
with either the Company or the Cable Stockholders. (See Note 9.)
Effective January 1, 1996 the assets and liabilities of TCG Dallas Systems
were transferred to TCG Dallas.
Certain of the Local Market Partnerships commenced operations prior to
December 31, 1993; the results of such operations are not significant to the
combined financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination--The accompanying combined financial statements
include the accounts of the Local Market Partnerships. All intercompany
transactions and balances among the Local Market Partnerships have been
eliminated.
Basis of Accounting--The accompanying combined financial statements have
been prepared on the accrual basis of accounting.
Revenue Recognition--Revenue is recognized in accordance with the terms of
the underlying customer contracts or tariffs and over the period in which the
services are provided.
Depreciation and Amortization--Depreciation and amortization are computed on
the straight-line basis over the estimated useful lives of the assets or the
length of the lease, whichever is shorter. Estimated useful lives are 5 to 25
years for the communications network and 3 to 5 years for other fixed assets,
except for buildings which are 40 years.
During 1995, the Local Market Partnerships completed a review of the useful
lives of their fixed assets. The Local Market Partnerships determined that the
lives of certain electronics equipment were longer than industry standard,
while the lives of other electronics equipment were shorter than industry
standard. Therefore, the Local Market Partnerships adjusted the estimated
useful lives of certain electronics equipment to conform with industry
standard, effective December 1, 1995. The effect of these changes in estimate
increased depreciation expense for the year ended December 31, 1995 by
approximately $135,000.
F-26
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill--Goodwill represents the excess of the capital credited to the
partners over the historical basis of the net assets contributed by the
partners. Such goodwill is being amortized over the average remaining useful
lives of the contributed assets. The related amortization was $2,611,000,
$2,422,000 and $26,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Deferred Credits--Deferred credits principally represent advance payments
received from customers for long-term fiber optic service, and are amortized
into income over the life of the related contracts. The current portions,
$828,000 and $743,000 at December 31, 1995 and 1994, respectively, are
included in accounts payable and accrued liabilities and the non-current
portions, $4,091,000 and $4,376,000 at December 31, 1995 and 1994,
respectively, are included in other liabilities.
Income Taxes--The Local Market Partnerships are not subject to Federal or
state and local income taxes. Each partner's distributive share of partnership
revenues, expenses and other items is computed on the basis of the respective
partner's capital interest in the partnership for reporting by the partners in
their respective Federal and state and local income tax returns.
Financial Instruments--Financial instruments which potentially subject the
Local Market Partnerships to concentration of credit risk consist of accounts
receivable. Concentrations of credit risk with respect to accounts receivable
are limited due to the dispersion of the Local Market Partnerships' customer
base among different industries and geographic areas in the United States, by
credit granting policies adopted by the Local Market Partnerships' and by
remedies provided by terms of contracts, tariffs and statutes.
Cash Equivalents--The Local Market Partnerships consider all highly liquid
instruments readily convertible to known amounts of cash to be cash
equivalents.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation--Certain 1994 and 1993 amounts have been reclassified to
conform with the 1995 presentation.
F-27
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PARTNERS' CAPITAL
A summary of changes in partners' capital for the years ended December 31,
1995 and 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
PARTNERS' PARTNERS' PARTNERS'
CAPITAL CAPITAL CAPITAL
JANUARY 1, CAPITAL NET DECEMBER 31, CAPITAL NET DECEMBER 31,
1994 CONTRIBUTIONS LOSS 1994 CONTRIBUTIONS LOSS 1995
---------- ------------- -------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TCGI/TCGP............... $6,042 $ 90,962 $(12,300) $ 84,704 $ 62,297 $(18,231) $128,771
Continental............. -- 38,524 (4,925) 33,599 16,712 (6,294) 44,017
TCI..................... -- 72,232 (8,978) 63,254 48,941 (13,365) 98,830
Comcast................. -- 10,436 (1,532) 8,904 8,226 (2,354) 14,776
Times Mirror Access,
Inc. .................. -- 8,589 (964) 7,625 7,284 (2,136) 12,773
Viacom Telecom Inc. .... -- 11,097 (1,435) 9,662 5,896 (2,366) 13,192
Cox..................... 8,214 3,365 (1,344) 10,235 8,591 (1,907) 16,918
Metrovision
Telecommunications of
Michigan, Inc. ........ -- 1,080 (153) 927 719 (197) 1,449
Booth Telecable, Inc. .. -- 1,062 (151) 911 707 (194) 1,424
Micronet Inc. .......... -- 2,580 (328) 2,252 1,058 (528) 2,782
InterMedia Partners..... -- 1,505 (191) 1,314 617 (308) 1,623
Hyperion
Telecommunications
Inc., of Florida....... -- 2,279 (478) 1,801 1,693 (664) 2,830
M.H. Lightnet, Inc., of
Florida................ -- 1,103 (232) 871 819 (322) 1,368
------- -------- -------- -------- -------- -------- --------
Total.................. $14,256 $244,814 $(33,011) $226,059 $163,560 $(48,866) $340,753
======= ======== ======== ======== ======== ======== ========
</TABLE>
For the year ended December 31, 1993, TCGI/TCGP contributed $6,651,312 and
Cox contributed $9,111,312. The respective shares of the net loss were
$609,661 and $896,644, respectively.
4. RELATED PARTY TRANSACTIONS
TCGI provides various services to and makes certain cash payments on behalf
of each Local Market Partnership (including providing employees to each Local
Market Partnership whose salaries and benefits, which include participation in
the Teleport Communications Group Stock Option Plan, the Teleport
Communications Group Unit Appreciation Plan, and the Teleport Communications
Group Inc. Retirement Savings Plan (including the deferred compensation Make-
Up Plan) are charged directly to each Local Market Partnership. Such expenses
were $23,097,125, $15,777,834 and $847,228 for the years ended December 31,
1995, 1994 and 1993, respectively.
TCGI and its subsidiaries provide each Local Market Partnership with various
management services that include accounting and financial reporting,
marketing, regulatory, legal, systems support and other services. Total
management fees charged to Local Market Partnerships for such services were
$20,770,300, $13,717,415 and $884,227 for the years ended December 31, 1995,
1994 and 1993, respectively, and are included, where appropriate, in operating
or selling, general and administrative expenses in the combined statements of
operations and partners' capital. In the opinion of management, such charges
have been made on a basis which is considered to be reasonable; however, these
charges are not necessarily indicative of the total cost that the Local Market
Partnerships would have incurred had they operated on a stand-alone basis.
In accordance with the Management Services Agreements, TCGI charges each
Local Market Partnership a royalty fee based on revenues. The royalty fees
charged to the Local Market Partnerships were $1,674,695, $1,170,258, and
$158,698 for the years ended December 31, 1995, 1994 and 1993, respectively,
and are included in operating expenses in the combined statements of
operations and partners' capital.
F-28
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. PENSION PLANS
TCGI implemented a retirement savings plan effective January 1, 1992 with a
401(k) savings component and a retirement component covering substantially all
eligible employees of TCGI, as well as other related entities, including
employees dedicated to each Local Market Partnership, with one or more years
of service. Under the 401(k) component of the plan, participants may make pre-
tax contributions and TCGI matches 50 percent of the first 6 percent of
eligible compensation to a maximum company contribution of $1,500 per
employee. Under the retirement component of the plan, TCGI contributes an
amount based on years of service and eligible compensation.
Expenses allocated to the Local Market Partnerships from TCGI aggregated
$288,144, $238,936 and $2,868 for the years ended December 31, 1995, 1994 and
1993, respectively, for contributions required under the plan.
6. COMMITMENTS AND CONTINGENCIES
Under the terms of contracts with various parties, the Local Market
Partnerships are obligated to pay franchise fees, office rents, node rents and
right-of-way fees in connection with their fiber optic networks through 2019.
These contracts provide for certain scheduled increases and for possible
escalation of basic rentals based on a change in the cost of living or on
other factors. The Local Market Partnerships expect to enter into other
contracts for additional franchise fees, office rents, node rents, rights-of-
way, facilities, equipment, and maintenance services in the future.
A summary of such fixed commitments at December 31, 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996............................................................. $ 5,653
1997............................................................. 5,113
1998............................................................. 4,867
1999............................................................. 4,606
2000............................................................. 4,130
Thereafter........................................................ 17,412
-------
Total........................................................... $41,781
=======
</TABLE>
Communications network includes assets acquired under capital leases of
approximately $77,241,000 and $54,569,000 (including approximately $68,482,000
and $50,898,000 with related parties) at December 31, 1995 and 1994,
respectively. The related accumulated depreciation and amortization was
approximately $5,456,000 and $1,907,000 at December 31, 1995 and 1994,
respectively.
The following is a schedule, by year, of future minimum payments under the
leases, together with the present value of the net minimum payments as of
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996............................................................ $18,818
1997............................................................ 17,461
1998............................................................ 14,456
1999............................................................ 7,962
2000............................................................ 2,248
-------
Total minimum lease payments..................................... 60,945
Less amount representing interest................................ 10,064
-------
Total obligations under capital leases........................... $50,881
=======
</TABLE>
F-29
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In the ordinary course of business, the Local Market Partnerships are
involved in various litigation and regulatory matters, proceedings and claims.
In the opinion of the Local Market Partnerships' management, after
consultation with counsel, the outcome of such proceedings will not have a
materially adverse effect on the Local Market Partnerships' combined financial
position, results of operations or cash flows.
7. NOTES RECEIVABLE
Local licensing regulations, state regulatory requirements, and contractual
restrictions did not permit the immediate transfer of title of fixed assets
from Teleport Communications Los Angeles, Inc. ("TCLA"), Teleport
Communications San Francisco, Inc. ("TCSF") and Teleport Communications
Dallas, Inc. ("TCD") to TCG Los Angeles ("TCGLA"), TCG San Francisco ("TCGSF")
and TCG Dallas ("TCGD"), respectively, in 1994. The obligations of TCLA, TCSF,
and TCD to contribute the fixed assets once the appropriate approvals were
received was evidenced by noninterest-bearing notes aggregating $9,912,758,
$10,955,201 and $5,115,358, respectively, at December 31, 1994. Depreciation
on the related fixed assets of $194,913, $200,678 and $458,191, respectively,
for the period January 1, 1995 to the date of transfer was accounted for by a
reduction of the notes on the books of TCGLA, TCGSF and TCGD, respectively.
Once the appropriate approvals were received, TCLA, TCSF and TCD transferred
title of the fixed assets to TCGLA, TCGSF and TCGD.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash investing and financing activities for the years ended December 31,
1995, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Fixed assets acquired under capital leases........ $ 22,672 $ 47,823 $(4,887)
======== ======== =======
Transfer of title to fixed assets................. $ 25,130 $ -- $ --
======== ======== =======
Assets contributed by partners.................... $ -- $(23,464) $(1,207)
Liabilities assumed by partnership................ -- 27,895 1,596
Agreed-upon value assigned to assets.............. 18,170 43,800 --
Net assets contributed............................ (12,004) (7,975) --
-------- -------- -------
Goodwill recorded upon inception of partnerships.. $ 6,166 $ 40,256 $ 389
======== ======== =======
Contribution of assets from partners credited to
the partners' capital accounts................... $ 18,170 $ 62,183 $ --
======== ======== =======
Reimbursement of pre-organization funding from
partners credited to the partners' capital
accounts......................................... $ 6,706 $ 1,275 $ 764
======== ======== =======
</TABLE>
9. SUBSEQUENT EVENTS
On January 2, 1996, January 19, 1996 and January 23, 1996, additional
capital contributions of $6,000,000, $31,917,150, and $4,082,850,
respectively, were made by the partners.
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-30
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents.......................................... $ 19,195
--------
Accounts receivable:
Trade--net of allowance for doubtful accounts of $383............. 10,162
Miscellaneous--net of allowance for doubtful accounts of $14...... 626
Related parties................................................... 1,340
--------
Accounts receivable--net........................................ 12,128
--------
Prepaid expenses................................................... 4,407
--------
Other current assets............................................... 671
--------
Total current assets.............................................. 36,401
--------
Fixed assets--at cost:
Communications network............................................. 413,261
Other.............................................................. 10,017
--------
423,278
Less accumulated depreciation and amortization..................... (39,729)
--------
Fixed assets--net............................................... 383,549
--------
Goodwill--net of accumulated amortization of $5,744................. 41,071
--------
Other assets........................................................ 3,610
--------
Total assets...................................................... $464,631
========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S> <C>
Current liabilities:
Accounts payable and accrued liabilities............................. $ 43,830
Current portion of capital lease obligations ($12,030 with related
parties)............................................................ 13,298
Due to Teleport Communications Group Inc. ........................... 2,446
Other current liabilities............................................ 803
--------
Total current liabilities........................................... 60,377
Capital lease obligations ($26,977 with related parties).............. 32,913
Other liabilities..................................................... 5,045
--------
Total liabilities................................................... 98,335
--------
Commitments and contingencies
Partners' capital..................................................... 366,296
--------
Total liabilities and partners' capital............................. $464,631
========
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Telecommunications services.............................. $ 18,594 $ 9,922
-------- --------
Expenses:
Operating................................................ 11,148 6,948
Selling, general and administrative...................... 14,187 9,050
Depreciation and amortization............................ 8,432 3,838
-------- --------
Total expenses......................................... 33,767 19,836
-------- --------
Operating loss............................................. (15,173) (9,914)
-------- --------
Interest:
Interest income.......................................... 534 489
Interest expense ($1,576 in 1996 and $1,075 in 1995 with
related parties)........................................ (1,818) (1,274)
-------- --------
Total interest......................................... (1,284) (785)
-------- --------
Net loss................................................... (16,457) (10,699)
Partners' capital contributions............................ 42,000 48,045
Partners' capital, beginning of period..................... 340,753 226,059
-------- --------
Partners' capital, end of period........................... $366,296 $263,405
======== ========
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(16,457) $(10,699)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 8,432 3,839
Amortization of deferred credits........................ (220) (222)
Provision for losses on accounts receivable............. 98 52
(Increase) decrease in operating assets and increase
(decrease) in operating liabilities:
Accounts receivable.................................... (2,553) 2,456
Due to (from) related parties.......................... (806) (6,540)
Other assets........................................... (1,581) (601)
Accounts payable and accrued liabilities............... (5,515) 6,569
Deferred credits....................................... 856 135
-------- --------
Net cash used in operating activities................. (17,746) (5,011)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications network.......... (22,337) (25,524)
Capital expenditures for other fixed assets.............. (1,034) (562)
-------- --------
Cash used in investing activities..................... (23,371) (26,086)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' capital contributions.......................... 42,000 48,045
Principal payments under capital lease obligations....... (4,862) (3,645)
Due to (from) Teleport Communications Group Inc. ........ 2,200 533
-------- --------
Net cash provided by financing activities............. 39,338 44,933
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (1,779) 13,836
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 20,973 22,987
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 19,194 $ 36,823
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash
paid during the period for interest...................... $ 1,262 $ 819
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION--Fixed
assets acquired under capital leases..................... $ 323 $ 161
======== ========
</TABLE>
See notes to combined financial statements.
F-33
<PAGE>
COMBINED FINANCIAL STATEMENTS OF
LOCAL MARKET PARTNERSHIPS TO BE
ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. PRESENTATION
In the opinion of the management of Teleport Communications Group Inc.
("TCGI") and TCG Partners, the accompanying unaudited combined financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of March
31, 1996 and the results of operations and cash flows for the three month
periods ended March 31, 1996 and 1995. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of results
that may be expected for any other interim period or for the full year.
The financial statements should be read in conjunction with the combined
financial statements and notes thereto for the year ended December 31,
1995. The accounting policies used in preparing these financial statements
are the same as those described in the December 31, 1995 combined financial
statements.
2. SUBSEQUENT EVENT
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-34
<PAGE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 13
The Reorganization....................................................... 21
Use of Proceeds.......................................................... 25
Capitalization........................................................... 26
Selected Combined Financial Data......................................... 27
Pro Forma Financial Information.......................................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
The Local Telecommunications Services Industry........................... 44
Business................................................................. 47
Management............................................................... 60
Certain Relationships and Related Transactions........................... 74
Principal Stockholders................................................... 78
Description of Certain Indebtedness...................................... 79
Description of Notes..................................................... 81
Description of Capital Stock............................................. 107
Certain Federal Income Tax Considerations................................ 110
Underwriting............................................................. 115
Legal Matters............................................................ 117
Experts.................................................................. 117
Additional Information................................................... 117
Glossary................................................................. 118
Index to Combined Financial Statements................................... F-1
</TABLE>
----------------
UNTIL JULY 22, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
$1,373,606,000
TCG
===
TELEPORT COMMUNICATIONS GROUP INC.
$300,000,000
9 7/8% SENIOR NOTES DUE 2006
$1,073,606,000
11 1/8% SENIOR DISCOUNT NOTES DUE 2007
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES
(USA) INC.
JUNE 27, 1996
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses of issuance and distribution of the shares of
the debt securities registered hereunder on Form S-1, other than the
underwriting discounts and commissions. All amounts except the Registration
Fee and NASD Filing Fee are estimated.
<TABLE>
<S> <C>
Registration Fee................................................. $ 318,966
NASD Filing Fee.................................................. 30,500
Printing and Engraving Fees...................................... 525,000
Blue Sky Fees and Expenses....................................... 20,000
Legal Fees and Expenses.......................................... 405,000
Accounting Fees and Expenses..................................... 175,000
Trustee's Fees................................................... 13,000
Miscellaneous.................................................... 479,065
----------
Total.......................................................... $1,966,531
==========
</TABLE>
- - --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article V of the Amended and Restated Certificate of Incorporation of
Teleport Communications Group Inc. ("TCGI") (the "Certificate of
Incorporation"), provides that to the fullest extent of Section 102 of the
General Corporation Law of the State of Delaware (the "DGCL"), a director of
TCGI shall not be personally liable to TCGI or its stockholders for monetary
damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the DGCL, provides that a corporation (in its original
certificate of incorporation or an amendment thereto) may eliminate or limit
the personal liability of a director (or certain persons who, pursuant to the
provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which the director derived an improper personal
benefit.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by third parties to which they may be made parties by reason of their
being or having been directors, officers, employees or agents and shall so
indemnify such persons if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. Article VIII of the
Certificate of Incorporation provides that TCGI shall indemnify its officers,
directors, employees and agents to the full extent permitted by Delaware law.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of securities sold by TCGI during the past three
years without registration under the Act.
1. On May 5, 1993, TCGI issued and sold 333.335 shares of its common stock
representing approximately 20% of the then outstanding capital stock of TCGI
to each of Comcast Teleport, Inc. and Continental Teleport, Inc., for a
purchase price of approximately $60 million each.
2. Prior to the consummation of the Offerings, TCGI will issue 69,250,230
shares of Class B Common Stock to the Cable Stockholders in exchange for the
contribution by the Cable Stockholders of approximately $269.0 million
aggregate principal amount of indebtedness, plus accrued interest from May
1995, owed by TCGI under the Stockholder Loan Agreement (except that TCI will
retain a $26 million subordinated note of TCGI) and for the transfer by the
Cable Stockholders, directly or indirectly, of their partnership interests in
TCG Partners and the Local Market Partnerships.
3. Concurrent with the consummation of the Offerings, TCGI will issue
approximately 285,750 shares and 290,513 shares of Class A Common Stock to be
issued to Booth Telecable, Inc. and Time Warner Entertainment- Advance-
Newhouse Partnership, respectively, in consideration for their partnership
interests in TCG Detroit, which share amounts have been calculated on the
basis of an aggregate acquisition price of approximately $9.2 million.
In each of the foregoing instances, the issuance of common stock was deemed
to be exempt from the registration requirements of the Act as a transaction
not involving any public offering, pursuant to Section 4(2) of the Act.
ITEM 16. EXHIBITS
(a) Exhibits:
TELEPORT COMMUNICATIONS GROUP INC.
<TABLE>
<CAPTION>
EXHIBIT LIST
------------
<C> <S>
1 Form of Underwriting Agreement
**2.1 Reorganization Agreement, dated as of April 18, 1996
**3.1 Amended and Restated Certificate of Incorporation of TCGI
**3.2 Form of Amended and Restated Certificate of Incorporation of TCGI
**3.3 Amended and Restated By-laws of TCGI
**3.4 Form of Amended and Restated By-laws of TCGI
**3.5 Form of Amended and Restated Certificate of Incorporation of TCGI
3.6 Form of Amended and Restated Certificate of Incorporation of TCGI, as
revised
3.7 Form of Amended and Restated By-laws of TCGI, as revised
**4.1 Amended and Restated Stockholders' Agreement, dated as of May 5, 1993,
as amended November 2, 1993
**4.2 Form of Amended and Restated Stockholders' Agreement (incorporated by
reference to Exhibit E of Exhibit 2.1 hereof)
4.3 Form of Indenture between TCGI and United States Trust Company of New
York, as Trustee, relating to the 11 1/8% Senior Discount Notes due
2007 of TCGI
**4.4 Form of Indenture between TCGI and United States Trust Company of New
York, as Trustee, relating to the 9 7/8% Senior Notes due 2006 of TCGI
4.5 Form of Global Security for 11 1/8% Senior Discount Notes due 2007 of
TCGI
4.6 Form of Global Security for 9 7/8% Senior Notes due 2006 of TCGI
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST
------------
<C> <S>
5.1 Opinion of Dow, Lohnes & Albertson (including consent)
5.2 1996 Telecommunications Act Opinion of Dow, Lohnes & Albertson
(including consent)
5.3 Opinion of Smith, Don, Alampi, D'Argenio & Arturi (including consent)
5.4 Opinion of Roland, Fogel, Koblenz & Carr, LLP (including consent)
5.5 Opinion of the Office of the General Counsel of the State of New York
Department of Public Service dated June 25, 1996
8 Tax Opinion of Dow, Lohnes & Albertson (including consent)
**10.1 New York Franchise Agreement, dated May 2, 1994, as amended
**10.2 Participation Agreement, dated May 15, 1984
**10.3 Agreement of Lease, dated May 15, 1984
**10.4 The Keepwell Agreement, dated June 7, 1984, as amended
**10.5 Agreement of Lease with Teleport Associates, dated November 10, 1987
**10.6 Agreement of Sublease between Merrill Lynch/WFC/L, Inc. and TC
Systems, Inc., dated January 30, 1990
**10.7 Loan Agreement, dated May 5, 1993
**10.8 Amendment No. 1 to Loan Agreement, dated March 1, 1994
**10.9 Amendment No. 2 to Loan Agreement, dated October 24, 1994
**10.10 Amendment No. 3 to Loan Agreement, dated February 15, 1995
**10.11 Loan Agreement, dated May 22, 1995 and related documents
10.12 Amendment No. 1 to Loan Agreement, dated May 31, 1996
**10.13 Teleport Communications Group Inc. 1992 Unit Appreciation Plan
**10.14 Teleport Communications Group Inc. 1993 Unit Appreciation Plan, as
amended
**10.15 Teleport Communications Group Inc. Stock Option Plan
10.16 Form of Teleport Communications Group Inc. Employee Stock Purchase
Plan
**10.17 Deferred Compensation Plan of Teleport Communications Group Inc.
**10.18 Make-Up Plan of Teleport Communications Group Inc. for the Retirement
Savings Plan
**10.19 Teleport Communications Group Inc. 1996 Equity Incentive Plan
**10.20 Robert Annunziata Employment Agreement, dated December 18, 1992, as
amended
**10.21 John A. Scarpati Employment Agreement, dated July 12, 1994, as amended
**10.22 Robert C. Atkinson Employment Agreement, dated July 12, 1994, as
amended
**10.23 Stuart A. Mencher Employment Agreement, dated July 12, 1994, as
amended
**10.24 Alf T. Hansen Employment Agreement, dated July 12, 1994, as amended
**10.25 Partnership Agreement of TCG Detroit, dated as of November 1, 1993
**10.26 Amended and Restated Partnership Agreement of TCG Los Angeles, dated
as of March 1, 1994
**10.27 Partnership Agreement of TCG Pittsburgh, dated as of March 1, 1994
**10.28 Partnership Agreement of TCG San Diego, dated as of June 1, 1994
**10.29 Partnership Agreement of TCG San Francisco, dated as of January 1,
1994, as amended
**10.30 Partnership Agreement of TCG Seattle, dated as of January 1, 1994, as
amended
**10.31 Agreement among Teleport Communications Group Inc. and Comcast
Corporation, dated April 18, 1996
10.32 First Amendment to the Teleport Communications Group Inc. 1993 Stock
Option Plan
10.33 Second Amendment to the Teleport Communications Group Inc. 1993 Stock
Option Plan
10.34 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996.
10.35 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996.
10.36 First Amendment to the Teleport Communications Group Inc. 1996 Equity
Incentive Plan
10.37 Stockholders' Agreement of Comcast CAP of Philadelphia, Inc. dated as
of June 30, 1993
12 Statement re: computation of ratios
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST
------------
<C> <S>
**21 Subsidiaries of Teleport Communications Group Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consents of Dow, Lohnes & Albertson (contained in their opinions filed
as Exhibits 5.1, 5.2 and 8)
**23.3 Consent of James Bruce Llewellyn
**23.4 Consent of C.B. Rogers, Jr.
23.5 Consent of Smith, Don, Alampi, D'Argenio & Arturi (contained in their
opinion filed as Exhibit 5.3)
23.6 Consent of Roland, Fogel, Koblenz & Carr, LLP (contained in their
opinion filed as Exhibit 5.4)
**24 Power of Attorney (included on page II-5)
**25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
of United States Trust Company of New York, as Trustee
**27 Financial Data Schedule
</TABLE>
- - --------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of TCGI pursuant to
the provisions described under Item 14 above or otherwise, TCGI 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 TCGI of expenses incurred
or paid by a director, officer or controlling person of TCGI 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, TCGI will, unless in the opinion of their counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
TCGI hereby undertakes that:
1. For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as a part of this Registration
Statement in reliance upon Rule 430A and contained in the form of prospectus
filed by TCGI pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall
be deemed part of this Registration Statement as of the time it was declared
effective.
2. For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at such time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
TELEPORT COMMUNICATIONS GROUP INC. HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON JUNE 27, 1996.
Teleport Communications Group Inc.
/s/ Robert Annunziata
By: _________________________________
ROBERT ANNUNZIATA PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
* Chairman of the
- - ------------------------------------- Board of Directors, June 27, 1996
ROBERT ANNUNZIATA President, Chief
Executive Officer,
and Chief Operating
Officer
/s/ John A. Scarpati Senior Vice
- - ------------------------------------- President and Chief June 27, 1996
JOHN A. SCARPATI Financial Officer
(Principal
Financial Officer)
* Vice President and
- - ------------------------------------- Controller June 27, 1996
MARIA TERRANOVA-EVANS (Principal
Accounting Officer)
II-5
<PAGE>
SIGNATURE TITLE DATE
* Director
- - ------------------------------------- June 27, 1996
JAMES O. ROBBINS
* Director
- - ------------------------------------- June 27, 1996
BRIAN L. ROBERTS
* Director
- - ------------------------------------- June 27, 1996
RONALD H. COOPER
* Director
- - ------------------------------------- June 27, 1996
BRENDAN R. CLOUSTON
* Director
- - ------------------------------------- June 27, 1996
JOHN R. DILLON
* Director
- - ------------------------------------- June 27, 1996
GERALD W. GAINES
* Director
- - ------------------------------------- June 27, 1996
NANCY HAWTHORNE
* Director
- - ------------------------------------- June 27, 1996
LAWRENCE S. SMITH
* Director
- - ------------------------------------- June 27, 1996
LARRY E. ROMRELL
* Director
- - ------------------------------------- June 27, 1996
DAVID M. WOODROW
* John A. Scarpati, by signing his name hereto, does sign this document on
behalf of each of the persons indicated above for whom he is attorney-in-fact
pursuant to a power of attorney duly executed by such person and filed with the
Securities and Exchange Commission.
By: /s/ John A. Scarpati
-----------------------------------
JOHN A. SCARPATI
ATTORNEY-IN-FACT
II-6
<PAGE>
Inside Front Cover
- - ------------------
- - - Map of the United States with graphic areas enlarged and color coded to
indicate current operating networks and networks in development.
Cover Page of Prospectus
- - ------------------------
- - - TCG Logo
Page 2
- - ------
- - - Photograph of TCG's advanced Network Management Center at Staten Island, NY.
Page 45
- - -------
- - - Pie chart representing $96 billion market of 1995 Estimated Local
Telecommunications Revenue, indicating local services revenue ($55 billion),
toll services revenue ($13 billion), 1 X C switched access services revenue
($22 billion), dedicated services revenue ($5 billion) and other revenue ($1
billion).
Inside Back Cover
- - -----------------
- - - Diagram of the interrelationship of TCG's fiber optic Sonet Networks,
ISDN/Telephone switches, and ATM switches
6(a)
- - ----
- - - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships as of June 3, 1996.
6(b)
- - ----
- - - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships immediately prior to the consummation of the
Offerings.
6(c)
- - ----
- - - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships after the consummation of the Offerings and the
transactions comprising the Reorganization that will occur prior thereto or
in connection therewith.
6(d)
- - ----
- - - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships after giving effect to the Reorganization and the
Offerings.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement
**2.1 Reorganization Agreement, dated as of April 18, 1996
**3.1 Amended and Restated Certificate of Incorporation of TCGI
**3.2 Form of Amended and Restated Certificate of Incorporation of
TCGI
**3.3 Amended and Restated By-laws of TCGI
**3.4 Form of Amended and Restated By-laws of TCGI
**3.5 Form of Amended and Restated Certification of Incorporation of
TCGI
3.6 Amended and Restated Certificate of Incorporation of TCGI, as
revised
3.7 Amended and Restated By-laws of TCGI, as revised
**4.1 Amended and Restated Stockholders' Agreement, dated May 5,
1993, as amended November 2, 1993
**4.2 Form of Amended and Restated Stockholders' Agreement
(incorporated by reference to Exhibit E of Exhibit 2.1 hereof)
4.3 Form of Indenture between TCGI and United States Trust Company
of New York, as Trustee, relating to the 11 1/8% Senior
Discount Notes due 2007 of TCGI
**4.4 Form of Indenture between TCGI and United States Trust Company
of New York, as Trustee, relating to the 9 7/8% Senior Notes
due 2006 of TCGI
4.5 Form of Global Security for 11 1/8% Senior Discount Notes due
2007 of TCGI
4.6 Form of Global Security for 9 7/8% Senior Notes due 2006 of
TCGI
5.1 Opinion of Dow, Lohnes & Albertson (including consent)
5.2 1996 Telecommunications Act Opinion of Dow, Lohnes & Albertson
(including consent)
5.3 Opinion of Smith, Don, Alampi, D'Argenio & Arturi (including
consent)
5.4 Opinion of Roland, Fogel, Koblenz & Carr, LLP (including
consent)
5.5 Opinion of the Office of the General Counsel of the State of
New York Department of Public Service dated June 25, 1996
8 Tax Opinion of Dow, Lohnes & Albertson (including consent)
**10.1 New York Franchise Agreement, dated May 2, 1994, as amended
**10.2 Participation Agreement, dated May 15, 1984
**10.3 Agreement of Lease, dated May 15, 1984
**10.4 The Keepwell Agreement, dated June 7, 1984, as amended
**10.5 Agreement of Lease with Teleport Associates, dated November 10,
1987
**10.6 Agreement of Sublease between Merrill Lynch/WFC/L, Inc. and TC
Systems, Inc., dated
January 30, 1990
**10.7 Loan Agreement, dated May 5, 1993
**10.8 Amendment No. 1 to Loan Agreement, dated March 1, 1994
**10.9 Amendment No. 2 to Loan Agreement, dated October 24, 1994
**10.10 Amendment No. 3 to Loan Agreement, dated February 15, 1995
**10.11 Loan Agreement, dated May 22, 1995 and related documents
10.12 Amendment No. 1 to Loan Agreement, dated May 31, 1996
**10.13 Teleport Communications Group Inc. 1992 Unit Appreciation Plan
**10.14 Teleport Communications Group Inc. 1993 Unit Appreciation Plan
**10.15 Teleport Communications Group Inc. 1993 Stock Option Plan, as
amended
10.16 Form of Teleport Communications Group Inc. Employee Stock
Purchase Plan
**10.17 Deferred Compensation Plan of Teleport Communications Group
Inc.
**10.18 Make-Up Plan of Teleport Communications Group Inc. for the
Retirement Savings Plan
**10.19 Teleport Communications Group Inc. 1996 Equity Incentive Plan
**10.20 Robert Annunziata Employment Agreement, dated December 18,
1992, as amended
**10.21 John A. Scarpati Employment Agreement, dated July 12, 1994, as
amended
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
**10.22 Robert C. Atkinson Employment Agreement, dated July 12, 1994,
as amended
**10.23 Stuart A. Mencher Employment Agreement, dated July 12, 1994, as
amended
**10.24 Alf T. Hansen Employment Agreement, dated July 12, 1994, as
amended
**10.25 Partnership Agreement of TCG Detroit, dated as of November 1,
1993
**10.26 Amended and Restated Partnership Agreement of TCG Los Angeles,
dated as of March 1, 1994
**10.27 Partnership Agreement of TCG Pittsburgh, dated as of March 1,
1994
**10.28 Partnership Agreement of TCG San Diego, dated as of June 1,
1994
**10.29 Partnership Agreement of TCG San Francisco, dated as of January
1, 1994, as amended
**10.30 Partnership Agreement of TCG Seattle, dated as of January 1,
1994, as amended
**10.31 Agreement among Teleport Communications Group Inc. and Comcast
Corporation, dated April 18, 1996
10.32 First Amendment to the Teleport Communications Group Inc. 1993
Stock Option Plan
10.33 Second Amendment to the Teleport Communications Group Inc. 1993
Stock Option Plan
10.34 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
10.35 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
10.36 First Amendment to the Teleport Communications Group Inc. 1996
Equity Incentive Plan
10.37 Stockholders' Agreement of Comcast CAP of Philadelphia, Inc.
dated as of June 30, 1993
12 Statement re computation of ratios
**21 Subsidiaries of Teleport Communications Group Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consents of Dow, Lohnes & Albertson (contained in their
opinions filed as Exhibits 5.1, 5.2 and 8)
**23.3 Consent of James Bruce Llewellyn
**23.4 Consent of C.B. Rogers, Jr.
23.5 Consent of Smith, Don, Alampi, D'Argenio & Arturi (contained in
their opinion filed as Exhibit 5.3)
23.6 Consent of Roland, Fogel, Koblenz & Carr, LLP (contained in
their opinion filed as Exhibit 5.4)
**24 Power of Attorney (included on page II-5)
**25 Form T-1 Statement of Eligibility under the Trust Indenture Act
of 1939 of United States Trust Company of New York, as Trustee
**27 Financial Data Schedule
</TABLE>
- - --------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 1
S&S Draft
June 22, 1996
$200,000 Principal Amount of ___% Senior Notes due 2006
$_____________ Principal Amount of ___% Senior Discount Notes due 2007
TELEPORT COMMUNICATIONS GROUP INC.
UNDERWRITING AGREEMENT
----------------------
June ___, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES (USA) INC.
As representatives of the
several underwriters
named in Schedule I hereto
277 Park Avenue
New York, New York 10172
Dear Sirs:
Teleport Communications Group Inc., a Delaware corporation (the
"Company"), proposes to issue and sell $200,000,000 principal amount of its ___%
Senior Notes due 2006 (the "Senior Notes") and $ principal amount of its
___% Senior Discount Notes due 2007 (the "Senior Discount Notes" and, together
with the Senior Notes, the "Securities") to the several underwriters named in
Schedule I hereto (the "Underwriters"). The Senior Notes are to be issued
pursuant to the provisions of an Indenture to be dated as of July ___, 1996 (the
"Senior Notes Indenture") between the Company and the United States Trust
Company of New York, as trustee (the "Trustee"), and the Senior Discount Notes
are to be issued pursuant to the provisions of an Indenture to be
<PAGE>
2
dated as of July ___, 1996 (the "Senior Discount Notes Indenture" and, together
with the Senior Notes Indenture, the "Indentures") between the Company and the
Trustee.
1. Registration Statement and Prospectus. The Company has prepared
-------------------------------------
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"1933 Act"), a registration statement on Form S-1 No. 333-3984 including a
prospectus relating to the Securities, which may be amended. The registration
statement, as amended at the time when it becomes effective, including a
registration statement (if any) filed pursuant to Rule 462(b) under the 1933 Act
(a "Rule 462(b) Filing") increasing the size of the offering registered under
the 1933 Act and information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the 1933 Act
("Rule 430A"), is hereinafter referred to as the Registration Statement; and the
prospectus in the form first used to confirm sales of Securities is hereinafter
referred to as the Prospectus.
2. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell, and each Underwriter
agrees, severally and not jointly, to purchase from the Company (i) the
principal amount of Senior Notes set forth opposite the name of such Underwriter
in Schedule I hereto, at ____% of the principal amount thereof (the "Senior
Notes Purchase Price") plus accrued interest thereon, if any, from __________
__, 1996 to the date of payment and delivery and (ii) the principal amount of
Senior Discount Notes set forth opposite the name of such Underwriter in
Schedule I hereto, at ___ % of the principal amount thereof plus accrued
interest thereon, if any, from , 1996 to the date of payment and delivery (the
"Senior Discount Notes Purchase Price" and, together with the Senior Notes
Purchase Price, the "Purchase Prices").
3. Terms of Public Offering. The Company is advised by you that the
------------------------
Underwriters propose (i) to make a public offering of their respective portions
of the Securities as soon after the effective date of the Registration Statement
as in your judgment is advisable and (ii) initially to offer the Securities upon
the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and payment
--------------------
for the Securities shall be made at 10:00 A.M., New York City time, on the third
or fourth business day unless otherwise permitted by the Commission pursuant to
Rule 15c6-1 of the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the Commission thereunder (collectively called the "1934
Act"), following the date of the initial public offering (the "Closing Date"),
at such place as you shall designate. The Closing Date and the location of
delivery of and the form of payment for the Securities may be varied by
agreement between you and the Company.
<PAGE>
3
Certificates for the Securities shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date. Such certificates shall be made
available to you for inspection not later than 9:30 A.M., New York City time, on
the business day next preceding the Closing Date. Certificates in definitive
form evidencing the Securities shall be delivered to you on the Closing Date
with any transfer taxes thereon duly paid by the Company, for the respective
accounts of the several Underwriters, against payment of the Purchase Prices
therefor by wire transfer of immediately available funds to a bank account
designated by the Company.
5. Agreements of the Company. The Company agrees with you:
-------------------------
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 5(b) hereof, will comply with the
requirements of Rule 430A or Rule 434 under the 1933 Act ("Rule 434"), as
applicable, and will notify you immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration
Statement shall become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission relating to the Registration Statement, the
Prospectus or any amendment or supplement thereto, (iii) of any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information
relating to the offering of the Securities, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b)
under the 1933 Act ("Rule 424(b)") and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and,
in the event that it was not, it will promptly file such prospectus. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest practicable moment.
(b) Filing of Amendments. The Company will give to you notice of its
intention to file or prepare any amendment to the Registration Statement
(including any Rule 462(b) Filing), any term sheet prepared in accordance
with the provisions of Rule 434 or any amendment, supplement or revision to
either the prospectus included in the Registration Statement at the time it
became effective or to the Prospectus, will furnish you with copies of any
such documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which you or counsel for the Underwriters shall reasonably object.
<PAGE>
4
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to you and counsel for the Underwriters, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Underwriters, without charge, a
conformed copy of the Registration Statement as originally filed and of
each amendment thereto (without exhibits) for each of the Underwriters. If
applicable, the copies of the Registration Statement and each amendment
thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus
as such Underwriter reasonably requested, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each Underwriter, without charge, during the period
when the Prospectus is required to be delivered under the 1933 Act or the
1934 Act such number of copies of the Prospectus (as amended or
supplemented) as such Underwriter may reasonably request. If applicable,
the Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1934 Act so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in
the Prospectus. If at any time when a prospectus is required by the 1933
Act to be delivered in connection with sales of the Securities, any event
shall occur or condition shall exist as a result of which it is necessary,
in the opinion of counsel for the Underwriters or for the Company, to amend
the Registration Statement or amend or supplement the Prospectus in order
that the Prospectus will not include any untrue statements of a material
fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the opinion of such counsel, at any such time to amend the
Registration Statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act, the Company will promptly
prepare and file with the Commission, subject to Section 3(b) hereof, such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectus comply
with such requirements, and the Company will furnish to the Underwriters
such number of copies of such amendment or supplement as the Underwriters
may reasonably request.
<PAGE>
5
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as you may designate and to
maintain such qualifications in effect for a period of not less than one
year from the later of the effective date of the Registration Statement
(including any Rule 462(b) Filing); provided, however, that the Company
shall not be obligated to file any general consent to service of process or
to qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is
not otherwise so subject. In each jurisdiction in which the Securities
have been so qualified, the Company will file such statements and reports
as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement or of any Rule 462(b) Filing.
(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earning statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds."
(i) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant
to the 1934 Act within the time periods required by the 1934 Act.
(j) Reorganization. Following the Closing Time, the Company will use
its commercially reasonable efforts to complete as promptly as practicable
those aspects of the Reorganization, as defined in the Registration
Statement, that had not been completed prior to or simultaneously with the
Closing Time.
(k) Publicly Available Information. During the period of five years
after the date of this Agreement, to furnish to you as soon as available a
copy of each report or other publicly available information of the Company
mailed to the security holders of the Company or filed with the Commission
and such other publicly available information concerning the Company and
its subsidiaries as you may reasonably request.
<PAGE>
6
(l) Expenses. To pay all costs, expenses, fees and taxes incident to
(i) the preparation, printing, filing and distribution under the 1933 Act
of the Registration Statement (including financial statements and
exhibits), each preliminary prospectus and all amendments and supplements
to any of them prior to or during the period specified in paragraph (d),
(ii) the printing and delivery of the Prospectus and all amendments or
supplements to it during the period specified in paragraph (d), (iii) the
printing and delivery of this Agreement, the Preliminary and the Blue Sky
laws memoranda, (iv) the registration or qualification of the Securities
for offer and sale under the securities or Blue Sky laws of the several
states (including in each case the reasonable fees and disbursements of
counsel for the Underwriters relating to such registration or qualification
and memoranda relating thereto), (v) filings and clearance with the
National Association of Securities Dealers, Inc. in connection with the
offering and (vi) furnishing such copies of the Registration Statement, the
Prospectus and all amendments and supplements thereto as may be requested
for use in connection with the offering or sale of the Securities by the
Underwriters or by dealers to whom Securities may be sold.
(m) Restrictions on Sale and Issuance of Securities. During the
period beginning on the date hereof and continuing to and including the
Closing Date, not to offer, sell contract to sell or otherwise dispose of
any debt securities issued by the Company (or warrants to purchase debt
securities issued by the Company) substantially similar to the Securities
(other than (i) the Securities and (ii) commercial paper issued in the
ordinary course of business), without your prior written consent.
(n) Best Efforts. To use its best efforts to do and perform all
things required or necessary to be done and performed under this Agreement
by the Company prior to the Closing Date and to satisfy all conditions
precedent to the delivery of the Securities.
6. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to each Underwriter that:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement (including any Rule 462(b) Filing) has become
effective under the 1933 Act and no stop order suspending the effectiveness
of the Registration Statement (including any Rule 462(b) Filing) has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, are
contemplated by the Commission, and any request on the part of the
Commission for additional information from the Company or its agents has
been complied with.
<PAGE>
7
At the respective times the Registration Statement, any Rule 462(b)
filing and any post-effective amendments thereto became effective, the
Registration Statement, any Rule 462(b) Filing and any amendments and
supplements thereto complied in all material respects with the requirements
of the 1933 Act and did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. Neither the Prospectus nor
any amendments or supplements thereto, at the time the Prospectus or any
amendments or supplements thereto were issued and at the Closing Time,
included or will include an untrue statement of a material fact or omitted
or will omit 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. If Rule 434 is used, the Company will comply with
the requirements of Rule 434 and the Prospectus shall not be "materially
different," as such term is used in Rule 434, from the prospectus included
in the Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through you
expressly relating to any Undrwriter for use in the Registration Statement
or the Prospectus.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act.
(iii) Financial Statements. The combined balance sheets of the
--------------------
Company and its subsidiaries and TCG Partners, a New York general
partnership (collectively, "TCG"), as of December 31, 1994 and 1995 and the
related combined statements of operations, changes in stockholders' equity
and partners' capital (deficit), and cash flows for the three years ended
December 31, 1993, 1994 and 1995 and the combined balance sheet of TCG as
of March 31, 1996 and the related combined statements of operations and
cash flows for the three month periods ended March 31, 1995 and 1996
included in the Registration Statement and the Prospectus, together with
the related schedules and notes, present fairly the combined financial
position of TCG at the dates indicated and the combined results of TCG's
operations and TCG's combined cash flows for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The combined balance sheets of the Local
Market Partnerships (as defined in Note 1 to the financial statements
thereof), as of December 31, 1994 and 1995 and the related combined
statements
<PAGE>
8
of operations and partners' capital and of cash flows for the three years
ended December 31, 1993, 1994 and 1995 and the combined balance sheet of
the Local Market Partnerships as of March 31, 1996 and the related combined
statements of operations and cash flows for the three month periods ended
March 31, 1995 and 1996 included in the Registration Statement and
Prospectus, together with the related schedules and notes, present fairly
the combined financial position of the Local Market Partnerships at the
dates indicated and the combined results of the Local Market Partnerships'
operations and the Local Market Partnerships' combined cash flows for the
periods specified; said financial statements have been prepared in
conformity with GAAP applied on a consistent basis throughout the periods
involved. The supporting schedules, if any, included in the Registration
Statement present fairly in accordance with GAAP the information required
to be stated therein. The selected financial data and the summary financial
information included in the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement. The
pro forma financial statements and the related notes thereto included in
the Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described therein,
and the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change or no development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the
earnings or business affairs of the Company and its Subsidiaries considered
as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its Subsidiaries, other than those in
the ordinary course of business, which are material with respect to the
Company and its Subsidiaries considered as one enterprise and which are
required to be disclosed in the Registration Statement or which would have
been required to be disclosed in the Registration Statement prior to its
effectiveness, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly organized
----------------------------
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the
<PAGE>
9
ownership or leasing of property or the conduct of business, except where
the failure so to qualify or to be in good standing would not result in a
Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Schedule II lists each
-----------------------------
"significant subsidiary" of the Company (as such term is defined in Rule 1-
02 of Regulation S-X) and other subsidiaries not deemed "significant" but
nonetheless material (each a "Subsidiary" and, collectively, the
"Subsidiaries"). Each Subsidiary has been duly organized or formed and is
validly existing as a corporation, a partnership or a limited partnership
in good standing (with respect to a Subsidiary that is a corporation or
limited partnership) under the laws of the jurisdiction in which it has
been incorporated or formed, as applicable, has the necessary corporate or
partnership power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and (with
respect to a Subsidiary that is a corporation or a limited partnership) is
duly qualified as a foreign corporation or limited partnership to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement or on Schedule
II hereof, all of the issued and outstanding capital stock of each such
Subsidiary which is a corporation has been duly authorized and validly
issued, is fully paid and non-assessable and all the issued and outstanding
capital stock of each such Subsidiary which is a corporation and all the
existing partnership interests of such Subsidiary which is a partnership or
a limited partnership are owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary which is a corporation was issued in
violation of the preemptive rights of any securityholder of such
Subsidiary.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectus in the column
entitled "Pro Forma for the Reorganization" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement, pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectus or pursuant to the exercise of convertible
securities or options referred to in the Prospectus). The shares of issued
and outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive rights of any securityholder of the Company arising under
the Delaware General Corporation Law (the "DGCL"), the Company's
certificate of incorporation or bylaws or any agreement to which the
Company is a party.
<PAGE>
10
(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities to
-------------------------------------------
be purchased by the Underwriters from the Company have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement, and,
when issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth herein, will be validly issued,
fully paid and non-assessable; the Securities conform to all statements
relating thereto contained in the Prospectus and such description conforms
to the rights set forth in the instruments defining the same; the issuance
of the Securities is not subject to preemptive or other similar rights of
any securityholder of the Company arising under the DGCL, the Company's
certificate of incorporation or bylaws or any agreement to which the
Company is a party.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
---------------------------------
Subsidiary is in violation of its charter or by-laws or partnership
agreement, as the case may be, or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company or any
Subsidiary is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any Subsidiary is
subject (collectively, "Agreements and Instruments") except for such
violations or defaults that would not reasonably be expected to result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the Indenture and the consummation of the transactions
contemplated in this Agreement and the Indentures, the consummation of the
Reorganization, the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds" and compliance by the Company with its
obligations under this Agreement and the Indentures have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not reasonably be expected to result in a Material Adverse Effect),
nor will such actions result in any violation of the provisions of the
charter or by-laws or partnership agreement, as the case may be, of the
Company or any Subsidiary or (subject to the receipt of regulatory consents
and approvals for the Reorganization as described in the Registration
Statement) any applicable law (including the Communications Act of 1934, as
amended, and the Telecommunications Act of 1996,
<PAGE>
11
as amended (the "1996 Act"), and the rules, regulations and policies of the
Federal Communications Commission (the "FCC") and the public utilities laws
of the various states in which the Company and the Subsidiaries do business
or the ordinances, rules and regulations of the various local governments
in which the Company and the Subsidiaries do business), statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Subsidiary or any of their assets, properties or operations
(except for such violations that would not reasonably be expected to result
in a Material Adverse Effect). As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note, debenture or
other evidence of indebtedness for borrowed money in principal amount in
excess of $10 million (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company or any Subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees of
------------------------
the Company or any Subsidiary exists or, to the knowledge of the Company,
is imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any Subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any Subsidiary
(or any of the properties or assets thereof), which is required to be
disclosed in the Registration Statement (other than as disclosed therein),
or which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the consummation of the transactions contemplated in this Agreement
and the Indentures or the performance by the Company of its obligations
hereunder or thereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any Subsidiary is a party or of which
any of their respective properties or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required by the 1993 Act to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which have
not been so described and filed as required.
<PAGE>
12
(xiv) Possession of Intellectual Property. The Company and the
-----------------------------------
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of the Subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of the Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the Indentures or the consummation
of the transactions contemplated by this Agreement and the Indentures, (i)
except such as have been already obtained or as may be required under the
1933 Act and foreign or state securities or blue sky laws and (ii) except
for notice filings the failure with which to comply would not materially
adversely affect the performance by the Company of its obligations
hereunder, in connection with the offering, issuance or sale of the
Securities under this Agreement and the Indentures or the consummation of
the transactions contemplated by this Agreement and the Indentures.
(xvi) Possession of Licenses and Permits. The Company and the
----------------------------------
Subsidiaries possess all permits, licenses, approvals, consents and other
authorizations issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies (including the FCC, the public utilities
commission, or any equivalent body, of each state in which the Company does
business and any other relevant state and local authorities (the "Local
Authorities")) required for the conduct the business now operated by them
(collectively, "Governmental Licenses"), except where the failure to
possess any such permit, license, approval consent or authorization would
not reasonably be expected to result in a Material Adverse Effect; the
Company and the Subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so
to comply would not reasonably be expected to, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
(except for the effects of the 1996 Act as described in the Prospectus)
valid and in full force and effect, except when the invalidity of such
Governmental
<PAGE>
13
Licenses or the failure of such Governmental Licenses to be in full force
and effect would not reasonably be expected to have a Material Adverse
Effect; there is no outstanding adverse judgment, decree or order that has
been issued by the FCC or any of the Local Authorities against the Company
and the Subsidiaries and which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect; and neither
the Company nor any of the Subsidiaries has received any notice of or is
aware of proceedings relating to the revocation or modification of any such
Governmental Licenses or that would otherwise affect the operations of the
Company or the Subsidiaries and which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect.
(xvii) Title to Property. The Company and the Subsidiaries have good
-----------------
and marketable title to all real property owned by the Company and the
Subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus, (b) are "Permitted Liens" under the Indenture
and Revolving Credit Agreement (as such terms are defined in the
Prospectus) or (c) would not reasonably be expected to, singly or in the
aggregate, result in a Material Adverse Effect; and all of the leases and
subleases material to the business of the Company and the Subsidiaries,
considered as one enterprise, and under which the Company or any of the
Subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the Company nor any Subsidiary has any notice
of any claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any Subsidiary under any of the leases or
subleases mentioned above, or affecting or questioning the rights of the
Company or such Subsidiary to the continued possession of the leased or
subleased premises under any such lease or sublease except for such claims
that would not reasonably be expected to result in a Material Adverse
Effect.
(xviii) Compliance with Cuba Act. The Company has complied with, and
------------------------
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
<PAGE>
14
(xx) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of the
Subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance or code or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata)
or wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or
petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and its Subsidiaries have all permits,
authorizations and approvals required under any applicable Environmental
Laws and are each in compliance with their requirements, (C) there are no
pending or, to the Company's knowledge, threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
Subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of its
Subsidiaries relating to Hazardous Materials or the violation of
Environmental Laws.
(xxi) Registration Rights. Except as described in the Registration
-------------------
Statement, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
(xxii) Reorganization. The agreements entered into by the Company
--------------
for the purposes of completing the Reorganization are all in full force and
effect with respect to the Company and, to the knowledge of the Company,
with respect to the other parties thereto, the representations and
warranties of the Company set forth in such agreements are true and correct
in all material respects, except to the extent any such representation or
warranty was expressly made as of a specific date, in which case such
representation and warranty was true and correct in all material respects
at such date. The Company has used its commercially reasonable efforts to
obtain all regulatory and contractual consents and approvals necessary to
consummate the Reorganization. All aspects of the Reorganization will be
completed prior to or simultaneously with the Closing Time, except that, as
described in the Registration Statement, (A) the Company may not acquire
the partnership interests in certain Local Market Partnerships (as defined
in the Registration Statement) without first obtaining
<PAGE>
15
certain regulatory consents and approvals, (B) the Company will acquire the
interests of the Cable Stockholders (as defined in the Registration
Statement) in the Local Market Partnerships in the Seattle and San
Francisco areas at the earliest time such acquisitions can be accomplished
without the consent of the unaffiliated minority partners of such Local
Market Partnerships and (C) the Company may not have completed the
redemption of the Class B Common Stock held by a subsidiary of Continental
Cablevision, Inc.
(xxiii) Authorization and Enforceability of the Securities. The
--------------------------------------------------
Securities have been duly authorized and, when executed and authenticated
in accordance with the provisions of the Indentures and delivered to the
Underwriters against payment therefor as provided by this Agreement, will
be entitled to the benefits of the Indentures, and will be valid and
binding obligations of the Company, enforceable in accordance with their
terms except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights
generally, (ii) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability
and (iii) the waiver as to stay or extension laws may not be enforceable.
(xxiv) Authorization and Enforceability of the Indentures. The
--------------------------------------------------
Indentures have been duly authorized by the Company, will be substantially
in the form heretofore delivered to you and, when duly executed by the
Company and the Trustee, will have been duly qualified under the Trust
Indenture Act of 1939, as amended, and will constitute valid and binding
agreements of the Company, enforceable in accordance with their terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally, (ii)
rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability and (iii) the
waiver as to stay or extension laws may not be enforceable.
(xxv) Federal Reserve System Regulations. No part of the proceeds of
----------------------------------
the sale of the Securities will be used for any purpose that violates the
provisions of any of Regulation G, T, U or X of the Board of Governors of
the Federal Reserve System.
7. Indemnification. (a) The Company agrees to indemnify and hold
---------------
harmless each Underwriter, its directors, officers and employees and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the 1934 Act, from and against any and all losses,
claims, damages, liabilities and judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
prospectus, or
<PAGE>
16
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
judgments are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriters
furnished in writing to the Company by or on behalf of any Underwriter through
you expressly for use therein; provided, however, that the foregoing indemnity
-------- -------
agreement with respect to any preliminary prospectus or any Prospectus (or
amendment or supplement thereto) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages and
liabilities and judgments purchased Securities, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Securities to such person, and if the Prospectus (as so amended and
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or judgment.
(b) In case any action shall be brought against any Underwriter, any
of its directors, officers and employees or any person controlling such
Underwriter, based upon any preliminary prospectus, the Registration Statement
or the Prospectus or any amendment or supplement thereto and with respect to
which indemnity may be sought against the Company, such indemnified party shall
promptly notify the Company in writing and the Company shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all reasonable fees and expenses. Any such
indemnified party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the Company, (ii) the Company shall have failed to assume the defense and employ
counsel reasonably satisfactory to such indemnified party or (iii) the named
parties to any such action (including any impleaded parties) include both such
indemnified party and the Company and such indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the Company
(in which case the Company shall not have the right to assume the defense of
such action on behalf of such indemnified party, it being understood, however,
that the Company shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such indemnified parties, which firm shall be designated in
writing by Donaldson, Lufkin & Jenrette Securities Corporation and that all such
fees and expenses shall be reimbursed as they are incurred). The Company shall
not be liable for any settlement of any such action effected without its written
consent but, if settled with the written consent of the Company,
<PAGE>
17
the Company agrees to indemnify and hold harmless any any Underwriter, any of
its officers, directors or employess and any person controlling such
Underwritter from and against any loss or liability by reason of any settlement
of any such action. Notwithstanding the immediately preceding sentence, if in
any case where the fees and expenses of counsel are at the expense of the
indemnifying party and an indemnified party shall have requested the
indemnifying party to reimburse the indemnified party for such fees and expenses
of counsel as incurred, such indemnifying party agrees that it shall be liable
for any settlement effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request and (ii) such indemnifying party fails, prior to the date
of such settlement, to reimburse such indemnified party in accordance with such
request to the extent it considers such request to be reasonable or to provide
written notice to the indemnified party substantiating the unpaid balance as
unreasonable. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement (i) includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability, or a failure to act by or on behalf of any indemnified party.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same extent
as the foregoing indemnity from the Company to each Underwriter but only with
reference to information relating to such Underwriter furnished in writing by or
on behalf of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus. In case any action
shall be brought against the Company, any of its directors, any such officer or
any person controlling the Company based on the Registration Statement, the
Prospectus or any preliminary prospectus and in respect of which indemnity may
be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Company (except that if the Company shall have assumed the
defense thereof, such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Underwriter), and
the Company, its directors, any such officers and any person controlling the
Company shall have the rights and duties given to the Underwriter, by Section
7(b) hereof.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such
<PAGE>
18
losses, claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or judgments, as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Underwriters shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses but after deducting the underwriting discount) received by the Company,
and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Securities, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Securities purchased by each of the Underwriters hereunder and not joint.
8. Conditions of Underwriters' Obligations. The several obligations
---------------------------------------
of the Underwriters to purchase the Securities under this Agreement are subject
to the satisfaction of each of the following conditions:
<PAGE>
19
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later
than 5:00 P.M. (and in the case of a Registration Statement filed under
Rule 462(b) of the 1933 Act, not later than 10:00 p.m.), New York City
time, on the date of this Agreement or at such later date and time as you
may approve in writing, and at the Closing Date no stop order suspending
the effectiveness of the Registration Statement shall have been issued and
no proceedings for that purpose shall have been commenced or shall be
pending before or contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have been any downgrading, nor
shall any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating organization",
as such term is defined for purposes of Rule 436(g)(2) under the 1933 Act.
(d) (i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company, (ii) since the date of the
latest balance sheet included in the Registration Statement and the
Prospectus there shall not have been any change, or any development
involving a prospective material adverse change, in the capital stock or in
the long-term debt of the Company from that set forth in the Registration
Statement and Prospectus, (iii) the Company and its subsidiaries shall have
no liability or obligation, direct or contingent, which is material to the
Company and its subsidiaries, taken as a whole, other than those reflected
in the Registration Statement and the Prospectus and (iv) on the Closing
Date you shall have received a certificate from the Company dated the
Closing Date, signed by the President or a Vice President of the Company
and by the chief financial or chief accounting officer of the Company,
confirming the matters set forth in paragraphs (a), (b), (c) and (d) of
this Section 8.
(e) You shall have received on the Closing Date opinions (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, (A) of
the General Counsel of the Company, and (B) of Dow, Lohnes and Albertson,
counsel for the Company.
<PAGE>
20
[USE RELEVANT PARTS OF THE FORM OF GENERAL COUNSEL'S OPINION WHEN
FINALIZED. ALSO ADD THE TERM "INDENTURES" IN CLAUSES (v) AND (x) THEREOF.]
[USE RELEVANT PARTS OF FORM OF DL&A OPINION. ALSO ADD THE TERM
"INDENTURES" TO CLAUSES (ii) AND (x) THEREOF AND ADD THE FOLLOWING OPINIONS:]
( ) the Securities have been duly authorized and, when executed
and authenticated in accordance with the provisions of the Indentures
and delivered to and paid for by the Underwriters in accordance with
the terms of this Agreement, will be entitled to the benefits of the
Indentures and will be valid and binding obligations of the Company
enforceable in accordance with their terms except as (a) the
enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally, (b) rights of
acceleration and the availability of equitable remedies may be limited
by equitable principles of general applicability and (c) the waiver as
to stay or extension laws may not be enforceable;
( ) the Indentures have been duly qualified under the Trust
Indenture Act of 1939, as amended, and have been duly authorized,
executed and delivered by the Company and are valid and binding
agreements of the Company, enforceable in accordance with their terms
except as (a) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally, (b)
rights of acceleration and the availability of equitable remedies may
be limited by equitable principles of general applicability and (c)
the waiver as to stay or extension laws may not be enforceable;
( ) the Securities and the Indentures conform to the
descriptions thereof contained in the Prospectus under the caption
"Description of Notes";
( ) neither the issuance, sale or delivery of the Securities nor
the application of the proceeds thereof by the Company in accordance
with the Prospectus will violate regulations G, T, U or X of the Board
of Governors of the Federal Reserve System.
In giving such opinions with respect to the matters covered by clause
[10b-5 Opinion] each such counsel may state that their opinion and belief are
based upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified.
<PAGE>
21
The opinion of the General Counsel of the Company and Dow, Lohnes &
Albertson described in paragraph (e) above shall be rendered to you at the
request of the Company and shall so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Shearman & Sterling, counsel for the Underwriters, as to
the matters referred to in clauses [_______ of the opinions mentioned in
foregoing paragraph (e)]. In giving such opinion with respect to the
matters covered by clause [10b-5 Opinion] such counsel may state that their
opinion and belief are based upon their participation in the preparation of
the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
(g) You shall have received a letter on and as of the Closing Date, in
form and substance satisfactory to you, from Deloitte & Touche LLP
independent public accountants, with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus and substantially in the form and substance of the
letter delivered to you by Deloitte & Touche on the date of this Agreement.
(h) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(i) At the Closing Time, the agreements entered into by the Company
for the purposes of completing the Reorganization shall be in full force
and effect with respect to the Company and, to the knowledge of the
Company, with respect to the other parties thereto; prior to, or
simultaneously with, the Closing Time, all aspects of the Reorganization
shall be completed (except that, as described in the Registration
Statement, (A) the Company shall not be required to acquire the partnership
interests in those Local Market Partnerships for which regulatory consents
and approvals are required; (B) the Company shall not be required to
acquire the interests of the Cable Stockholders in the Local Market
Partnerships in the Seattle and San Francisco areas without the consent of
the unaffiliated minority partners of such Local Market Partnerships and
(C) the Company may not have completed the redemption of the Class B Common
Stock held by a subsidiary of Continental Cablevision, Inc.) and the
Company shall have provided to the Underwriters' counsel copies of all
closing documents delivered to the parties to the transactions contemplated
in these agreements.
(j) The Company shall not have failed at or prior to the Closing Date
to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Company at or prior to the
Closing Date.
<PAGE>
22
9. Effective Date of Agreement and Termination. This Agreement
-------------------------------------------
shall become effective upon the later of (i) execution of this Agreement and
(ii) when notification of the effectiveness of the Registration Statement has
been released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Company if any of the following has occurred:
(i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in the condition,
financial or otherwise, of the Company and its subsidiaries or the earnings,
affairs, or business prospects of the Company or any of its subsidiaries taken
as a whole, whether or not arising in the ordinary course of business, which
would, in your judgment, make it impracticable to market the Securities on the
terms and in the manner contemplated in the Prospectus, (ii) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic conditions or in the financial markets of the United
States or elsewhere that, in your judgment, is material and adverse and would,
in your judgment, make it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus, (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market System or limitation on prices for
securities on any such exchange or National Market System, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially and adversely affects, or will materially and adversely
affect, the business or operations of the Company or any subsidiary, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date any one or more of the Underwriters shall fail
or refuse to purchase the Securities which it or they have agreed to purchase
hereunder on such date and the aggregate number of Securities which such
defaulting Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase is not more than one-tenth of the total number of Securities
to be purchased on such date by all Underwriters, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the number of
Securities set forth opposite its name in Schedule I bears to the total number
of Securities which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Securities which such defaulting Underwriter or Underwriters, as
the case may be, agreed but failed or refused to purchase on such date; provided
--------
that in no event shall the number of Securities which any Underwriter has agreed
to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9
by an amount in excess of one-ninth of such number of Securities without the
written consent of such Underwriter. If on the Closing Date any Underwriter or
Underwriters shall fail or
<PAGE>
23
refuse to purchase Securities and the aggregate number of Securities with
respect to which such default occurs is more than one-tenth of the aggregate
number of Securities to be purchased on such date by all Underwriters and
arrangements satisfactory to you and the Company for purchase of such Securities
are not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter and the Company.
In any such case which does not result in termination of this Agreement, either
you or the Company shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
10. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, to Teleport
Communications Group Inc., One Teleport Drive, Staten Island, New York, NY
10311, Attention: John W. Thomson, Esq. and (b) if to any Underwriter or to
you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 140
Broadway, New York, New York 10005, Attention: Syndicate Department, or in any
case to such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, its officers and directors and
of the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Securities, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter or
by or on behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Securities and payment
for them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the several Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Securities from any of the several Underwriters merely because of
such purchase.
<PAGE>
24
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
<PAGE>
25
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
TELEPORT COMMUNICATIONS GROUP INC.
By______________________________
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES (USA) INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By__________________________
<PAGE>
SCHEDULE I
----------
Senior Notes
------------
Principal Amount of
Senior Notes
Underwriters to Be Purchased
------------ ---------------------
Donaldson, Lufkin & Jenrette Securities
Corporation......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
Morgan Stanley & Co. Incorporated.................
Chase Securities Inc..............................
Toronto Dominion Securities (USA) Inc.............
--------------
Total.............................. $200,000,000
==============
Senior Discount Notes
---------------------
Principal Amount of
Senior Discount Notes
Underwriters to Be Purchased
- - ------------ --------------------
Donaldson, Lufkin & Jenrette Securities
Corporation............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................
Morgan Stanley & Co. Incorporated.......
Chase Securities Inc....................
Toronto Dominion Securities (USA) Inc...
-----------------
Total.............................. $
=================
<PAGE>
SCHEDULE II
LIST OF SUBSIDIARIES
Corporations
- - ------------
TC Boston Holdings, Inc.
TC Boston Holdings II, Inc.
TC New York Holdings I, Inc.
TC New York Holdings II, Inc.
TC Systems, Inc.
Teleport Communications Chicago, Inc.
Teleport Communications Dallas, Inc.
Teleport Communications Houston, Inc.
Teleport Communications Los Angeles, Inc.
Teleport Communications San Francisco, Inc.
Teleport Communications Washington, D.C., Inc.
TCG America, Inc.
TCG Indiana, Inc.
TCG Joint Venture Holdings, Inc.
TCG Miami, Inc.
TCG Milwaukee, Inc.
TCG New Hampshire, Inc.
TCG New York, Inc.
TCG Payphones, Inc.
TCG Seattle, Inc.
Partnerships
- - ------------
TCG Partners
Teleport Communications Boston
Teleport Communications New York
TCG Chicago
TCG Cleveland
TCG Colorado
TCG Connecticut
TCG Dallas
TCG Data - New York
TCG Detroit
TCG Illinois
TCG Indianapolis
TCG Los Angeles
TCG Maryland
C-1
<PAGE>
TCG Northern New Jersey
TCG Omaha
TCG Phoenix
TCG Pittsburgh
TCG Rhode Island
TCG San Diego
TCG San Francisco
TCG Seattle
TCG South Florida
TCG St. Louis
1. The outstanding partnership interests of each Subsidiary which is a
partnership are subject to certain restrictions on transfer pursuant to the
partnership agreement with respect to such Partnership. Such partnership
interests and the outstanding capital stock of each Subsidiary which is a
corporation are subject to certain restrictions on transfer pursuant to
securities laws.
2. The capital stock and partnership interests of the subsidiaries of TCG New
York, Inc. are pledged as security for the loans under the Revolving Credit
Agreement.
3. Equity interests in certain partnerships identified as Subsidiaries are
held by third parties in the percentages identified in Attachment 1 to this
Schedule C./1/
- - -----------------
/1/ Attachment 1 reflects the ownership of the Local Market Partnerships before
the Reorganization, we understand that it will be modified to reflect the
ownership on the effective date.
C-2
<PAGE>
SCHEDULE D
LIST OF PERSONS AND ENTITIES
SUBJECT TO LOCK-UP
Tele-Communications, Inc. and its subsidiaries
Cox Communications, Inc. and its subsidiaries
Comcast Corporation and its subsidiaries
Continental Cablevision, Inc. and its subsidiaries
Robert Annunziata
Robert C. Atkinson
Joel D. Gross
Alf T. Hansen
J. Curt Hockemeier
Marvin L. Lindsey
Stuart A. Mencher
John A. Scarpati
Kenneth A. Shulman
Maria Terranova-Evans
Wayne G. Fox
John W. Thompson
W. Terrell Wingfield, Jr.
<PAGE>
Exhibit A(i)
FORM OF OPINION OF THE COMPANY'S GENERAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 8(e)(A)
See Attachment
<PAGE>
Attachment
----------
July __, 1996
Donaldson, Lufkin & Jenrette
Securities Corporation
Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Morgan Stanley & Co. Incorporated
Chase Securities Inc.
Toronto Dominion Securities (USA) Inc.
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 8(e)(i) of
the Underwriting Agreement dated as of June , 1996 (the "Underwriting
Agreement") among you and Teleport Communications Group Inc. (the "Company"),
providing for the sale to you on this date of $300,000,000 principal amount of
its __% Senior Notes due 2006 (the "Senior Notes") and $________ principal
amount of its __% Senior Discount Notes due 2007 (together with the Senior
Notes, the "Securities"). I am the General Counsel of the Company. Capitalized
terms used herein that are not otherwise defined herein shall have the same
meaning as in the Underwriting Agreement.
<PAGE>
2
In this connection, I have examined the Registration Statement on Form
S-1 (No. 333-3984) relating to the Securities filed with the Securities and
Exchange Commission (the "Commission") on April 24, 1996, under the Securities
Act of 1933, as amended (the "Securities Act"), Amendment No. 1 thereto filed
with the Commission on June 3, 1996, and Amendment No. 2 thereto filed with the
Commission on June __, 1996 (such Registration Statement, as so amended, being
hereinafter referred to as the "Debt Registration Statement"); the final
prospectus, dated June , 1996, filed with the Commission on June , 1996,
relating to the offering of the Securities (the "Prospectus"), filed pursuant to
Rule 424(b) of the Commission's General Rules and Regulations under the
Securities Act; and the Purchase Agreements.
On June , 1996, I was informed by telephone by a member of the
staff of the Commission that the Debt Registration Statement had become
effective under the Securities Act at ________ [A.M./P.M.], New York City time,
on that date.
I have also examined originals or copies, certified or otherwise
identified to my satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as I have deemed necessary or
appropriate as a basis for the opinions set forth herein. In my examination I
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to me as originals, the
conformity to original documents of all documents submitted to me as certified
or photostatic copies and the authenticity of the originals of such latter
documents and the due, binding and valid authorization, execution and delivery
pursuant to lawful power and legal right of applicable instruments and documents
on behalf of persons and entities other than the Company.
As to matters of law set forth below, my opinion is limited to
matters of law under the laws of the State of New York, the laws of the United
States, to the extent applicable hereto, and the conflicts of law rules or the
laws of any states or jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications
stated herein, I am of the opinion that:
(i) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required,
<PAGE>
3
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(ii) Each Subsidiary has been duly incorporated or formed, as
applicable, and is validly existing as a corporation, a partnership or a limited
partnership in good standing (with respect to a Subsidiary that is a corporation
or a limited partnership) under the laws of the jurisdiction in which it has
been incorporated or formed, as applicable, has the necessary corporate or
partnership power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and (with respect to a
Subsidiary that is a corporation or a limited partnership) is duly qualified as
a foreign corporation or a limited partnership to transact business and is in
good standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect; except as otherwise disclosed in the
Debt Registration Statement or in Schedule II to the Underwriting Agreement, all
of the issued and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and all the
issued and outstanding capital stock of each such Subsidiary which is a
corporation and all the existing partnership interests of each such Subsidiary
which is a partnership or limited partnership, to the best of my knowledge and
information, is owned by the Company, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any Subsidiary which
is a corporation was issued in violation of the preemptive rights of any
securityholder of such Subsidiary arising under the DGCL, the certificate of
incorporation or bylaws of such Subsidiary or any agreement to which such
Subsidiary is a party.
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Pro Forma for
the Reorganization" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to the U.S. Purchase Agreement, dated as of June __,
1996 between the Company and the persons named in Schedule A thereof and the
International Purchase Agreement dated as of June __, 1996, between the Company
and the persons named in Schedule A thereof or pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus or pursuant
to the exercise of convertible securities or options referred to in the
Prospectus); the shares of issued and outstanding capital stock have been duly
authorized and validly issued and are fully paid and non-assessable; and none of
the outstanding shares of capital stock of the Company was issued in violation
of the preemptive rights of any securityholder of the Company arising under the
DGCL, the Company's certificate of incorporation or bylaws or any agreement to
which the Company is a party.
<PAGE>
4
(iv) To the best of my knowledge, there are no actions, suits,
proceedings, inquiries or investigations before or brought by any court or
governmental agency or body, domestic or foreign, now pending or threatened,
against or affecting the Company or any Subsidiary, which, in the aggregate,
might reasonably be expected to result in a Material Adverse Effect, or which,
in the aggregate, might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the transactions
contemplated in the Underwriting Agreement and the Indenture or the performance
by the Company of its obligations thereunder.
(v) The information in the Prospectus under "Business," to the
extent that it constitutes matters of law, summaries of legal matters, the
Company's certificate of incorporation and bylaws or legal proceedings, or legal
conclusions, has been reviewed by me and is correct in all material respects.
(vii) To the best of my knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(viii) All descriptions in the Debt Registration Statement of
contracts and other documents to which the Company or the Subsidiaries are a
party are accurate in all material respects; to the best of my knowledge, there
are no franchises, contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred to in the Debt
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material respects.
(ix) To the best of my knowledge, neither the Company nor any
Subsidiary is in violation of its charter or by-laws or partnership agreement,
as the case may be, and no default by the Company or any Subsidiary exists in
the due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described or
referred to in the Debt Registration Statement or the Prospectus or filed as an
exhibit to the Debt Registration Statement except for such violations or
defaults that would not reasonably be expected to result in a Material Adverse
Effect.
(x) The execution, delivery and performance of the Underwriting
Agreement and the Indentures and the consummation of the transactions
contemplated in the Underwriting Agreement and the Indentures, the consummation
of the Reorganization, as defined in the Debt Registration Statement, the
issuance and sale of the Securities, and the use of the proceeds from the sale
of the Securities as expressly described in the Prospectus under the caption
"Use Of Proceeds," and compliance by the Company with its obligations under the
Underwriting Agreement and the Indentures, do not and will not, whether with or
without the giving
<PAGE>
5
of notice or lapse of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined in Section 6(x) of the Underwriting
Agreement) under or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to me, to
which the Company or any Subsidiary is a party or by which it or any of them may
be bound, or to which any of the property or assets of the Company or any
Subsidiary is subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not reasonably be expected to have a Material
Adverse Effect.
(xi) To the best of my knowledge, except as described in the Debt
Registration Statement, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the Debt
Registration Statement or otherwise registered by the Company under the 1933
Act.
(xii) The Company and the Subsidiaries possess the Governmental
Licenses and are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure to so comply would not
reasonably be expected to, singly or in the aggregate, have a Material Adverse
Effect, and all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental License or the failure
of such Governmental Licenses to be in full force and effect would not
reasonably be expected to have a Material Adverse Effect.
(xiii) There is no outstanding adverse judgment, decree or order that
has been issued by the FCC or any of the Local Authorities against the Company
and the Subsidiaries which, singly or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect and, to the best of my
knowledge, neither the Company nor any of the Subsidiaries is the object of, or
threatened by, any proceedings relating to the revocation or modification of any
such Governmental Licenses or that would otherwise affect the operation of the
Company or any of the Subsidiaries, which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect.
(xiv) At the Closing Time, the agreements entered into by the Company
for the purposes of completing the Reorganization are in full force and effect
and the closings contemplated by these agreements have been consummated in
accordance with the terms thereof in all material respects.
In the course of the preparation of the Debt Registration Statement
and the Prospectus, I participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company, your representatives and your counsel, at
which conferences the contents of the Debt Registration Statement and the
Prospectus and related matters were discussed and, although
<PAGE>
6
I am not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Debt Registration
Statement and the Prospectus (except as expressly provided in paragraph (v)) and
have not made an independent investigation, check or verification of facts for
the purposes of rendering this opinion, on the basis of the foregoing, I advise
you that nothing has come to my attention that leads me to believe (i) that the
Debt Registration Statement or any amendment thereto, including the Rule A
Information and Rule 434 Information, if applicable (except for financial
statements and schedules and other financial and statistical data included
therein or omitted therefrom, as to which I make no statement), at the time
such Debt registration Statement or any such amendment became effective,
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, (ii) that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial and
statistical data included or incorporated by reference therein or omitted
therefrom), at the time the Prospectus was issued, at the time any such amended
or supplemented prospectus was issued or at the Closing Time, included or
includes an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or (iii) that the Debt
Registration Statement, including any Rule 462(b) Debt Registration Statement,
the Rule 430A Information and the Rule 434 Information, as applicable, the
Prospectus and each amendment or supplement to the Debt Registration Statement
and the Prospectuses, excluding the documents incorporated by reference therein
as of their respective effective or issue dates (other than the financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein or omitted therefrom, as to which I make no
statement) did not comply as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
The opinions set forth above are subject to the following
qualifications:
(i) the enforceability of agreements, documents and instruments is
subject to general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and
the discretion of the court before which any proceeding therefor may be
brought, regardless of whether enforcement is sought in a proceeding in
equity or at law, and bankruptcy, reorganization, insolvency, fraudulent
conveyance or transfer, moratorium (whether general or specific) and other
laws affecting creditors' rights or the relief of debtors generally.
(ii) I express no opinion concerning the enforceability of (a)
waivers of notice or of any other constitutional, statutory or common law
rights, (b) indemnification provisions to the extent such provisions are
deemed to violate public
<PAGE>
7
policy or federal or state securities laws, and (c) submissions to the
personal jurisdiction of any particular court.
(iii) I express no opinion as to any New York state or local laws,
rules or regulations relating to the regulation of telecommunications.
This opinion is furnished by me as General Counsel to the Company in
connection with the closing of the above-referenced public offering to date
hereof. I assume no obligation to advise you of changes which may thereafter
be brought to my attention. My opinion is based upon statutory laws and
judicial decisions in effect at the date hereof, and I do not opine with
respect to any law, regulation, rule or governmental policy which may be enacted
or adopted after the date hereof, nor assume any responsibility to advise you of
future changes in my opinion. The opinion is solely for your benefit and is
not to be used, circulated, quoted or otherwise referred to for any other
purpose, and may not be relied upon by any other person, without my express
prior written permission.
<PAGE>
Exhibit A(ii)
FORM OF OPINION OF DL&A
TO BE DELIVERED PURSUANT TO
SECTION 8(e)(B)
See Attachment
<PAGE>
Attachment
----------
[DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD]
July __, 1996
Donaldson, Lufkin & Jenrette
Securities Corporation
Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Morgan Stanley & Co. Incorporated
Chase Securities Inc.
Toronto Dominion Securities (USA) Inc.
227 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 8(e) of the
Underwriting Agreement dated as of June , 1996 (the "Underwriting Agreement")
among you and Teleport Communications Group Inc. (the "Company"), providing for
the sale to you on this date of [$300,000,000] principal amount of its ___%
Senior Notes due 2006 (the "Senior Notes") and $__________ principal amount of
its ___% Senior Discount Notes due 2007 (the "Senior Discount Notes" and,
together with the Senior Notes, the "Securities"). We have served as counsel to
the Company in connection with the issuance and sale of the Securities.
Capitalized terms used herein that are not otherwise defined herein shall have
the same meaning as in the Underwriting Agreement.
In this connection, we have examined the Registration Statement on Form S-1
(No. 333-3984) relating to the Securities filed with the Securities and Exchange
Commission (the "Commission") on April 24, 1996, under the Securities Act of
1933, as amended (the "Securities Act"), Amendment No. 1 thereto filed with the
Commission on June 3, 1996, and Amendment No. 2 thereto filed with the
Commission on June , 1996 (such Registration Statement, as so amended, being
hereinafter referred to as the "Debt Registration Statement"); the final
prospectus, dated June , 1996, filed with the Commission on June , 1996,
relating to the offering of the Securities (the "Prospectus"), filed pursuant to
Rule 424(b) of the Commission's General Rules and Regulations under the
Securities Act; and the Underwriting Agreement.
On June __, 1996, we were informed by telephone by a member of the staff of
the Commission that the Debt Registration Statement had become effective under
the Securities Act at _____ [A.M./P.M.], New York City time, on that date.
<PAGE>
-2-
We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents and the due, binding and valid authorization, execution and delivery
pursuant to lawful power and legal right of applicable instruments and documents
on behalf of persons and entities other than the Company. As to any facts
material to the opinions expressed herein, we have relied upon statements and
representations of officers and other representatives of the Company and others.
As to matters of law set forth below, our opinion is limited to matters of
law under the laws of the State of New York, the laws of the United States to
the extent applicable hereto and the Delaware General Corporation Law, and we
express no opinion as to conflicts of law rules, or the laws of any States or
jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications stated
herein, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
2. The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement and the Indentures.
3. The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
the Underwriting Agreement, and, when executed and authenticated in accordance
with the provisions of the Indentures and issued and delivered to and paid for
by the Underwriters in accordance with the terms of the Underwriting Agreement,
will be entitled to the benefits of the Indentures and will be valid and binding
obligations of the Company enforceable in accordance with their terms.
4. The Indentures have been duly qualified under the Trust Indenture Act
of 1939, as amended, and have been duly authorized, executed and delivered by
the Company and are valid and binding agreements of the Company, enforceable in
accordance with their terms.
<PAGE>
-3-
5. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
6. The Debt Registration Statement, including any Rule 462(b) Debt
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, no stop order suspending the effectiveness of the Debt
Registration Statement or any Rule 462(b) Debt Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
7. The Securities and the Indenture conform to the descriptions thereof
contained in the Prospectus under the caption "Description of Notes."
8. Neither the issuance, sale or delivery of the Securities nor the
application of the proceeds thereof by the Company in accordance with the
Prospectus will violate regulations G, T, U or X of the Board of Governors of
the Federal Reserve System.
9. The information in the Prospectus under the captions "Description of
Capital Stock," "Certain Federal Income Tax Considerations" and in the Debt
Registration Statement under Item 14, to the extent that it constitutes matters
of law, summaries of legal matters, the Company's certificate of incorporation
and bylaws or legal proceedings, or legal conclusions has been reviewed by us
and is correct in all material respects.
10. No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority or
agency (other than under the Securities Act and the Securities Act Regulations,
which have been obtained, or as may be required under the securities or blue sky
laws of the various states, as to which we express no opinion) is necessary or
required in connection with the due authorization, execution and delivery of the
Underwriting Agreement, or the Indentures, or for the offering, issuance, sale
or delivery of the Securities, except for notice filings where the failure to
make such filings would not materially adversely affect the performance by the
Company of its obligations under the Underwriting Agreement or the Indentures.
11. The execution, delivery and performance of the Underwriting Agreement
and the Indentures and the consummation of the transactions contemplated in the
Underwriting Agreement and the Indentures, the consummation of the
Reorganization, as defined in the Debt Registration Statement, the issuance and
sale of the Securities, and the use of the proceeds from the sale of the
Securities to the extent expressly described in the Prospectus under the caption
"Use of Proceeds" and compliance by the Company with its obligations under the
Underwriting Agreement and the Indentures do not and will not, whether with or
without
<PAGE>
-4-
the giving of notice or lapse of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined in Section 6(x) of the
Underwriting Agreement) under or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or other agreement or instrument that has been
filed or incorporated by reference as an exhibit to the Debt Registration
Statement (except for such conflicts, breaches, defaults, Repayment Events,
liens, charges or encumbrances that would not reasonably be expected to result
in a Material Adverse Effect), nor will such actions result in any violation of
the provisions of the certificate of incorporation or by-laws or partnership
agreement, as the case may be, of the Company or any Subsidiary, or (subject to
the receipt of regulatory consents and approvals for the Reorganization as
described in the Debt Registration Statement) any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us of any governmental,
government instrumentality or court having jurisdiction over the Company or any
Subsidiary or any of their respective properties, assets or operations, except
for such violations that would not reasonably be expected to result in a
Material Adverse Effect.
12. The Company is not an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the Investment Company
Act of 1940.
13. The statements contained in the Debt Registration Statement under the
captions "Risk Factors -- Federal and State Regulation -- Governmental and Other
Authorizations" and "Business -- Government Regulation -- Telecommunications Act
of 1996 -- Federal Regulation -- State Regulation -- Local Government
Authorizations," insofar as such statements constitute a summary of the legal
matters or legal proceedings referred to therein, have been reviewed by us and
are correct in all material respects.
In the course of the preparation of the Debt Registration Statement and the
Prospectus, we participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company, your representatives and your counsel, at
which conferences the contents of the Debt Registration Statement and the
Prospectus and related matters were discussed and, although we are not passing
upon and do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Debt Registration Statement and the
Prospectus (except as expressly provided in subparagraphs [9 and 13]) and have
not made an independent investigation, check or verification of facts for the
purpose of rendering this opinion, on the basis of the foregoing (relying as to
materiality to a large extent upon the opinions of officers and other
representatives of the Company), we advise you that, nothing has come to our
attention that leads us to believe (i) that the Debt Registration Statement or
any amendment thereto, including the Rule 430A Information and
<PAGE>
-5-
Rule 434 Information (if applicable) (except for financial statements and
schedules and other financial and statistical data included therein or omitted
therefrom and any information contained in any Form T-1 prepared by the Trustee
under either Indenture, as to which we make no statement), at the time such Debt
Registration Statement or any such amendment became effective, 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,
(ii) that the Prospectus or any amendment or supplement thereto (except for
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein or omitted therefrom and any
information contained in any Form T-1 prepared by the Trustee under either
Indenture, as to which we make no statement), at the time the Prospectus was
issued, at the time any such amended or supplemented prospectus was issued or at
the Closing Time, included or includes an untrue statement of a material fact or
omitted or omits 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 or (iii) that the Debt Registration Statement, including
any Rule 462(b) Debt Registration Statement, the Rule 430A Information and the
Rule 434 Information, as applicable, the Prospectus and each amendment or
supplement to the Debt Registration Statement and the Prospectus, excluding the
documents incorporated by reference therein as of their respective effective or
issue dates (other than the financial statements and schedules and other
financial and statistical data included or incorporated by reference therein or
omitted therefrom and any information contained in any Form T-1 prepared by the
Trustee under either Indenture, as to which we make no statement) did not comply
as to form in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations.
The opinions set forth above are subject to the following qualifications:
(i) The enforceability of agreements, documents and instruments is subject
to general principles of equity, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the discretion of
the court before which any proceeding therefor may be brought, regardless of
whether enforcement is sought in a proceeding in equity or at law, and
bankruptcy, reorganization, insolvency, fraudulent conveyance or transfer,
moratorium (whether general or specific) and other laws affecting creditors'
rights or the relief of debtors generally.
(ii) We express no opinion concerning the enforceability of (a) waivers of
notice or of any other constitutional, statutory or common law rights,
including, without limitation, waiver of stay, extension or usury laws, (b)
indemnification provisions to the extent such provisions are deemed to violate
public policy or federal or state securities laws, and (c) submissions to the
personal jurisdiction of any particular court.
<PAGE>
-6-
(iii) We express no opinion as to any New York state or local laws, rules
or regulations relating to the regulation of telecommunications.
This opinion is furnished by us as counsel to the Company in connection
with the closing of the above-referenced public offering occurring today. The
information set forth herein is as of the date hereof. We assume no obligation
to advise you of changes which may thereafter be brought to our attention. Our
opinion is based upon statutory laws and judicial decisions in effect at the
date hereof, and we do not opine with respect to any law, regulation, rule or
governmental policy which may be enacted or adopted after the date hereof, nor
assume any responsibility to advise you of future changes in our opinion. The
opinion is solely for your benefit and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, and may not be relied upon by any
other person, without our express prior written permission.
Very truly yours,
DOW, LOHNES & ALBERTSON
_______________________
Timothy J. Kelley, Member
<PAGE>
Annex A
[FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)]
See Attachment
<PAGE>
EXHIBIT 3.6
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TELEPORT COMMUNICATIONS GROUP INC.
The undersigned officers of Teleport Communications Group Inc., a Delaware
corporation (the "Corporation"), do hereby certify as follows:
-----------
1. The name of the Corporation is "Teleport Communications Group Inc.,"
and the name under which the Corporation was originally incorporated is "Merrill
Lynch Technology Group, Inc." The date of filing of the original Certificate of
Incorporation of the Corporation with the Secretary of State was March 3, 1983.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Second Amended and Restated Certificate of
Incorporation of the Corporation dated as of May 4, 1993, as amended by a
Certificate of Amendment dated as of March 14, 1994, and as corrected by a
Certificate of Correction dated as of December 19, 1994.
3. This Amended and Restated Certificate of Incorporation was adopted by
the unanimous written consent of stockholders of the Corporation in accordance
with the applicable provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
4. The text of the Certificate of Incorporation as amended, restated or
supplemented heretofore, is further amended and restated hereby to read as
herein set forth in full:
Article I: Name.
The name of this corporation (the "Corporation") is:
Teleport Communications Group Inc.
Article II: Registered Office.
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The registered agent in charge thereof
is The Corporation Trust Company.
<PAGE>
Article III: Business.
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware and to have and exercise all the powers conferred by the laws
of the State of Delaware upon corporations formed under the General Corporation
Law of the State of Delaware.
Article IV: Authorized Capital Stock.
A. Authorized Shares. The total number of shares of all classes of
-----------------
capital stock that the Corporation shall have author ity to issue is Nine
Hundred Million (900,000,000) shares, of which (i) Seven Hundred Fifty Million
(750,000,000) shares, of a par value of $0.01 per share, shall be Common Stock
(the "Common Stock"), and (ii) One Hundred Fifty Million (150,000,000) shares,
of a par value of $0.01 per share, shall be Preferred Stock (hereinafter called
"Preferred Stock"). The Common Stock shall be divided into classes as follows:
Four Hundred Fifty Million (450,000,000) shares of Class A Common Stock ("Class
A Stock") and Three Hundred Million (300,000,000) shares of Class B Common Stock
("Class B Stock").
B. Class A Stock and Class B Stock.
-------------------------------
1. Powers, Preferences and Rights.
------------------------------
Except as otherwise provided in this paragraph B of Article IV, each share
of Common Stock shall be identical.
2. Voting Rights.
-------------
a. If there shall be only one class of Common Stock outstanding, each
share of Common Stock shall entitle the holder thereof to one vote.
b. If both classes of Common Stock are issued and outstanding, each
share of Class A Stock shall entitle the holder thereof to one vote and each
share of Class B Stock shall entitle the holder thereof to ten votes. Except as
set forth herein or as may otherwise be required by the laws of the State of
Delaware, all actions submitted to a vote of stockholders of the Corporation
(including, without limitation, any proposed amendment to this Certificate that
would increase the number of authorized shares of Class A Stock, of Class B
Stock or of any class or series of voting Preferred Stock, if any, or decrease
the number of authorized shares of any such class or series of stock (but not
below the number of shares thereof then outstanding)) shall be voted on by the
holders of Class A Stock and Class B Stock (as well as the holders of any
Preferred Stock,
2
<PAGE>
if any, entitled to vote thereon) voting together as a single class, and no
separate vote or consent of the holders of shares of Class A Stock, the holders
of the shares of Class B Stock or the holders of voting shares of Preferred
Stock shall be required for the approval of any such matter.
c. Until the earlier of (i) the date that is five years after the
date of filing of this Amended and Restated Certificate of Incorporation and
(ii) the date on which the holders of Class B Stock no longer represent at least
50% of the voting power of the outstanding Common Stock, the Corporation shall
not, directly or through a subsidiary or affiliate, engage in the business of
providing, offering, promoting or branding any of the following
telecommunications products or services unless approved by the affirmative vote
or written consent of the holders of at least a majority of the shares of Class
B Common Stock:
(a) Wireless communications services that use radio spectrum for cellular,
personal communications service (PCS), enhanced specialized mobile
radio (ESMR), paging, mobile telecommunications and any other voice or
data wireless services whether fixed or mobile; provided, however, that
the Corporation may provide and brand telecommunications products and
services delivered via point-to-point microwave transmissions; and
(b) Telecommunications services to residences; provided, however, that the
Corporation may provide telecommunications services to residences to
the extent required by a regulatory authority having jurisdiction over
the Corporation's business, including requirements of the Corporation's
local exchange carrier certificates and common carrier obligations, if
any, or in any geographic area in which such services are offered as of
July 1, 1996, but only to the extent of the services then so offered.
d. Except as otherwise provided by law or pursuant to this Article IV
or by resolution or resolutions of the Board of Directors of the Corporation
(the "Board") providing for the issuance of any series of Preferred Stock, the
holders of the Class A Stock and the Class B Stock shall have sole voting power
for all purposes, each holder of the Class A Stock and Class B Stock being
entitled to vote as provided in subparagraph 2.b of paragraph B of this Article
IV.
3
<PAGE>
3. Dividends.
---------
a. Subject to subparagraph 3.b. of paragraph B of this Article IV, if
and when dividends on the Class A Stock and Class B Stock are declared payable
from time to time by the Board as provided in this subparagraph 3.a of paragraph
B of Article IV, the holders of Class A Stock and the holders of Class B Stock
shall be entitled to share equally, on a per share basis, in such dividends,
subject to the limitations described below.
b. If at any time a distribution with respect to the Class A Stock or
Class B Stock is to be paid in shares of Class A Stock, Class B Stock or any
other securities of the Corporation or any other corporation, partnership,
limited company, trust or legal entity ("Person") (hereinafter sometimes called
a "share distribution"), such share distribution shall be declared and paid only
as follows:
(1) a share distribution consisting of Class A Stock (or securities of
the Corporation (other than any class of Common Stock) that are
convertible into, exchangeable for or evidence the right to
purchase any shares of any class of Common Stock, whether upon
conversion, exercise, exchange, pursuant to anti-dilution
provisions of such securities or otherwise ("Convertible
Securities") that are convertible into, exchangeable for or
evidence the right to purchase shares of Class A Stock) to holders
of Class A Stock and Class B Stock, on an equal per share basis;
or (or Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase shares of Class
B Stock) consisting of shares of Class B Stock; to holders of
Class A Stock and Class B Stock, on an equal per share basis; or
to holders of Class A Stock and, on an equal per share basis,
shares of Class B Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to
purchase shares of Class B Stock) to; and
(2) a share distribution consisting of shares of any class or series
of securities of the Corporation or any other Person other than
Class A Stock or Class B Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to
purchase shares of Class A Stock or Class B Stock), either on the
basis of a distribution if identical securities, on an equal per
share basis, to holders of Class A Stock and Class B Stock or on
the basis of a distribution of one class or series of securities
to holders of Class A Stock and another class or series of
securities to Class B Stock, provided that the securities so
distributed (and, if applicable, the securities into which the
distributed securities are convertible, or for which they are
exchangeable, or which the distributed securities evidence the
right to purchase) do not differ in any respect other than their
relative voting rights and related differences in designation,
conversion and share distribution provisions, with holders of
shares of Class B Stock receiving the class or series having the
higher relative voting rights (without regard to whether such
rights differ to a greater or lesser extent than the corresponding
differences in voting rights and related differences in
designation, conversion and share distribution provisions between
the Class A Stock and the Class B Stock), provided that if the
securities so distributed constitute capital stock of a Subsidiary
of the Corporation, such rights shall not differ to a greater
extent than the corresponding differences in voting rights,
designation, conversion and share distribution provisions between
the Class A Stock and Class B Stock, and provided in each case
that such distribution is otherwise made on an equal per share
basis.
As used herein, the term "Subsidiary" means, when used with
respect to any Person, (i) a corporation in which such Person
and/or one or more Subsidiaries of such Person, directly or
indirectly, owns capital stock having a majority of the voting
power of such corporation's capital stock to elect directors under
ordinary circumstances, and (ii) any other Person (other than a
corporation) in which such Person and/or one or more Subsidiaries
or such Person, directly or indirectly, has (x) a majority
ownership interest or (y) the power to elect or direct the
election of a majority of the members of the governing body of
such first-named Person.
c. If the Corporation shall in any manner reclassify, subdivide or
combine the outstanding shares of Class A Stock or Class B Stock, the
outstanding shares of the other class of Common Stock shall be proportionally
reclassified, subdivided or combined in the same manner and on the same basis as
the outstanding shares of Class A Stock or Class B Stock, as the case may be,
that have been reclassified subdivided or combined.
d. Subject to provisions of law and the preferences of the Preferred
Stock and of any other stock ranking prior to the Class A Stock or the Class B
Stock as to dividends, the
4
<PAGE>
holders of the Class A Stock and the Class B Stock shall be entitled to receive
dividends at such time and in such amounts as may be determined by the Board and
declared out of any funds lawfully available therefor, and shares of Preferred
Stock of any class shall not be entitled to share therein except as otherwise
expressly provided in the resolution or resolutions of the Board providing for
the issue of such series. Dividends shall be payable only as and when declared
by the Board of Directors.
4. Conversion of Class B Stock by Holder.
-------------------------------------
a. The holder of each share of Class B Stock shall have the right at
any time, or from time to time, at such holder's option, to convert such share
into one fully paid and nonassessable share of Class A Stock on and subject to
the terms and conditions hereinafter set forth.
b. In order to exercise his conversion privilege, the holder of any
shares of Class B Stock to be converted shall present and surrender the
certificate or certificates representing such shares, duly endorsed, during
usual business hours at any office or agency of the Corporation maintained for
the transfer of Class B Stock and shall deliver a written notice of the election
of the holder to convert the shares represented by such certificate or any
portion thereof specified in such notice. Such notice shall also state the name
or names (with address) in which the certificate or certificates for shares of
Class A Stock issuable on such conversion shall be registered. If required by
the Corporation, any certificate for shares surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the Corporation,
duly executed by the holder of such shares or his duly authorized representa
tive. Each conversion of shares of Class B Stock shall be deemed to have been
effected at the close of business on the date (the "conversion date") on which
the certificate or certificates representing such shares shall have been
surrendered and such notice and any required instruments of transfer shall have
been received as aforesaid, and the person or persons in whose name or names any
certificate or certificates for shares of Class A Stock shall be issuable on
such conversion shall be, for the purpose of receiving dividends and for all
other corporate purposes whatso ever, deemed to have become the holder or
holders of record of the shares of Class A Stock represented thereby on the
conversion date.
c. As promptly as practicable after the presentation and surrender
for conversion, as herein provided, of any certificate for shares of Class B
Stock, the Corporation shall issue and deliver at such office or agency, to or
upon the written order of the holder thereof, certificates for the number of
shares of Class A Stock issuable upon such conversion. In case any certificate
for shares of Class B Stock shall be surren
5
<PAGE>
dered for conversion of a part only of the shares represented thereby, the
Corporation shall deliver at such office or agency, to or upon the written order
of the holder thereof, a certificate or certificates for the number of shares of
Class B Stock repre sented by such surrendered certificate that are not being
converted. The issuance of certificates for shares of Class A Stock issuable
upon the conversion of shares of Class B Stock by the registered holder thereof
shall be made without charge to the converting holder for any tax imposed on the
Corporation in respect of the issue thereof. The Corporation shall not, howev
er, be required to pay any tax that may be payable with respect to any transfer
involved in the issue and delivery of any certif icate in a name other than that
of the registered holder of the shares being converted, and the Corporation
shall not be required to issue or deliver any such certificate unless and until
the person requesting the issue thereof shall have paid to the Corporation the
amount of such tax or has established to the satisfaction of the Corporation
that such tax has been paid.
d. Upon any conversion of shares of Class B Stock into shares of
Class A Stock pursuant hereto, no adjustment with respect to dividends shall be
made; only those dividends shall be payable on the shares so converted as have
been declared and are payable to holders of record of shares of Class B Stock on
a date prior to the conversion date with respect to the shares so converted; and
only those dividends shall be payable on shares of Class A Stock issued upon
such conversion as have been de clared and are payable to holders of record of
shares of Class A Stock on or after such conversion date.
e. In case of any sale or conveyance of all or substantially all of
the property or business of the Corporation as an entirety, a holder of a share
of Class B Stock shall have the right thereafter to convert such share into the
kind and amount of cash, shares of stock and other securities and proper ties
receivable upon such sale or conveyance by a holder of one share of Class A
Stock and shall have no other conversion rights with regard to such share. The
provisions of this subparagraph 4.e of paragraph B of Article IV shall similarly
apply to succes sive sales or conveyances.
f. Shares of the Class B Stock converted into Class A Stock shall be
retired and shall resume the status of authorized but unissued shares of Class B
Stock.
g. Such number of shares of Class A Stock as may from time to time be
required for such purpose shall be reserved for issuance upon conversion of
outstanding shares of Class B Stock.
h. Shares of Class A Stock shall not be convertible into shares of
Class B Stock.
6
<PAGE>
6. Priority of Preferred Stock.
---------------------------
The Class A Stock and the Class B Stock are subject to all the powers,
rights, privileges, preferences and priorities of any series of Preferred Stock
as may be stated herein and as shall be stated and expressed in any resolution
or resolutions adopted by the Board, pursuant to authority expressly granted to
and vested in it by the provisions of this Article IV.
7. Liquidation, Dissolution or Winding Up.
--------------------------------------
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntarily or involuntarily (some times referred to as
liquidation), after payment or provision for payment of the debts and other
liabilities of the Corporation and the preferential amounts to which the holders
of any stock ranking prior to the Class A Stock and the Class B Stock in the
distribution of the Corporation's assets shall be entitled upon such
liquidation, dissolution or winding up, the holders of the Class A Stock and the
Class B Stock shall be entitled to share equally, on a per share basis, in the
distribution of the remaining assets of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other corporation or
corporations nor the sale, transfer or lease of all or substantially all of the
assets of the Corporation shall itself be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this
paragraph 7.
C. Preferred Stock.
---------------
Shares of Preferred Stock may be issued from time to time in one or more
series. Shares of Preferred Stock that may be redeemed, purchased or acquired
by the Corporation may be reis sued except as otherwise provided by law. The
Board is hereby authorized to fix or alter the designations and powers, prefer
ences and relative, participating, optional or other rights, if any, and
qualifications, limitations or restrictions thereof, including, without
limitation, the dividend rate (and whether dividends are cumulative), conversion
rights, if any, voting rights, rights and terms of redemption (including sinking
fund provisions, if any), redemption price and liquidation preferences of any
wholly unissued series of Preferred Stock, and the number of shares constituting
any such series and the designation thereof, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
7
<PAGE>
Article V: Number of Directors and Limitation of Liability of Directors.
A. Number of Directors. The number of directors that shall constitute
-------------------
the whole Board of the Corporation shall be as specified in the Bylaws of the
Corporation, as the same may be amended from time to time. In the absence of
such a provision in the Bylaws of the Corporation, the number of directors that
shall constitute the whole Board of the Corporation shall be thirteen.
B. Limitation of Liability of Directors. The Corporation shall, to the
------------------------------------
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented, or any successor
provision thereto, indemnify any and all persons whom it shall have power to
indem nify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section and, as
provided in said section shall advance expenses, including reasonable attorneys'
fees, of any and all such persons, and the indemnification and advancement of
expenses provided for herein shall not be deemed exclusive of any other rights
to which a person seeking indemnification or advancement of expenses may be
entitled under any Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding such office, and shall continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors, and administrators of such
persons. To the fullest extent permitted by Section 102 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented, or any successor provision thereto, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
C. Future Amendments. In addition to the provisions of paragraph B of
-----------------
this Article V, if the General Corporation Law of the State of Delaware is
amended hereafter to authorize or permit corporate action further limiting or
eliminating the personal liability of a director to the Corporation or its
stockholders, then the liability of each director of the Corporation shall be
further limited or eliminated to the fullest extent permitted by any such future
amendment of the law of the State of Delaware.
D. Repeal or Modification. Any repeal or modification of this Article V
----------------------
or any provision hereof shall not increase the personal liability of any
director or the Corporation for any act or occurrence taking place prior to such
repeal or modification, or otherwise adversely affect any right or protection of
a director of the Corporation existing at the time of such repeal or
modification.
8
<PAGE>
Article VI: Meetings.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of the Corporation may provide. The books of the
Corporation may be kept (subject to any provi sion of Delaware law) outside the
State of Delaware at such place or places as may be designed from time to time
by the Board or in the Bylaws of the Corporation. Elections of directors need
not be by written ballot unless the Bylaws of the Corporation shall so provide.
Article VII: Election of Directors.
A. Stockholders' Meeting. The directors who are directors on the date
---------------------
that the Amended and Restated Certificate of Incorporation of the Corporation is
filed with the Secretary of State of Delaware shall serve until the first annual
meeting of stockholders at which directors are elected following that date. The
Directors shall be elected at the annual meeting of stockholders, and each
director elected shall hold office until such director's successor has been
elected and qualified. Directors need not be stockholders of the Corporation.
B. Directors Elected by Preferred Stock. During any period when the
------------------------------------
holders of Preferred Stock or any one or more series thereof, voting as a class,
shall be entitled to elect a specified number of directors by reason of dividend
arrearages or other contingencies giving them the right to do so, then and
during such times as such right continues the then otherwise authorized number
of directors shall be increased by such speci fied number of directors, and the
holders of the Preferred Stock or such series thereof, voting as a class, shall
be entitled to elect the additional directors so provided for, pursuant to the
provisions of such Preferred Stock or series; and each such additional director
shall serve until the annual meeting at which his term of office shall expire
and until his successor shall be elected and shall qualify, or until his right
to hold such office terminates pursuant to the provisions of such Preferred
Stock or series, whichever occurs earlier. Whenever the holders of such
Preferred Stock or series thereof are divested of such rights to elect a
specified number of directors, voting as a class, pursu ant to the provisions of
such Preferred Stock or series, the terms of office of all directors elected by
the holders of such Preferred Stock or series, voting as a class pursuant to
such provisions, or elected to fill any vacancies resulting from the death,
resignation or removal of directors so elected by the holders of such Preferred
Stock or series, shall forthwith terminate and the authorized number of
directors shall be reduced accordingly.
C. Removal. Subject to the rights of any series of Preferred Stock then
-------
outstanding, any director, or the entire
9
<PAGE>
Board, may be removed from office at any time by the affirmative vote of the
holders of shares that entitle the holders to cast a majority of the votes
entitled to be cast by the holders of all shares of capital stock of the
Corporation that are entitled to vote generally in the election of directors of
the Corporation.
D. Notice of Stockholder Nominees. Nominations of persons for election
------------------------------
to the Board (other than persons being nominated to fill vacancies and newly
created directorships, who shall in each case be nominated and elected as
provided in the Bylaws of the Corporation) shall be made only at a meeting of
stockholders and only (1) by or at the direction of the Board or (2) by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice proce dures set forth in this paragraph
D of Article VII. Such nomina tions, other than those made by or at the
direction of the Board, shall be made pursuant to timely notice in writing to
the Secre tary of the Corporation. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than thirty days nor more than sixty days prior to the
meeting; provided, however, that if less than forty days notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. For purpose of this
paragraph D of Article VII, any adjournment(s) or postponement(s) of the
original meeting whereby the meeting will reconvene within thirty days from the
original date shall be deemed for purposes of this notice to be a continuation
of the original meeting and no nominations by a stockholder of persons to be
elected directors of the Corporation may be made at any such reconvened meeting
and no nominations by a stockholder of persons to be elected directors of the
Corporation may be made at any such reconvened meeting unless pursuant to a
notice that was timely for the meeting on the date originally scheduled. Such
stockholder's notice shall set forth: (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); and (ii) as to the stockholder giving
the notice (a) the name and address, as they appear on the Corporation's books,
of such stockholder, and (b) the class and number of shares of the Corporation
that are beneficially owned by such stockholder. Notwithstanding the foregoing,
nothing in this paragraph D of Article VII shall be interpreted or construed to
require the inclusion of information about any such nominee in any proxy
statement distributed by, at
10
<PAGE>
the direction of, or on behalf of the Board. The chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by this paragraph D of
Article VII, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
Article VIII: Indemnification.
The Corporation shall indemnify, in the manner and to the full extent
permitted by law, any person (or the estate of any person) who was or is a party
to, or is threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director, officer
or employee of the Corporation, or is or was serving at the request of the
Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise. The Corporation may, to
the full extent permitted by law, purchase and maintain insurance on behalf of
any such person against any liability that may be asserted against him. To the
full extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settle ment, and, in the manner provided by law, any such expenses may be paid
by the Corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such expenses
to the full extent permitted by law, nor shall it be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, vote of stock holders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
Article IX: Stockholder Proposals at Annual Meetings.
Business may be properly brought before an annual meeting by a stockholder
only upon the stockholder's timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than thirty days nor more than sixty days prior to the meeting as
originally scheduled; provided, however, that if less than forty days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. For purposes of this Article IX, any
11
<PAGE>
adjournment(s) or postponement(s) of the original meeting whereby the meeting
will reconvene within thirty days from the original date shall be deemed for
purposes of notice to be a continuation of the original meeting and no business
may be brought before any reconvened meeting unless such timely notice of such
business was given to the Secretary of the Corporation for the meeting as
originally scheduled. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting, (ii) the name and record address of the stockholder proposing such
business, and (iii) the class and number of shares of the Corporation that are
beneficially owned by the stockholder proposing such business. Notwithstanding
the foregoing, nothing in this Article IX shall be interpreted or construed to
require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of the Board. The
chairman of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting in
accordance with the provisions of this Article IX, and if he should so
determine, he shall so declare to the meeting and any such business not proper
ly brought before the meeting shall not be transacted.
Article X:Call of Special Meetings.
Special meetings of the stockholders of the Corporation for any purpose or
purposes may be called at any time by the Board, or by a majority of the members
of the Board. Such special meetings may not be called by any other person or
persons or in any other manner.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed in its corporate name by the undersigned officer and attested to by its
Secretary this ___ day of June, 1996.
TELEPORT COMMUNICATIONS
GROUP INC.
By:__________________________________
Name:___________________________
Title:__________________________
And:_________________________________
Name:___________________________
Secretary
13
<PAGE>
EXHIBIT 3.7
AMENDED AND RESTATED
BY-LAWS
OF
TELEPORT COMMUNICATIONS GROUP INC.
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office of the corporation in
-----------------
the State of Delaware shall be at the principal office of The Corporation Trust
Company in the City of Wilmington, County of New Castle, and the registered
agent in charge thereof shall be The Corporation Trust Company.
Section 1.2 Other Offices. The corporation may also have an office or
-------------
offices at any other place or places within or without the State of Delaware as
the Board of Directors of the corporation may from time to time determine or the
business of the corporation may from time to time require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 Annual Meetings. The annual meeting of stockholders of the
---------------
corporation for the election of directors of the corporation, and for the
transaction of such other business as may properly come before such meeting,
shall be held at such place, date, and time as shall be fixed by the Board of
Directors and designated in the notice of such annual meeting; provided,
however, that no annual meeting of stockholders need be held if all actions,
including the election of directors, required by the General Corporation Law of
the State of Delaware to be taken at such annual meeting are taken by written
consent in lieu of meeting pursuant to Section 2.9 hereof.
Section 2.2 Special Meetings. Special meetings of stockholders for any
----------------
purpose or purposes may be called by the President of the corporation and shall
be called by the President or the Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of stockholders
owning a majority of the Voting Stock, to be held at such place, date and time
as shall be designated in the notice or waiver of notice thereof. As used in
these By-Laws, "Voting Stock" means, with respect to any annual or special
meeting of the stockholders of the corporation, or with respect to any action to
be taken by the stockholders of the corporation, all issued and outstanding
shares of capital stock of the corporation entitled to
<PAGE>
vote at such meeting or with respect to such action, and each reference to a
percentage or portion of shares of Voting Stock shall refer to such percentage
or portion of the votes entitled to be cast by such shares.
Section 2.3 Notice of Meetings.
------------------
(a) Except as otherwise provided by law, written notice of each annual or
special meeting of stockholders stating the place, date, and time of such
meeting and, in the case of a special meeting, the purpose or purposes for which
such meeting is to be held, shall be given personally or by first-class mail to
each holder of record of shares of the corporation's Voting Stock, not less than
10 nor more than 60 days before the date of such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at such stockholder's address as it
appears on the records of the corporation. If, prior to the time of mailing,
the Secretary of the corporation shall have received from any stockholder a
written request that notices intended for such stockholder are to be mailed to
some address other than the address that appears on the records of the
corporation, notices intended for such stockholder shall be mailed to the
address designated in such request.
(b) Notice of a special meeting of stockholders may be given by the person
or persons calling the meeting, or, upon the written request of such person or
persons, such notice shall be given by the Secretary on behalf of such person or
persons. If the person or persons calling a special meeting of stockholders
give notice thereof, such person or persons shall deliver a copy of such notice
to the Secretary. Each request to the Secretary for the giving of notice of a
special meeting of stockholders shall state the purpose or purposes of such
meeting.
Section 2.4 Waiver of Notice. Notice of any annual or special meeting of
----------------
stockholders need not be given to any stockholder who files a written waiver of
notice with the Secretary, signed by the person entitled to notice, whether
before or after such meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of stockholders need be specified in any written waiver
of notice thereof. Attendance of a stockholder at a meeting, in person or by
proxy, shall constitute a waiver of notice of such meeting, except when such
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds
that the notice of such meeting was inadequate or improperly given.
Section 2.5 Adjournments. Whenever a meeting of stockholders, annual or
------------
special, is adjourned to another date, time or place, notice need not be given
of the adjourned meeting if the date, time and place thereof are announced at
the meeting at which the adjournment is taken. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
holder of record of Voting Stock. At the adjourned meeting, any business may be
transacted which might have been transacted at the original meeting.
-2-
<PAGE>
Section 2.6 Quorum. Except as otherwise provided by law or the Certificate
------
of Incorporation of the corporation, the greater of (i) the holders of record of
one-third of the issued and outstanding shares of capital stock of the
corporation entitled to vote at such a meeting or (ii) a majority of the Voting
Stock, present in person or by proxy, shall constitute a quorum for the
transaction of business at all meetings of stockholders, whether annual or
special. If, however, such quorum shall not be present in person or by proxy at
any meeting of stockholders, the stockholders entitled to vote at such meeting
may adjourn the meeting from time to time in accordance with Section 2.5 hereof
until a quorum shall be present in person or by proxy.
Section 2.7 Voting. Except as otherwise provided by law, by the Certificate
------
of Incorporation of the corporation or these By-laws, each stockholder shall be
entitled to one vote for each share held of record by such stockholder. Except
as otherwise provided by law or the Certificate of Incorporation of the
corporation or these By-laws, when a quorum is present at any meeting of
stockholders, the vote of the holders of record of a majority of the Voting
Stock present in person or by proxy shall decide any question brought before
such meeting.
Section 2.8 Proxies. Each stockholder entitled to vote at a meeting of
-------
stockholders or to express, in writing, consent to or dissent from any action of
stockholders without a meeting may authorize another person or persons to act
for such stockholder by proxy. Such proxy shall be filed with the Secretary
before such meeting of stockholders or such action of stockholders without a
meeting, at such time as the Board of Directors may require. No proxy shall be
voted or acted upon more than three years from its date, unless the proxy
provides for a longer period.
Section 2.9 Stockholders' Consent in Lieu of Meeting. Any action required
----------------------------------------
by the General Corporation Law of the State of Delaware to be taken at any
annual or special meeting of stockholders, and any action which may be taken at
any annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders or record of shares of the
corporation's common stock having not less than the minimum number of votes
necessary to authorize or take such action at a meeting at which the holders or
record of all shares of the corporation's common stock entitled to vote thereon
were present and voted.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 General Powers. The business and affairs of the corporation
--------------
shall be managed by the Board of Directors, which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by law, the
Certificate of Incorporation of the corporation or these By-laws directed or
required to be exercised or done by stockholders.
-3-
<PAGE>
3. Dividends.
---------
a. Subject to subparagraph 3.b. of paragraph B of this Article IV, if
and when dividends on the Class A Stock and Class B Stock are declared payable
from time to time by the Board as provided in this subparagraph 3.a of paragraph
B of Article IV, the holders of Class A Stock and the holders of Class B Stock
shall be entitled to share equally, on a per share basis, in such dividends,
subject to the limitations described below.
b. If at any time a distribution with respect to the Class A Stock or
Class B Stock is to be paid in shares of Class A Stock, Class B Stock or any
other securities of the Corporation or any other corporation, partnership,
limited company, trust or legal entity ("Person") (hereinafter sometimes called
a "share distribution"), such share distribution shall be declared and paid only
as follows:
(1) a share distribution consisting of Class A Stock (or securities of
the Corporation (other than any class of Common Stock) that are
convertible into, exchangeable for or evidence the right to
purchase any shares of any class of Common Stock, whether upon
conversion, exercise, exchange, pursuant to anti-dilution
provisions of such securities or otherwise ("Convertible
Securities") that are convertible into, exchangeable for or
evidence the right to purchase shares of Class A Stock) to holders
of Class A Stock and Class B Stock, on an equal per share basis;
or consisting of shares of Class B Stock (or Convertible
Securities that are convertible into, exchangeable for or evidence
the right to purchase shares of Class B Stock) to holders of Class
A Stock and Class B Stock, on an equal per share basis; or to
holders of Class A Stock and, on an equal per share basis, shares
of Class B Stock (or Convertible Securities that are convertible
into, exchangeable for or evidence the right to purchase shares of
Class B Stock) to holders of Class B Stock; and
(2) a share distribution consisting of shares of any class or series
of securities of the Corporation or any other Person other than
Class A Stock or Class B Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to
purchase shares of Class A Stock or Class B Stock), either on the
basis of a distribution if identical securities, on an equal per
share basis, to holders of Class A Stock and Class B Stock or on
the basis of a distribution of one class or series of securities
to holders of Class A Stock and another class or series of
securities to Class B Stock, provided that the securities so
distributed (and, if applicable, the securities into which the
distributed securities are convertible, or for which they are
exchangeable, or which the distributed securities evidence the
right to purchase) do not differ in any respect other than their
relative voting rights and related differences in designation,
conversion and share distribution provisions, with holders of
shares of Class B Stock receiving the class or series having the
higher relative voting rights (without regard to whether such
rights differ to a greater or lesser extent than the corresponding
differences in voting rights and related differences in
designation, conversion and share distribution provisions between
the Class A Stock and the Class B Stock), provided that if the
securities so distributed constitute capital stock of a Subsidiary
of the Corporation, such rights shall not differ to a greater
extent than the corresponding differences in voting rights,
designation, conversion and share distribution provisions between
the Class A Stock and Class B Stock, and provided in each case
that such distribution is otherwise made on an equal per share
basis.
As used herein, the term "Subsidiary" means, when used with
respect to any Person, (i) a corporation in which such Person
and/or one or more Subsidiaries of such Person, directly or
indirectly, owns capital stock having a majority of the voting
power of such corporation's capital stock to elect directors under
ordinary circumstances, and (ii) any other Person (other than a
corporation) in which such Person and/or one or more Subsidiaries
or such Person, directly or indirectly, has (x) a majority
ownership interest or (y) the power to elect or direct the
election of a majority of the members of the governing body of
such first-named Person.
c. If the Corporation shall in any manner reclassify, subdivide or
combine the outstanding shares of Class A Stock or Class B Stock, the
outstanding shares of the other class of Common Stock shall be proportionally
reclassified, subdivided or combined in the same manner and on the same basis as
the outstanding shares of Class A Stock or Class B Stock, as the case may be,
that have been reclassified subdivided or combined.
d. Subject to provisions of law and the preferences of the Preferred
Stock and of any other stock ranking prior to the Class A Stock or the Class B
Stock as to dividends, the
4
<PAGE>
purpose of such meeting. Notice of each such meeting shall be given to each
director, if by mail, addressed to him at his residence or usual place of
business, at least two days before the day on which such meeting is to be held,
or shall be sent to him at such place by telecopy, telegraph, cable, or other
form of recorded communication, or be delivered personally or by telephone not
later than the day before the day on which such meeting is to be held. A written
waiver of notice, signed by the director entitled to notice, whether before or
after the time of the meeting referred to in such waiver, shall be deemed
equivalent to notice. Neither the business to be transacted at, nor the purpose
of any meeting of the Board of Directors need be specified in any written waiver
of notice thereof. Attendance of a director at a meeting of the Board of
Directors shall constitute a waiver of notice of such meeting, except as
provided by law.
(d) Place of Meetings. The Board of Directors may hold its meetings at
-----------------
such place or places within or without the State of Delaware as the Board of
Directors or the Chairman may from time to time determine, or as shall be
designated in the respective notices or waivers of notice of such meetings.
(e) Manner of Acting.
----------------
(i) Except as otherwise provided in Section 3.6(e)(ii) and Section
3.6(e)(iii), all actions of the Board of Directors and committees thereof shall
require the affirmative vote of a majority of the total number of directors
comprising the Board of Directors or committee thereof or, in lieu of a meeting,
by the unanimous written consent of the members of the Board of Directors or
committee thereof.
(ii) In the absence of a majority of all of the directors for any such
meeting, a majority of the directors present at the meeting may adjourn such
meeting from time to time until a majority of all of the directors shall be
present.
(f) Organization. At each meeting of the Board of Directors, one of the
------------
following shall act as chairman of the meeting and preside, in the following
order of precedence:
(i) the Chairman;
(ii) the President;
(iii) any director chosen by a majority of the directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
-5-
<PAGE>
Section 3.7 Committees of the Board of Directors.
------------------------------------
(a) The Board of Directors may, by resolution passed by a majority of the
whole Board of Directors, designate one or more committees, each committee to
consist of one or more directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting may unanimously appoint
another director to act at the meeting in the place of any such absent or
disqualified member. Any committee of the Board of Directors, to the extent
provided in the resolution of the Board of Directors designating such committee,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; provided, however, that no such committee shall have such power or
authority in reference to amending the Certificate of Incorporation of the
corporation (except that such a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of the State of Delaware, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
of stock of the corporation or fix the number of shares of any series of stock
or authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation under Section 251 or 252 of the General
Corporation Law of the State of Delaware, recommending to the stockholders the
sale, lease or exchange of all or substantially all the corporation's property
and assets, recommending to the stockholders a dissolution of the corporation or
the revocation of a dissolution, or amending these By-laws.
(b) Each committee of the Board of Directors shall keep regular minutes of
its proceedings and report the same to the Board of Directors when so requested
by the Board of Directors.
Section 3.8 Directors' Consent in Lieu of Meeting. Any action required or
-------------------------------------
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by all the members of the Board of Directors or such committee
and such consent is filed with the minutes of the proceedings of the Board of
Directors or such committee.
Section 3.9 Action by Means of Telephone or Similar Communications
------------------------------------------------------
Equipment. Any one or more members of the Board of Directors, or of any
committee thereof, may participate in a meeting of the Board of Directors or
such committee by means of conference telephone or
-6-
<PAGE>
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting by such means
shall constitute presence in person at such meeting.
Section 3.10 Compensation. Unless otherwise restricted by the Certificate
------------
of Incorporation of the corporation, the Board of Directors may determine the
compensation of directors. In addition, as determined by the Board of
Directors, directors may be reimbursed by the corporation for their expenses, if
any, in the performance of their duties as directors. No such compensation or
reimbursement shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor.
ARTICLE IV
OFFICERS
Section 4.1 Officers. The officers of the corporation shall be the
--------
Chairman, the President, the Secretary and a Treasurer and may include one or
more Executive Vice Presidents, Senior Vice Presidents and Vice Presidents and
one or more Assistant Secretaries and one or more Assistant Treasurers. Any two
or more offices may be held by the same person.
Section 4.2 Authority and Duties. All officers shall have such authority
--------------------
and perform such duties in the management of the corporation as may be provided
in these By-laws or, to the extent not so provided, by resolution of the Board
of Directors.
Section 4.3 Term of Office, Resignation and Removal.
---------------------------------------
(a) Each officer shall be appointed by the Board of Directors and shall
hold office for such term as may be determined by the Board of Directors. Each
officer shall hold office until his successor has been appointed and qualified
or his earlier death or resignation or removal in the manner hereinafter
provided. The Board of Directors may require any officer to give security for
the faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice to the
Board of Directors, the Chairman, the President or the Secretary. Such
shall take effect at the time specified in such notice or, if the time be not
specified, upon receipt thereof by the Board of Directors, the Chairman, the
President or the Secretary, as the case may be. Unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective.
(c) All officers and agents appointed by the Board of Directors shall be
subject to removal, with or without cause, at any time by the Board of
Directors.
-7-
<PAGE>
Section 4.4 Vacancies. Any vacancy occurring in any office of the
---------
corporation, for any reason, shall be filled by action of the Board of
Directors. Unless earlier removed pursuant to Section 4.3 hereof, any officer
appointed by the Board of Directors to fill any such vacancy shall serve only
until such time as the unexpired term of his predecessor expires unless
reappointed by the Board of Directors.
Section 4.5 The Chairman. The Chairman shall have the power to call
------------
special meetings of stockholders, to call special meetings of the Board of
Directors and, if present, to preside at all meetings of stockholders and all
meetings of the Board of Directors. The Chairman shall perform all duties
incident to the office of Chairman of the Board of Directors and all such other
duties as may from time to time be assigned to him by the Board of Directors or
these By-laws.
Section 4.6 The President. The President shall be the chief executive
-------------
officer of the corporation and shall have general and active management and
control of the business and affairs of the corporation, subject to the control
of the Board of Directors, and shall see that all orders and resolutions of the
Board of Directors are carried into effect. The President shall perform all
duties incident to the office of President and all such other duties as may from
time to time be assigned to him by the Board of Directors or these By-laws.
Section 4.7 Vice Presidents. Vice Presidents, if any, in order of their
---------------
seniority or in any other order determined by the Board of Directors, shall
generally assist the President and perform such other duties as the Board of
Directors or the President shall prescribe, and in the absence or disability of
the President, shall perform the duties and exercise the powers of the
President.
Section 4.8 The Secretary. The Secretary shall, to the extent
-------------
practicable, attend all meetings of the Board of Directors and all meetings of
stockholders and shall record all votes and the minutes of all proceedings in a
book to be kept for that purpose, and shall perform the same duties for any
committee of the Board of Directors when so requested by such committee. He
shall give or cause to be given notice of all meetings of stockholders and of
the Board of Directors, shall perform such other duties as may be prescribed by
the Board of Directors, the Chairman or the President and shall act under the
supervision of the Chairman. He shall keep in safe custody the seal of the
corporation and affix the same to any instrument that requires that the seal be
affixed to it and which shall have been duly authorized for signature in the
name of the corporation and, when so affixed, the seal shall be attested by his
signature or by the signature of the Treasurer of the corporation (the
"Treasurer") or an Assistant Secretary or Assistant Treasurer of the
---------
corporation. He shall keep in safe custody the certificate books and stockholder
records and such other books and records of the corporation as the Board of
Directors, the Chairman or the President may direct and shall perform all other
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him by the Board of Directors, the Chairman or the
President.
-8-
<PAGE>
Section 4.9 Assistant Secretaries. Assistant Secretaries of the
---------------------
corporation ("Assistant Secretaries"), if any, in order of their seniority or
---------------------
in any other order determined by the Board of Directors, shall generally assist
the Secretary and perform such other duties as the Board of Directors or the
Secretary shall prescribe, and, in the absence or disability of the Secretary,
shall perform the duties and exercise the powers of the Secretary.
Section 4.10 The Treasurer. The Treasurer shall have the care and
-------------
custody of all the funds of the corporation and shall deposit such funds in such
banks or other depositories as the Board of Directors, or any officer or
officers, or any officer and agent jointly, duly authorized by the Board of
Directors, shall, from time to time, direct or approve. He shall disburse the
funds of the corporation under the direction of the Board of Directors and the
President. He shall keep a full and accurate account of all moneys received and
paid on account of the corporation and shall render a statement of his accounts
whenever the Board of Directors, the Chairman or the President shall so request.
He shall perform all other necessary actions and duties in connection with the
administration of the financial affairs of the corporation and shall generally
perform all the duties usually appertaining to the office of treasurer of a
corporation. When required by the Board of Directors, he shall give bonds for
the faithful discharge of his duties in such sums and with such sureties as the
Board of Directors shall approve.
Section 4.11 Assistant Treasurers. Assistant Treasurers of the
--------------------
corporation ("Assistant Treasurers"), if any, in order of their seniority or
--------------------
in any other order determined by the Board of Directors, shall generally assist
the Treasurer and perform such other duties as the Board of Directors or the
Treasurer shall prescribe, and, in the absence or disability of the Treasurer,
shall perform the duties and exercise the powers of the Treasurer.
ARTICLE V
CHECKS, DRAFTS, NOTES AND PROXIES
Section 5.1 Checks, Drafts and Notes. All checks, drafts and other orders
------------------------
for the payment of money, notes and other evidences of indebtedness issued in
the name of the corporation shall be signed by such officer or officers, agent
or agents of the corporation and in such manner as shall be determined, from
time to time, by resolution of the Board of Directors.
Section 5.2 Execution of Proxies. The Chairman or the President, or, in
--------------------
the absence or disability of both of them, any Vice President, may authorize,
from time to time, the execution and issuance of proxies to vote shares of stock
or other securities of other corporations held of record by the corporation and
the execution of consents to action taken or to be taken by any such
corporation. All such proxies and consents, unless otherwise authorized by the
-9-
<PAGE>
Board of Directors, shall be signed in the name of the corporation by the
Chairman, the President or any Vice President.
ARTICLE VI
SHARES AND TRANSFERS OF SHARES
Section 6.1 Certificates Evidencing Shares. Shares of the corporation's
------------------------------
common stock shall be evidenced by certificates in such form or forms as shall
be approved by the Board of Directors. Certificates shall be issued in
consecutive order and shall be numbered in the order of their issue, and shall
be signed by the Chairman, the President or any Vice President and by the
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer.
Any or all the signatures on the certificate may be a facsimile. In the event
any such officer who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to hold such office or to be employed by
the corporation before such certificate is issued, such certificate may be
issued by the corporation with the same effect as if such officer had held such
office on the date of issue.
Section 6.2 Stock Ledger. A stock ledger in one or more counterparts
------------
shall be kept by the Secretary, in which shall be recorded the name and address
of each person, firm or corporation owning the shares of the corporation's
common stock evidenced by each certificate evidencing shares of the
corporation's common stock issued by the corporation, the number of shares of
the corporation's common stock evidenced by each such certificate, the date of
issuance thereof and, in the case of cancellation, the date of cancellation.
Except as otherwise expressly required by law, the person in whose name shares
of the corporation's common stock stand on the stock ledger of the corporation
shall be deemed the owner and holder of record thereof for all purposes.
Section 6.3 Transfers of Shares. Registration of transfers of shares of
-------------------
the corporation's common stock shall be made only in the stock ledger of the
corporation upon request of the registered holder of such shares, or of his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary, and upon the surrender of the certificate or certificates
evidencing such shares of the corporation's common stock properly endorsed or
accompanied by a stock power duly executed, together with such proof of the
authenticity of signatures as the corporation may reasonably require.
Section 6.4 Addresses of stockholders. Each stockholder shall designate
-------------------------
to the Secretary an address at which notices of meetings and all other corporate
notices may be served or mailed to such stockholder, and, if any stockholder
shall fail to so designate such an address, corporate notices may be served upon
such stockholder by mail directed to the mailing address, if any, as the same
appears in the stock ledger of the corporation or at the last known mailing
address of such stockholder.
-10-
<PAGE>
Section 6.5 Lost, Destroyed and Mutilated Certificates. Each holder of
------------------------------------------
record of shares of the corporation's common stock shall promptly notify the
corporation of any loss, destruction or mutilation of any certificate or
certificates evidencing any shares of the corporation's common stock of which he
is the holder of record. The Board of Directors may, in its discretion, cause
the corporation to issue a new certificate in place of any certificate
theretofore issued by it and alleged to have been mutilated, lost, stolen or
destroyed, upon the surrender of the mutilated certificate or, in the case of
loss, theft or destruction of the certificate, upon satisfactory proof of such
loss, theft or destruction, and the Board of Directors may, in its discretion,
require the holder of record of the shares of the corporation's common stock
evidenced by the lost, stolen or destroyed certificate or his legal
representative to give the corporation a bond sufficient to indemnify the
corporation against any claim made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 6.6 Regulations. The Board of Directors may make such other rules
-----------
and regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates evidencing
shares of the corporation's common stock.
Section 6.7 Fixing Date for Determination of stockholders of Record. In
-------------------------------------------------------
order that the corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to, or to dissent from, corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other such action. A determination of the
stockholders entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of such meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
ARTICLE VII
SEAL
The Board of Directors may approve and adopt a corporate seal, which shall
be in the form of a circle and shall bear the full name of the corporation, the
year of its incorporation and the words "Corporate Seal Delaware".
-11-
<PAGE>
ARTICLE VIII
FISCAL YEAR
The fiscal year of the corporation shall end on the thirty-first day of
December of each year unless changed by resolution of the Board of Directors.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 9.1 Indemnification.
---------------
(a) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
---- ----------
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware
-12-
<PAGE>
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 9.1(a) and (b) of these By-
laws, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under Section 9.1(a) and (b) of these By-laws
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 9.1(a) and (b) of these By-
laws. Such determination shall be made (i) by the Board of Directors by a
majority vote of directors who were not parties to such action, suit or
proceeding, or (ii) if a majority of disinterested directors so directs, by
independent legal counsel in a written opinion, or (iii) by the stockholders of
the corporation.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation
pursuant to this Article IX. Such expenses (including attorneys' fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, other Sections of this Article IX shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any law, by-law, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office.
(g) For purposes of this Article IX, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or
-13-
<PAGE>
other enterprise, shall stand in the same position under the provisions of this
Article IX with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(h) For purposes of this Article IX, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
IX.
(i) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article IX shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 9.2 Insurance for Indemnification. The corporation may purchase
-----------------------------
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of Section
145 of the General Corporation Law of the State of Delaware.
ARTICLE X
AMENDMENTS
These By-laws may be altered, amended, or repealed or new By-laws may be
adopted by the stockholders at any regular meeting of the stockholders or at any
special meeting of the stockholders if notice of such alteration, amendment,
repeal, or adoption of new By-laws is contained in the notice of such special
meeting.
-14-
<PAGE>
EXHIBIT 4.3
================================================================================
TELEPORT COMMUNICATIONS GROUP INC.,
Issuer
AND
UNITED STATES TRUST COMPANY OF NEW YORK,
Trustee
____________________
INDENTURE
Dated as of July __, 1996
_____________________
$___________
_____% Senior Discount Notes
due 2007
================================================================================
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT
OF 1939 AND INDENTURE, DATED AS OF _______________
<TABLE>
<CAPTION>
TRUST INDENTURE
ACT SECTION INDENTURE SECTION
<S> <C>
(S) 310(a)(1)........................ 607
(a)(2)........................ 607
(b)........................... 608
(S) 312(c)........................... 701
(S) 314(a)........................... 703
(a)(4)........................ 1008(a)
(c)(1)........................ 102
(c)(2)........................ 102
(e)........................... 102
(S) 315(b)........................... 601
(S) 316(a)(last
sentence)..................... 101 ("Outstanding")
(a)(1)(A)..................... 502, 512
(a)(1)(B)..................... 513
(b)........................... 508
(c)........................... 104(d)
(S) 317(a)(1)........................ 503
(a)(2)........................ 504
(b)........................... 1003
(S) 318(a)........................... 111
</TABLE>
<PAGE>
TABLE OF CONTENTS/1/
PAGE
PARTIES..................................................... 1
RECITALS OF THE COMPANY
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
<TABLE>
<CAPTION>
<S> <C>
SECTION 101. Definitions.............................. 1
Accreted Value.................................... 2
Acquired Indebtedness............................. 2
Act............................................... 2
Affiliate......................................... 2
Asset Sale........................................ 3
Board of Directors................................ 3
Board Resolution.................................. 3
Business Day...................................... 3
Capital Lease Obligation.......................... 4
Capital Stock..................................... 4
Change of Control................................. 4
Class A Common Stock and Class B Common Stock..... 4
Commission........................................ 5
Common Stock...................................... 5
Company........................................... 5
Company Request or Company Order.................. 5
Consolidated Interest Expense..................... 5
Consolidated Net Income........................... 5
Corporate Trust Office............................ 6
Default........................................... 6
Defaulted Interest................................ 6
Disqualified Stock................................ 6
EBITDA............................................ 6
Eligible Cash Equivalents......................... 6
Equity Interests.................................. 7
</TABLE>
- - ----------
/1/ Note: This table of contents shall not, for any purpose, be deemed to be a
part of this Indenture.
<PAGE>
ii
<TABLE>
<CAPTION>
PAGE
<S> <C>
Event of Default.................................. 7
Exchange Act...................................... 7
Exchange Rate Contract............................ 7
Existing Indebtedness............................. 7
Fair Market Value................................. 7
Federal Bankruptcy Code........................... 8
GAAP.............................................. 8
Guarantee......................................... 8
Guarantor......................................... 8
Holder............................................ 8
Indebtedness...................................... 8
Indebtedness to Adjusted Total Equity Ratio....... 9
Indebtedness to EBITDA Ratio...................... 9
Indenture......................................... 10
Interest Payment Date............................. 10
Interest Rate Agreement........................... 10
Investments....................................... 10
Issuance Date..................................... 11
Joint Venture..................................... 11
Lien.............................................. 11
Local Market Partnership.......................... 11
Maturity.......................................... 11
Net Proceeds...................................... 11
Non-Recourse Indebtedness......................... 12
Obligations....................................... 12
Officers' Certificate............................. 12
Opinion of Counsel................................ 12
Outstanding....................................... 12
Paying Agent...................................... 13
Permitted Holders................................. 13
Permitted Indebtedness............................ 13
Permitted Investments............................. 14
Permitted Liens................................... 15
Permitted Temporary Investments................... 16
Person............................................ 16
Predecessor Security.............................. 17
Preferred Stock................................... 17
Public Equity Offering............................ 17
Redemption Date................................... 17
Redemption Price.................................. 17
</TABLE>
<PAGE>
iii
<TABLE>
<CAPTION>
PAGE
<S> <C>
Registration Statement............................ 17
Regular Record Date............................... 17
Reorganization.................................... 17
Reorganization Agreement.......................... 17
Responsible Officer............................... 17
Restricted Payment................................ 18
Restricted Subsidiary............................. 18
Revolving Credit Agreement........................ 18
Sale-Leaseback Transaction........................ 18
Securities........................................ 18
Security Register and Security Registrar.......... 18
Significant Subsidiary............................ 19
Special Record Date............................... 19
Stated Maturity................................... 19
Stock Offering.................................... 19
Strategic Equity Investor......................... 19
Subsidiary........................................ 19
Telecommunications Assets......................... 19
Telecommunications Assets Indebtedness............ 19
Telecommunications Business....................... 20
Trust Indenture Act or TIA........................ 20
Trustee........................................... 20
Unrestricted Subsidiary........................... 20
Vice President.................................... 21
Voting Stock...................................... 21
Weighted Average Life to Maturity................. 21
Wholly Owned Restricted Subsidiary................ 21
SECTION 102. Compliance Certificates and Opinions..... 21
SECTION 103. Form of Documents Delivered to Trustee... 22
SECTION 104. Acts of Holders.......................... 22
SECTION 105. Notices, etc., to Trustee, Company....... 24
SECTION 106. Notice to Holders; Waiver................ 24
SECTION 107. Effect of Headings and Table of Contents. 25
SECTION 108. Successors and Assigns................... 25
SECTION 109. Separability Clause...................... 25
SECTION 110. Benefits of Indenture.................... 25
SECTION 111. Governing Law............................ 25
SECTION 112. Legal Holidays........................... 25
</TABLE>
<PAGE>
iv
ARTICLE TWO
SECURITY FORMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 201. Forms Generally........................................... 26
SECTION 202. Form of Face of Security.................................. 26
SECTION 203. Form of Reverse of Security.............................. 28
SECTION 204. Form of Trustee's Certificate of Authentication........... 31
</TABLE>
ARTICLE THREE
THE SECURITIES
<TABLE>
<CAPTION>
<S> <C>
SECTION 301. Title and Terms........................................... 32
SECTION 302. Denominations............................................. 33
SECTION 303. Execution, Authentication, Delivery and Dating............ 33
SECTION 304. Temporary Securities...................................... 34
SECTION 305. Registration, Registration of Transfer and Exchange....... 35
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.......... 36
SECTION 307. Payment of Interest; Interest Rights Preserved............ 37
SECTION 308. Persons Deemed Owners..................................... 38
SECTION 309. Cancellation.............................................. 38
SECTION 310. Computation of Interest................................... 39
SECTION 311. No Personal Liability of Directors, Officers, Employees and
Stockholders............................................. 39
</TABLE>
ARTICLE FOUR
SATISFACTION AND DISCHARGE
<TABLE>
<S> <C>
SECTION 401. Satisfaction and Discharge of Indenture................... 39
SECTION 402. Application of Trust Money................................ 40
</TABLE>
ARTICLE FIVE
REMEDIES
<TABLE>
<CAPTION>
<S> <C>
SECTION 501. Events of Default......................................... 40
SECTION 502. Acceleration of Maturity; Rescission and Annulment........ 42
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.................................................. 43
</TABLE>
<PAGE>
v
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 504. Trustee May File Proofs of Claim.......................... 44
SECTION 505. Trustee May Enforce Claims Without Possession of
Securities............................................... 45
SECTION 506. Application of Money Collected............................ 45
SECTION 507. Limitation on Suits....................................... 46
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest..................................... 47
SECTION 509. Restoration of Rights and Remedies........................ 47
SECTION 510. Rights and Remedies Cumulative............................ 47
SECTION 511. Delay or Omission Not Waiver.............................. 47
SECTION 512. Control by Holders........................................ 48
SECTION 513. Waiver of Past Defaults................................... 48
SECTION 514. Waiver of Stay or Extension Laws.......................... 49
</TABLE>
ARTICLE SIX
THE TRUSTEE
<TABLE>
<CAPTION>
<S> <C>
SECTION 601. Notice of Defaults........................................ 49
SECTION 602. Certain Rights of Trustee................................. 49
SECTION 603. Trustee Not Responsible for Recitals or Issuance of
Securities............................................... 51
SECTION 604. May Hold Securities....................................... 51
SECTION 605. Money Held in Trust....................................... 51
SECTION 606. Compensation and Reimbursement............................ 51
SECTION 607. Corporate Trustee Required; Eligibility................... 52
SECTION 608. Resignation and Removal; Appointment of Successor......... 53
SECTION 609. Acceptance of Appointment by Successor.................... 54
SECTION 610. Merger, Conversion, Consolidation or Succession to
Business................................................. 54
</TABLE>
ARTICLE SEVEN
HOLDERS LISTS AND REPORTS BY TRUSTEE
<TABLE>
<S> <C>
SECTION 701. Disclosure of Names and Addresses of Holders.............. 55
SECTION 702. Reports by Trustee........................................ 55
</TABLE>
<PAGE>
vi
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 801. Limitation on Merger, Consolidation or Sale of Assets..... 55
SECTION 802. Successor Substituted..................................... 57
SECTION 803. Securities to Be Secured in Certain Events................ 57
</TABLE>
ARTICLE NINE
SUPPLEMENTAL INDENTURES
<TABLE>
<CAPTION>
<S> <C>
SECTION 901. Supplemental Indentures Without Consent of Holders........ 58
SECTION 902. Supplemental Indentures with Consent of Holders........... 58
SECTION 903. Execution of Supplemental Indentures...................... 59
SECTION 904. Effect of Supplemental Indentures......................... 60
SECTION 905. Conformity with Trust Indenture Act....................... 60
SECTION 906. Reference in Securities to Supplemental Indentures........ 60
SECTION 907. Notice of Supplemental Indentures......................... 60
</TABLE>
ARTICLE TEN
COVENANTS
<TABLE>
<CAPTION>
<S> <C>
SECTION 1001. Payment of Principal, Premium, if any, and Interest...... 60
SECTION 1002. Maintenance of Office or Agency.......................... 61
SECTION 1003. Money for Security Payments to Be Held in Trust.......... 61
SECTION 1004. Corporate Existence...................................... 63
SECTION 1005. Payment of Taxes and Other Claims........................ 63
SECTION 1006. Maintenance of Properties................................ 63
SECTION 1007. Insurance................................................ 63
SECTION 1008. Statement by Officers as to Default...................... 64
SECTION 1009. Reports to Holders....................................... 64
SECTION 1010. Change of Control........................................ 64
SECTION 1011. Limitation on Incurrence of Indebtedness................. 65
SECTION 1012. Limitation on Restricted Payments........................ 66
SECTION 1013. Limitation on Liens...................................... 68
SECTION 1014. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries........................ 68
SECTION 1015. Limitation on Issuance and Sale of Capital
Stock of Restricted Subsidiaries......................... 69
SECTION 1016. Limitation on Guarantees of Indebtedness by
</TABLE>
<PAGE>
vii
<TABLE>
<CAPTION>
PAGE
<S> <C>
Restricted Subsidiaries.................................. 70
SECTION 1017. Limitation on Asset Sales................................ 71
SECTION 1018. Limitation on Transactions with Stockholders
and Affiliates........................................... 72
SECTION 1019. Waiver of Certain Covenants.............................. 74
</TABLE>
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
<TABLE>
<CAPTION>
<S> <C>
SECTION 1101. Right of Redemption...................................... 74
SECTION 1102. Applicability of Article................................. 74
SECTION 1103. Election to Redeem; Notice to Trustee.................... 74
SECTION 1104. Selection by Trustee of Securities to Be Redeemed........ 75
SECTION 1105. Notice of Redemption..................................... 75
SECTION 1106. Deposit of Redemption Price.............................. 76
SECTION 1107. Securities Payable on Redemption Date.................... 76
SECTION 1108. Securities Redeemed in Part.............................. 77
</TABLE>
ARTICLE TWELVE
RESERVED
ARTICLE THIRTEEN
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1301. Company's Option to Effect Legal Defeasance or
Covenant Defeasance......................................... 77
SECTION 1302. Legal Defeasance and Discharge................................ 77
SECTION 1303. Covenant Defeasance........................................... 78
SECTION 1304. Conditions to Legal Defeasance or
Covenant Defeasance......................................... 78
SECTION 1305. Deposited Money and U.S. Government Obligations to Be
Held in Trust; Other Miscellaneous Provisions............... 80
SECTION 1306. Reinstatement................................................. 81
</TABLE>
<PAGE>
viii
PAGE
ARTICLE FOURTEEN
RESERVED
TESTIMONIUM.................................................
SIGNATURES AND SEALS........................................
<PAGE>
INDENTURE, dated as of July __, 1996 between TELEPORT
COMMUNICATIONS GROUP INC., a corporation duly organized and existing under the
laws of the State of Delaware (herein called the "Company"), having its
principal office at One Teleport Drive, Staten Island, New York 10311-1011, and
UNITED STATES TRUST COMPANY OF NEW YORK, a corporation duly organized and
existing under the laws of the State of New York, Trustee (herein called the
"Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of ____% Senior
Discount Notes due 2007 (herein called the "Securities"), 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.
This Indenture is subject to the provisions of the Trust Indenture Act of
1939, as amended, that are required to be part of this Indenture and shall, to
the extent applicable, be governed by such provisions.
All things necessary have been done to make the Securities, when executed
by the Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a valid
agreement of the Company, in accordance with their and its terms.
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;
<PAGE>
2
(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, and the terms "cash transaction" and "self-
liquidating paper," as used in TIA Section 311, shall have the meanings
assigned to them in the rules of the Commission adopted under the Trust
Indenture Act;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as
are generally accepted at the date of such computation; and
(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.
"Accreted Value" means with respect to any Security as of any
specified date on or prior to, _______, 2001, the amount provided below for each
$1,000 principal amount of Securities:
(i) if the specified date occurs on one of the following dates
(each a "Semiannual Accrual Date"), the Accreted Value will equal the amount
set forth below for such Semiannual Accrual Date:
ACCRETED
SEMIANNUAL ACCRUAL DATE VALUE
----------------------- --------
, 1997 ................ $
, 1997 ................ $
, 1998 ................ $
, 1998 ................ $
, 1999 ................ $
, 1999 ................ $
, 2000 ................ $
, 2000 ................ $
, 2001 ................ $
, 2001 ................ $1,000
(ii) if the specified date occurs before the first Semiannual
Accrual Date, the Accreted Value will equal the sum of (a) $ and (b) an
amount equal to the product of (1) the Accreted Value for the First Semiannual
Accrual Date less $ multiplied by (2) a fraction, the numerator of which is
the number of days from the Issuance Date to the specified date, using a 360-day
year of twelve 30-day months, and the denominator of which is the number of days
from the Issuance Date to the first Semiannual Accrual Date, using a 360-day
year of twelve 30-day months; or
(iii) if the specified date occurs between two Seminannual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the
Semiannual Accrual Date immediately preceding such specified date and (b) an
amount equal to the product of (1) the Accreted Value for the immediately
following Semiannual Accrual Date less the Accreted Value for the immediately
preceding Semiannual Accrual Date multiplied by (2) a fraction, the numerator of
which is the number of days from the immediately preceding Semiannual Accrual
Date to the specified date, using a 360-day year of twelve 30-day months, and
the denominator of which is 180.
"Acquired Indebtedness" means (a) Indebtedness of any other Person
existing at the time such other Person merged with or into or became a
Restricted Subsidiary, including Indebtedness incurred in connection with or in
contemplation of such other Person merging with or into or becoming a Restricted
Subsidiary, (b) Indebtedness of any other Person assumed by the Company or a
Restricted Subsidiary in connection with the acquisition of assets from such
other Person, and (c) Indebtedness secured by a Lien encumbering any asset
acquired by the Company or a Restricted Subsidiary.
"Act," when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the
<PAGE>
3
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Asset Sale" means (a) any sale, lease, transfer, conveyance or other
disposition of any assets (including by way of a sale-leaseback) other than the
sale or transfer of inventory or goods (including equipment) held for sale in
the ordinary course of business (provided that the sale, lease, transfer,
conveyance or other disposition of all or substantially all of the assets of the
Company shall not be deemed to be an "Asset Sale" and shall be governed by the
provisions of Section 1010 or Article Eight) or (b) any issuance, sale, lease,
transfer, conveyance or other disposition of any Equity Interests of any of the
Company's Restricted Subsidiaries (other than director's qualifying shares) to
any Person. Notwithstanding the foregoing, none of the following shall be
deemed to be an Asset Sale: (i) a swap or other exchange of cable, fiber line
or other equipment or transmission capacity or of networks or systems between
the Company or any Restricted Subsidiary and any other Person which is an
exchange at Fair Market Value, (ii) an issuance and sale of Equity Interests by
a Restricted Subsidiary to the Company or to another Restricted Subsidiary
including any such issuance in connection with the contribution to such
Restricted Subsidiary of Telecommunications Assets, (iii) an Asset Sale
involving assets with a Fair Market Value not in excess of $2 million, (iv) any
lease of cable, fiber optic or transmission capacity, any lease of equipment or
equipment space, any grant of indefeasible rights-of-use or rights-of-access or
similar rights and grants of nominal title to assets entered into in the
ordinary course and consistent with past practices, (v) any sale or other
disposition of any or all of the capital stock or assets of an Unrestricted
Subsidiary, and (vi) any sale, transfer or conveyance of Eligible Cash
Equivalents. Additionally, the contribution of Telecommunications Assets to an
Unrestricted Subsidiary whereby the Company or a Restricted Subsidiary receives
an equity interest in such Unrestricted Subsidiary shall be deemed not to be an
Asset Sale and shall be deemed to be a Restricted Payment and be governed by
Section 1012.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company 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.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York
are authorized or obligated by law or executive order to close.
<PAGE>
4
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at such time be so required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means, with respect to any specified Person, any and
all shares, interests, participations, rights, or other equivalents (however
designated) of corporate stock, including, without limitation, partnership
interests of such Person.
"Change of Control" means (a) the sale, lease, transfer, conveyance or
other disposition of all or substantially all of the assets of the Company to
any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act) other
than Permitted Holders except in connection with a liquidation as a dissolution
of the Company that does not constitute a Change of Control under clause (b)
below), (b) the approval by the requisite stockholders of the Company of a plan
of liquidation or statutory dissolution (which shall not be construed to include
a plan of merger or consolidation) of the Company, unless Permitted Holders
"beneficially own" (as defined in Rule 13d-3 under the Exchange Act) at least
the same percentage of voting power after the consummation of such plan as
before or otherwise retain the right or ability, by voting power, to control the
Person that acquires the proceeds of such liquidation or dissolution, (c) any
"person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the
Exchange Act or any successor provision to either of the foregoing, including
any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other
than Permitted Holders, becomes the "beneficial owner" (as so defined) of more
than 35% of the total voting power of all classes of the Voting Stock of the
Company and/or warrants or options to acquire such Voting Stock, calculated on a
fully diluted basis, provided that Permitted Holders "beneficially own" (as so
defined) in the aggregate a percentage of such Voting Stock or warrants having a
lesser percentage of voting power than such other "person" or "group" and do not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors, or (d) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors (together with any new directors whose
election or appointment by such board or whose nomination for election by the
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 the Board of
Directors then in office.
"Class A Common Stock" and "Class B Common Stock" mean the two classes
of Common Stock of the Company authorized to be issued by the Company pursuant
to Article IV of the Amended and Restated Certificate of Incorporation of the
Company.
<PAGE>
5
"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 execution 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.
"Common Stock" means, with respect to the Company, the Class A Common
Stock, the Class B Common Stock or any similar common stock of the Company.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, 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 its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Consolidated Interest Expense" means, with respect to the Company and
its Restricted Subsidiaries, for any period, the amount of interest in respect
of Indebtedness (including amortization of original issue discount, amortization
of debt issuance costs, and non-cash interest payments on any Indebtedness and
the interest portion of any deferred payment obligation and after taking into
account the effect of elections made under any Interest Rate Agreement, however
denominated, with respect to such Indebtedness), the net costs associated with
Interest Rate Agreements, Preferred Stock dividends of the Company (and of its
Restricted Subsidiaries if paid to a Person other than the Company or its
Restricted Subsidiaries) and the interest component of rentals in respect of any
Capital Lease Obligation paid, in each case whether accrued or scheduled to be
paid or accrued by the Company and its Restricted Subsidiaries during such
period to the extent such amounts were deducted in computing Consolidated Net
Income, determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any
period, the aggregate net income of the Company and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the net income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid to
the Company or a Restricted Subsidiary, (ii) the net income of any Person
acquired in a pooling of interests transactions for any period prior to the date
of such acquisition shall be excluded, (iii) the cumulative effect of a change
in accounting principles shall be excluded, (iv) all items classified as
extraordinary gains or losses of the Company or a Restricted Subsidiary for such
period shall be excluded, (v) the net income of any Restricted Subsidiary shall
be included only to the extent that the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary of such net income is not at
<PAGE>
6
the time prohibited by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary, and (vi) with respect to a
non-Wholly Owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of the Company's or such Restricted Subsidiary's pro rata share of such
non-Wholly Owned Restricted Subsidiary's net income (or loss) shall be excluded.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee, at which at any particular time its corporate trust business shall
be administered, which office at the date of execution of this Indenture is
located at 114 West 47th Street, New York, NY 10036.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 307.
"Depository" has the meaning assigned to it in Section 205(a).
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
on which the Securities mature.
"EBITDA" means, with respect to the Company and its Restricted
Subsidiaries, for any period, an amount equal to (A) the sum of (i) Consolidated
Net Income for such period (exclusive of any gain or loss realized in such
period upon an Asset Sale or upon transactions that are excluded from the
definition of Asset Sale pursuant to clauses (v) and (vi) of such definition and
that involve securities), plus (ii) the provision for taxes for such period
based on income or profits to the extent such income or profits were included in
computing Consolidated Net Income and any provision for taxes utilized in
computing net loss under clause (i) hereof, plus (iii) Consolidated Interest
Expense for such period, plus (iv) depreciation for such period on a
consolidated basis to the extent deducted in calculating Consolidated Net
Income, plus (v) amortization of intangibles for such period on a consolidated
basis to the extent deducted in calculating Consolidated Net Income, plus (vi)
any other non-cash item reducing Consolidated Net Income for such period, plus
(vii) any premium or penalty paid in connection with repurchasing, redeeming,
retiring, defeasing or acquiring any Indebtedness prior to maturity to the
extent deducted in calculating Consolidated Net Income, minus (B) all non-cash
items increasing Consolidated Net Income for such period, determined in
accordance with GAAP consistently applied.
"Eligible Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than one year and one day
<PAGE>
7
from the date of acquisition, (iii) certificates of deposit and Eurodollar time
deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any commercial bank(s) domiciled in the United
States or in any member of the OECD having capital and surplus in excess of $500
million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper rated no lower than P-2 or the equivalent thereof by Moody's
Investors Service, Inc. or no lower than A-2 or the equivalent thereof by
Standard & Poor's Ratings Group and in each case maturing within one year and
one day after the date of acquisition, (vi) direct obligations issued by any
state of the United States or any political subdivision of any such state or
political instrumentality thereof maturing, or subject to tender at the option
of the holder thereof, within ninety (90) days after the date of acquisition,
having a rating of A from Standard & Poor's Ratings Group or A-2 from Moody's
Investors Service, Inc., and (vii) investments in money market funds
substantially all of whose assets comprise securities of the types described in
clauses (i) through (vi).
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any Indebtedness that is
convertible into, or exchangeable for, Capital Stock, except to the extent such
Indebtedness has been so converted or exchanged).
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Rate Contract" means, with respect to any Person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance and
other agreements or arrangements, or combinations thereof, the principal purpose
of which is to provide protection against fluctuations in currency exchange
rates. An Exchange Rate Contract may also include an Interest Rate Agreement.
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issuance Date, including
Indebtedness incurred under the Revolving Credit Agreement as in effect on the
Issuance Date, until such amounts are repaid.
"Fair Market Value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Fair Market Value shall be
determined (i) for an amount not in excess of $15 million,
<PAGE>
8
by the Chief Financial Officer of the Company, or (ii) for an amount of $15
million or more, by the Board of Directors acting in good faith and shall be
evidenced by a Board Resolution, and in either case shall be set forth in an
Officers' Certificate delivered to the Trustee.
"Federal Bankruptcy Code" means the Bankruptcy Code of Title 11 of the
United States Code, as amended from time to time.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which may be in effect from time to time and are applied on a consistent basis.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Restricted Subsidiary which is a guarantor of
the Securities, including any Person that is required after the Issuance Date to
execute a guarantee of the Securities pursuant to Section 1016 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.
"Indebtedness" means, with respect to any Person, without duplication,
(i) any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or the balance deferred and unpaid of the purchase price of
any property (including pursuant to capital leases and Sale-Leaseback
Transactions) or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that constitutes
an accrued expense or trade payable or customer deposit received in the ordinary
course of business, if and to the extent any of the foregoing indebtedness
(other than obligations under an Exchange Rate Contract or an Interest Rate
Agreement) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (ii) Indebtedness of others secured by a Lien
on any asset of such Person (whether or not such Indebtedness is assumed by such
Person), but, if such indebtedness is otherwise non-recourse to such Person,
only to
<PAGE>
9
the extent of the lesser of (x) the Fair Market Value of such asset at the time
of determination and (y) the amount of such Indebtedness, (iii) to the extent
not otherwise included, the Guarantee of items defined in clauses (i) and (ii)
above and (iv) the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person at the time of determination. For purposes of the
preceding sentence, (1) the maximum fixed repurchase price of Disqualified Stock
that does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Stock as if such Disqualified Stock were
repurchased on any date on which Indebtedness shall be required to be determined
pursuant to this Indenture; provided, however, that if such Disqualified Stock
is not then permitted to be repurchased, the repurchase price shall be the book
value of such Disqualified Stock, and (2) the amount outstanding at any time of
any Indebtedness issued with original issue discount is the accreted value of
such Indebtedness.
"Indebtedness to Adjusted Total Equity Ratio" means as of the date of
determination the ratio of (i) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis as at the date
of determination to (ii) the sum of (a) the total equity investments in the
Company as of ________, 1996 adjusted to give effect to the Stock Offering and
the repurchase of [7,807,881] shares of Class B Common Stock from Continental
Cablevision, Inc. as described in the prospectus contained in the Registration
Statement, provided that any issuance of Equity Interests pursuant to the
Reorganization shall be included only to the extent actually issued and shall be
treated as if issued on or prior to the Issuance Date regardless of the date
such Equity Interests were actually issued, (b) two times the aggregate net cash
proceeds to the Company from the issuance of any Equity Interests (other than
Disqualified Stock) subsequent to the Issuance Date, (c) two times the aggregate
net cash proceeds to the Company from the sales of Disqualified Stock of the
Company or debt securities of the Company convertible into Equity Interests of
the Company, in either case upon conversion thereof into Equity Interests (other
than Disqualified Stock) of the Company subsequent to the Issuance Date;
provided, however, that, for purposes of calculation of the Indebtedness to
Adjusted Total Equity Ratio the net cash proceeds from the sale of Capital Stock
of the Company, including Capital Stock issued upon the conversion of
convertible Indebtedness, described in clause (b) or (c) above, shall not be
included if such proceeds have been utilized to make a (x) Restricted Payment,
(y) a Permitted Investment under clause (d) of the definition of Permitted
Investment (provided that such amounts shall be included to the extent of such
amounts invested in Local Market Partnerships that become Restricted
Subsidiaries prior to the first anniversary of the Issuance Date) or (z) a
Permitted Investment pursuant to clause (e)(ii) of the definition of Permitted
Investments (provided that such amounts shall be included to the extent of the
Fair Market Value of the Company's interest in any Joint Ventures that become
Restricted Subsidiaries but not in excess of the amount of any such Investments
in such Joint Ventures pursuant to such clause (e)(ii)).
"Indebtedness to EBITDA Ratio" means, as at any date of determination,
the ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted
<PAGE>
10
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the determination date occurs shall be calculated as
if such Indebtedness was so incurred or retired on the first day of such four
fiscal quarter period; and provided further that (x) if the transaction giving
rise to the need to calculate the Indebtedness to EBITDA Ratio would have the
effect of increasing or decreasing Indebtedness or EBITDA in the future,
Indebtedness or EBITDA shall be calculated on a pro forma basis as if such
transaction had occurred on the first day of such four fiscal quarter period
preceding the date of determination, and (y) if during such four fiscal quarter
period, the Company or any of its Restricted Subsidiaries shall have engaged in
any Asset Sale, EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive), or increased by an amount equal to the EBITDA (if
negative), directly attributable to the assets which are the subject of such
Asset Sale and any related retirement of Indebtedness as if such Asset Sale and
related retirement of Indebtedness had occurred on the first day of such period
and (z) if during such four fiscal quarter period the Company or any of its
Restricted Subsidiaries shall have acquired any material assets out of the
ordinary course of business, EBITDA shall be calculated on a pro forma basis as
if such asset acquisition and related financing had occurred on the first day of
such period.
"Indenture" means this instrument as originally executed 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.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Interest Rate Agreement" means, for any Person, any interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement the principal purpose of which is to protect the party
indicated therein against fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of loans
(including Guarantees, advances or capital contributions (excluding commission,
travel and similar advances and loans, in each case, made to officers and
employees) made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP. Investments shall exclude
accounts receivable and other extensions of trade credit on commercially
reasonable terms in accordance with the Company's normal trade practice. In
addition, the Fair Market Value of
<PAGE>
11
the net assets of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary shall be deemed to be an
"Investment" made by the Company in such Unrestricted Subsidiary at such time.
"Issuance Date" means the date on which the Securities are first
authenticated and issued.
"Joint Venture" means any Person engaged in the Telecommunications
Business in which the Company or any Restricted Subsidiary owns an Equity
Interest and which may be an Unrestricted Subsidiary.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Local Market Partnership" means the partnerships created among
Affiliates of the Company and of the Permitted Holders to develop and operate
local telecommunications networks across the United States including, on the
date hereof, the Local Market Partnerships listed in Schedule I hereto.
"Maturity," when used with respect to any Security, means the date on
which the principal of such Security or an installment of principal becomes due
and payable as herein or therein provided, whether at the Stated Maturity or by
declaration of acceleration, notice of redemption or otherwise.
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale, net
of (a) the direct costs relating to such Asset Sale (including, without
limitation, legal, title, recording, accounting and investment banking fees, and
sales commissions) and any relocation expenses incurred as a result thereof, (b)
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), (c)
amounts required to be applied to the repayment of Indebtedness secured by a
Lien on the asset or assets that are the subject of such Asset Sale or in order
to obtain a consent necessary to effect such Asset Sale and (d) any reserve for
adjustment or indemnification in respect of the sale price of such asset or
assets (provided that any such reserves shall be added back to Net Proceeds upon
the release of such reserves) and required distributions to holders of minority
interests. Furthermore, the amount of (i) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or in the
notes thereto) of the Company or any Restricted Subsidiary that are assumed by
the transferee of any assets sold in an Asset Sale
<PAGE>
12
and (ii) any 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 Eligible Cash Equivalents, shall be
deemed to be Eligible Cash Equivalents (to the extent of the Eligible Cash
Equivalents received in such conversion) for purposes of clause (b) of the first
paragraph of Section 1017.
"NJBPU" means the New Jersey Board of Public Utilities.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness (a) as to which none of the Company or any Restricted Subsidiary:
(i) provides credit support (including any undertaking, agreement or instrument
which would constitute Indebtedness); (ii) is directly or indirectly liable; or
(iii) constitutes the lender, and (b) no default with respect to which
(including any rights which the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.
"NYPSC" means the New York Public Service Commission.
"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,
the President or a Vice President, and by the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, including an employee of the Company, and who shall be
acceptable 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:
(i) Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
(ii) 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 satisfactory to the
Trustee has been made;
<PAGE>
13
(iii) Securities, except to the extent provided in Sections 1302 and
1303, with respect to which the Company has effected legal defeasance
and/or covenant defeasance as provided in Article Thirteen; and
(iv) Securities which have been paid pursuant to Section 306 or 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 proof
satisfactory to it 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, consent, notice or waiver hereunder, and for the
purpose of making the calculations required by TIA Section 313, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in making such calculation or 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 satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or such other
obligor.
"Paying Agent" means any Person (including the Company acting as
Paying Agent) authorized by the Company to pay the principal of (and premium, if
any) or interest on any Securities on behalf of the Company.
"Permitted Holders" means Comcast Corporation, a Pennsylvania
corporation, Continental Cablevision Inc., a Delaware corporation, Cox
Communications, Inc., a Delaware corporation, Tele-Communications, Inc., a
Delaware corporation, US WEST Inc., a Delaware corporation, any successor (by
merger, consolidation, transfer or otherwise) (i) to all or substantially all of
the business or assets of any of the foregoing or (ii) to cable television
systems of any of the foregoing with at least 5 million cable television
households passed, and any Person at least 51% of the Capital Stock of which is
owned, directly or indirectly, by one or any group of the foregoing Permitted
Holders.
"Permitted Indebtedness" means: (1) for Indebtedness of either the
Company or any Restricted Subsidiary (a) Telecommunications Assets Indebtedness;
(b) Indebtedness owed by the Company to any Restricted Subsidiary (but only so
long as such Indebtedness is held by such Restricted Subsidiary) and
Indebtedness owed by a Restricted Subsidiary to the Company or any other
Restricted Subsidiary (but only so long as such Indebtedness is held by the
Company or such other Restricted Subsidiary); (c) Indebtedness under any
Exchange Rate Contract or Interest Rate Agreements, provided that the
obligations under such agreements are related to payment obligations on Existing
Indebtedness or Refinancing
<PAGE>
14
Indebtedness of the Company or a Restricted Subsidiary, as applicable, or
Indebtedness permitted to be incurred pursuant to Section 1011; (d) letters of
credit or performance bonds or performance guarantees incurred in the ordinary
course of business and consistent with industry practice; (e) Existing
Indebtedness; (f) Indebtedness issued in exchange for or the proceeds of which
are used to extend, refinance, renew, replace or refund outstanding Indebtedness
that is incurred or outstanding pursuant to clauses (a), (e), (h) or this clause
(f) of this definition or clause (b) of Section 1011 (the "Refinancing
Indebtedness"); provided, however, that (i) the principal amount of, and any
premium payable in respect of, such Refinancing Indebtedness shall not exceed
the principal amount of Indebtedness so extended, refinanced, renewed, replaced
or refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) the Refinancing Indebtedness shall have a (A) Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, and (B) a stated maturity no earlier than the stated maturity of, the
Indebtedness being extended, refinanced, renewed, replaced or refunded; (iii)
the Refinancing Indebtedness shall rank in right of payment to the Securities on
terms no less favorable to the Holders of Securities as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced or refunded; and (iv) the Company shall incur Refinancing Indebtedness
only to refinance Indebtedness of the Company or of a Restricted Subsidiary and
a Restricted Subsidiary shall incur Refinancing Indebtedness only to refinance
Indebtedness of such Restricted Subsidiary or any other Restricted Subsidiary;
(g) Indebtedness represented by performance bonds, surety or appeal bonds, or
similar obligations incurred in the ordinary course of business; (h)
Indebtedness incurred in connection with a prepayment or redemption of the
Securities pursuant to a Change of Control, provided that such Indebtedness is
Indebtedness of the Company and the principal amount of such Indebtedness does
not exceed 101% of the principal amount of the Securities prepaid or redeemed
(plus the amount of reasonable expenses incurred in connection therewith) and
that such Indebtedness has (A) a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, and (B) a stated maturity
no earlier than the Stated Maturity of, the Securities; (i) ordinary course
Capital Lease Obligations or purchase money debt for plant or equipment secured
by a Lien on property acquired, constructed or developed by the Company or any
Restricted Subsidiary in an aggregate amount not to exceed $20 million
outstanding at any time; (j) Indebtedness or Guarantee of Indebtedness under the
Revolving Credit Agreement in an aggregate amount not to exceed $400 million
outstanding at any time and (k) additional Indebtedness in an aggregate
principal amount not to exceed $50 million at any one time outstanding; and (2)
for Indebtedness of the Company, Indebtedness evidenced by the Securities.
"Permitted Investments" means (a) any Investments in the Company or in
a Restricted Subsidiary (including through a purchase of Equity Interests in
such Restricted Subsidiary from another Person), provided that any purchase of
Equity Interests in a Restricted Subsidiary from any Person other than another
Restricted Subsidiary shall be a
<PAGE>
15
Permitted Investment only if such Restricted Subsidiary in engaged in the
Telecommunications Business; (b) any Investments in Eligible Cash Equivalents;
(c) Investments by the Company or any Restricted Subsidiary in a Person
(including through a purchase of Equity Interests in such Person from another
Person), if as a result of such Investment (i) such person becomes a Restricted
Subsidiary that is engaged in the Telecommunications Business or (ii) such
person is merged or consolidated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary that is engaged in the Telecommunications Business; (d)
Investments up to an aggregate of $150 million in one or more of the Local
Market Partnerships listed in Schedule I hereto, which Investments are used to
fund a Telecommunications Business; provided that no such Investment in a Local
Market Partnership pursuant to this clause (d) may be made after the first
anniversary of the Issuance Date; (e) Investments after the Issuance Date in
Joint Ventures in an aggregate amount not to exceed the sum of (i) (l) for any
Joint Venture, $200 million and (2) for Joint Ventures in which the Company or
any Restricted Subsidiary owns a 35% or greater share of Equity Interests and is
the managing partner, $200 million plus any amount not invested pursuant to the
preceding clause (1), plus (ii) for any Joint Venture, the net cash proceeds
received by the Company from any Person from the issuance and sale subsequent to
the Issuance Date of Equity Interests of the Company or of debt securities of
the Company that have been converted into such Equity Interests (other than
Equity Interests (or convertible debt securities) sold to a Restricted
Subsidiary and other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock) subsequent to the Issuance Date, plus (iii)
for any Joint Venture, the Fair Market Value of the Company's interest in any
Joint Ventures that become Restricted Subsidiaries but not excess of the amount
of any such Investments in such Joint Ventures pursuant to clause (e)(ii),
provided that amounts added pursuant to this clause (iii) out of Investments
originally made pursuant to subclause (i)(2) of this clause (e) shall not be
used for Investments in Joint Ventures not described in such subclause (i)(2);
(f) loans and advances to employees made in the ordinary course of business and
consistent with past practice in an aggregate amount not to exceed $1 million
outstanding at any time; (g) bonds, notes, debentures, partnership or joint
venture interests, stock or other securities received as a result of Asset Sales
permitted under Section 1017; (h) any Investments in Permitted Temporary
Investments of the proceeds from the issuance of the Securities and from the
Stock Offering; (i) any Investments in prepaid expenses, negotiable instruments
held for collection and lease, utility and workers' compensation, performance
and other similar deposits; and (j) any Exchange Rate Contract or Interest Rate
Contract.
"Permitted Liens" means (a) Liens in favor of the Company; (b) Liens
on property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary; provided that such
Liens were not granted in contemplation of such merger or consolidation and do
not secure any property or assets of the Company or any of its Restricted
Subsidiaries other than the property or assets subject to the Liens prior to
such merger or consolidation; (c) liens imposed by law, including
<PAGE>
16
restrictions on transfer of governmental licenses, permits and authorizations
and carriers', warehousemen's, landlords', and mechanics' liens and other
similar liens arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or are being contested in good faith
and by appropriate proceedings; (d) Liens existing on the Issuance Date; (e)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded; provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (f) easements, rights of way, restrictions and other similar
easements, licenses, restrictions on the use of properties or minor
imperfections of title, or other incidental Liens not incurred in connection
with the borrowing of money or the obtaining of advances or credit, that in the
aggregate, are not material in amount, and do not in any case materially detract
from the properties subject thereto or interfere with the ordinary course of the
business of the Company or its Restricted Subsidiaries; (g) Liens securing
Indebtedness incurred under the Revolving Credit Agreement; (h) Liens securing
Telecommunications Assets Indebtedness; (i) Liens of utility companies and other
Persons pursuant to pole attachment agreements or other easement agreements, and
restrictions on the transfer of rights under franchises, pole attachment
agreements or other easements, and any encumbrances created in favor of
franchising authorities and customers by provisions or franchises on plant and
equipment located in the areas covered thereby; (j) Liens under capitalized
leases or purchase money security interests relating to Indebtedness permitted
to be incurred under Section 1011; (k) Liens incurred to secure the performance
of statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (l)
any Lien to secure obligations under workmen's compensation laws or similar
legislation including unemployment insurance or social security laws; (m) Liens
in the form of a pledge of Capital Stock of a Restricted Subsidiary to secure
Indebtedness of such Restricted Subsidiary that is otherwise permitted to be
incurred pursuant to Section 1011; (n) Liens arising as a result of any grant of
indefeasible rights-of-use or rights-of-access or similar rights and grants of
nominal title to assets entered into in the ordinary course and consistent with
past practice; and (o) Liens securing Refinancing Indebtedness, provided that
the Indebtedness being refinanced is secured and such Liens encumber no
additional assets than those pursuant to the Indebtedness being refinanced.
"Permitted Temporary Investments" means (a) all Eligible Cash
Equivalents, except that each use of the term "one year" in such definition is
changed to "two years" and (b) debt securities issued by any Person which has
outstanding pari passu debt securities with an investment grade rating by
Standard & Poor's Ratings Group or Moody's Investors Service, Inc. and that
mature within two years and one day after the date of acquisition.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
<PAGE>
17
"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 306 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 and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the date of this Indenture, and includes, without limitation, all classes
and series of preferred or preference stock.
"Public Equity Offering" means an underwritten public offering (other
than the Stock Offering) by the Company after the Issuance Date of Common Stock
of the Company pursuant to a registration statement filed pursuant to the
Securities Act of 1933, as amended.
"Redemption Date," when used with respect to any Security to be
redeemed, in whole or in part, means the date fixed for such redemption by or
pursuant to this Indenture and includes the Special Redemption Date.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Registration Statement" means the registration statement on Form S-1,
File No. 333-3984, relating to the Securities and initially filed with the
Commission on April 24, 1996, as amended.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the [date] or [date] (whether or not a Business Day), as the case may
be, next preceding such Interest Payment Date.
"Reorganization" means all of the transactions that are described in
the prospectus contained in the Registration Statement under the caption "The
Reorganization" as constituting the "Reorganization" which are to be effected
pursuant to the Reorganization Agreement.
"Reorganization Agreement" means the Reorganization Agreement, dated
as of April 18, 1996, among the Company, TCI Communications, Inc., Cox
Communications, Inc., Comcast Corporation and Continental Cablevision, Inc.
"Responsible Officer," when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any
<PAGE>
18
assistant treasurer, the cashier, any assistant cashier, any trust officer or
assistant trust officer, the controller or any assistant controller or any other
officer of the Trustee customarily performing functions similar to those
performed by any of the above-designated officers, and also means, with respect
to a particular corporate trust matter, any other officer to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"Restricted Payment" means (a) any dividend or any distribution on any
Equity Interests (other than dividends or distributions in additional Equity
Interests (other than Disqualified Stock) of the Company or a Restricted
Subsidiary or dividends or distributions payable to the Company or any Wholly
Owned Restricted Subsidiary); (b) any purchase, redemption, acquisition or
retirement for value of any Equity Interests of the Company or any Restricted
Subsidiary or other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Restricted Subsidiary) that
is not a Permitted Investment; (c) any defeasance, purchase, redemption,
acquisition or retirement for value prior to final maturity of any Indebtedness
that is subordinated in right of payment (whether pursuant to its terms or by
operation of law) to the Securities or the guarantees thereof by the Guarantors;
and (d) any Investment that is not a Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company which is
not an Unrestricted Subsidiary.
"Revolving Credit Agreement" means the Loan Agreement dated as of May
22, 1995, as amended, among TCG New York Inc., the Banks, as defined in the Loan
Agreement, Toronto Dominion (Texas), Inc. and Chemical Bank, as such agreement
may be amended, modified, supplemented, refunded, refinanced or replaced from
time to time.
"Sale-Leaseback Transaction" means any direct or indirect arrangement,
or series of related arrangements, with any Person (other than the Company or a
Restricted Subsidiary) or to which any Person (other than the Company or a
Restricted Subsidiary) is a party, providing for the leasing to the Company or
to a Restricted Subsidiary of any property for an aggregate term exceeding three
years, whether owned by the Company or by any Subsidiary of the Company at the
Issuance Date or later acquired, which has been or is to be sold or transferred
by the Company or such Restricted Subsidiary to such Person or to any other
Person from whom funds have been or are to be advanced by such Person on the
security of such property.
"Securities" has the meaning stated in the first recital of this
Indenture and more particularly means any Securities authenticated and delivered
under this Indenture.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Notes" means the __% Senior Notes due 2006 of the Company
registered under the Registration Statement.
<PAGE>
19
"Significant Subsidiary" means any Restricted Subsidiary which is a
"significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the
Securities Act of 1933, as amended.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 307.
"Special Redemption Date" has the meaning specified in Section 203.
"Special Redemption Event" has the meaning specified in Section 203.
"Stated Maturity," when used with respect to a Security or any
installment of interest thereon, means the date specified in such Security as
the final date on which the principal of such Security or such installment of
interest is due and payable.
"Stock Offering" means the offering by the Company of [23,500,000]
shares of Class A Common Stock pursuant to the registration statement on Form
S-1, File No. 333-3850 initially filed with the Commission on April 19, 1996, as
amended.
"Strategic Equity Investor" means a corporation or entity with an
equity market capitalization, a net asset value or annual revenues of at least
$2 billion that owns and operates businesses in the telecommunications,
information systems, entertainment, cable or similar or related industries.
"Subsidiary" means, with respect to a specified Person, any
corporation, association or other business entity of which 50% or more of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more of the other Subsidiaries of the Person or a
combination thereof.
"Telecommunications Assets" means, with respect to any Person, any
asset that is utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration, operation, management or
provision of telecommunications systems and/or services, including without
limitation, any businesses or services in which the Company is engaged at the
Issuance Date and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall include stock, joint venture or
partnership interests where substantially all of the assets of the entity being
acquired consist of Telecommunications Assets.
"Telecommunications Assets Indebtedness" means Indebtedness incurred
(including in the case of discount or paid in kind Indebtedness any accretion on
such Indebtedness or notes payable in respect of such Indebtedness) by the
Company or a Restricted Subsidiary to finance the construction, expansion,
development or acquisition of Telecommunications Assets or the acquisition of
the Capital Stock of a Restricted Subsidiary substantially all the assets of
which are Telecommunications Assets, provided that the net cash proceeds from
the issuance of such Indebtedness do not exceed, as of the date of
<PAGE>
20
incurrence of such Indebtedness, 100% of the lesser of cost or Fair Market Value
of such Telecommunications Assets so constructed or acquired; provided further,
however, that if an acquired Restricted Subsidiary has outstanding previously
incurred Indebtedness, such previously incurred Indebtedness shall also
constitute Telecommunications Assets Indebtedness if such previously incurred
Indebtedness was not incurred in contemplation of such acquisition and all such
Indebtedness is Non-Recourse Indebtedness, except to the acquired Restricted
Subsidiary.
"Telecommunications Business" means the design, development,
construction, acquisition, installation, integration, management or provision of
telecommunications systems and/or services, including, without limitation, any
business or services in which the Company or any of its Restricted Subsidiaries
is engaged at the Issuance Date.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939
as in force at the date as of which this Indenture was executed, except as
provided in Section 905.
"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.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but, in each case, only to the extent that such Subsidiary (a)
has no Indebtedness other than Non-Recourse Indebtedness and (b) has not
guaranteed any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by Section 1012. If, at any time, any Unrestricted Subsidiary would
fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under Section 1011, the Company shall
be in default of Section 1011). The Board of Directors may at any time designate
any Unrestricted Subsidiary as a Restricted Subsidiary and such designation
shall only be permitted if (i) the incurrence of the Indebtedness of such
Subsidiary is permitted under Section 1011, and (ii) no Default or Event of
Default would be in existence following such designation. For so long as any
Subsidiary is an Unrestricted Subsidiary, all Subsidiaries of such Unrestricted
Subsidiary shall also be deemed to be Unrestricted Subsidiaries and shall be
required to meet the tests and comply with the restrictions set forth above.
<PAGE>
21
"Vice President," when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president."
"Voting Stock" means stock of the class or classes having 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 stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that shall elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means, at any time, a Restricted
Subsidiary all of the Capital Stock of which (except directors' qualifying
shares) is at the time owned directly or indirectly by the Company.
SECTION 102. 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 shall furnish to
the Trustee an Officers' Certificate 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 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 documents 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 with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant to
Section 1008(a)) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
<PAGE>
22
(2) 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;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 103. 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 or opinion of an officer of the Company 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 of Counsel 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 stating that the
information with respect to such factual matters is in the possession of the
Company, unless such 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.
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 104. 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 agents duly
appointed in writing; and, except as herein otherwise
<PAGE>
23
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.
(b) 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 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 that the Trustee deems sufficient.
(c) The principal amount and serial numbers of Securities held by any
Person, and the date of holding the same, shall be proved by the Security
Register.
(d) If the Company shall solicit from the Holders of Securities 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 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 TIA Section
316(c), such record date shall be the record date specified in or pursuant to
such Board Resolution, which shall be a date not earlier than the date 30 days
prior to the first solicitation of Holders generally in connection therewith and
not later than the date such solicitation is completed. 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 the purposes of determining whether Holders of the requisite
proportion of Outstanding Securities have authorized or agreed or consented to
such request, demand, authorization, direction, notice, consent, waiver or other
Act, and for that purpose the Outstanding Securities shall be computed as of
such record date; provided that no such authorization, agreement or consent 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 eleven
months after the record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same
<PAGE>
24
Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
SECTION 105. Notices, Etc., to Trustee, Company.
----------------------------------
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,
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office, Attention: Corporate
Trust Administration; or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if
in writing and mailed, registered or certified postage prepaid, to the
Company addressed to it at the address of its principal office specified in
the first paragraph of this Indenture, or at any other address previously
furnished in writing to the Trustee by the Company.
SECTION 106. Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice of any event to Holders by
the Company or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder affected by such event, at his 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 mailed to a Holder in the manner herein prescribed shall be conclusively
deemed to have been received by such Holder, whether or not such Holder actually
receives such notice. 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 or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice is required to be given pursuant
to any provision of this Indenture,
<PAGE>
25
then any manner of giving such notice as shall be satisfactory to the Trustee
shall be deemed to be a sufficient giving of such notice for every purpose
hereunder.
SECTION 107. 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 108. Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 109. 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 110. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto, any Paying Agent, any
Securities Registrar and their successors hereunder and the Holders, any benefit
or any legal or equitable right, remedy or claim under this Indenture.
SECTION 111. Governing Law.
-------------
This Indenture and the Securities shall be governed by and construed
in accordance with the law of the State of New York. This Indenture is subject
to the provisions of the Trust Indenture Act that are required to be part of
this Indenture and shall, to the extent applicable, be governed by such
provisions.
SECTION 112. Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity or Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of principal (or premium, if any) or interest 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 the Interest Payment Date or Redemption Date or at the
Stated Maturity or Maturity; provided that no interest shall accrue
<PAGE>
26
for the period from and after such Interest Payment Date, Redemption Date,
Stated Maturity or Maturity, as the case may be to the next Business Day.
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally.
---------------
The Securities and the Trustee's certificate of authentication shall
be in substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, 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 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
on steel-engraved borders or may be produced in any other manner, all as
determined by the officers of the Company executing such Securities, as
evidenced by their execution of such Securities.
SECTION 202. Form of Face of Security.
------------------------
TELEPORT COMMUNICATIONS GROUP, INC.
Senior
Discount Note
due 2007
No._____ $__________
CUSIP: 879463AA5
The following information is supplied for purposes of Sections 1273
and 1275 of the Internal Revenue Code:
Issuance Date: July __, 1996 Original issue discount under Section 1273
of the Internal Revenue Code (for each
$1,000 principal amount):
$__________
<PAGE>
27
Issue Price (for each $1,000 Yield to Maturity: _____%
principal amount): $__________
Method used to determine yield to maturity Original issue discount for [short]
for [short] accrual period of accrual period of July __, 1996 to
July __, 1996 to [date]: [date] (for each $1,000 principal
exact method amount):
$__________
Teleport Communications Group, Inc., 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 __________
Dollars on _____________, 2007, at the office or agency of the Company referred
to below, and to pay interest thereon on _______________, 2001, and semi-
annually thereafter, on [date] and [date] in each year (each an "Interest
Payment Date"), from ______________, 2001, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of _____% per annum, until the principal hereof is paid or duly provided for,
and (to the extent lawful) to pay on demand (pursuant to the procedures set
forth in Section 307 of the Indenture) interest on any overdue interest at the
rate of ____% per annum from the date on which such overdue interest becomes
payable to the date payment of such interest has been made or duly provided for,
provided, however, that at any time prior to ____________, 2001, the Company may
elect to commence the accrual of cash interest on an Interest Payment Date (from
and after such Interest Payment Date), in which case the principal amount at
Stated Maturity of this Note shall on such Interest Payment Date be reduced to
the Accreted Value of this Note as of such Interest Payment Date and cash
interest on such principal amount shall be payable as provided above on each
Interest Payment Date thereafter. The principal on this Note shall not accrue
interest until ________________, 2001, except in the case of a default in
payment of the amount due at Maturity, in which case, the amount then due on
this Note shall bear interest at the rate of _____% per annum from the date of
such default in payment, as provided in the Indenture and except as provided in
the proviso of the previous sentence. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date shall, as provided in
such Indenture, be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the Regular Record
Date for such interest, which shall be the [date] or [date] (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 shall forthwith
cease to be payable to the holder on such Regular Record Date, and such
defaulted interest, and (to the extent lawful) interest on such defaulted
interest at _____% per annum, may be paid to the Person in whose name this Note
(or one or more Predecessor Notes) 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 Notes not less than 10
days prior to such Special Record Date, or may be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Notes may be listed, and upon such notice as may be
<PAGE>
28
required by such exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this Note
shall be made at the office or agency of the Company maintained for that purpose
in The City of New York, or at such other office or agency of the Company as may
be maintained for such purpose, 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; provided, however, that payment of interest may be made at the
option of the Company by check mailed to the address of the Person entitled
thereto as such address shall appear on the Note Register.
Reference is hereby made to the further provisions of this Note 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 by manual signature, this Note
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.
Dated: TELEPORT COMMUNICATIONS
GROUP INC.
By
------------------------
Attest: Title:
- - -----------------------------
Authorized Signature
SECTION 203. Form of Reverse of Security.
---------------------------
This Note is one of a duly authorized issue of securities of the
Company designated as its ___% Senior Discount Notes due 2007 (herein called the
"Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal amount to $___________, which may be issued under
an indenture (herein called the "Indenture") dated as of July __, 1996, between
the Company and United States Trust Company of New York, 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 Trustee and the
<PAGE>
29
holders of the Notes, and of the terms upon which the Notes are, and are to be,
authenticated and delivered.
The Notes are subject to redemption, upon not less than 30 nor more
than 60 days' notice, at any time after ________, 2001, as a whole or in part,
at the election of the Company, at a Redemption Price equal to the percentage of
the principal amount of the Notes (which shall be subject to possible reduction
as set forth on the face hereof) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on ___________ of the years indicated below:
YEAR PERCENTAGE
- - ---- ----------
2001......................................... %
2002......................................... %
2003......................................... %
2004 and thereafter.......................... 100%
In the event of the first to occur after the Issuance Date and prior
to _____________, 1999 of (a) a Public Equity Offering for gross proceeds of
$150,000,000 or more or (b) a sale or series of related sales by the Company of
its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150,000,000 or more, the
Company may, at its option, within 60 days thereof, use up to 67% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Notes originally issued at a redemption price
of ____% of the Accreted Value as of the redemption date of the Notes so
redeemed; provided that at least one-half of the aggregate principal amount of
the Notes originally issued remains outstanding after such redemption. Any such
redemption may be effected only once and must be effected upon not less than 30
nor more than 60 days' notice given within 30 days following such Public Equity
Offering or the most recent sale to a Strategic Equity Investor, as the case may
be.
Upon the occurrence of a Change of Control, each holder of Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such holder's
Notes at a purchase price equal to (i) 101% of the Accreted Value thereof on any
Change of Control Payment Date occurring prior to __________, 2001, plus any
accrued and unpaid interest not otherwise included in the Accreted Value on such
Change of Control Payment Date or (ii) 101% of the principal amount thereof
(which shall be subject to possible reduction as set forth on the face hereof)
on any Change of Control Payment Date occurring on or after ____________, 2001,
plus
<PAGE>
30
accrued and unpaid interest, if any, to such Change of Control Payment Date, in
accordance with the procedures set forth in the Indenture.
Note aggregating $----- million in principal amount will be subject to
mandatory redemption at a redemption price of 101% of the Accreted Value thereof
as of the redemption date in the event that either, (a) within 270 days after
the Issuance Date the Company has not received both confirmation of the NYPSC of
the opinion of its General Counsel or approval otherwise from the NYPSC of the
issuance of the Notes and the approval from the NJBPU to incur up to $----
billion of longterm debt or (b) either the NYPSC or the NJBPU issues an order
denying the petition of the Company to increase its borrowing authority to
permit the issuance of the Notes, the Senior Notes and the $26 million
subordinated note of the Company to TCI (each event described in clause (a) and
(b), a "Special Redemption Event"). The Redemption Date (the "Special Redemption
Date") will be five Business Days after the occurrence of a Special Redemption
Event.
Upon occurrence of a Special Redemption Event, the Trustee shall mail
a notice to each holder of Notes stating, among other things, that a Special
Redemption Event has occurred, the amount of Notes to be redeemed on the Special
Redemption Date and the portion of such holder's Notes that must be surrendered
to the Paying Agent.
In the case of any redemption of Notes, interest installments whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
holders of such Notes, or one or more Predecessor Notes, of record at the close
of business on the relevant Record Date referred to on the face hereof. Notes
(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 of this Note in part only, a new Note or
Notes 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 of
all the Notes may be declared to be due and payable in the manner and with the
effect provided in the Indenture and in an amount equal to (i) the Accreted
Value of the Notes as of the date on which the Notes first become due and
payable, if such date occurs prior to ____________, 2001, or (ii) the principal
amount of the Notes (which shall be subject to possible reduction as set forth
on the face hereof) as of the date on which the Notes first become due and
payable plus accrued and unpaid interest, if any, to such date, if such date
occurs on or after ______________, 2001.
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Default, upon compliance by the
Company with certain conditions set forth therein, which provisions apply to
this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders under the Indenture at any time by the
Company and the Trustee with the consent of the holders of a majority in
aggregate principal amount of the Notes at the time Outstanding. The Indenture
also contains provisions permitting the holders of specified percentages in
aggregate principal amount of the Notes at the time Outstanding, on behalf of
the holders of all the Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by or on behalf of the holder of
this Note shall be conclusive and binding upon such holder and upon all future
holders of this Note and of any Note 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 Note.
<PAGE>
31
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any, on)
and interest on this Note 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 on the Note
Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
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 his attorney duly authorized in writing, and
thereupon one or more new Notes, of authorized denominations and for the same
aggregate principal amount, shall be issued to the designated transferee or
transferees.
The Notes 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 Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes (subject to provisions with respect to record dates for the
payment of interest), whether or not this Note be overdue, and neither the
Company, the Trustee nor any agent shall be affected by notice to the contrary.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
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.
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1010 or Section 1017 of the Indenture, check the box: [ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1010 or Section 1017 of the Indenture, state the
amount (in original principal amount) below:
$--------------------------
Date: ----------------
Your Signature: ----------------------------------
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: -----------------------------------------
SECTION 204: Form of Trustee's Certificate of Authentication
------------------------------------------------
The Trustee's certificate of authentication shall be in substantially
the following form:
<PAGE>
32
TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
Dated: ____________________
This is one of the Notes referred to in the within-mentioned
Indenture.
UNITED STATES TRUST COMPANY
OF NEW YORK,
as Trustee
By:
--------------------------------
Name:
Title:
SECTION 205. Securities Issuable in Global Form.
-----------------------------------
(a) If so specified in the Company Order referred to in Section 303,
the Securities may be issued in the form of one or more global Securities,
registered in the name of a securities depository (the "Depository") or its
nominee, representing all the Outstanding Securities. Such global Securities
shall be substantially in the form set forth in Exhibit A hereto.
(b) Subject to the provisions of Section 303 and, if applicable,
Section 304, the Trustee shall deliver and redeliver any Security in global form
in the manner and upon instructions given the Person or Persons specified
therein or in the applicable Company Order. If a Company Order pursuant to
Section 303 or Section 304 has been, or simultaneously is, delivered, any
instructions by the Company with respect to endorsement or delivery or
redelivery of a Security in global form shall be in writing but need not comply
with Section 102 and need not be accompanied by an Opinion of Counsel.
(c) Notwithstanding the provisions of Section 307(b), payment of
principal of (and premium, if any) and interest on any Security in global form
shall be made to the Person or Persons specified therein. Notwithstanding the
provisions of Section 308 and except as provided in the preceding sentence, the
Company, the Trustee and any agent of the Company and the Trustee shall treat
the Holder of any global Security as the owner of such Security for the purpose
of receiving payment of principal of (and premium, if any, on) and interest on
such Security and for all other purposes whatsoever, whether or not such
Security be overdue, and none of the Company, the Trustee or any agent of the
Company or the Trustee shall be affected by notice of the contrary.
(d) If at any time, (i) the Depository notifies the Company that it is
unwilling or unable to continue as Depository or if at any time the Depository
shall no longer be registered or in good standing under the Securities Exchange
Act of 1934, as amended, or other applicable statute or regulation and a
successor Depository is not appointed by the Company within 90 days after the
Company receives such notice or becomes aware of such condition, as the case may
be, or (ii) any Event of Default shall have occurred and be continuing and
Holders of more than 25% in principal amount of the Securities Outstanding
represented by one or more global Securities advise the Trustee that the
continuation of a book-entry system through the Depository (or a successor
thereto) with respect to the Securities no longer required, then in such event
this Section 205 shall no longer be applicable to the Securities and the Company
will execute and the Trustee, upon Company Request, will authenticate and
deliver Securities in definitive registered form, in authorized denominations,
and in an aggregate principal amount equal to the principal amount of the global
Security or Securities in exchange for such global Security whereupon the global
Security or Securities shall be cancelled by the Trustee. Such Securities in
definitive registered form issued in exchange for the global Security or
Securities pursuant to this Section 205(d) shall be registered in such names and
issued in such authorized denominations as the Depository, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Securities to the Persons
in whose names such Securities are so registered.
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 $___________,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Section 205,
303, 304, 305, 306, 906, 1010, 1017 or 1108.
The Securities shall be known and designated as the "___% Senior
Discount Notes due 2007" of the Company. Their Stated Maturity shall be
______________, 2007, and they shall bear interest at the rate of _____% per
annum from ______________, 2001 or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, payable on _____________,
2001 and semi-annually thereafter on [date] and [date] in each year (each an
"Interest Payment Date") and at said Stated Maturity, until the principal
thereof is paid or duly provided for; provided, however, that at any time prior
to ____________, 2001, the Company may, by notice to the Holders given no more
than 60 and not less than 30 days, elect to commence the accrual of cash
interest on an Interest Payment Date (from and after such Interest Payment
Date), in which case the principal amount at Stated Maturity of each Security
shall on such Interest Payment Date be reduced to the Accreted Value of the
Security as of such Interest Payment Date and cash interest on such principal
amount shall be payable with respect to such Security on each Interest Payment
Date thereafter. The principal of the Securities shall not accrue interest until
______________, 2001, except in the case of a
<PAGE>
33
default in payment of the amount due at Maturity, in which case the amount due
on this Security shall bear interest at a rate of _____% per annum (to the
extent that the payment of such interest shall be legally enforceable), which
shall accrue from the date of such default to the date the payment of such
amount has been made or duly provided for and except as provided for in the
previous sentence. Interest on any overdue principal amount shall be payable on
demand pursuant to the procedures set forth in Section 307.
The principal of (and premium, if any) and interest on the Securities
shall be payable at the office or agency of the Company maintained for such
purpose in The City of New York, or at such other office or agency of the
Company as may be maintained for such purpose; provided, however, that at the
option of the Company interest may be paid by check mailed to addresses of the
Persons entitled thereto as such addresses shall appear on the Security
Register.
The Securities shall be redeemable as provided in Article Eleven.
SECTION 302. Denominations.
-------------
The Securities shall be issuable only in 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 its
Chairman, its President or a Vice President, and attested by its Secretary or
an Assistant Secretary. The signature of any of these officers on the
Securities may be manual or facsimile signatures of the present or any future
such authorized officer and may be imprinted or otherwise reproduced on the
Securities.
Securities bearing the manual or facsimile signatures of individuals
who were at any time 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 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 deliver such Securities.
Each Security shall be dated the date of its authentication.
<PAGE>
34
No Security 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, pursuant to Article Eight, shall be consolidated
or merged with or into any other Person or shall convey, transfer, lease or
otherwise dispose of its properties and assets substantially as an entirety to
any Person, and the successor Person resulting from such consolidation, or
surviving such merger, or into which the Company shall have been merged, or the
Person which shall have received a 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, 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 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.
SECTION 304. Temporary Securities.
--------------------
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
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 conclusively evidenced
by their execution of such Securities.
If temporary Securities are issued, the Company shall 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
<PAGE>
35
Trustee shall authenticate and deliver 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 to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and 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 it may prescribe, the Company shall provide for the registration
of Securities and of transfers of Securities. The Security Register shall be in
written form or any other form capable of being converted into written form
within a reasonable time. At all reasonable times, the Security Register shall
be open to inspection by the Trustee. The Trustee is hereby initially appointed
as security registrar (the "Security Registrar") for the purpose of registering
Securities and transfers of Securities as herein provided.
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 authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Securities of any
authorized denomination or denominations of a like aggregate principal amount.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denomination and 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 authenticate and deliver, the Securities
which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, 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 shall (if so required by the Company or the Security Registrar)
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.
<PAGE>
36
No service charge shall be made for any registration of transfer or
exchange or redemption of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 205, 303, 304, 906, 1010, 1017 or 1108 not
involving any transfer.
The Company shall not be required (i) to issue, register the transfer
of or exchange any Security during a period beginning at the opening of business
15 days before the selection of Securities to be redeemed under Section 1104 and
ending at the close of business on the day of such mailing of the relevant
notice of redemption, or (ii) to register the transfer of or exchange any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
------------------------------------------------
If (i) any mutilated Security is surrendered to the Trustee, or (ii)
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 and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute and upon Company Order the Trustee shall authenticate and
deliver, in exchange for any such mutilated Security or in lieu of any such
destroyed, lost or stolen Security, a new 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 new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the mutilated,
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.
<PAGE>
37
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 307. Payment of Interest; Interest Rights Preserved.
----------------------------------------------
(a) Interest on any Security which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the Person
in whose name such Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such interest
at the office or agency of the Company maintained for such purpose pursuant to
Section 1002; provided, however, that each installment of interest may at the
Company's option be paid by mailing a check for such interest, payable to or
upon the written order of the Person entitled thereto pursuant to Section 308,
to the address of such Person as it appears in the Security Register.
(b) Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date shall
forthwith cease to be payable to the Holder on the Regular Record Date by virtue
of having been such Holder, and such defaulted interest and (to the extent
lawful) interest on such defaulted interest at the rate borne by the Securities
(such defaulted interest and interest thereon herein collectively called
"Defaulted Interest") may be paid by the Company, at its election in each case,
as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities (or their respective 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 of the proposed payment, 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 date
of the proposed payment, such money when deposited to be held in trust for
the benefit of the Persons entitled to such Defaulted Interest as in this
clause 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 proposed payment 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 of such
Special Record Date, and in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be given in the manner provided for in
Section 106, not less than 10 days prior to such Special Record Date.
Notice of the proposed payment of
<PAGE>
38
such Defaulted Interest and the Special Record Date therefor having been so
given, such Defaulted Interest shall be paid to the Persons in whose names
the Securities (or their respective Predecessor Securities) are registered
at the close of business on such Special Record Date and shall no longer be
payable pursuant to the following clause (2).
(2) 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 such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause,
such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, 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 308. Persons Deemed Owners.
---------------------
Prior to the due presentment of a Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Security is registered as the owner of
such Security for the purpose of receiving payment of principal of (and premium,
if any) and (subject to Sections 305 and 307) interest on such Security and for
all other purposes whatsoever, whether or not such Security be overdue, and none
of the Company, the Trustee or any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 309. Cancellation.
------------
All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee and shall be promptly cancelled by it. The Company
may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and may deliver to the Trustee (or to any
other Person for delivery to the Trustee) for cancellation any Securities
previously authenticated hereunder which the Company has not issued and sold,
and all Securities so delivered shall be promptly cancelled by the Trustee. If
the Company shall so acquire any of the Securities, however, such acquisition
shall not operate as a redemption or satisfaction of the indebtedness
represented by such Securities unless and until the same are surrendered to the
Trustee for cancellation. No Securities shall be authenticated in lieu of or in
exchange for any Securities cancelled as provided in this Section, except as
expressly
<PAGE>
39
permitted by this Indenture. All cancelled Securities held by the Trustee shall
be disposed of by the Trustee in accordance with its customary procedures and
certification of their disposal delivered to the Company unless by Company Order
the Company shall direct that cancelled Securities be returned to it.
SECTION 310. Computation of Interest.
-----------------------
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
SECTION 311. No Personal Liability of Directors, Officers, Employees
-------------------------------------------------------
and Stockholders.
----------------
No director, officer, employee, agent, incorporator or stockholder of
the Company, as such, shall have any liability for any obligations of the
Company under the Securities or this Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
the Securities by accepting a Security irrevocably waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Securities.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall upon Company Request cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
Securities expressly provided for herein or pursuant hereto) and the Trustee, at
the expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture when
(1) either
(a) all Securities theretofore authenticated and delivered (other
than (i) Securities which have been destroyed, lost or stolen and
which have been replaced or paid as provided in Section 306 and (ii)
Securities for whose payment money has theretofore been deposited in
trust with the Trustee or any Paying Agent 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
<PAGE>
40
(b) all such Securities not theretofore delivered to the Trustee
for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee as
trust funds in trust for such purpose an amount sufficient to pay and
discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal (and premium,
if any) and interest to the date of such deposit;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 606 and, if money shall
have been deposited with the Trustee pursuant to subclause (b) of clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
--------------------------
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 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 (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
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):
<PAGE>
41
(1) default in the payment of any interest on any Security when it
becomes due and payable, and continuance of such default for a period of 30
days; or
(2) default in the payment of the principal of (or premium, if any)
any Security at its Maturity; or
(3) default in the performance or breach of the provisions of Section
1010 and Section 1017; or
(4) default in the performance, or breach, of any covenant or
agreement of the Company in this Indenture (other than a default in the
performance, or breach, of a covenant or agreement which is specifically
dealt with elsewhere in this Section), and continuance of such default or
breach for a period of 60 days after there has been given, by registered or
certified mail, to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities a written notice specifying such default or breach
and requiring it to be remedied and stating that such notice is a "Notice
of Default" hereunder; or
(5) default under any mortgage, indenture or instrument under which
there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the Company or any of its Restricted Subsidiaries),
whether such Indebtedness or guarantee now exists, or is created after the
Issuance Date, which default (a) is caused by a failure to pay when due at
stated maturity principal or interest on such Indebtedness within the grace
period (including any extension thereof granted by the holders of such
Indebtedness) provided in such Indebtedness (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $12 million or more; or
(6) failure by the Company or any Restricted Subsidiary to pay final
judgments aggregating in excess of $12 million (net of any amount as to
which a reputable insurance company has accepted liability), which
judgments are not stayed or bonded within 60 days after their entry;
or
(7) any Guarantee by a Guarantor of the Securities being held in any
judicial proceeding to be unenforceable or invalid, provided any other
Guarantee by such Guarantor giving rise to such obligation to Guarantee the
Securities is not held unenforceable, or failure of any Guarantee of the
Securities to be in full force and
<PAGE>
42
effect, or the assertion that such Guarantee is invalid or unenforceable by
any Guarantor; or
(8) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company or any Significant Subsidiary a bankrupt
or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under the Federal Bankruptcy Code
or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
the Company or any Significant Subsidiary or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period
of 60 consecutive days; or
(9) the institution by the Company or any Significant Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the consent by it
to the institution of bankruptcy or insolvency proceedings against it, or
the filing by it of a petition or answer or consent seeking reorganization
or relief under the Federal Bankruptcy Code or any other applicable federal
or state law, or the consent by it to the filing of any such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Company or any Significant Subsidiary or
of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing
of its inability to pay its debts generally as they become due.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
(a) If an Event of Default (other than an Event of Default specified
in Section 501(8) or (9)) occurs and is continuing, then and in every such case
the Trustee or the Holders of not less than 25% in principal amount of the
Securities Outstanding may and the Trustee shall, at the request of the Holders
of not less than 25% in principal amount of the Securities Outstanding, declare
the principal of all the Securities to be due and payable immediately in an
amount equal to (i) the Accreted Value of the Securities as of the date on which
the Securities first become due and payable, if such date occurs prior to
_______, 2001, or (ii) the aggregate principal amount of the Securities (which
shall be subject to possible reduction should the Company exercise its right to
start to pay interest on the securities prior to _________, 2001 as provided in
Section 301) plus accrued and unpaid interest, if any, to such date, if such
date occurs on or after _______, 2001, by a notice in writing to the Company
(and to the Trustee if given by Holders), and upon any such declaration such
principal shall become immediately due and payable. If an Event of Default
specified in Section 501(8) or (9) occurs and is continuing, then the principal
of all the Securities shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder in
an amount equal to (i) the Accreted Value of Securities as of
<PAGE>
43
the date on which the Securities first become due and payable, if such date
occurs prior to ________, 2001, or (ii) the aggregate principal amount of the
Securities (which shall be subject to possible reduction should the Company
exercise its right to start to pay interest on the securities prior to
_________, 2001 as provided in Section 301) plus accrued and unpaid interest, if
any, to such date, if such date occurs on or after _______, 2001.
(b) At any time after a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter provided in this Article, the Holders of a majority
in 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
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay,
(A) all overdue interest on all Outstanding Securities,
(B) all unpaid principal of (and premium, if any, on) any
Outstanding Securities which has become due otherwise than by such
declaration of acceleration, and interest on such unpaid principal at
the rate borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest on overdue interest at the rate borne by the Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default, other than the non-payment of amounts of
principal of (or premium, if any, on) or interest on 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 covenants that if
<PAGE>
44
(a) default is made in the payment of any installment of 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 Maturity thereof,
the Company shall, upon demand of the Trustee, pay to the Trustee for the
benefit of the Holders of such Securities, the whole amount then due and payable
on such Securities for principal (and premium, if any) and interest, and
interest on any overdue principal (and premium, if any) and, to the extent that
payment of such interest shall be legally enforceable, upon any overdue
installment 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 fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company 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 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 by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, 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 to enforce any other proper remedy
subject, however, to Section 512.
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 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, premium, if any, or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
<PAGE>
45
(i) 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
(ii) 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 606.
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.
SECTION 505. Trustee May Enforce Claims Without Possession of
------------------------------------------------
Securities.
----------
All rights of action and claims under this Indenture or the Securities
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 shall be
applied 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 (or 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:
<PAGE>
46
FIRST: To the payment of all amounts due the Trustee under Section
606;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Securities 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 (and premium, if
any) and interest, respectively; and
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
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 for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(2) 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;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority or
more 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 virtue of, or by availing of, any provision of
this Indenture 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, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
<PAGE>
47
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, which is absolute and unconditional, to
receive payment, as provided herein (including, if applicable, Article Thirteen)
and in such Security of the principal of (and premium, if any) and (subject to
Section 307) interest on such Security on the respective Stated Maturities
expressed in such Security (or, in the case of redemption, on the Redemption
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 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, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
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.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in the last paragraph
of Section 306, 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.
<PAGE>
48
SECTION 512. Control by Holders.
------------------
The Holders of not less than a majority in principal amount of the
Outstanding Securities shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, provided that
--------
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve it in
personal liability or be unjustly prejudicial to the Holders not
consenting.
SECTION 513. Waiver of Past Defaults.
-----------------------
The Holders of not less than a majority in principal amount of the
Outstanding Securities may on behalf of the Holders of all the Securities waive
any past default hereunder and its consequences (including consents obtained in
connection with a tender offer or exchange offer for the Securities), except
that, without the consent of each Holder affected, a waiver may not (with
respect to any Securities held by a non-consenting Holder of the Securities)
(1) waive a default in the payment of principal of (or premium, if
any) or interest on any Security (except a rescission of acceleration of
the Securities by the Holders of at least a majority in principal amount of
the Securities and a waiver of the payment default that resulted from such
acceleration), or
(2) waive a redemption payment with respect to any Security, or
(3) waive a default in respect of a covenant or provision hereof which
under Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected, or
(4) waive a default under this Section or Section 902.
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 Event of Default or impair any right consequent thereon.
<PAGE>
49
SECTION 514. Waiver of Stay or Extension Laws.
--------------------------------
The Company covenants (to the extent that it may lawfully do so) that
it shall 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 wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it shall not hinder, delay or impede the execution of any
power herein granted to the Trustee, but shall suffer and permit the execution
of every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Notice of Defaults.
------------------
Within 90 days after the occurrence of any Default hereunder, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such Default hereunder known to the Trustee, unless such
Default shall have been cured or waived; provided, however, that, except in the
case of a Default in the payment of the principal of (or premium, if any) or
interest on any Security, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interest of the
Holders; and provided further that in the case of any Default of the character
specified in Section 501(4) no such notice to Holders shall be given until at
least 60 days after the occurrence thereof.
SECTION 602. Certain Rights of Trustee.
-------------------------
Subject to the provisions of TIA Sections 315(a) through 315(d):
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon 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;
(2) 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;
<PAGE>
50
(3) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel and the written 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;
(5) 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 reasonable security and indemnity against the
costs, losses, expenses and liabilities which might be incurred by it in
compliance with such request or direction;
(6) 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,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see 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;
(7) 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; and
(8) the Trustee shall not be liable for any action taken, suffered or
omitted by it in good faith and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by this Indenture.
The Trustee shall not be required 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.
<PAGE>
51
In case an Event of Default shall occur (which shall not be cured),
the Trustee shall be required, in the exercise of its rights and powers under
this Indenture, to use the degree of care and skill of a prudent man in the
conduct of its own affairs.
SECTION 603. Trustee Not Responsible for Recitals or Issuance of
---------------------------------------------------
Securities.
----------
The recitals contained herein and in the Securities, except for 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 a Statement of Eligibility 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 604. May Hold Securities.
-------------------
The Trustee, any Paying Agent, any Security Registrar or any other
agent of the Company or of the Trustee, in its individual or any other capacity,
may become the owner or pledgee of Securities and, subject to TIA Sections
310(b) and 311, may otherwise deal with the Company with the same rights it
would have if it were not Trustee, Paying Agent, Security Registrar or such
other agent.
SECTION 605. Money Held in Trust.
-------------------
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company.
SECTION 606. Compensation and Reimbursement.
------------------------------
The Company agrees:
(1) to pay to the Trustee from time to time reasonable compensation
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);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or
<PAGE>
52
made by the Trustee in accordance with any provision of this Indenture
(including the reasonable compensation and the expenses and disbursements
of its agents and counsel), except any such expense, disbursement or
advance as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability, tax, assessment or other governmental charge (other than
taxes applicable to the Trustee's compensation hereunder) or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of this trust, including the costs and
expenses of defending itself against 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 to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless the Trustee shall constitute
additional indebtedness hereunder. As security for the performance of such
obligations of the Company, the Trustee shall have a claim prior to the
Securities upon all property and funds held or collected by the Trustee as such,
except funds held in trust for the payment of principal of (and premium, if any)
or interest on particular Securities.
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 501(8) or (9), the expenses
(including the reasonable charges and expenses of its counsel) of and the
compensation for such services are intended to constitute expenses of
administration under any applicable Federal or State bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 607. Corporate Trustee Required; Eligibility.
---------------------------------------
There shall be at all times a Trustee hereunder which shall be
eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined
capital and surplus of at least $50,000,000. If such corporation 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, 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, it shall resign immediately in the manner and with
the effect hereinafter specified in this Article.
<PAGE>
53
SECTION 608. Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(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 in accordance with the
applicable requirements of Section 609.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If the instrument of acceptance by a successor Trustee
required by Section 609 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of
not less than a majority in 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 TIA
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, or
(2) the Trustee shall cease to be eligible under Section 607 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 such case, (i) the Company, by a Board Resolution, may remove the
Trustee, or (ii) subject to TIA Section 315(e), 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 removal of the Trustee and the appointment of 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. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee
<PAGE>
54
shall be appointed by Act of the Holders of a majority in principal amount of
the Outstanding Securities delivered to the Company and the retiring Trustee,
the 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 and accepted appointment in the manner hereinafter
provided, 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.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to the Holders of
Securities in the manner provided for in Section 106. Each notice shall include
the name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 609. 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; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. 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, powers and
trusts. Any Trustee ceasing to act shall, nevertheless, retain a prior claim
upon all property or funds held or collected by such Trustee or such successor
trustee to secure any amounts then due such Trustee pursuant to the provisions
of Section 606, except funds held in trust for the payment of principal of (and
premium, if any) or interest on particular Securities.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 610. 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, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any
<PAGE>
55
of the parties hereto. In case any Securities shall have been authenticated, but
not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation, or any Corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, to such
authenticating Trustee may adopt such authentication and deliver the Securities
so authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities. In case at that time any of the Securities shall
not have been authenticated, any successor Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor Trustee. In all such cases such certificates shall have the full force
and effect which this Indenture provides for the certificate of authentication
of the Trustee shall have; provided, however, 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.
ARTICLE SEVEN
HOLDERS LISTS AND REPORTS BY TRUSTEE
SECTION 701. Disclosure of Names and Addresses of Holders.
--------------------------------------------
Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that none of the Company or the Trustee or any
agent of either of them shall be held accountable by reason of the disclosure of
any such information as to the names and addresses of the Holders in accordance
with TIA 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 TIA Section 312(b).
SECTION 702. Reports by Trustee.
------------------
Within 60 days after [May 15] of each year commencing with the first
[May 15] after the first issuance of Securities, the Trustee shall transmit to
the Holders, in the manner and to the extent provided in TIA Section 313(c), a
brief report dated as of such [May 15] if required by TIA Section 313(a).
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Limitation on Merger, Consolidation or Sale of Assets.
-----------------------------------------------------
<PAGE>
56
The Company shall not consolidate or merge with or into (whether or
not the Company is the surviving Person), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person unless:
(1) the Company is the surviving corporation or the Person formed by
or surviving any such consolidation or merger (if other than the Company)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation, partnership or limited
liability company organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company, pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee, under the Securities and this
Indenture and, in the case of such surviving Person that is a partnership,
at least one subsidiary of such Person which shall be a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia and which shall also assume the
Obligations of the Company under the Securities and this Indenture as a co-
obligor with such surviving Person;
(3) immediately before and after giving effect to such transaction or
series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of transactions), no Default or
Event of Default shall have occurred and be continuing or would result
therefrom;
(4) immediately after giving effect to any such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions) as if such
transaction or series of transactions had occurred on the first day of the
determination period, the Company (or the surviving entity if the Company
is not the continuing obligor under the Securities) would be permitted to
incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to Section 1011; and
(5) the Company or such Person shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such
supplemental indenture, comply with this
<PAGE>
57
Article and that all conditions precedent herein provided for relating to
such transaction have been complied with.
SECTION 802. Successor Substituted.
---------------------
Upon any consolidation of the Company with or merger of the Company
with or into any other corporation or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety to any Person
in accordance with Section 801, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein,
and in the event of any such conveyance or transfer, the Company (which term
shall for this purpose mean the Person named as the "Company" in the first
paragraph of this Indenture or any successor Person which shall theretofore
become such in the manner described in Section 801), except in the case of a
lease, shall be discharged of all obligations and covenants under this Indenture
and the Securities and may be dissolved and liquidated.
SECTION 803. Securities to Be Secured in Certain Events.
------------------------------------------
If, upon any such consolidation of the Company with or merger of the
Company into any other corporation, or upon any conveyance, lease or transfer of
the property of the Company substantially as an entirety to any other Person,
any property or assets of the Company would thereupon become subject to any
Lien, then unless such Lien could be created pursuant to Section 1013 without
equally and ratably securing the Securities, the Company, prior to or
simultaneously with such consolidation, merger, conveyance, lease or transfer,
shall as to such property or assets, secure the Securities Outstanding (together
with, if the Company shall so determine, any other Indebtedness of the Company
now existing or hereinafter created which is not subordinate in right of payment
to the Securities) equally and ratably with (or prior to) the Indebtedness which
upon such consolidation, merger, conveyance, lease or transfer is to become
secured as to such property or assets by such Lien, or will cause such
Securities to be so secured; provided that, for the purpose of providing such
equal and ratable security, the principal amount of the Securities shall mean
that amount which would at the time of making such effective provision be due
and payable pursuant to Section 502 upon a declaration of acceleration of the
Maturity thereof, and the extent of such equal and ratable security shall be
adjusted, to the extent permitted by law, as and when said amount changes over
time as provided in Section 502.
<PAGE>
58
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.
--------------------------------------------------
Without the consent of any Holders, the Company, 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, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to cure any ambiguity, defect or inconsistency; or
(2) to provide for uncertificated Securities in addition to or in
place of certificated Securities; or
(3) to provide for the assumption of the Company's obligations to
Holders of the Securities in the case of a merger, consolidation or sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of its properties or assets as provided in Section 801; or
(4) to make any change that would provide any additional rights or
benefits to the Holders of the Securities or that does not materially and
adversely affect the legal rights under this Indenture of any such Holder;
or
(5) to comply with requirements of the Commission in order to maintain
the qualification of this Indenture under the Trust Indenture Act.
(6) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of Section
609; or
(7) to secure the Securities pursuant to the requirements of Section
803 or 1013 or otherwise.
SECTION 902. Supplemental Indentures with Consent of Holders.
-----------------------------------------------
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities (including consents obtained in
connection with a tender offer as exchange offer for the Securities), by Act of
said Holders delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
of modifying in any manner the rights of the Holders under this Indenture;
<PAGE>
59
provided, however, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby (with
respect to any Securities held by a non-consenting Holder):
(1) reduce the principal amount of the Securities, whose Holders must
consent to a supplemental indenture or to a waiver pursuant to Sections 513 and
1019, or
(2) reduce the principal of or premium on or change the Stated
Maturity of any Security, or alter the provisions with respect to redemption of
the Securities (other than provisions of Sections 1010 and 1017), or reduce the
amount of the principal of the Securities that would be due and payable upon a
declaration of acceleration of the Maturity thereof pursuant to Section 502(a)
(provided that such acceleration can still be rescinded pursuant to the
--------
provisions of Section 502(b)) or the amount thereof provable in bankruptcy
pursuant to Section 504, 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), or
(3) reduce the rate of or change of time for payment of interest on
any Security, or
(4) make the principal of, or premium, if any, or interest on, any
Security payable in money other than stated in the Securities, or
(5) make any change in the provisions of this Indenture relating to
the rights of Holders of Securities to receive payment of principal or
premium, if any, or interest on the Securities, or
(6) make any change in the provisions of this Section or Sections 513
and 1019, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Security affected thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and shall be fully protected in relying upon, an Opinion of Counsel stating that
the execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
<PAGE>
60
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 (except as provided in Section 902).
SECTION 905. Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to the Article 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 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
Company, to any such supplemental indenture may be prepared and executed by the
Company 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 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.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if any, and Interest.
---------------------------------------------------
The Company covenants and agrees for the benefit of the Holders that
it shall duly and punctually pay the principal of (and premium, if any) and
interest on the Securities in accordance with the terms of the Securities and
this Indenture.
<PAGE>
61
SECTION 1002. Maintenance of Office or Agency.
-------------------------------
The Company shall maintain in The City of New York, an office or
agency where Securities may be presented or surrendered for payment, where
Securities may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Corporate Trust Office of the Trustee shall 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 shall give prompt written notice to the Trustee of any change in the
location of any such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the Corporate Trust Office of the Trustee, and the
Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
The Company may also 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 any such designation; provided, however, that no such
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York for such
purposes. The Company shall give prompt written notice to the Trustee of any
such designation or rescission and any change in the location of any such other
office or agency.
SECTION 1003. Money for Security Payments to Be Held in Trust.
-----------------------------------------------
If the Company shall at any time act as its own Paying Agent, it
shall, on or before each due date of the principal of (or premium, if any) or
interest on any of the Securities, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal of (or
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 shall promptly
notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for the
Securities, it shall, on or before each due date of the principal of (or
premium, if any) or interest on any Securities, deposit with a Paying Agent a
sum sufficient to pay the principal (and 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 shall promptly notify the Trustee of such action or
any failure so to act.
<PAGE>
62
The Company shall 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 shall:
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on 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;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment of
principal (and premium, if any) or interest; and
(3) 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.
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 sums.
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 (or premium, if
any) or interest on any Security and remaining unclaimed for two years after
such principal, premium or interest has become due and payable shall 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 a newspaper published in the English language, customarily
published on each Business Day and of general circulation in the Borough of
Manhattan, The City of New York, 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 publication, any unclaimed balance of such money then remaining
shall be repaid to the Company.
<PAGE>
63
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, rights (charter and statutory) and franchises of the Company and each
Significant Subsidiary; provided, however, that the Company shall not be
required to preserve any such right or franchise if the Board of Directors shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and its Subsidiaries as a whole and that the loss
thereof is not disadvantageous in any material respect to the Holders.
SECTION 1005. Payment of Taxes and Other Claims.
---------------------------------
The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any Significant
Subsidiary or upon the income, profits or property of the Company or any
Significant Subsidiary and (b) all lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Company or any Significant Subsidiary; 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.
SECTION 1006. Maintenance of Properties.
-------------------------
The Company shall cause all properties owned by the Company or any
Significant Subsidiary or used or held for use in the conduct of its business or
the business of any Significant Subsidiary to be maintained and kept in good
condition, repair and working order, ordinary wear and tear excepted and
supplied with all necessary equipment and shall cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously 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 judgment of the Company, desirable in the conduct of its business or
the business of any Significant Subsidiary and not disadvantageous in any
material respect to the Holders.
SECTION 1007. Insurance.
---------
The Company shall at all times keep all of its and its Significant
Subsidiaries' properties which are of an insurable nature insured with insurers,
believed by the Company to be 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.
<PAGE>
64
SECTION 1008. Statement by Officers as to Default.
-----------------------------------
(a) The Company shall deliver to the Trustee, within 120 days after
the end of each fiscal year, a brief certificate from the principal executive
officer, principal financial officer or principal accounting officer as to his
or her knowledge of the Company's compliance with all conditions and covenants
under this Indenture. For purposes of this Section 1008(a), such compliance
shall be determined without regard to any period of grace or requirement of
notice under this Indenture.
(b) When any senior executive officer of the Company obtains actual
knowledge that any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Company or any Subsidiary gives any notice or takes any
other action with respect to a claimed default (other than with respect to
Indebtedness in the principal amount of less than $25 million, the Company shall
deliver to the Trustee by registered or certified mail or by telegram, telex or
facsimile transmission an Officers' Certificate specifying such event, notice or
other action within five Business Days of its occurrence.
SECTION 1009. Reports to Holders.
------------------
The Company shall deliver to the Trustee and to the Holders, within 30
days after it files them with the Commission, copies of its annual and quarterly
reports which the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may
not be required to remain subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act or otherwise report on an annual and quarterly basis
on forms provided for such annual and quarterly reporting pursuant to rules and
regulations promulgated by the Commission, the Company shall continue to file
with the Commission and provide to the Trustee and to the Holders annual audited
financial statements and quarterly unaudited financial statements, along in each
case with a "Management's Discussion and Analysis of Results of Operations and
Financial Condition," all in the form the Company would be required to file were
it subject to the Exchange Act reporting requirements. The Company shall not be
obligated to file any such reports with the Commission if the Commission does
not permit such filings.
SECTION 1010. Change of Control.
-----------------
(a) Upon the occurrence of a Change of Control, each Holder of
Securities shall have the right to require the Company to repurchase all or any
part (equal to $1,000 in principal amount or an integral multiple thereof) of
such Holder's Securities pursuant to the offer described below (the "Change of
Control Offer") at a purchase price (the "Purchase Price") equal to (i) 101% of
the Accreted Value thereof on any Change of Control Payment Date (as defined
below) occurring prior to __________, 2001, plus any accrued and unpaid interest
not otherwise included in the Accreted Value on such Change of Control Payment
Date or (ii) 101% of the
<PAGE>
65
principal amount thereof (which shall be subject to possible reduction as set
forth in Section 301) on any Change of Control Payment Date occurring on or
after ____________, 2001, plus accrued and unpaid interest, if any, to such
Change of Control Payment Date, in accordance with the procedures set forth
below.
(b) Within 30 days following any Change of Control, the Company shall
mail a notice to each Holder in the manner provided in Section 106 stating: (1)
that the Change of Control Offer is being made pursuant to the provisions of
Section 1010 of this Indenture and that all Securities duly and timely tendered
shall be accepted for payment; (2) the Purchase Price and the purchase date (the
"Change of Control Payment Date"), which date shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed; (3) that any
Securities not tendered shall continue to accrete and/or accrue interest, as the
case may be; (4) that, unless the Company defaults in the payment of the
Purchase Price, all Securities accepted for payment pursuant to the Change of
Control Offer shall cease to accrete and/or accrue interest, as the case may be,
after the Change of Control Payment Date; (5) that Holders electing to have any
Securities purchased pursuant to a Change of Control Offer shall be required to
surrender the Securities, with the form entitled "Option of Holder to Elect
Purchase on the reverse of the Securities completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that Holders
shall be entitled to withdraw their election if the Paying Agent receives, not
later than the close of business on the second Business Day preceding the Change
of Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of Securities
delivered for purchase, and a statement that such Holder is withdrawing his
election to have such Securities purchased; (7) that Holders whose Securities
are being purchased only in part shall be issued new Securities equal in
principal amount to the unpurchased portion of the Securities surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof; (8) the instructions that the Holders of Securities must
follow in order to tender their Securities; and (9) the circumstances and
relevant facts regarding such Change of Control.
(c) The Company will 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 Securities in connection with a Change of Control.
SECTION 1011. Limitation on Incurrence of Indebtedness.
----------------------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become
<PAGE>
66
directly or indirectly liable with respect to (collectively, "incur") any
Indebtedness (including, without limitation, Acquired Indebtedness) other than
Permitted Indebtedness, unless, in the case of Indebtedness of the Company
exclusively, (a) no Default or Event of Default shall have occurred and be
continuing at the time of the proposed incurrence thereof or would occur as a
result of such proposed incurrence and (b) after giving effect to such
incurrence on a pro forma basis (i) with respect to such proposed incurrence of
Indebtedness on or prior to January 1, 2001, the Company's Indebtedness to
Adjusted Total Equity Ratio would not exceed 1.0 to 1.0, and (ii) with respect
to such proposed incurrence of Indebtedness thereafter, the Company's
Indebtedness to EBITDA Ratio would not equal or exceed 5.0 to 1.0.
SECTION 1012. Limitation on Restricted Payments.
---------------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of such Restricted Payment and after giving pro forma effect thereto:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the aggregate amount of all Restricted Payments subsequent to the
Issuance Date would not exceed the greater of:
(1) the sum of, without duplication
(w) cumulative EBITDA of the Company and its Restricted
Subsidiaries less 1.4 times cumulative Consolidated Interest
Expense, in each case for the period (treated as one accounting
period) beginning on the first day of the Company's fiscal
quarter in which the Issuance Date occurs, and ending on the last
day of the Company's fiscal quarter immediately preceding such
proposed Restricted Payment; plus
(x) 100% of the net cash proceeds received by the Company from
any Person from the issuance and sale subsequent to the Issuance
Date of Equity Interests of the Company or of debt securities of
the Company that have been converted into such Equity Interests
(other than Equity Interests (or convertible debt securities)
sold to a Restricted Subsidiary and other than Disqualified Stock
or debt securities that have been converted into Disqualified
Stock); minus
(y) 100% of all Investments made pursuant to clause (d) of the
definition of "Permitted Investments" less any such amounts
invested in
<PAGE>
67
Local Market Partnerships that become Restricted Subsidiaries
prior to the first anniversary of the Issuance Date; minus
(z) the amount of any Investments in Joint Ventures pursuant to
clause (e)(ii) of the definition of "Permitted Investments" less
the Fair Market Value of the Company's interest in any Joint
Ventures that become Restricted Subsidiaries but not in excess of
the amount of any such Investments in such Joint Ventures
pursuant to such clause (e)(ii); and
(2) $10 million; and
(c) the Company would have been permitted to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
test set forth in clause (b) of Section 1011.
The provisions of this Section shall not prohibit (i) the payment of
any dividend (or similar distribution with respect to Equity Interests) within
60 days after the date of declaration thereof, if at said date of declaration
such payment would have complied with the provisions of this Indenture; (ii) the
redemption, purchase, retirement or other acquisition of any Equity Interests of
the Company or any Restricted Subsidiary in exchange for, or out of the proceeds
of the substantially concurrent sale (other than to a Restricted Subsidiary) of,
other Equity Interests (other than Disqualified Stock) of the Company; (iii) the
redemption, purchase, retirement or other acquisition of any Equity Interests of
a Restricted Subsidiary in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to another Restricted Subsidiary) of,
other Equity Interests (other than Disqualified Stock) of such Restricted
Subsidiary; (iv) the redemption, purchase, defeasance, acquisition or retirement
of Indebtedness that is subordinated to the Securities (including premium, if
any, and accrued and unpaid interest, fees and expenses) in exchange for, or out
of the proceeds of the substantially concurrent sale (other than to a Restricted
Subsidiary) of, (A) Equity Interests (other than Disqualified Stock) of the
Company or (B) Refinancing Indebtedness permitted to be incurred under Section
1011; (v) any purchase, redemption, retirement or acquisition, from minority
partners in one or more of the Local Market Partnerships listed in Schedule I
hereto, of any Capital Stock of such Local Market Partnership at the time or
after it becomes a Restricted Subsidiary; (vi) any distribution in respect of
partners' income tax liability and any other distribution that is required to be
made pursuant to the terms of any partnership agreement or similar operating
agreement in effect as of the Issuance Date governing any of the Local Market
Partnerships listed in Schedule I hereto or, to the extent that it is pro rata
or required under law, any distribution that is required to be made pursuant to
the terms of any other similar partnership or similar operating agreement
entered into after the Issuance Date; (vii) the purchase, redemption, retirement
or acquisition by the Company of shares of Capital Stock of the Company from
Continental Teleport, Inc. pursuant to the
<PAGE>
68
Reorganization Agreement; (viii) the purchase, redemption or other acquisition
or retirement for value of Capital Stock, or options, warrants or rights to
purchase or acquire shares of Capital Stock, of the Company or any Restricted
Subsidiary, or similar securities, held by officers or employees or former
officers or employees of the Company or its Restricted Subsidiaries (or their
estates or beneficiaries under their estates), upon death, disability,
retirement or termination of employment in an aggregate amount not to exceed $2
million per year; and (ix) Permitted Investments, provided that no default
described in clauses (1) or (2) of the definition of Events of Default in
Section 501 have occured and are continuing at the time such Permitted
Investments are made or shall occur as a consequence thereof.
For purposes of this Section, if a particular Restricted Payment
involves a non-cash payment, including a distribution of assets, then the amount
of such Restricted Payment shall be deemed to be an amount equal to the sum of
the cash portion of such Restricted Payment, if any, plus an amount equal to the
Fair Market Value of the non-cash portion of such Restricted Payment.
Not later than the date of making any Restricted Payment (other than
those described under clauses (v), (vi), (vii) or (viii) of the second preceding
paragraph), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by clause (b) of this Section, to the
extent applicable, were computed, which calculations may be based upon the
Company's latest available financial statements.
SECTION 1013. Limitation on Liens.
-------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or otherwise
suffer to exist any Lien (other than Permitted Liens) on any property or asset
now owned or hereafter acquired, of the Company or any such Restricted
Subsidiary, unless (a) in the case of any Lien securing Indebtedness that is
expressly subordinated in right of payment to the Securities, the Securities are
secured by a Lien on such property or assets that is senior in priority to such
Lien for so long as such Indebtedness shall be so secured and (b) in the case of
any other Lien, the Securities are equally and ratably secured with the
obligation or liability secured by such Lien for so long as such obligation or
liability shall be so secured.
SECTION 1014. Limitation on Dividend and Other Payment Restrictions
-----------------------------------------------------
Affecting Restricted Subsidiaries.
---------------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on its Capital Stock or with respect to any other interest
or participation in, or measured by, its profits owned by, or pay any
Indebtedness owed to, the Company or any of its Restricted Subsidiaries or (b)
make loans or
<PAGE>
69
advances to the Company or any of its Restricted Subsidiaries or (c) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except, in each case, for such encumbrances or restrictions
existing under or by reason of (i) the Revolving Credit Agreement, provided that
any such encumbrances or restrictions, taken as a whole, are no more restrictive
than those contained in the Revolving Credit Agreement as in effect on the
Issuance Date, (ii) applicable law, (iii) any instrument governing Indebtedness
or Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, (iv) customary nonassignment provisions in leases, rights-
of-way agreements and other agreements entered into in the ordinary course of
business and consistent with past practices, (v) with respect to clause (c)
above, purchase money obligations for property acquired in the ordinary course
of business, (vi) Refinancing Indebtedness permitted to be incurred under
Section 1011, provided that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced, (vii)
any other Indebtedness permitted to be incurred by a Restricted Subsidiary under
Section 1011, provided that the restrictions contained in the agreements
governing such Indebtedness are similar to those contained in the Revolving
Credit Agreement as in effect on the Issuance Date, (viii) provisions of the
partnership agreement or other operating agreement in effect as of the Issuance
Date governing any of the Local Market Partnerships listed in Schedule I hereto,
and (ix) any agreement effecting the renewal, refunding, refinancing or
extension of any Indebtedness referred to in the preceding clause (iii),
provided that the restrictions contained in the agreements governing such new
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being extended, renewed, refinanced or replaced.
SECTION 1015. Limitation on Issuance and Sale of Capital
------------------------------------------
Stock of Restricted Subsidiaries.
--------------------------------
The Company (a) shall not permit any Restricted Subsidiary to issue
any Capital Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) and (b) shall not permit any Person (other than the Company or a
Restricted Subsidiary) to own any Capital Stock of any Restricted Subsidiary;
provided, however, that this Section shall not prohibit (i) the sale or other
disposition of all, but not less than all, of the issued and outstanding Capital
Stock of any Restricted Subsidiary owned by the Company or any Restricted
Subsidiary in compliance with the other provisions of this Indenture, (ii) the
ownership by directors of director's qualifying shares or the ownership by
foreign nationals of Capital Stock of any Restricted Subsidiary, to the extent
mandated by applicable law, (iii) the ownership of Capital Stock of a Restricted
Subsidiary issued and outstanding either (A) as of the Issuance Date (including
minority partnership interests in any of the Local
<PAGE>
70
Market Partnerships listed in Schedule I hereto) or (B) prior to the time that
such Person becomes a Restricted Subsidiary so long as such Capital Stock was
not issued in contemplation of such Person's becoming a Restricted Subsidiary of
the Company or otherwise being acquired by the Company or (iv) the issue or sale
of Capital Stock of a Restricted Subsidiary in a transaction not prohibited by
Section 1017, provided that such Restricted Subsidiary would remain a Restricted
Subsidiary after such transaction.
SECTION 1016. Limitation on Guarantees of Indebtedness by
-------------------------------------------
Restricted Subsidiaries.
-----------------------
The Company shall not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable for the
payment of any Indebtedness of the Company unless (i) (A) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to this
Indenture providing for a Guarantee of payment of the Securities by such
Restricted Subsidiary and (B) with respect to any Guarantee of subordinated
Indebtedness of the Company by a Restricted Subsidiary, any such Guarantee shall
be subordinated to such Restricted Subsidiary's Guarantee with respect to the
Securities at least to the same extent as such subordinated Indebtedness is
subordinated to the Securities and (ii) such Restricted Subsidiary shall waive
and shall not in any manner whatsoever claim or take the benefit or advantage
of, any rights of reimbursement, indemnity or subrogation or any other rights
against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Guarantee until the Securities
have been paid in full. The incurrence by a Restricted Subsidiary as a primary
obligor of any Indebtedness that is guaranteed by the Company shall not be
deemed a Guarantee of the Company's Indebtedness for purposes of this Section.
Notwithstanding the foregoing, any Guarantee of the Securities or
waiver of rights created pursuant to the provisions described in the foregoing
paragraph shall provide by their terms that they shall be automatically and
unconditionally released and discharged upon the release by the holders of the
Indebtedness of the Company described in the preceding paragraph of their
Guarantee by such Restricted Subsidiary (including any deemed release upon
payment in full of all obligations under such Indebtedness, except by or as a
result of payment under such Guarantee), at a time when (A) no other
Indebtedness of the Company has been Guaranteed by such Restricted Subsidiary or
(B) the holders of all such other Indebtedness which is Guaranteed by such
Restricted Subsidiary also release their Guarantee by such Restricted Subsidiary
(including any deemed release upon payment in full of all obligations under such
Indebtedness, except by or as a result of payment under such Guarantee).
<PAGE>
71
SECTION 1017. Limitation on Asset Sales.
-------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, cause, make or suffer to exist any Asset Sale unless (a) the
Company (or the applicable Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets or property sold or otherwise disposed of and (b) at least
75% of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of Eligible Cash Equivalents (or, if less than 75%,
the remainder of such consideration consists of Telecommunications Assets).
Within 365 days after any Asset Sale, the Company (or the applicable
Restricted Subsidiary, as the case may be) may apply (but shall not be required
to apply) the Net Proceeds from such Asset Sale (a) to permanently reduce
outstanding Indebtedness of the Company that is pari passu in right of payment
with the Securities or Indebtedness of any Restricted Subsidiary or (b) to
invest or reinvest in properties and assets that shall be used in the
Telecommunications Business. Any Net Proceeds from any Asset Sale that are not
used, invested or reinvested at the end of such 365-day period as provided in
the preceding sentence shall constitute "Excess Proceeds." Pending final
application of any Net Proceeds of an Asset Sale, such Net Proceeds may only be
invested in Eligible Cash Equivalents or applied to pay Obligations under the
Revolving Credit Agreement. When the aggregate amount of Excess Proceeds exceeds
$10 million, the Company shall be required to make an offer (an "Asset Sale
Offer") to all Holders of the Securities to purchase on a pro rata basis with
the holders of the Senior Notes the maximum principal amount of Securities that
may be purchased out of such Excess Proceeds at an offer price in cash in an
amount equal to 100% of the Accreted Value on the date fixed for closing of such
offer (if such date is prior to __________, 2001) plus any accrued and unpaid
interest not otherwise included in the Accreted Value on such date, or 100% of
the outstanding principal amount thereof (which shall be subject to possible
reduction as set forth in Section 301) plus accrued and unpaid interest, if any,
to the date fixed for the closing of such offer (if such date is on or after
__________, 2001) in accordance with the procedures set forth below (the "Asset
Sale Purchase Price"). To the extent that the aggregate Accreted Value or
principal amount, as the case may be, of the Securities and the Senior Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds
remaining after the consummation of any required Asset Sale Offer to the Holders
of the Securities, the Company may use any remaining Excess Proceeds for general
corporate purposes not otherwise prohibited by this Indenture. If the aggregate
Accreted Value or principal amount, as the case may be, of the Securities and
the Senior Notes surrendered by Holders thereof shall exceed the amount of
Excess Proceeds, then the Trustee shall select the Securities to be purchased on
the basis set forth in Section 1104. Upon completion of any required Asset Sale
Offer to the Holders of the Securities, the amount of Excess Proceeds shall be
reset at zero. The provisions of this Section shall not apply to any transaction
that is permitted under Article Eight.
<PAGE>
72
Within 30 days following the date on which the Company has to make an
Asset Sale Offer, the Company shall mail a notice to each Holder in the manner
provided in Section 106 stating: (1) that the Asset Sale Offer is being made
pursuant to the provisions of Section 1017 of this Indenture and that all
Securities duly and timely tendered shall be accepted for payment (except, as
provided above, if the aggregate Accreted Value or principal amount, as the case
may be, of the Securities and the Senior Notes surrendered exceeds the amount of
Excess Proceeds); (2) the Asset Sale Purchase Price and the purchase date (the
"Asset Sale Payment Date"), which date shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed; (3) that any Securities
not tendered shall continue to accrete and/or accrue interest, as the case may
be; (4) that, unless the Company defaults in the payment of the Asset Sale
Purchase Price, all Securities accepted for payment pursuant to the Asset Sale
Offer shall cease to accrete and/or accrue interest, as the case may be, after
the Asset Sale Payment Date; (5) that Holders electing to have any Securities
purchased pursuant to a Asset Sale Offer shall be required to surrender the
Securities, with the form entitled "Option of Holder to Elect Purchase Pursuant
to an Asset Sale Offer" on the reverse of the Securities 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 Asset Sale Payment Date; (6)
that Holders shall 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 Asset Sale Payment Date, a telegram, telex, facsimile transmission
or letter setting forth the name of the Holder, the principal amount of
Securities delivered for purchase, and a statement that such Holder is
withdrawing his election to have such Securities purchased; (7) that Holders
whose Securities are being purchased only in part shall be issued new Securities
equal in principal amount to the unpurchased portion of the Securities
surrendered, which unpurchased portion must be equal to $1,000 in principal
amount or an integral multiple thereof; (8) the instructions that the Holders of
Securities must follow in order to tender their Securities; and (9) the
circumstances and relevant facts regarding such Asset Sale.
SECTION 1018. Limitation on Transactions with Stockholders
--------------------------------------------
and Affiliates.
--------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, render any services to or receive any
services from, conduct any business or enter into or permit to exist any
transaction or series of related transactions within any twelve-month period
(including, but not limited to, the purchase, sale, exchange, lease, transfer or
other disposition of any of its properties or assets) or enter into any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any holder (or any Affiliate of such holder) of 5% or more of any
class of Capital Stock of the Company or with any Affiliate of the Company or
any Restricted Subsidiary (each of the foregoing, an "Affiliate Transaction"),
unless (a) such Affiliate Transaction is fair to the Company or the
<PAGE>
73
relevant Restricted Subsidiary and on terms that are no less favorable, taken as
a whole, to the Company or the relevant Restricted Subsidiary than those that
could have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person (or, in the event that there are
no comparable transactions involving unrelated Persons to apply for comparative
purposes, is otherwise on terms that, taken as a whole, the Company has
determined to be fair to the Company or the relevant Restricted Subsidiary) and
(b) the Company delivers to the Trustee with respect to any Affiliate
Transaction involving an aggregate consideration in excess of $15 million,
either (i) a resolution to the Board of Directors set forth in an Officers'
Certificate certifying that each such Affiliate Transaction complies with clause
(a) above and which Board Resolution shall have been approved by a majority of
the directors on the Board of Directors who are disinterested with respect to
such transaction or (ii) a written opinion from a nationally recognized
investment banking firm that each such Affiliate Transaction complies with
clause (a) above (without regard to the parenthetical clause thereof).
Notwithstanding the foregoing provisions, the following shall not be
deemed to be Affiliate Transactions: (A) any transaction (1) in the ordinary
course of business between the Company or any Restricted Subsidiary and any
Affiliate thereof engaged in the Telecommunications Business or (2) with respect
to the lease or sharing or other use of cable or fiber lines, equipment,
transmission capacity, rights-of-way or other access rights, between the Company
or any Restricted Subsidiary and any other Person, provided, however, in either
case, that such transaction is on terms that are no less favorable, taken as a
whole, to the Company or the relevant Restricted Subsidiary than those that
could have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person (or, in the event that there are
no comparable transactions involving unrelated Persons to apply for comparative
purposes, is otherwise on terms that, taken as a whole, the Company had
determined to be fair to the Company or the relevant Restricted Subsidiary); (B)
any transaction between the Company and any Wholly Owned Restricted Subsidiary
or between any Wholly Owned Restricted Subsidiaries; (C) any employment
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary (including ordinary course transactions
with officers or directors with respect to compensation, bonus, employee benefit
and severance arrangements, and payments under indemnification arrangements
existing as of the Issuance Date or as may be permitted by law with any officer
or director); (D) transactions permitted by Section 1012; (E) transactions
undertaken pursuant to contractual obligations in place as of the Issuance Date;
(F) purchases of goods and services, any service trials, market testing and new
product arrangements entered into in the ordinary course of business and on
terms consistent with past practice; and (G) all transactions necessary to
effect the Reorganization.
<PAGE>
74
SECTION 1019. Waiver of Certain Covenants.
---------------------------
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Article 8 or Sections 1002 through
1018, inclusive, if before or after the time for such compliance the Holders of
at least a majority in principal amount of the Outstanding Securities, by Act of
such Holders, waive such compliance in such instance with such term, provision
or condition, but no such waiver shall extend to or affect such term, provision
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 term, provision or condition shall remain in full
force and effect.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption.
-------------------
The Securities (a) may be redeemed at the election of the
Company, as a whole or from time to time in part, at any time after ________,
2001 subject to the conditions and at the Redemption Prices specified in the
form of Security, together with accrued interest to the Redemption Date, (b) may
be redeemed at the election of the Company, upon the occurrence prior to
________1999, of the events described in the form of Security, subject to the
conditions and at the Redemption Price specified in the form of Security,
together with accrued interest to the Redemption Date and (c) will be subject to
mandatory redemption in part upon the occurrence of a Special Redemption Event
described in the form of Security, subject to the conditions and at the
Redemption Price specified in the form of Security.
SECTION 1102. Applicability of Article.
------------------------
Redemption upon the occurrence of a Special Redemption Event 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.
SECTION 1103. Notice to Trustee; Election to Redeem.
-------------------------------------
(a) The election of the Company to redeem any Securities pursuant to
Section 1101 (a) or (b) shall be evidenced by a Board Resolution. In case of any
redemption at such election of the Company, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice shall
be satisfactory to the Trustee), notify the Trustee of such Redemption Date and
of the principal amount of Securities to be redeemed and shall deliver to the
Trustee such documentation and records as shall enable the Trustee to select the
Securities to be redeemed pursuant to Section 1104.
(b) If the Company is required to redeem Securities pursuant to
Section 1101(c), the Company shall notify the Trustee upon occurrence of the
Special Redemption Event of such Special Redemption Date and of the principal
amount of Securities to be redeemed and shall deliver to the Trustee such
documentation and records as shall enable the Trustee to select the Securities
to be redeemed pursuant to Section 1104.
<PAGE>
75
SECTION 1104. Selection by Trustee of Securities to Be Redeemed.
-------------------------------------------------
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption on a pro rata basis, subject to the requirements of any
national securities exchange on which the Securities are listed, or, in
the absence of such requirements or if the Securities are not listed; provided,
however, that no such partial redemption shall reduce the portion of the
principal amount of a Security not redeemed to less than $1,000.
The Trustee shall promptly notify the Company 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.
--------------------
Except in the case of a redemption pursuant to Section 1101(c) for
which notice shall be given upon occurence of a Special Redemption Event, notice
of redemption shall be given in the manner provided for in Section 106 not less
than 30 nor more than 60 days prior to the Redemption Date, to each Holder of
Securities to be redeemed.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price and the amount of accrued interest to the
Redemption Date payable as provided in Section 1107, if any,
(3) if less than all Outstanding Securities are to be redeemed, the
identification (and, in the case of a partial redemption, the principal
amounts) of the particular Securities to be redeemed,
(4) in case any Security is to be redeemed in part only, the notice
which relates to such Security shall state that on and after the Redemption
Date, upon surrender of such Security, the Holder shall receive, without
charge, a new Security
<PAGE>
76
or Securities of authorized denominations for the principal amount thereof
remaining unredeemed,
(5) that on the Redemption Date the Redemption Price (and accrued
interest, if any, to the Redemption Date payable as provided in Section
1107) shall become due and payable upon each such Security, or the portion
thereof, to be redeemed, and that discount shall cease to accrete or
interest shall cease to accrue, as the case may be, on and after said date,
and
(6) the place or places where such Securities are to be surrendered
for payment of the Redemption Price and accrued interest, if any.
Notices of redemption in the case of a redemption pursuant to Section
1101(c) shall also state:
(1) that a Special Redemption Event has occurred, and
(2) the portion of such Holder's Securities that must be surrendered
to the Paying Agent.
Notice of redemption of Securities to be redeemed at the election of
the Company or upon the occurrence of a Special Redemption Event shall be given
by the Company or, at the Company's request, by the Trustee in the name and at
the expense of the Company.
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 is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and accrued interest on, all
the Securities which are to be redeemed on that date.
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 (together with accrued interest, if any, to
the Redemption Date), 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. 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, if any, 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 at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 307.
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 the
Securities.
<PAGE>
77
SECTION 1108. Securities Redeemed in Part.
---------------------------
Any Security which is to be redeemed only in part shall be surrendered
at the office or agency of the Company maintained for such purpose pursuant to
Section 1002 (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee 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.
ARTICLE TWELVE
RESERVED
ARTICLE THIRTEEN
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Company's Option to Effect Legal 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 1302 or Section 1303 be
applied to all Outstanding Securities upon compliance with the conditions set
forth below in this Article Thirteen.
SECTION 1302. Legal Defeasance and Discharge.
------------------------------
Upon the Company's exercise under Section 1301 of the option
applicable to this Section 1302, the Company shall be deemed to have been
discharged from its obligations with respect to all Outstanding Securities on
the date the conditions set forth in Section 1304 are satisfied (hereinafter,
"legal defeasance"). For this purpose, such legal defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the Outstanding Securities, which shall thereafter be deemed to
be "Outstanding" only for the purposes of Section 1305 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, 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 Outstanding Securities to receive, solely from the trust
fund
<PAGE>
78
described in Section 1304 and as more fully set forth in such Section, payments
in respect of the principal of (and premium, if any, on) and interest on such
Securities when such payments are due, (B) the Company's obligations with
respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C) the
rights, powers, trusts, duties and immunities of the Trustee hereunder and the
Company's obligations in connection therewith and (D) this Article Thirteen.
Subject to compliance with this Article Thirteen, the Company may exercise its
option under this Section 1302 notwithstanding the prior exercise of its option
under Section 1303 with respect to the Securities.
SECTION 1303. Covenant Defeasance.
-------------------
Upon the Company's exercise under Section 1301 of the option
applicable to this Section 1303, the Company shall be released from its
obligations under any covenant contained in Section 801(4) and Section 803 and
in Sections 1007 through 1018 with respect to the Outstanding Securities on and
after the date the conditions set forth below are satisfied (hereinafter,
"covenant defeasance"), and the Securities shall thereafter be deemed not to be
"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 Outstanding Securities, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such covenant, whether directly or indirectly, by reason of any reference
elsewhere herein to any such covenant or by reason of any reference in any such
covenant 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(3) and (4), but, except as specified above, the remainder of this
Indenture and such Securities shall be unaffected thereby.
SECTION 1304. Conditions to Legal Defeasance or Covenant Defeasance.
-----------------------------------------------------
The following shall be the conditions to application of either Section
1302 or Section 1303 to the Outstanding Securities:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 607 who shall agree to comply with the provisions of this
Article Thirteen applicable to it) 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, (A)
cash in U.S. dollars, or (B) U.S. Government Obligations, or (C) a
combination thereof which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide,
not later than one day before the due date of any payment, money in an
amount
<PAGE>
79
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered
to the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or other qualifying trustee) to pay and discharge, the principal
of (and premium, if any) and interest on the Outstanding Securities on the
Stated Maturity (or Redemption Date, if applicable) of such principal (and
premium, if any) or installment of interest on the day on which such
payments are due and payable in accordance with the terms of this Indenture
and of such Securities; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to said payments with respect to the Securities.
Before such a deposit, the Company may give to the Trustee, in accordance
with Section 1103 hereof, a notice of its election to redeem all of the
Outstanding Securities at a future date in accordance with Article Eleven
hereof, which notice shall be irrevocable. Such irrevocable redemption
notice, if given, shall be given effect in applying the foregoing. For
this purpose, "U.S. Government Obligations" means securities that are (x)
direct obligations of the United States of America for the timely payment
of which its full faith and credit is pledged or (y) 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 of 1933, as amended), 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.
(2) In the case of an election under Section 1302, the Company shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee stating that (x) the Company has
received from, or there has been published by, the Internal Revenue Service
a ruling, or (y) since July __, 1996, 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 Counsel shall confirm that, the Holders of
the Outstanding Securities shall not recognize income, gain or loss for
federal income tax purposes solely as a result of such legal defeasance and
shall 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 legal
defeasance had not occurred.
<PAGE>
80
(3) In the case of an election under Section 1303, the Company shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee to the effect that the Holders of the
Outstanding Securities shall not recognize income, gain or loss for federal
income tax purposes solely as a result of such covenant defeasance and
shall 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.
(4) No Default or Event of Default with respect to the Securities
shall have occurred and be continuing under paragraphs (8) and (9) of
Section 501 hereof are concerned, at any time during the period ending on
the 91st day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until the expiration of such
period).
(5) Such legal 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 is a party
or by which it is bound.
(6) The Company shall have delivered to the Trustee an Opinion of
Counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds shall not be subject to the effect
of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditor's rights generally.
(7) 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 Securities over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others.
(8) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the legal defeasance under
Section 1302 or the covenant defeasance under Section 1303 (as the case may
be) have been complied with.
SECTION 1305. 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
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for purposes of this
Section 1305, the "Trustee") pursuant to Section 1304 in respect of the
Outstanding Securities shall be held in trust and
<PAGE>
81
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
(including the Company acting as its own 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 (and 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. Governmental Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Securities.
Anything in this Article Thirteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1304 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 an equivalent legal defeasance or covenant
defeasance, as applicable, in accordance with this Article.
SECTION 1306. Reinstatement.
-------------
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 1305 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 shall be revived and reinstated as though no deposit had occurred
pursuant to Section 1302 or 1303, as the case may be, until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 1305; provided, however, that if the Company makes any payment of
principal of (or premium, if any) or interest on any Security following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Securities to receive such payment from the money held by
the Trustee or Paying Agent.
<PAGE>
82
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the day and year first above written.
TELEPORT COMMUNICATIONS GROUP INC.
By
--------------------------------
Name:
Title:
Attest:
-------------------
Title:
UNITED STATES TRUST COMPANY
OF NEW YORK
By
--------------------------------
Name:
Title:
Attest:
-------------------
Title:
<PAGE>
SCHEDULE I
to
Indenture
dated June __, 1996
Local Market Partnerships
TCG Chicago (a New York partnership)
TCG Connecticut (a New York partnership)
TCG Dallas (a New York partnership)
TCG Detroit (a New York partnership)
TCG Illinois (a New York partnership)
TCG Los Angeles (a New York partnership)
TCG Omaha (a New York partnership)
TCG Phoenix (a New York partnership)
TCG Pittsburgh (a New York partnership)
TCG San Diego (a New York partnership)
TCG San Francisco (a New York partnership)
TCG Seattle (a New York partnership)
TCG South Florida (a New York partnership)
TCG St. Louis (a New York partnership)
<PAGE>
EXHIBIT 4.5
EXHIBIT A - FORM OF GLOBAL SECURITY
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY (AS
DEFINED BELOW) 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 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.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN
DEFINITIVE REGISTERED FORM, THIS CERTIFICATE MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER
NOMINEE OF DTC OR BY DTC OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A
NOMINEE OF SUCH SUCCESSOR DEPOSITORY.
TELEPORT COMMUNICATIONS GROUP INC.
Senior
Discount Note
due 2007
No._____ $__________
CUSIP: 879463 AA 5
The following information is supplied for purposes of Sections 1273
and 1275 of the Internal Revenue Code:
Issuance Date: July __, 1996 Original issue discount under
Section 1273 of the Internal Revenue
Code (for each $1,000 principal
amount): $__________
Issue Price (for each $1,000 Yield to Maturity: _____%
principal amount): $__________
<PAGE>
Method used to determine yield to maturity Original issue discount for [short]
for [short] accrual period of accrual
July __, 1996 to [date]: period of July __, 1996 to [date]
exact method (for each $1,000 principal amount):
$__________
Teleport Communications Group Inc., 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 Cede & Co., or registered assigns, the principal sum of __________ Dollars on
_____________, 2007, at the office or agency of the Company referred to below,
and to pay interest thereon on _______________, 2001, and semi-annually
thereafter, on [date] and [date] in each year (each an "Interest Payment Date"),
from ______________, 2001, or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, at the rate of _____% per
annum, until the principal hereof is paid or duly provided for, and (to the
extent lawful) to pay on demand (pursuant to the procedures set forth in Section
307 of the Indenture) interest on any overdue interest at the rate of ____% per
annum from the date on which such overdue interest becomes payable to the date
payment of such interest has been made or duly provided for, provided, however,
-------- -------
that at any time prior to ____________, 2001, the Company may elect to commence
the accrual of cash interest on an Interest Payment Date (from and after such
Interest Payment Date), in which case the principal amount at Stated Maturity of
this Note shall on such Interest Payment Date be reduced to the Accreted Value
of this Note as of such Interest Payment Date and cash interest on such
principal amount shall be payable as provided above on each Interest Payment
Date thereafter. The principal on this Note shall not accrue interest until
________________, 2001, except in the case of a default in payment of the amount
due at Maturity, in which case, the amount then due on this Note shall bear
interest at the rate of _____% per annum from the date of such default in
payment, as provided in the Indenture and except as provided in the proviso of
the previous sentence. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date shall, as provided in such Indenture,
be paid to the Person in whose name this Note (or one or more Predecessor Notes)
is registered at the close of business on the Regular Record Date for such
interest, which shall be the [date] or [date] (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 shall forthwith cease to be
payable to the holder on such Regular Record Date, and such defaulted interest,
and (to the extent lawful) interest on such defaulted interest at _____% per
annum, may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) 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 Notes not less than 10 days prior to
such Special Record Date, or may be paid at any time in any other lawful manner
not inconsistent with the requirements of any securities exchange on which the
Notes may be listed, and upon such notice as may be required by such exchange,
all as more fully provided in said Indenture. Payment of the principal of (and
premium, if any) and interest on this Note shall be made at the office or agency
of the Company maintained for that purpose in The City of New York, or at such
other office or agency of the Company as may be maintained for such purpose, in
<PAGE>
3
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; provided, however, that
-------- -------
payment of interest may be made at the option of the Company (i) by check mailed
to the address of the Person entitled thereto as such address shall appear on
the Security Register, or (ii) by transfer to an account maintained by the payee
located in the United States.
This Note is a global Security representing $ _____ of the Notes. If
at any time, (i) the Depository notifies the Company that it is unwilling or
unable to continue as Depository or if at any time the Depository shall no
longer be registered or in good standing under the Securities Exchange Act of
1934, as amended, or other applicable statute or regulation and a successor
Depository is not appointed by the Company within 90 days after the Company
receives such notice or becomes aware of such condition, as the case may be, or
(ii) any Event of Default shall have occurred and be continuing and Holders of
more than 25% in principal amount of the Securities Outstanding represented by
one or more global Notes advise the Trustee that the continuation of a book-
entry system through the Depository (or a successor thereto) with respect to the
Notes is no longer required, then in such event the Company will execute and the
Trustee will authenticate and deliver Securities in definitive registered form,
in authorized denominations, and in an aggregate principal amount equal to the
principal amount of this Security in exchange for this Security. Such
Securities in definitive registered form shall be registered in such names and
issued in such authorized denominations as the Depository, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Securities to the Persons
in whose names such Securities are so registered.
Reference is hereby made to the further provisions of this Note 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 by manual signature, this Note
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.
<PAGE>
4
Dated: TELEPORT COMMUNICATIONS GROUP INC.
By ____________________________
Attest: Title:
_____________________________
Authorized Signature
<PAGE>
5
[Form of Reverse of Security]
---------------------------
This Note is one of a duly authorized issue of securities of the
Company designated as its ___% Senior Discount Notes due 2007 (herein called the
"Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal amount to $___________, which may be issued under
an indenture (herein called the "Indenture") dated as of July __, 1996, between
the Company and United States Trust Company of New York, 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 Trustee and the
holders of the Notes, and of the terms upon which the Notes are, and are to be,
authenticated and delivered.
The Notes are subject to redemption, upon not less than 30 nor more
than 60 days' notice, at any time after ________, 2001, as a whole or in part,
at the election of the Company, at a Redemption Price equal to the percentage of
the principal amount of the Notes (which shall be subject to possible reduction
as set forth on the face hereof) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on ___________ of the years indicated below:
YEAR PERCENTAGE
- - ---- ----------
2001.................. %
2002.................. %
2003.................. %
2004 and thereafter... 100%
In the event of the first to occur after the Issuance Date and prior
to _____________, 1999 of (a) a Public Equity Offering for gross proceeds of
$150,000,000 or more or (b) a sale or series of related sales by the Company of
its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150,000,000 or more, the
Company may, at its option, within 60 days thereof, use up to 67% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Notes originally issued at a redemption price
of ____% of the Accreted Value as of the redemption date of the Notes so
redeemed; provided that at least one-half of the aggregate principal amount of
--------
the Notes originally issued remains outstanding after such redemption. Any such
redemption may be effected only once and must be effected upon not less than 30
nor more than 60 days' notice given within 30 days
<PAGE>
6
following such Public Equity Offering or the most recent sale to a Strategic
Equity Investor, as the case may be.
Upon the occurrence of a Change of Control, each holder of Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such holder's
Notes at a purchase price equal to (i) 101% of the Accreted Value thereof on any
Change of Control Payment Date occurring prior to __________, 2001, plus any
accrued and unpaid interest not otherwise included in the Accreted Value on such
Change of Control Payment Date or (ii) 101% of the principal amount thereof
(which shall be subject to possible reduction as set forth on the face hereof)
on any Change of Control Payment Date occurring on or after ____________, 2001,
plus accrued and unpaid interest, if any, to such Change of Control Payment
Date, in accordance with the procedures set forth in the Indenture.
Notes aggregating $____ million in principal amount will be subject to
mandatory redemption at a redemption price of 101% of the Accreted Value thereof
as of the redemption date in the event that either, (a) within 270 days after
the Issuance Date the Company has not received both confirmation of the NYPSC of
the opinion of its General Counsel or approval otherwise from the NYPSC of the
issuance of the Notes and the approval from the NJBPU to incur up to $____
billion of longterm debt or (b) either the NYPSC or the NJBPU issues an order
denying the petition of the Company to increase its borrowing authority to
permit the issuance of the Notes, the Senior Notes and the $26 million
subordinated note of the Company to TCI (each event described in clause (a) and
(b), a "Special Redemption Event"). The Redemption Date (the "Special
Redemption Date") will be five Business Days after the occurrence of a Special
Redemption Event.
Upon occurrence of a Special Redemption Event, the Trustee shall mail
a notice to each holder of Notes stating, among other things, that a Special
Redemption Event has occurred, the amount of Notes to be redeemed on the Special
Redemption Date and the portion of such holder's Notes that must be surrendered
to the Paying Agent.
In the case of any redemption of Notes, interest installments whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
holders of such Notes, or one or more Predecessor Notes, of record at the close
of business on the relevant Record Date referred to on the face hereof. Notes
(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 of this Note in part only, a new Note or
Notes 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 of
all the Notes may be declared to be due and payable in the manner and with the
effect provided in the Indenture and in an amount equal to (i) the Accreted
Value of the Notes as of the date on which the Notes first become due and
payable, if such date occurs prior to ____________, 2001, or (ii) the principal
amount of the Notes (which shall be subject to possible reduction as set forth
on the face hereof) as of the date on which the Notes first become due and
payable plus accrued and unpaid interest, if any, to such date, if such date
occurs on or after ______________, 2001.
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Default, upon compliance by the
Company with certain conditions set forth therein, which provisions apply to
this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders under the Indenture at any time by the
Company and the Trustee with
<PAGE>
7
the consent of the holders of a majority in aggregate principal amount of the
Notes at the time Outstanding. The Indenture also contains provisions permitting
the holders of specified percentages in aggregate principal amount of the Notes
at the time Outstanding, on behalf of the holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by or on behalf of the holder of this Note shall be conclusive and
binding upon such holder and upon all future holders of this Note and of any
Note 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 Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any, on)
and interest on this Note 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 Note is registrable on the Security
Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
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 his attorney duly authorized in writing, and
thereupon one or more new Notes, of authorized denominations and for the same
aggregate principal amount, shall be issued to the designated transferee or
transferees.
The Notes 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 Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes (subject to provisions with respect to record dates for the
payment of interest), whether or not this Note be overdue, and neither the
Company, the Trustee nor any agent shall be affected by notice to the contrary.
<PAGE>
8
All terms used in
this Note which are defined in the Indenture shall have the meanings assigned to
them in the Indenture.
<PAGE>
9
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.
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1010 or Section 1017 of the Indenture, check the box: [ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1010 or Section 1017 of the Indenture, state the
amount (in original principal amount) below:
$_____________________.
Date:________________
Your Signature:____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:________________________________
<PAGE>
EXHIBIT 4.6
EXHIBIT A - FORM OF GLOBAL SECURITY
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY (AS
DEFINED BELOW) 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 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.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN
DEFINITIVE REGISTERED FORM, THIS CERTIFICATE MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER
NOMINEE OF DTC OR BY DTC OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A
NOMINEE OF SUCH SUCCESSOR DEPOSITORY.
TELEPORT COMMUNICATIONS GROUP INC.
Senior
Note
due 2006
No._____ $__________
Issuance Date: July __, 1996 CUSIP: 879463 AB 3
<PAGE>
Teleport Communications Group Inc., 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 Cede & Co., or registered assigns, the principal sum of __________ Dollars on
_____________, 2006, at the office or agency of the Company referred to below,
and to pay interest thereon on _______________, 1996, and semi-annually
thereafter, on [date] and [date] in each year (each an "Interest Payment Date"),
from ______________, 1996, or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, at the rate of _____% per
annum, until the principal hereof is paid or duly provided for, and (to the
extent lawful) to pay on demand (pursuant to the procedures set forth in Section
307 of the Indenture) interest on any overdue interest at the rate of ____% per
annum from the date on which such overdue interest becomes payable to the date
payment of such interest has been made or duly provided for. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
shall, as provided in such Indenture, be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of business
on the Regular Record Date for such interest, which shall be the [date] or
[date] (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 shall forthwith cease to be payable to the holder on such Regular Record
Date, and such defaulted interest, and (to the extent lawful) interest on such
defaulted interest at _____% per annum, may be paid to the Person in whose name
this Note (or one or more Predecessor Notes) 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 Notes not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this Note
shall be made at the office or agency of the Company maintained for that purpose
in The City of New York, or at such other office or agency of the Company as may
be maintained for such purpose, in
<PAGE>
3
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; provided, however, that
-------- -------
payment of interest may be made at the option of the Company (i) by check mailed
to the address of the Person entitled thereto as such address shall appear on
the Security Register, or (ii) by transfer to an account maintained by the payee
located in the United States.
This Note is a global Security representing $ _____ of the Notes. If
at any time, (i) the Depository notifies the Company that it is unwilling or
unable to continue as Depository or if at any time the Depository shall no
longer be registered or in good standing under the Securities Exchange Act of
1934, as amended, or other applicable statute or regulation and a successor
Depository is not appointed by the Company within 90 days after the Company
receives such notice or becomes aware of such condition, as the case may be, or
(ii) any Event of Default shall have occurred and be continuing and Holders of
more than 25% in principal amount of the Securities Outstanding represented by
one or more global Notes advise the Trustee that the continuation of a book-
entry system through the Depository (or a successor thereto) with respect to the
Notes is no longer required, then in such event the Company will execute and the
Trustee will authenticate and deliver Securities in definitive registered form,
in authorized denominations, and in an aggregate principal amount equal to the
principal amount of this Security in exchange for this Security. Such
Securities in definitive registered form shall be registered in such names and
issued in such authorized denominations as the Depository, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Securities to the Persons
in whose names such Securities are so registered.
Reference is hereby made to the further provisions of this Note 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 by manual signature, this Note
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.
<PAGE>
4
Dated: TELEPORT COMMUNICATIONS GROUP INC.
By ____________________________
Attest: Title:
_____________________________
Authorized Signature
<PAGE>
5
[Form of Reverse of Security]
---------------------------
This Note is one of a duly authorized issue of securities of the
Company designated as its ___% Senior Notes due 2006 (herein called the
"Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal amount to $___________, which may be issued under
an indenture (herein called the "Indenture") dated as of July __, 1996, between
the Company and United States Trust Company of New York, 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 Trustee and the
holders of the Notes, and of the terms upon which the Notes are, and are to be,
authenticated and delivered.
The Notes are subject to redemption, upon not less than 30 nor more
than 60 days' notice, at any time after ________, 2001, as a whole or in part,
at the election of the Company, at a Redemption Price equal to the percentage of
the principal amount of the Notes set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on ___________ of the years indicated below:
YEAR PERCENTAGE
- - ---- ----------
2001.................. %
2002.................. %
2003.................. %
2004 and thereafter... 100%
In the event of the first to occur after the Issuance Date and prior
to _____________, 1999 of (a) a Public Equity Offering for gross proceeds of
$150,000,000 or more or (b) a sale or series of related sales by the Company of
its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150,000,000 or more, the
Company may, at its option, within 60 days thereof, use up to 33% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Notes originally issued at a redemption price
of ____% of the aggregate principal amount of the Notes so redeemed; provided
--------
that at least one-half of the aggregate principal amount of the Notes originally
issued remains outstanding after such redemption. Any such redemption may be
effected only once and must be effected upon not less than 30 nor more than 60
days' notice given within 30 days
<PAGE>
6
following such Public Equity Offering or the most recent sale to a Strategic
Equity Investor, as the case may be.
Upon the occurrence of a Change of Control, each holder of Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such holder's
Notes at a purchase price equal to 101% of the principal amount thereof on any
Change of Control Payment Date plus accrued and unpaid interest, if any, to such
Change of Control Payment Date, plus accrued and unpaid interest, if any, to
such change of Control Payment Date, in accordance with the procedures set forth
in the Indenture.
In the case of any redemption of Notes, interest installments whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
holders of such Notes, or one or more Predecessor Notes, of record at the close
of business on the relevant Record Date referred to on the face hereof. Notes
(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 of this Note in part only, a new Note or
Notes 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 of
all the Notes may be declared to be due and payable in the manner and with the
effect provided in the Indenture and in an amount equal to the principal amount
of the Notes as of the date on which the Notes first become due and payable plus
accrued and unpaid interest, if any, to such date.
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Default, upon compliance by the
Company with certain conditions set forth therein, which provisions apply to
this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders under the Indenture at any time by the
Company and the Trustee with
<PAGE>
7
the consent of the holders of a majority in aggregate principal amount of the
Notes at the time Outstanding. The Indenture also contains provisions permitting
the holders of specified percentages in aggregate principal amount of the Notes
at the time Outstanding, on behalf of the holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by or on behalf of the holder of this Note shall be conclusive and
binding upon such holder and upon all future holders of this Note and of any
Note 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 Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any, on)
and interest on this Note 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 Note is registrable on the Security
Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
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 his attorney duly authorized in writing, and
thereupon one or more new Notes, of authorized denominations and for the same
aggregate principal amount, shall be issued to the designated transferee or
transferees.
The Notes 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 Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes (subject to provisions with respect to record dates for the
payment of interest), whether or not this Note be overdue, and neither the
Company, the Trustee nor any agent shall be affected by notice to the contrary.
<PAGE>
8
All terms used in
this Note which are defined in the Indenture shall have the meanings assigned to
them in the Indenture.
<PAGE>
9
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.
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1010 or Section 1017 of the Indenture, check the box: [ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1010 or Section 1017 of the Indenture, state the
amount (in original principal amount) below:
$_____________________.
Date:________________
Your Signature:____________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:________________________________
<PAGE>
EXHIBIT 5.1
[DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD]
June 26, 1996
Teleport Communications Group Inc.
One Teleport Drive
Staten Island, New York 10311
Ladies and Gentlemen:
We refer to the Registration Statement (the "Registration Statement") on
Form S-1 (File No. 333-3984), filed by Teleport Communications Group Inc. (the
"Company"), with the Securities and Exchange Commission (the "Commission"), for
the purpose of registering under the Securities Act of 1933, as amended (the
"Securities Act"), the Company's Senior Notes due 2006 (the "Senior Notes") and
the Company's Senior Discount Notes due 2007 (the "Senior Discount Notes" and,
together with the Senior Notes, the "Notes"), to be offered to the public
pursuant to an Underwriting Agreement (the "Debt Underwriting Agreement") by and
among the Company and Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Chase Securities Inc. and Toronto Dominion Securities (USA) Inc.
as underwriters. Capitalized terms used herein that are not otherwise defined
herein shall have the same meaning as in the Debt Underwriting Agreement.
In connection with the foregoing registration, we have acted as counsel
for the Company, and have examined originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents. As to any facts material to the opinion expressed herein which were
not independently established or verified, we have relied upon statements and
<PAGE>
Teleport Communications Group Inc.
June 26, 1996
Page 2
representations of officers and other representatives of the Company and others.
We are members of the Bar of the District of Columbia and do not purport
to be experts on, or generally familiar with, or certified to express legal
conclusions based upon, the laws of any other jurisdiction, other than the
Delaware General Corporation Law and the laws of the United States to the extent
applicable hereto. Accordingly, as to matters of law set forth below, our
opinion is limited to matters of law under the laws of the District of Columbia,
the laws of the United States to the extent applicable hereto and the Delaware
General Corporation Law, and we express no opinion as to conflicts of law rules,
or the laws of any states or jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications stated
herein, we are of the opinion that the Notes have been duly authorized and, when
executed and authenticated in accordance with the provisions of the Indentures
and delivered to and paid for by the underwriters pursuant to the Debt
Underwriting Agreement, will be binding obligations of the Company enforceable
against the Company in accordance with their terms, except to the extent that
(a) the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium (whether general or specific), fraudulent conveyance
or other similar laws now or hereafter in effect affecting the enforcement of
creditor's rights and remedies generally, (b) the remedy of specific performance
and injunctive and other forms of equitable relief may be limited by equitable
defenses and the discretion of the court before which any proceeding therefor
may be brought (whether such proceeding is at law or in equity or in a
bankruptcy proceeding) or limited by other equitable principles of general
applicability, and (c) the waiver as to usury, stay or extension laws may be
unenforceable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and any abbreviated registrations statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statement (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to this
firm under the caption "Legal Matters" contained in the prospectus filed as a
part thereof. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
Very truly yours,
DOW, LOHNES & ALBERTSON
By: /s/ Edward J. O'Connell
-------------------------
Edward J. O'Connell
Member
<PAGE>
EXHIBIT 5.2
[DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD]
June 24, 1996
Teleport Communications Group Inc.
One Teleport Drive
Staten Island, New York 10311-1011
Ladies and Gentlemen:
We refer to (i) the Registration Statement on Form S-1 (File No. 333-3850)
(the "Equity Registration Statement") filed by Teleport Communications Group
Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") for the purpose of registering under the Securities Act of 1933,
as amended (the "Securities Act"), shares of the Company's Class A Common Stock,
par value $0.01 per share, and (ii) the Registration Statement on Form S-1 (File
No. 333-3984) (the "Debt Registration Statement") filed by the Company with the
Commission for the purpose of registering under the Securities Act the Company's
Senior Notes due 2006 and Senior Discount Notes due 2007 (the Equity
Registration Statement and the Debt Registration Statement being referred to
collectively herein as the "Registration Statements"). All capitalized terms
used herein and not otherwise defined herein shall have the same meanings
assigned to them in the Registration Statements.
We have acted as special Federal Communications Commission ("FCC") counsel
to the Company in connection with the Registration Statements. As special FCC
counsel, in this opinion we address only matters within the jurisdiction of the
FCC under the Communications Act of 1934, as amended, and the rules, regulations
and published orders of the FCC (collectively, the "Communications Act").
Amendments to the Communications Act include the Telecommunications Act of 1996
(the "1996 Act"). We do not express opinions herein concerning any laws other
than the Communications Act. Our opinions are limited strictly to the matters
stated herein and no opinions may be inferred or are implied beyond the matters
expressly stated herein.
Acting as special FCC counsel, we have reviewed the proposed Reorganization
of the Company as described in the Registration Statements. Based upon our
analysis of the Communications Act and subject to the qualifications,
assumptions and limitations set forth herein, we are of the opinion that the
1996 Act does not limit the acquisition of any of the partnership interests
contemplated to be acquired in the Reorganization.
<PAGE>
John W. Thomson, Esq.
Teleport Communications Group Inc.
June 24, 1996
Page 2
With respect to questions of fact regarding the assumptions above, we have
relied, without independent inquiry or verification by us, upon the
representations of the Company regarding the Reorganization. We have not been
retained or engaged to perform, nor have we performed, any independent review or
investigation of any agreements to which the Company may be subject, nor have we
made any independent investigation as to the existence of facts, if any, which
could materially affect the above assumptions.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statements and any abbreviated registration statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statements (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to this
firm and this opinion under "Risk Factors -- Federal and State Regulation" and
"Business --Government Regulation -- Telecommunications Act of 1996" contained
in the prospectuses filed as a part thereof. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
The opinions set forth herein are as of the date hereof. We assume no
obligation to advise you of changes which may hereafter be brought to our
attention. Our opinions are based on statutory and judicial decisions in effect
at the date hereof, and we do not opine with respect to any law, regulation,
rule, judicial interpretation or government policy which may be enacted or
adopted after the date hereof, nor do we assume any responsibility to advise you
of further changes in our opinion.
This opinion is furnished to you in connection with the Registration
Statements and, except for the submission of it as an Exhibit to the
Registration Statements, is not to be used, circulated, quoted or otherwise
relied upon by any other person or entity or for any other purpose without our
prior written consent.
Very truly yours,
DOW, LOHNES & ALBERTSON
By: /s/ Timothy J. Kelley
--------------------------------
Timothy J. Kelley,
Member
<PAGE>
EXHIBIT 5.3
[SMITH, DON, ALAMPI, D'ARGENIO & ARTURI
LETTERHEAD]
June 25, 1996
Teleport Communications Group Inc.
One Teleport Drive
Staten Island, New York 10311-1011
Ladies and Gentlemen:
We refer to (i) the Registration Statement on Form S-1 (File No.
333-3850) (the "Equity Registration Statement") filed by Teleport Communications
Group Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") for the purpose of registering under the Securities Act of 1933,
as amended (the "Securities Act"), shares of the Company's Class A Common Stock,
par $0.01 per share, and (ii) the Registration Statement on Form S-1 (File No.
333-3984) (the "Debt Registration Statement") filed by the Company with the
Commission for the purpose of registering under the Securities Act the Company's
Senior Notes due 2006 and Senior Discount Notes due 2007 (collectively the
"Notes" and the Equity Registration Statement and the Debt Registration
Statement being collectively referred to as the "Registration Statements"). All
capitalized terms used herein and not otherwise defined have the same meanings
assigned to them in the Registration Statements.
We have acted as counsel for the Company for New Jersey regulatory
matters insofar as they relate to the Registration Statements. As New Jersey
Regulatory Counsel, in this opinion we address only matters within the
jurisdiction of the New Jersey Board of Public Utilities ("NJBPU") under the
applicable statutes and rules governing its authority. We do not express
opinions herein concerning any laws other than those of New Jersey. Our
opinions are limited strictly to the matters stated herein and no opinions may
be inferred or are implied beyond the matters expressly stated herein.
Acting as New Jersey Regulatory Counsel, we have reviewed the proposed
issuances of Notes as described in the Registration Statements. Based upon our
analysis of the laws of New Jersey, and
<PAGE>
Teleport Communications Group Inc.
June 25, 1996
page - 2 -
subject to the qualifications, assumptions and limitations set forth herein, we
are of the opinion that the proposed Notes are properly authorized under the
laws of New Jersey and pursuant to the NJBPU orders and rulings relating to the
issuance of debt by the Company, are valid and enforceable, and that no further
authorizations or consents are required from any other New Jersey state
governmental agency having jurisdiction over telecommunications matters for the
Company to issue the Notes.
Pursuant to NJBPU Orders dated November 19, 1993 in Docket No.
TF93090391 and September 8, 1995 in Docket No. TF95050243, the Company and its
wholly owned subsidiary TCG New York Inc. each have authority to issue up to $1
billion in long term debt without prior approval of the NJBPU as to the terms
thereof, for a total potential long term indebtedness of $2 billion. Inasmuch
as the proceeds to the Company from the proposed issuance of Notes under the
Registration Statements consist of $300 million in Senior Notes and $625
million in Senior Discount Notes, and the remaining long term debt to be issued
is $26 million, we are of the opinion that the proposed transactions are
permitted under the applicable Orders and the provisions of the New Jersey
Public Utility Act governing the issuance of debt, N.J.S.A. 48:3-9.
We are also of the opinion that, to the extent the Company would need to
borrow in excess of the currently authorized amounts, its petition for extension
of debt would be routinely granted by the NJBPU in the ordinary course of
business, and we are aware of no instance in which such a petition has been
denied by the NJBPU. Finally, were the NJBPU to determine that any issuance of
Notes by the Company was not fully authorized by the NJBPU's prior Orders, we
are of the opinion that the Company could successfully obtain confirmation of
the issuance nunc pro tunc, inasmuch as such nunc pro tunc confirmation orders
have been issued by the NJBPU in the past in cases in which utility financing
transactions were not deemed to be fully in compliance with prior NJBPU orders,
and we are aware of no instance in which such a petition has been denied.
With respect to questions of fact regarding the assumptions above, we
have relied, without independent inquiry or verification by us, upon
representations of the Company. We have not been retained or engaged to
perform, nor have we performed, any independent review or investigation of any
agreements to which the Company may be subject, nor have we made any independent
investigation as to the existence of facts, if any, which could materially
affect the above assumptions.
<PAGE>
Teleport Communications Group Inc.
June 25, 1996
page - 3 -
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statements and any abbreviated registration statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statements (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to this
firm and this opinion under "Risk Factors - Limitation on Incurrence of Debt
Under New York and New Jersey Regulatory Authorizations" and "Legal Matters"
contained in the prospectuses filed as part thereof. In giving such consent, we
do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
The opinions set forth herein are as of the date hereof. We assume no
obligation to advise you of changes which may hereafter be brought to our
attention. Our opinions are based on statutory and judicial decisions in effect
at the date hereof, and we do not opine with respect to any law, regulation,
rule, judicial interpretation or government policy which may be enacted or
adopted after the date hereof, nor do we assume any responsibility to advise you
of further changes in our opinion.
This opinion is furnished to you in connection with the Registration
Statements, and except for submission of it as an Exhibit to the Registration
Statements, is not to be used, circulated, quoted or otherwise relied upon by
any other person or entity or for any other purpose without our prior written
consent.
Very truly yours,
SMITH, DON, ALAMPI,
D'ARGENIO & ARTURI
/s/ SMITH, DON, ALAMPI, D'ARGENIO & ARTURI
--------------------------------------
<PAGE>
EXHIBIT 5.4
[ROLAND, FOGEL, KOBLENZ & CARR, LLP
LETTERHEAD]
June 25, 1996
Teleport Communications Group Inc.
One Teleport Drive
Staten Island, New York 10311-1011
Ladies and Gentlemen:
We refer to (i) the Registration Statement on Form S-1 (File No.
333-3850) (the "Equity Registration Statement") filed by Teleport Communications
Group Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") for the purpose of registering under the Securities Act of 1933,
as amended (the "Securities Act"), shares of the Company's Class A Common Stock,
par value $0.01 per share, and (ii) the Registration Statement on Form S-1 (File
No. 333-3984) (the "Debt Registration Statement" and, together with the Equity
Registration Statement, the "Registration Statements") filed by the Company with
the Commission for the purpose of registering under the Securities Act the
Company's Senior Notes due 2006 and Senior Discount Notes due 2007 (collectively
the "Notes"). All capitalized terms used herein and not otherwise defined herein
shall have the same meanings assigned to them in the Registration Statements.
We have acted as special New York Public Service Commission ("PSC")
counsel to the Company in connection with the Registration Statements. As
special PSC counsel, in this opinion we address only matters within the
jurisdiction of the PSC under
<PAGE>
the New York Public Service Law, and the rules, regulations and published orders
of the PSC (collectively, the "Public Service Law"). We do not express opinions
herein concerning any laws other than the Public Service Law. Our opinions are
limited strictly to the matters stated herein and no opinions may be inferred or
are implied beyond the matters expressly stated herein.
Acting as special PSC counsel, we have reviewed the Debt Registration
Statement. Based on our analysis of the Public Service Law and an opinion
received from the Office of General Counsel of the PSC, and subject to the
qualifications, assumptions and limitations set forth herein, we are of the
opinion that under existing authorizations issued separately to TCGI and TCGNY,
up to $1.75 billion may be borrowed by either entity, subject only to the
requirement that the aggregate long-term debt not exceed $1.75 billion.
Accordingly, we are of the opinion that the Company has obtained all
authorizations and consents from the PSC required for the issuance of the Notes,
and that no further authorizations or consents are required from any other New
York State governmental agency having jurisdiction over telecommunications
matters for the Company to issue the Notes. It is also our opinion that, based
upon the foregoing and the opinion of the PSC general counsel, the Notes will be
validly
2
<PAGE>
issued and enforceable. A request for PSC confirmation of the opinion issued by
its general counsel or, in the alternative, for authorization to incur up to $2
billion in long term debt, has been submitted, and we can conceive of no reason
why said confirmation or authorization will not be promptly issued.
With respect to questions of fact regarding the assumptions above, we
have relied, without independent inquiry or verification by us, upon the
representations of the Company regarding the Notes. We have not been retained
or engaged to perform, nor have we performed, any independent review or
investigation of any agreements to which the Company may be subject, nor have we
made any independent investigation as to the existence of facts, if any, which
could materially affect the above assumptions.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statements and any abbreviated registration statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statements (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to this
firm and this opinion under "Risk Factors - Limitation on Incurrence of Debt
Under New York and New Jersey Regulatory Authorizations" and "Legal Matters"
contained in the prospectuses filed as a part thereof. In giving such consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
3
<PAGE>
The opinions set forth herein are as of the date hereof. We assume no
obligation to advise you of changes which may hereafter be brought to our
attention. Our opinions are based on statutory and judicial decisions in effect
at the date hereof, and we do not opine with respect to any law, regulation,
rule, judicial interpretation or government policy which may be enacted or
adopted after the date hereof, nor de we assume any responsibility to advise you
of further changes in our opinion.
This opinion is furnished to you in connection with the Registration
Statements and, except for the submission of it as as an Exhibit to the
Registration Statements, is not to be used, circulated, quoted or otherwise
relied upon by any other person or entity or for any other purpose without our
prior written consent.
Very truly yours,
ROLAND, FOGEL, KOBLENZ & CARR, LLP
By: /s/ Keith J. Roland
----------------------
Keith J. Roland
KJR/mac
4
<PAGE>
[LETTERHEAD OF STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE]
June 25, 1996
Keith J. Roland, Esq.
Roland, Fogel, Koblenz & Carr
One Columbia Place
Albany, New York 12207
Re: Teleport Communications
Group, Inc. -- Issuance of Debt
-------------------------------
Dear Mr. Roland:
This is in response to your request for an opinion as to whether
Teleport Communications Group, Inc. may, under existing Commission orders, issue
up to $1.75 billion in long-term debt.
You report that Teleport Communications Group, Inc. (TCGI) was
authorized, by order issued November 30, 1993 in Case 93-C-0739, to issue up to
$1 billion in long term debt. Subsequently, TCG New York, Inc. (TCGNY), a
wholly-owned subsidiary of TCGI, was separately authorized to issue $1 billion
in long term debt by order issued August 25, 1995 in Case 95-C-0493. Of this
amount, $250 million was for the purpose of refunding debt previously arranged
by TCGI.
Thus, the consolidated capital structure of the parent and subsidiary
has been authorized, by separate permissions granted to the parent and
subsidiary, to show debt of $1.75 billion. In light of these facts, it would be
consistent with the Commission's policies for "reasonable regulation"/1/ of
non-dominant competitive carriers to interpret the existing Commission orders as
authorizing TCGI and TCGNY to issue up to $1.75 billion in underlying long
term debt on an aggregate basis, with such underlying aggregate amount to be
allocated between the two entities as is necessary for the Teleport
organization's business structure and operations.
- - ---------------
/1/ See, e.g., Case 90-C-0166 - Petition of ALLTEL Corporation for a
---- ------------------------------------
Declaratory Ruling, issued April 23, 1990.
- - ------------------
<PAGE>
Accordingly, it is my view that TCGI may issue in excess of $1 billion
in underlying long term debt so long as the aggregate total amount of underlying
debt issued by TCGI and TCGNY does not exceed $1.75 billion.
Very truly yours,
/s/ Maureen O. Helmer
MAUREEN O. HELMER
General Counsel
cc: Chairman O'Mara
Deputy Chairman Zeltmann
Commissioner Jerry
Commissioner Cotter
Commissioner Dunleavy
<PAGE>
EXHIBIT 8
DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD
June 27, 1996
Teleport Communications Group Inc.
One Teleport Drive
Staten Island, New York 10311-1011
Gentlemen:
We are acting as counsel to Teleport Communications Group Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form S-1 (File No. 333-3984), as amended (the "Registration Statement"), filed
with the Securities and Exchange Commission on June 27, 1996, relating to the
proposed public offering of (i) 9 7/8% Senior Notes due 2006 (the "Senior
Notes") and (ii) 11 1/8% Senior Discount Notes due 2007 (the "Senior Discount
Notes" and together with the Senior Notes, the "Notes"), all of which Notes are
to be sold by the Company. This opinion letter is furnished to you at your
request to enable you to fulfill the requirements of Item 601(b)(8) of
Regulation S-K, 17 C.F.R. (S) 229.601(b)(8), in connection with the Registration
Statement.
For purposes of this opinion letter, we have examined an executed copy of
the Registration Statement. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter
is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the Internal
Revenue Code of 1986, as amended, existing and proposed regulations thereunder,
including regulations concerning the treatment of debt instruments issued with
original issue discount, published rulings and court decisions, all as in effect
and existing on the date hereof (collectively, "federal tax laws"), and all of
which are subject to change at any time, which change may be retroactive. We
express no opinion herein as to any other laws, statutes, regulations, or
ordinances. We have relied upon representations by the Company and its officers
with respect to factual matters for purposes of such opinion.
<PAGE>
Teleport Communications Group Inc.
June 27, 1996
Page 2
Based upon, subject to and limited by the foregoing, we are of the opinion
that the discussion set forth under the heading "Certain Federal Income
Tax Considerations" in the Prospectus forming a part of the Registration
Statement represent our opinion as to the material federal income tax
consequences of the purchase, ownership and disposition of the Senior Notes and
the Senior Discount Notes by Holders who acquire the Notes in their original
issuance, as a capital asset, for a purchase price equal, in the case of the
Senior Discount Notes, to the issue price of the Senior Discount Notes, and in
the case of the Senior Notes, to the stated principal amount of the Senior
Notes.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter and should not be quoted in whole
or in part or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 8 to the
Registration Statement and any abbreviated registration statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statement (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to us in
the discussion under the heading "Certain Federal Income Tax Considerations." In
giving this consent, we do not thereby admit that we are in the cartegory of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
DOW, LOHNES & ALBERTSON
By: /s/ Joyce T. Gwadz
---------------------------------
Joyce T. Gwadz
Member
<PAGE>
EXHIBIT 10.12
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") dated as of the
31st day of May, 1996, by and among TCG NEW YORK, INC., a Delaware corporation
(the "Borrower"), the financial institutions party hereto as Banks (the
"Banks"), TORONTO DOMINION (TEXAS), INC., as Administrative Agent (the
"Administrative Agent"), and CHEMICAL BANK, as Documentation Agent (the
"Documentation Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Teleport Communications Group Inc., a Delaware corporation
("Teleport"), the Administrative Agent, the Documentation Agent and the Banks
are parties to that certain Loan Agreement, dated as of May 22, 1995, as
assigned to and assumed by the Borrower pursuant to the Assumption Agreement
dated as of December 19, 1995 (as the same may be amended, modified or
supplemented from time to time, the "Loan Agreement"); and
WHEREAS, Teleport, the beneficial and record owner of all of the issued and
outstanding shares of capital stock of the Borrower, is considering a public
offering of debt instruments and shares of its capital stock (the "Offerings"),
and in connection therewith, among other things, all but $26,000,000 in
principal amount of the Parental Debt (as defined in the Loan Agreement) will be
contributed to Teleport as equity and cancelled; and
WHEREAS, the Borrower has requested that the Administrative Agent, the
Documentation Agent and the Banks amend certain provisions of the Loan Agreement
to, among other things, permit the transactions contemplated by the Offerings;
and
WHEREAS, the Borrower has also requested that the Administrative Agent, the
Documentation Agent and the Banks consent to the transfer of the Parental Debt
(as defined in the Loan Agreement) by certain Shareholders (as defined in the
Loan Agreement) to Affiliates of such Shareholders; and
WHEREAS, the Administrative Agent, the Documentation Agent and the Banks
are willing to consent to such amendments and such other matters as set forth
herein on the terms and conditions contained herein in return, in part, for the
payment of the Amendment Fee (as defined herein);
NOW THEREFORE, in consideration of the premises set forth above, the
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto
<PAGE>
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Loan Agreement, and hereby further agree as follows:
1. Amendments to Section 1.1.
-------------------------
(a) Section 1.1 of the Loan Agreement, Defined Terms, is hereby amended by
-------------
deleting in their entirety the definitions of "Assumption Agreement",
"Borrower", "Change of Control", "Fixed Charge Coverage Ratio", "Net Income",
"Operating Cash Flow", "Permitted Asset Sales", "Permitted Liens", "Restricted
Subsidiaries", "Security Documents", "Total Cash Interest Expense", "Total
Debt", and "Unrestricted Subsidiaries", and substituting in lieu thereof the
following new definitions in the appropriate alphabetical order:
"'Assumption Agreement' shall mean that certain Assumption Agreement
--------------------
dated as of December 19, 1995 among the Borrower, TCGI, the Administrative
Agent and the Banks."
"'Borrower' shall mean TCG New York, Inc., a Delaware corporation."
--------
"'Change of Control' shall mean, as applied to the Borrower, any
-----------------
change in the ownership of the stock of the Borrower that results in less
than fifty and one-tenth of one percent (50.1%) of all voting rights (after
giving effect to any shareholder's agreement or voting trust agreements and
assuming that the voting rights applicable to any stock subject to any Lien
are held by the holder of such Lien other than a Lien in favor of the
Agents and the Banks) with respect to the Capital Stock of the Borrower
(including, without limitation, warrants, options, conversion rights,
voting rights and calls or claims of any character with respect thereto, to
the extent exercisable prior to repayment in full of the Obligations) being
owned directly or indirectly by (a) any one or more of the Shareholders,
(b) any of the Shareholders and Sprint or (c) a Person owned by Sprint and
any one or more of the Shareholders."
"'Fixed Charge Coverage Ratio' shall mean, for every four (4) calendar
---------------------------
quarter period, the ratio of (a) the sum of (i) Annualized Operating Cash
Flow as of the last day of such period, (ii) the arithmetic average of the
daily unborrowed portion of the Commitment available for borrowing during
such period (after giving effect to the permitted Leverage Ratio), and
(iii) (A) the arithmetic average of the daily cash on hand for the Borrower
and the Restricted Subsidiaries, for such period less (B) the lesser of (1)
----
$1,000,000 and (2) the amount in clause (A) hereof; to (b) the sum of (i)
Total Cash Interest Expense during such
2
<PAGE>
period, (ii) Scheduled Principal Payments during such period, (iii) all
scheduled payments by the Restricted Subsidiaries and the Borrower, of
principal on Indebtedness for Money Borrowed (other than the Loans) for
such period, (iv) (A) aggregate Capital Expenditures made by the Borrower
and the Restricted Subsidiaries, during such period (other than from the
proceeds of casualty insurance) less (B) all cash payments of capital
contributions made directly or indirectly by the shareholders of TCGI to
the Borrower and the Restricted Subsidiaries, during such period, and (v)
the amount of all Restricted Payments made pursuant to Section 7.7 hereof
during such period."
"'Net Income' shall mean, for the Borrower and the Restricted
----------
Subsidiaries, on a consolidated basis, for any period, net income
determined in accordance with GAAP."
"'Operating Cash Flow' shall mean as of the end of any period, on a
-------------------
consolidated basis, (a) Net Income of the Borrower and the Restricted
Subsidiaries, for such period (after eliminating any extraordinary gains
and losses and excluding any interest income of such Persons from any loans
to any Affiliates of such Persons), plus (b) to the extent deducted in
----
determining Net Income, the sum of the following for such period: (i)
depreciation and amortization expense, (ii) interest with respect to
Indebtedness for Money Borrowed, (iii) tax expense, and (iv) all other non-
cash items."
"'Permitted Asset Sales' shall mean (a) sales, transfers or other
---------------------
dispositions of assets by the Borrower or any Restricted Subsidiary in bona
fide arms' length transactions which do not generate, in any calendar year,
Net Proceeds in excess of $5,000,000 in the aggregate, (b) the disposition
in the ordinary course of business of assets which are no longer used or
useful in the business of the Borrower or the Restricted Subsidiaries, (c)
the sales, transfers or other dispositions of assets which are exchanged
for, or the Net Proceeds of which are used to procure or acquire, similar
assets of equal or greater value within four (4) months from receipt of
such Net Proceeds by the Borrower or any Restricted Subsidiary, and (d) the
transfer of assets (including cash or cash equivalents) among the Borrower
and its Restricted Subsidiaries or the transfer of assets (including cash
or cash equivalents but excluding the Licenses) between or among Restricted
Subsidiaries so long as in each case, such assets remain assets of the
Borrower or the Restricted Subsidiaries."
"'Permitted Liens' shall mean, as applied to any Person:
---------------
3
<PAGE>
(a) Any Lien in favor of the Administrative Agent given to
secure the Obligations;
(b) (i) Liens on real estate or other property for taxes,
assessments, governmental charges or levies not yet delinquent and
(ii) Liens for taxes, assessments, judgments, governmental charges or
levies or claims the non-payment of which is being diligently
contested in good faith by appropriate proceedings and for which
adequate reserves in accordance with GAAP have been set aside on such
Person's books, but only so long as no foreclosure, distraint, sale or
similar proceedings have been commenced with respect thereto;
(c) Liens of carriers, warehousemen, mechanics, landlords,
laborers and materialmen and other statutory Liens incurred in the
ordinary course of business for sums not yet due or being diligently
contested in good faith, if reserves or appropriate provisions shall
have been made therefor in accordance with GAAP;
(d) Liens incurred in the ordinary course of business in
connection with worker's compensation and unemployment insurance or
other social security obligations which are not overdue for more than
ninety (90) days;
(e) Restrictions on the transfer of, or other Liens upon, the
Licenses or assets of the Borrower or its Subsidiaries imposed by
Applicable Law or the Licenses;
(f) Easements, rights-of-way, zoning restrictions and other
similar encumbrances on the use of real property and minor
imperfections of title which do not materially interfere with the
ordinary conduct of the business of such Person or the use of such
property;
(g) Purchase money security interests to the extent such
security interests secure Indebtedness permitted pursuant to Section
7.1(f)(1) hereof;
(h) Liens reflected by Uniform Commercial Code financing
statements filed in respect of Capitalized Lease Obligations permitted
pursuant to Section 7.1(f)(2) hereof and true leases of the Borrower
or any of its Subsidiaries;
(i) Liens granted to secure the performance of letters of
credit, bids, tenders, contracts, leases, public or statutory
obligations, surety, customs, appeal and performance bonds and other
similar
4
<PAGE>
obligations to the extent otherwise permitted under this Agreement and
not incurred in connection with Indebtedness for Money Borrowed, the
obtaining of advances or the payment of the deferred purchase price of
any property and which do not exceed $20,000,000 in the aggregate
outstanding from time to time;
(j) Liens of utility companies and other Persons pursuant to
pole attachment agreements and restrictions on the transfer of rights
under pole attachment agreements;
(k) Liens arising as a result of any grant of indefeasible
rights-of-use or rights-of-access or similar rights and grants of
nominal title to assets entered into in the ordinary course of
business and consistent with the Borrower's past practice."
"'Restricted Subsidiaries' shall mean, collectively, TC New York
-----------------------
Holdings I, Inc., TC New York Holdings II, Inc., TC Systems, Inc., Teleport
Communications New York and TCG Payphones, Inc., each of which is wholly-
owned directly or indirectly by the Borrower, and shall include, without
limitation, any future Subsidiaries of the foregoing, the Port Authority
Maintenance Division and the 5ESS Facilities Services Division of the
Borrower."
"'Security Documents' shall mean the Assignment of Rights by Partner,
------------------
the Borrower's Pledge Agreement, the Subsidiary Guaranty, the Subsidiary
Pledge Agreements, the Assignment of Intercompany Indebtedness, any other
agreement or instrument providing collateral for the Obligations whether
now or hereafter in existence, and any filings, instruments, agreements,
and documents related thereto or to this Agreement, and providing the
Administrative Agent, for the benefit of the Banks, with Collateral for the
Obligations."
"'Total Cash Interest Expense' shall mean, as of any calculation date,
---------------------------
for the twelve (12) calendar months immediately preceding the calculation
date, without duplication, (a) the sum of (i) all interest paid with
respect to the Loans after giving effect to any Interest Hedge Agreements;
(ii) the interest portion of payments with respect to Capitalized Lease
Obligations and Indebtedness for Money Borrowed of the Borrower and the
Restricted Subsidiaries; and (iii) the net expense incurred (A) by the
Borrower with respect to Interest Hedge Agreements in respect of the Loans
and (B) by any Restricted Subsidiary with respect to Interest Hedge
Agreements, minus (b) the amount of cash interest received by the Borrower
-----
and the Restricted Subsidiaries in respect of Indebtedness for Money
5
<PAGE>
Borrowed owed to such Persons by Affiliates of such Persons in an amount
not to exceed twenty-five percent (25%) of clause (a) of this definition."
"'Total Debt' shall mean, as of any date, the sum (without
----------
duplication) of (a) the outstanding principal amount of the Loans, (b) the
aggregate Capitalized Lease Obligations and Indebtedness for Money Borrowed
for the Borrower and all Restricted Subsidiaries (other than Indebtedness
permitted under Section 7.1(e) hereof), and (c) the aggregate Guarantees
for the Borrower and all Restricted Subsidiaries."
"'Unrestricted Subsidiaries' shall mean all Subsidiaries of TCGI other
-------------------------
than the Borrower and the Restricted Subsidiaries."
(b) Section 1.1 of the Loan Agreement, Defined Terms, is hereby further
-------------
amended by deleting the following definitions in their entirety: "Borrower
Equity", "Newco", "Parental Debt", "Parental Debt Subordination Agreement",
"Restricted Interest," "Restricted Principal", "Significant Unrestricted
Subsidiary" and "Total Consolidated Debt".
2. Amendment to Section 5.9. Section 5.9 of the Loan Agreement is hereby
------------------------
amended by deleting the parenthetical "(other than the Parental Debt)" that
appears on the fourth line thereof.
3. Amendment to Section 7.1. Section 7.1 of the Loan Agreement is hereby
------------------------
amended by deleting Section 7.1 in its entirety and substituting in lieu thereof
the following new Section 7.1 to read as follows:
"Section 7.1 Indebtedness for Money Borrowed of the Borrower and its
-------------------------------------------------------
Restricted Subsidiaries. The Borrower shall not, and shall not permit any
-----------------------
of its Subsidiaries to, create, assume, incur or otherwise become or remain
obligated in respect of, or permit to be outstanding, any Indebtedness for
Money Borrowed except:
(a) the Obligations;
(b) operating accounts payable, accrued expenses and customer
advance payments incurred in the ordinary course of business and
taxes, assessments, governmental charges or similar claims;
(c) Indebtedness secured by Permitted Liens;
(d) Obligations under Interest Hedge Agreements in respect of the
Loans;
6
<PAGE>
(e) unsecured Indebtedness of the Borrower owed to TCGI;
provided, that within five (5) Business Days from the date of the
-------- ----
First Amendment to the Agreement, the Borrower executes and
delivers to the Administrative Agent a subordination agreement
with respect to such Indebtedness pursuant to which such
Indebtedness is subordinated on terms and conditions satisfactory
to the Majority Banks;
(f) Indebtedness for Money Borrowed of the Restricted
Subsidiaries which does not exceed $10,000,000 in the aggregate
at any one time outstanding; provided such Indebtedness for Money
Borrowed is (1) purchase money Indebtedness of any of the
Restricted Subsidiaries that is incurred or assumed to finance
part or all of (but not more than) the purchase price of a
tangible asset in which neither the Borrower nor such Restricted
Subsidiary had at any time prior to such purchase any interest
other than a security interest or an interest as lessee under an
operating lease, (2) Capitalized Lease Obligations of any of the
Restricted Subsidiaries, or (3) reimbursement obligations of any
of the Restricted Subsidiaries with respect to letters of credit;
(g) [RESERVED]
(h) [RESERVED]
(i) Guaranties by the Borrower or any Restricted Subsidiary of
Indebtedness of any other Restricted Subsidiary and letters of
credit and performance bonds, real estate leases or trade
creditors for which any Restricted Subsidiary is the obligor
which do not exceed $20,000,000 in the aggregate at any time
outstanding; and
(j) loans from the Borrower to its Affiliates so long as such
loans are subject to the Assignment of Intercompany
Indebtedness."
4. Amendment to Section 7.2. Section 7.2 of the Loan Agreement is hereby
------------------------
amended by deleting Section 7.2 in its entirety and substituting in lieu thereof
the following new Section 7.2 to read as follows:
"Section 7.2 Limitation on Liens. The Borrower (to the extent any of
-------------------
the following assets or properties are used in the business or operations
of the Restricted Subsidiaries) shall not, and shall not permit any of the
Restricted Subsidiaries to, create, assume, incur or permit
7
<PAGE>
to exist or to be created, assumed, incurred or permitted to exist,
directly or indirectly, any Lien on any of its properties or assets
(including, without limitation, transmitting or receiving equipment of any
type, fiber or any other type of interconnection media, telephone switches
of any type, Licenses, or any contract (whether in the name of the Borrower
or otherwise) pursuant to which the Restricted Subsidiary provides local
competitive access service or any other type of telecommunications
service), used in the business or operations of the Restricted Subsidiaries
whether now owned or hereafter acquired, except for Permitted Liens, and
shall not, after the Agreement Date, undertake, covenant or agree with any
other Person that it will not create, assume, incur or permit to exist or
to be created, assumed, incurred or permitted to exist any first priority
lien by the Administrative Agent (for the benefit of the Banks) on any of
such assets (other than in connection with service arrangements entered
into with customers of the Borrower and the Restricted Subsidiaries in the
ordinary course of business)."
5. Amendment to Section 7.4. Section 7.4 of the Loan Agreement is hereby
------------------------
amended by deleting subsection 7.4(a) thereof in its entirety and substituting
in lieu thereof the following new subsection 7.4(a) to read as follows:
"(a) Disposition of Assets. The Borrower shall not, and shall not
---------------------
permit any of the Restricted Subsidiaries to, at any time sell, lease,
abandon, or otherwise dispose of any assets (other than assets disposed of
or leased in the ordinary course of business) without the prior written
consent of the Majority Banks; provided, however, that the prior written
-------- -------
consent of the Majority Banks shall not be required for Permitted Asset
Sales."
6. Amendment to Section 7.5. Section 7.5 of the Loan Agreement is hereby
------------------------
amended by deleting Section 7.5 in its entirety and substituting in lieu thereof
the following new Section 7.5 to read as follows:
"Section 7.5 Limitation on Guaranties. The Borrower shall not, and
------------------------
shall not permit any of the Restricted Subsidiaries to, at any time
Guaranty, assume, be obligated with respect to, or permit to be outstanding
any Guaranty of, any obligation of any other Person other than (a) a
guaranty by endorsement of negotiable instruments for collection in the
ordinary course of business, or (b) obligations under agreements of the
Borrower or any of its Subsidiaries entered into in connection with leases
of real property or the acquisition of services, supplies and equipment in
the ordinary course of business of the Borrower or any of its Subsidiaries
or other Affiliates, (c) Guaranties of Indebtedness incurred as permitted
pursuant to Section 7.1(i) hereof, or (d) as may be contained in any
8
<PAGE>
Loan Document including, without limitation, the Subsidiary Guaranty."
7. Amendment to Section 7.7. Section 7.7 of the Loan Agreement is hereby
------------------------
amended by deleting Section 7.7 in its entirety and substituting in lieu thereof
the following new Section 7.7 to read as follows:
"Section 7.7 Restricted Payments and Purchases. The Borrower shall
---------------------------------
not, and shall not permit any of the Restricted Subsidiaries to, directly
or indirectly declare or make any Restricted Payment or Restricted
Purchase, except that so long as no Default hereunder then exists or would
be caused thereby:
(a) so long as a Restricted Subsidiary is not obligated on any
Indebtedness to the Borrower or a Subsidiary of the Borrower, such
Subsidiary may make distributions to (i) any partner or shareholder of
such Subsidiary holding a minority position with respect to such
Subsidiary, so long as such Subsidiary makes a contemporaneous pro
rata distribution to the Borrower or any of the Restricted
Subsidiaries or (ii) the Borrower or any of the Restricted
Subsidiaries; and
(b) after June 30, 1997, so long as the Leverage Ratio is less
than 5.00 to 1.00, the Borrower may make Restricted Payments and
Restricted Purchases; provided that the Borrower provides to the
--------
Administrative Agent and the Banks a certificate signed by an
Authorized Signatory of the Borrower demonstrating compliance with
Sections 7.8, 7.9, 7.10 and 7.11 hereof both before and after giving
effect to such payment and stating that there does not exist a Default
or Event of Default hereunder, and; provided, further, that such
-------- -------
Restricted Payments and Restricted Purchases are not made with any
portion of the Net Proceeds of any asset sale by the Borrower or any
Restricted Subsidiary."
8. Amendment to Section 7.11. Section 7.11 of the Loan Agreement is
-------------------------
hereby amended by deleting such Section 7.11 in its entirety and substituting in
lieu thereof the following new subsection 7.11 to read as follows:
"Section 7.11 Limitation on Capital Expenditures of Restricted
------------------------------------------------
Subsidiaries. Prior to January 1, 1998, the Borrower shall not permit the
------------
aggregate amount of Capital Expenditures made or Capitalized Lease
Obligations incurred
9
<PAGE>
by the Borrower and its Restricted Subsidiaries, on a consolidated basis,
to exceed the amounts set forth below for the periods indicated:
<TABLE>
<CAPTION>
Total Capital
Expenditure and
Capital Lease Maximum
Obligation Capitalized Lease
Period Dollar Amount Obligations
------ ------------- -----------
<S> <C> <C>
From January 1, 1995 $60,000,000 $18,000,000
through December 31, 1995
From January 1, 1996 $50,000,000 $15,000,000
through December 31, 1996
From January 1, 1997 $50,000,000 $15,000,000
through December 31, 1997
</TABLE>
Unused amounts for Capital Expenditures may be carried forward to the next
calendar year (but not beyond) in an amount not to exceed the lesser of (a)
one hundred percent (100%) of the unused portion, and (b) (i) $50,000,000
from the calendar year 1995, and (ii) $40,000,000 from the calendar year
1996. Such amounts may be spent in addition to the otherwise applicable
limitations for such year. In addition to the foregoing amounts, the
Borrower and the Restricted Subsidiaries may make Capital Expenditures from
the proceeds of any insurance maintained pursuant to Section 5.5(a)(ii)
hereof."
9. Amendment to Section 8.1.
------------------------
(a) Section 8.1 of the Loan Agreement is hereby amended by deleting
subsections 8.1(f), 8.1(g), 8.1(h) and 8.1(j) thereof in their entirety and
substituting in lieu thereof the following new subsections 8.1(f), 8.1(g),
8.1(h) and 8.1(j) to read as follows:
"(f) There shall be entered and remain unstayed a decree or order for
relief in respect of the Borrower or any of the Restricted Subsidiaries
under Title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable Federal or state bankruptcy law or other
similar law, or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or similar official of the Borrower or any of the
Restricted Subsidiaries, or of any substantial part of their respective
properties, or ordering the winding-up or liquidation of the affairs of the
Borrower, or any of the Restricted Subsidiaries; or an involuntary petition
shall be filed against the Borrower or any of the Restricted Subsidiaries,
and a temporary stay entered, and (i) such petition and stay shall not be
diligently contested, or (ii) any such petition and stay shall continue
undismissed for a period of sixty (60) consecutive days;
10
<PAGE>
(g) The Borrower or any of the Restricted Subsidiaries shall file a
petition, answer or consent seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other
applicable Federal or state bankruptcy law or other similar law, or the
Borrower or any of the Restricted Subsidiaries shall consent to the
institution of proceedings thereunder or to the filing of any such petition
or to the appointment or taking of possession of a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Borrower or any of the Restricted Subsidiaries or of any substantial part
of their respective properties, or the Borrower or any of the Restricted
Subsidiaries shall fail generally to pay their respective debts as they
become due or shall be adjudicated insolvent; the Borrower shall suspend or
discontinue its business; the Borrower or any of the Restricted
Subsidiaries shall have concealed, removed any of its property with the
intent to hinder or defraud its creditors or shall have made a fraudulent
or preferential transfer under any applicable fraudulent conveyance or
bankruptcy law, or the Borrower or any of the Restricted Subsidiaries shall
take any action in furtherance of any such action;
(h) A judgment not covered by insurance (subject to applicable
deductibles) shall be entered by any court against the Borrower or any of
the Restricted Subsidiaries for the payment of money which exceeds singly
or in the aggregate with other such judgments, $5,000,000, or a warrant of
attachment or execution or similar process shall be issued or levied
against property of the Borrower or any of the Restricted Subsidiaries
which, together with all other such property of the Borrower or any of the
Restricted Subsidiaries subject to other such process, exceeds in value
$5,000,000 in the aggregate, if, in any such case, within thirty (30) days
after the entry, issue or levy thereof, such judgment, warrant or process
shall not have been paid or discharged or stayed pending appeal or removed
to bond, or if, after the expiration of any such stay, such judgment,
warrant or process shall not have been paid or discharged or removed to
bond;
(j) There shall occur (i) any acceleration of the maturity of any
Indebtedness for Money Borrowed of the Borrower or any of the Restricted
Subsidiaries in an aggregate principal amount exceeding $5,000,000; (ii)
any event which would permit (A) such acceleration or (B) the holder of
such Indebtedness for Money Borrowed to require the purchase or redemption
of such Indebtedness for Money Borrowed and which event has not been cured
within any applicable cure period or waived in writing prior to any
declaration of an Event of Default or acceleration of the Loans hereunder;
or (iii) any material default under any Interest Hedge Agreements which
would permit the obligation
11
<PAGE>
of the Borrower or any of the Restricted Subsidiaries to make payments to
the counterparties thereunder in an amount exceeding $5,000,000 in
aggregate to be then due and payable;"
(b) Section 8.1 of the Loan Agreement is hereby further amended by (i)
adding the word "or" immediately following the semicolon at the end of
subsection 8.1(o); (ii) deleting subsections 8.1(p) and 8.1(q) thereof in their
entirety; and (iii) adding the following new subsection (p) in lieu thereof:
"(p) There shall occur any default in payment of any sums due under
any Indebtedness for Money Borrowed of TCGI in excess of $50,000,000, or
the holders of such Indebtedness for Money Borrowed shall elect to
accelerate (or otherwise demand payment in full) the obligations
thereunder;"
10. Amendment to Section 11.20. Section 11.20 of the Loan Agreement is
--------------------------
hereby deleted in its entirety.
11. Parental Debt. Notwithstanding Section 11 of the Parental Debt
-------------
Subordination Agreement or any provision of the Loan Agreement or any other Loan
Document which may be construed to the contrary, the Administrative Agent, the
Documentation Agent and the Banks hereby consent to the transfer or assignment
of all or any part of the Parental Debt held by any Shareholder to any wholly-
owned Subsidiary of such Shareholder and to the subsequent assignment of all or
any part of the Parental Debt to TCG Partners, a New York general partnership in
which the Shareholders directly or indirectly own all the partnership interests;
provided, however, that prior to or contemporaneously with the effectiveness of
- - -------- -------
any such transfer or assignment, the transferor shall obtain the acknowledgement
of any transferee or assignee, that such Parental Debt remains subject to the
terms and conditions of the Parental Debt Subordination Agreement. Upon the
later to occur of (a) the effective date of this Amendment and (b) the effective
date of the contribution of the Parental Debt to Teleport as equity (or any
other cancellation or termination of the Parental Debt), other than up to
$26,000,000 of the Parental Debt to be retained by TCI, the Parental Debt
Subordination Agreement shall automatically, and without further action on the
part of any party thereto, be terminated and of no further force and effect.
12. No Other Amendment or Waiver. Notwithstanding the agreement of the
----------------------------
Administrative Agent, the Documentation Agent, and the Banks to the terms and
provisions of this Amendment, the Borrower acknowledges and expressly agrees
that this Amendment is limited to the extent expressly set forth herein and
shall not constitute a modification of the Loan Agreement or a course of dealing
at variance with the terms of the Loan Agreement (other than as expressly set
forth above) so as to require further notice by the Administrative Agent, the
Documentation Agent or
12
<PAGE>
the Banks, or any of them, of its or their intent to require strict adherence to
the terms of the Loan Agreement in the future. All of the terms, conditions,
provisions and covenants of the Loan Agreement and the other Loan Documents
shall remain unaltered and in full force and effect except as expressly modified
by this Amendment.
13. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants in favor of the Administrative Agent, the Documentation Agent and each
Bank, as follows:
(i) Each representation and warranty set forth in Article 4 of the
Loan Agreement is hereby restated and affirmed as true and correct in all
material respects as of the date hereof, except to the extent previously
fulfilled in accordance with the terms of the Loan Agreement, as amended hereby,
and to the extent relating specifically to the Agreement Date or otherwise
inapplicable;
(ii) The Borrower has the corporate power and authority to enter into
this Amendment and to do all acts and things as are required or contemplated
hereunder to be done, observed and performed by it;
(iii) This Amendment has been duly authorized, validly executed and
delivered by Authorized Signatories, and constitutes the legal, valid and
binding obligation of the Borrower enforceable against it in accordance with its
terms, subject, as to enforcement of remedies, to the following qualifications:
(i) an order of specific performance and an injunction are discretionary
remedies and, in particular, may not be available where damages are considered
an adequate remedy at law, and (ii) enforcement may be limited by bankruptcy,
insolvency, liquidation, reorganization, reconstruction and other similar laws
affecting enforcement of creditors' rights generally (insofar as any such law
relates to the bankruptcy, insolvency or similar event of the Borrower); and
(iv) The execution and delivery of this Amendment and the Borrower's
performance hereunder do not and will not require the consent or approval of any
regulatory authority or governmental authority or agency having jurisdiction
over the Borrower, nor be in contravention of or in conflict with the
certificate of incorporation or the by-laws of the Borrower, or the provision of
any statute, judgment, order, indenture, instrument, agreement, or undertaking
to which the Borrower is party or by which the Borrower's assets or properties
are or may be bound.
14. Effectiveness of Amendment. This Amendment shall be effective upon
--------------------------
receipt by the Administrative Agent of the Amendment Fee and of counterparts of
this Amendment executed by the Borrower and the Majority Banks.
13
<PAGE>
15. Fees. The Borrower shall pay to the Administrative Agent for the
----
account of the Banks an amendment fee (the "Amendment Fee") by wire transfer of
immediately available funds in an amount equal to the product of (i) each Bank's
pro rata portion of the Commitment as of the day immediately prior to the
effective date of this Amendment, multiplied by (ii) one-tenth of one percent
(.10%).
16. Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute one and the same instrument.
17. Loan Documents. Each reference in the Loan Agreement or any other
--------------
Loan Document to the term "Loan Agreement" shall hereafter mean and refer to the
Loan Agreement as amended hereby or as the same may hereafter be amended.
18. Governing Law. This Amendment shall be construed in accordance with
-------------
and governed by the laws of the State of New York, without giving effect to any
conflict of laws principles.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto cause their respective duly
authorized officers or representatives to execute and deliver this Amendment as
of the day and year first above written.
BORROWER: TCG NEW YORK, INC., a Delaware corporation
By: /s/ Wayne G. Fox
-------------------------------------------
Its: Vice President and Treasurer
-------------------------------------------
ADMINISTRATIVE AGENT: TORONTO DOMINION (TEXAS), INC.
By: /s/ Sophia D. Sgarbi
-------------------------------------------
Its: Vice President
-------------------------------------------
DOCUMENTATION AGENT: CHEMICAL BANK
By: /s/ Ann B. Kern
-------------------------------------------
Its: Vice President
-------------------------------------------
BANKS: THE TORONTO-DOMINION BANK
By: /s/ Sophia D. Sgarbi
-------------------------------------------
Its: Manager, Syndications and Credit
Administration
-------------------------------------------
CHEMICAL BANK
By: Ann B. Kern
-------------------------------------------
Its: Vice President
-------------------------------------------
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Fred L. Thorne
-------------------------------------------
Its: Vice President
-------------------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ Margot C. Bright
-------------------------------------------
Its: Authorized Signatory
-------------------------------------------
BARCLAYS BANK PLC
By: /s/ Craig J. Lewis
-------------------------------------------
Its: Associate Director
-------------------------------------------
CIBC INC.
By: /s/ S. Strek
-------------------------------------------
Its: Director
-------------------------------------------
CITIBANK, N.A.
By: /s/ Eric Huttner
-------------------------------------------
Its: Attorney-in-Fact
-------------------------------------------
CORESTATES BANK, N.A.
By: /s/ Philip D. Harrison
-------------------------------------------
Its: Assistant Vice President
-------------------------------------------
<PAGE>
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By: /s/ Mark D. Thorsheim
-------------------------------------------
Its: Authorized Signatory
-------------------------------------------
LTCB TRUST COMPANY
By: /s/ John A. Krob
-------------------------------------------
Its: Senior Vice President
-------------------------------------------
MELLON BANK, N.A.
By: /s/ Dave Crawford
-------------------------------------------
Its: Vice President
-------------------------------------------
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: /s/ R. Blake Witherington
-------------------------------------------
Its: Vice President
-------------------------------------------
NATIONSBANK OF TEXAS, N.A.
By:
-------------------------------------------
Its:
-------------------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Kelley L. Claypool
-------------------------------------------
Its: Banking Officer
-------------------------------------------
<PAGE>
ROYAL BANK OF CANADA
By: /s/ Thomas M. Byrne
-------------------------------------------
Its: Manager
-------------------------------------------
FLEET NATIONAL BANK, f/k/a Shawmut Bank
Connecticut, N.A.
By: /s/ Christine Campanelli
-------------------------------------------
Its: Officer
-------------------------------------------
SOCIETE GENERALE
By: /s/ John Sadik-Kahan
-------------------------------------------
Its: Vice President
-------------------------------------------
<PAGE>
EXHIBIT 10.16
TELEPORT COMMUNICATIONS GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
As Amended and Restated
The purpose of this Plan is to attract and retain qualified employees
to promote the business of Teleport Communications Group Inc. by providing its
employees with an opportunity to purchase its Class A common stock.
1. Definitions
-----------
"Average Market Price" shall mean the average of the closing price of
the Corporation's Shares on the NASDAQ National Market System on the ten trading
days prior to a given day, provided, however, that for the first Offering
Period, Average Market Price shall mean the initial public offering price per
Share as set forth in the Corporation's prospectus for the Shares.
"Beneficiary" shall have the meaning set forth in Section 25.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation and Benefits Committee
appointed by the Board of Directors of the Corporation.
"Compensation" shall mean the annual compensation paid by the
Corporation or its Subsidiaries to a Participant as determined
in the sole discretion of the Committee.
"Corporation" shall mean Teleport Communications Group Inc.
"Disability" shall mean, with respect to any Participant, a disability
which entitles the Participant to benefits under the Company's long-term
disability insurance policy, or in the absence of any such policy, a total and
permanent disability as determined by the Committee in its sole discretion.
"Eligible Employee"shall have the meaning set forth in Section 4.
"Exercise Date"shall mean with respect to any offering, the last day
of the Offering Period.
"Grant Date" shall mean the first business day of each Offering
Period.
<PAGE>
-2-
"Offering Period" shall mean the twelve (12) month period beginning,
for the first Offering Period, on the day that Shares are first offered to the
public in an initial public offering, or for each other Offering Period,
beginning on the date determined by the Committee for the issuance of Options.
"Option" shall mean a right granted to an Eligible Employee by the
Committee pursuant to the Plan to purchase shares in an Offering Period.
"Participant" shall mean an Eligible Employee who elects to
participate in the Plan pursuant to Section 6.
"Plan" means the Teleport Communications Group Inc. Employee Stock
Purchase Plan as set forth herein and amended from time to time.
"Retirement" shall mean termination of employment following a
Participant's attainment of (i) age sixty-five (65), or (ii) early retirement
date as defined in the Teleport Communications Group Inc. Retirement Savings
Plan or a successor plan.
"Shares" shall mean shares of the Class A common stock, $.01 par
value per share, of the Corporation.
"Subsidiary" shall mean a subsidiary of the Corporation within the
meaning of Section 424(f) of the Code and the regulations promulgated
thereunder, which has been designated by the Committee as a participating
employer in this Plan.
2. Administration. The Plan shall be administered by the Committee.
--------------
Members of the Committee shall not be Eligible Employees. The Committee shall
have the sole and discretionary authority to make rules and regulations for the
administration of the Plan and to interpret the Plan. The Committee's
interpretations and decisions with regard thereto shall be final, binding and
conclusive on all interested parties.
3. Stock Subject to the Plan. The Corporation hereby reserves and
-------------------------
makes available for purchase under the Plan such number of Shares equal to the
maximum number of Shares for which all Eligible Employees as of the Effective
Date could elect to be granted Options under Section 9 for the first Offering
Period (approximately 745,000 Shares). In the event any Option granted under
the Plan is canceled or expires unexercised, the number of Shares no longer
subject to such Option shall automatically become available for new awards under
the Plan.
<PAGE>
-3-
4. Eligible Employees. All employees of the Corporation or any of
------------------
its Subsidiaries as of a Grant Date shall be eligible to participate in the
Plan, except employees (i) whose customary employment is twenty (20) hours or
less per week or not more than five (5) months in any calendar year, or (ii) who
immediately after any Grant Date, would own 5 percent or more of the total
combined voting power or value of all classes of stock of the Corporation or any
Subsidiary. For purposes of the preceding sentence, the rules of Sections
423(b)(3) and 424(d) of the Code shall apply in determining the employee's
percentage of stock ownership.
5. Offerings. On each Grant Date, the Committee shall grant each
---------
Eligible Employee an Option to purchase Shares under the Plan.
6. Participation. An Eligible Employee on the Grant Date may become
-------------
a Participant in such offering by completing any election forms deemed
appropriate by the Committee.
7. Payment. A Participant may pay for any Shares by completing a
-------
payroll deduction authorization form and forwarding it to his or her employer's
payroll department. The form will authorize a regular payroll deduction from
the Participant's compensation for the purpose of purchasing Shares, and will
specify the date on which such deduction is to commence, which may not be
retroactive. A Participant may at any time increase or decrease his payroll
deduction by filing a new payroll deduction authorization form, subject to
Section 9(a). The change may not become effective sooner than the next pay
period after receipt of the form. A payroll deduction may be increased only once
and reduced only once during any Offering Period. Alternatively, a Participant
may pay for any Shares by: (i) making a lump-sum contribution to his employer's
payroll department at least five (5) business days prior to the Exercise Date;
(ii) delivering to the Committee at least ten (10) business days prior to the
Exercise Date a properly executed exercise notice together with irrevocable
instructions to a broker to sell such Shares from the Participant's Option as
are necessary to satisfy the purchase price and to promptly remit such sale
proceeds to the Corporation; or (iii) subject to the prior consent of the
Committee, delivering to the Committee at least ten (10) business days prior to
the Exercise Date written directions to the Corporation to withhold from the
Participant's Option such Shares as are necessary to satisfy the purchase price.
8. Cancellation. A Participant may, at any time and for any reason,
------------
cancel his payroll deduction authorization and permanently withdraw the balance
accumulated in the Participant's payroll deduction account with interest as
determined under Section 12. Any cancellation shall be in writing and must be
received by the Vice President - Human Resources prior to the Exercise Date.
The Participant may thereafter begin payroll deductions again only once during
the remainder of the Offering Period by completion of a new payroll deduction
authorization; provided that if the Participant is an "insider" subject to
<PAGE>
-4-
Section 16 of the Securities Exchange Act of 1934, he may not renew his
participation and purchase shares hereunder for at least six months. Partial
withdrawals are permitted.
9. Options.
-------
(a) Each Eligible Employee as of the first Grant Date will be granted
an Option to purchase a number of shares equal to 10 percent of his Compensation
divided by the Average Market Price. Each Eligible Employee as of any Grant
Date other than the initial Grant Date shall be granted an Option to purchase a
number of Shares under a uniform formula specified by the Committee. No
Eligible Employee may be granted an Option which permits him during any one
calendar year to purchase Shares under the Plan, and any other stock purchase
plan of the Corporation or its Subsidiaries, which exceed in value $25,000 based
on the Average Market Price of the Shares on the Grant Date of the Option.
(b) The purchase price for each Share purchased under the Plan will be
no less than 85 percent of the Average Market Price at the Grant Date; provided,
however, that in no event shall the purchase price be less than the par value of
such Shares. Shares shall be purchased on the Exercise Date and certificates
showing ownership shall be issued to the Participants as soon as practicable
thereafter.
(c) Options shall be exercised by written notice delivered to the Vice
President - Human Resources at least ten (10) business days prior to the
Exercise Date, stating the number of Options the Participant is exercising and
the manner in which the purchase price shall be paid. Any Options which are
not exercised by the Exercise Date shall be canceled. Upon the exercise of any
Option, the payroll deduction funds, if any, relating to such Options shall be
applied to the purchase price. No fractional shares shall be purchased, and any
balance remaining in a Participant's payroll deduction account after whole
Shares have been purchased on the Exercise Date shall be refunded to the
Participant with interest equal to five percent (5%) per annum.
10. Registration of Certificates. Share certificates may be
----------------------------
registered only in the name of the Participant, or, if the Participant so
indicates on his election form, in joint tenancy with a member of the
Participant's family, with right of survivorship. A Participant who is a
resident of a jurisdiction which does not recognize such a joint tenancy may
have certificates registered in the Participant's name as tenant in common or as
community property with a member of the Participant's family, without right of
survivorship.
<PAGE>
-5-
11. Rights as a Stockholder. None of the rights or privileges of a
-----------------------
stockholder of the Corporation shall exist with respect to Options issued under
the Plan unless and until Shares have been purchased on behalf of the
Participant and stock certificates have been issued.
12. Rights on Retirement, Death or Termination of Employment. In the
--------------------------------------------------------
event of a Participant's Retirement, death, or Disability prior to the Exercise
Date, the Participant or his Beneficiary may on the Exercise Date purchase the
shares for which he holds an Option. If, prior to the Exercise Date the
Participant terminates employment for any reason other than Retirement, Death or
Disability, his Option shall be canceled and his payroll deductions, if any,
shall be refunded with interest. All refunds of payroll deduction contributions
made under the Plan shall be made as promptly as possible with interest equal to
five percent (5%) per annum.
13. Rights Not Transferable. A Participant shall not assign, sell,
-----------------------
encumber, transfer or otherwise dispose of any rights or interests under the
Plan, other than by will or the laws of descent and distribution. Any attempted
disposition in violation of the preceding sentence shall be null and void. Any
Option hereunder must be exercised by the employee during his lifetime, or,
after his death, by his Beneficiary.
14. Application of Funds. All payroll deduction contributions held
--------------------
by the Corporation under the Plan may be used for any corporate purpose prior to
its application to the purchase price for an Option.
15. Adjustment in Case of Changes Affecting the Corporation's Stock.
---------------------------------------------------------------
In the event of any stock dividend, stock split, recapitalization,
reorganization, merger, consolidation, split-up, combination or exchange of
shares, or any purchase of Shares at a price substantially below fair market
value, or of any similar change affecting the capital structure of the
Corporation, the number and kind of Shares available for awards under the Plan
shall be appropriately adjusted, consistent with such change, in such manner as
the Committee in its sole discretion may deem equitable to prevent substantial
dilution or enlargement of the rights granted to, or available for, the
Participants hereunder. The Committee shall give notice to each Participant of
any adjustment made pursuant to this Section, and such adjustment shall be
effective and binding for all purposes of the Plan.
16. Amendment of the Plan. The Board of Directors may at any time,
---------------------
or from time to time, retroactively or prospectively, amend the Plan in any
respect, except that, without the approval of a majority of the shares of stock
of the Corporation then issued and outstanding and entitled to vote, no
amendment shall be made (i) increasing or decreasing the number of Shares
authorized for the Plan under Section 3 (other than as provided in Section 15),
(ii) decreasing the purchase price per Share under Section 9(b),
<PAGE>
-6-
(iii) withdrawing the administration of the Plan from the Committee, or (iv)
permitting any Options under the Plan to be granted to a member of the Committee
or to a person who is administering any stock option plan of the Corporation or
a Subsidiary or any employee stock purchase plan of the Corporation or a
Subsidiary. The Administrative Committee under the Retirement Savings Plan may
make any amendments to the Plan necessary to continue the Plan's qualification
as a Plan described in Section 423 of the Code.
17. Termination of the Plan. This Plan and all rights of employees
-----------------------
under any offering hereunder shall terminate at any time, at the discretion of
the Board of Directors. Upon termination of the Plan, all Options shall be
canceled and all amounts in the payroll deduction accounts of Participants shall
be carried forward into the Participant's payroll deduction account under a
successor Plan, if any, or refunded to the Participant with interest equal to
five percent (5%) per annum.
18. Investment Representation. A Participant, if required by the
-------------------------
Committee, shall deliver to the Committee at the time of any exercise of an
Option or portion thereof a written representation that the Shares to be
acquired upon such exercise are to be acquired for investment and not for resale
or with a view to the distribution thereof. Upon such demand, delivery of such
representation to the Corporation prior to the delivery of any Shares issued
upon exercise of any Option and prior to the expiration of the Offering Period
shall be a condition precedent to the right of the Participant or his
Beneficiary to purchase any Shares.
19. Plan Shares Purchases. The Committee may purchase outstanding
---------------------
Shares on behalf of the Plan, upon such terms as the Committee may approve, for
delivery under the Plan; provided, however, that in the initial public offering,
a sufficient number of Shares shall be reserved by the Corporation for issuance
hereunder.
20. Governing Law. The Plan shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without reference to the
principles of conflicts of law thereof. The Plan is intended to qualify as a
Plan which satisfies the requirements of Section 423 of the Code. Any
interpretation hereunder shall be made in accordance with such Code Section and
the regulations promulgated thereunder.
21. No Liability of Committee Members. No member of the Committee
---------------------------------
shall be personally liable (i) by reason of any contract or other instrument
executed by such member or by his authorized agent in his capacity as a member
of the Committee, or (ii) for any mistake of judgment made in good faith, and
the Corporation shall indemnify and hold harmless each employee, officer and
director of the Corporation and its Subsidiaries to whom any duty or power
relating to the administration or interpretation of the Plan may be allocated or
delegated,
<PAGE>
-7-
against any cost or reasonable expense (including counsel fees) or liability
(including any sum paid in settlement of a claim with the approval of the Board
of Directors of the Corporation) arising out of any act or omission to act in
connection with the Plan unless arising out of such person's own fraud or bad
faith. The indemnification provided for in this Section 21 shall be in addition
to any rights of indemnification such individual has as a director or officer
pursuant to law, or under his employer's certificate of incorporation or by-
laws.
22. Successor Corporation. The obligations of the Corporation under
---------------------
the Plan shall be binding upon the successor corporation or organization
resulting from the merger, consolidation or other reorganization of the
Corporation.
23. Withholding. Upon the exercise of any Option under the Plan, the
-----------
Participant's employer shall have the right to require the Participant (or his
representative): (i) to remit an amount sufficient to satisfy all Federal,
state and local withholding tax requirements prior to the delivery of any Share
certificate; or (ii) in the alternative, the Committee in its discretion may
either permit the Participant to provide irrevocable instructions to a broker to
sell such Shares from the Participant's Option as are necessary to satisfy any
tax withholding obligation and to promptly remit such sale proceeds to the
Corporation or have withheld from the Participant's Option such Shares as are
necessary to satisfy any tax withholding obligation.
24. Notice of Premature Disposition. A Participant or former
-------------------------------
Participant who disposes of Shares acquired under the Plan within (i) two years
of the Grant Date of the Options by which such Shares were acquired, or (ii)
twelve months of the date of transfer of Shares to him, shall notify in writing
the Chief Financial Officer of the Corporation of such disposition and shall
make appropriate arrangements for satisfying income and payroll tax withholding
requirements.
25. Beneficiary. A Participant may file a written designation of a
-----------
beneficiary who is to receive any Shares and/or payment under the Plan in the
event of the Participant's death. Such designation may be changed by the
Participant at any time by written notice to the Vice President, Human Resources
of the Corporation, but to be effective such notice must be received prior to
the Participant's death. In the event a Participant dies without designating a
Beneficiary, or if the designated Beneficiary predeceases the Participant, the
Participant's spouse shall be his Beneficiary, or in the absence of a spouse,
the Participant's estate shall be his Beneficiary.
26. Corporation's Payment of Expenses Related to the Plan. The
-----------------------------------------------------
Corporation will bear all expenses incurred in administering the Plan, including
expenses of issuing Shares provided hereunder.
<PAGE>
-8-
27. Plan and Rights to Purchase Common Stock Not to Confer Rights
-------------------------------------------------------------
with Respect to Continuance of Employment. The Plan and any right to purchase
- - -----------------------------------------
Shares under the Plan shall not confer upon any employee any right with respect
to continuance of employment by the Corporation or a Subsidiary and shall not
restrict or interfere in any way with the right of the Corporation or a
Subsidiary to terminate his employment at any time.
28. Gender and Number; Captions. Whenever used in the Plan, the
---------------------------
masculine gender shall include the feminine, and the singular shall include the
plural, unless the context indicates otherwise. The captions preceding the
Sections of the Plan have been inserted solely as a matter of convenience and in
no way define or limit the scope or intent of any provisions of the Plan.
29. Effective Date. The Plan is effective as of the effective date
--------------
of the initial public offering of Shares and has received approval by the
shareholders of the Corporation.
<PAGE>
EXHIBIT 10.32
FIRST AMENDMENT TO THE
TELEPORT COMMUNICATIONS GROUP INC.
1993 STOCK OPTION PLAN
Pursuant to Article XI of the Plan, the Company has reserved the right to
amend the Plan, provided any amendment which materially increases the number of
shares of Common Stock available for awards under the Plan must be approved by
the shareholders of the Company.
1.
Article II of the Plan is amended by deleting Section 2.3 and Section 2.6
in their entirety and by substituting in their place the following new Sections:
2.3 Change in Control: Means a direct or indirect transfer of
50% or more of the legal or beneficial ownership of stock in the Company in
one or more transactions to any entity other than to Tele-Communications,
Inc., Cox Enterprises, Inc., Comcast Corporation or Continental
Cablevision, Inc., or to any of their controlled subsidiaries.
2.6 Common Stock: Means the Class A Common Stock of TCG.
2.
Conditioned upon the approval of the shareholders of the Company, Article
IV of the Plan is hereby amended by deleting the first sentence thereof in its
entirety and by substituting in its place the following new sentence:
The total number of shares of Common Stock available for grants of
Options under the Plan shall be equal to 7% of the common stock of
the Company, Class A and Class B, determined on a fully diluted basis
as of the effective date of the initial public offering of the Common
Stock.
The above amendments shall be effective as of the effective date of the
initial public offering of the Common Stock of the Company.
<PAGE>
EXHIBIT 10.33
SECOND AMENDMENT TO THE
TELEPORT COMMUNICATIONS GROUP INC.
1993 STOCK OPTION PLAN
Pursuant to the power reserved to Teleport Communications Group Inc. (the
"Company") under Article XI of the Teleport Communications Group Inc. 1993 Stock
Option Plan (the "Plan"), the Plan is hereby amended as follows, subject to the
approval of the shareholders of the Company.
1.
Subject to the approval of the shareholders of the Company and effective as
of the effective date of the initial public offering of the Class A common stock
of the Company, Article IV of the Plan is hereby amended by deleting the first
sentence thereof in its entirety and by substituting in its place the following
new sentence:
"The total number of shares of Common Stock available for grants of
Options under the Plan shall be equal to 7% of the common stock of the Company,
Class A and Class B, determined on a fully diluted basis as of the effective
date of the initial public offering of the Common Stock (i.e., 10,931,033
shares)."
2.
Effective as of September 26, 1993, Section 6.8 is amended by deleting the
third sentence thereof in its entirety and by substituting in its place the
following new sentence:
"In the event an Optionee is either terminated without Cause after a
Change in Control or terminates with Good Reason after a Change in Control, all
outstanding Options shall immediately vest and become exercisable for one year
following the Change in Control."
<PAGE>
EXHIBIT 10.34
LETTER OF INTENT
LETTER OF INTENT, dated May 30, 1996 (this "Letter of Intent"),
between Viacom Telecom, Inc., a Delaware corporation ("Viacom"), and
Teleport Communications Group Inc., a Delaware corporation ("TCGI").
1. Purpose of Letter of Intent.
---------------------------
This Letter of Intent memorializes the non-binding intent of the
parties to consummate the sale by Viacom to TCGI of Viacom's Partnership
Interest in TCG Seattle ("TCG") (the "Sale") Capitalized terms used but not
defined herein shall have the respective meanings assigned to such terms in the
Partnership Agreement of TCG date January 1, 1994.
2. Purchase Price.
---------------
The purchase price for Viacom's Partnership Interest in TCG will be
$15,222,000, plus an amount equal to any Capital Contribution hereafter made by
Viacom together with an interest amount on any such Capital Contribution from
the date made until the closing of the Sale (the "Closing") at a rate equal, for
any day during such period, to the LIBOR rate for such day plus 75 basis points.
The parties contemplate that the Partners may agree hereafter to make loans to
TCG in lieu of any Capital Contributions. In such event, at the Closing, TCGI
would either cause TCG to repay any such loans hereafter made by Viacom in full,
together with accrued interest thereon, or would purchase such loans from Viacom
at par plus accrued interest. All amounts payable to Viacom hereunder would be
paid in cash, and in full, at the Closing.
3. Definitive Documents.
---------------------
(a) The parties intend to work towards the prompt execution and
delivery of a mutually acceptable definitive agreement (the "Sale Agreement")
providing for the Sale.
(b) TCGI understand that affiliates of Viacom are parties to certain
agreements with Tele-Communications, Inc. and TCI Communications, Inc.
(collectively, "TCI"), and their affiliates, which contemplate a series of
transactions as a result of which TCI may acquire indirect ownership of Viacom's
Partnership Interests (the "Pending Transactions"). Viacom may elect either to
consummate the Sale, with TCI's consent, prior to the consummation or
termination of the Pending Transactions or to defer consummation of the Sale
until, and condition such consummation upon, the termination of the Pending
Transactions.
(c) The parties intend that the Sale Agreement will contain
provisions pursuant to which Viacom consents to the other Partners in TCG
transferring their respective Partnership Interests in TCG to TCGI. (TCGI
understands that Viacom may require TCI's consent to Viacom in turn granting
such consent). In any event, the Sale Agreement will contain provisions
acceptable to Viacom protecting Viacom's rights and interests with respect to
transfers of the
<PAGE>
Partnership Interests of the other Partners prior to consummation of the
Closing consistent with the terms of the Partnership Agreement.
4. Regulatory and Other Approvals.
-------------------------------
The obligation of each of Viacom and TCGI to consummate the Sale
shall be subject to the following conditions: (i) if the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, and the rules and regulations
promulgated thereunder (collectively, the "HSR Act"), apply to the Sale, any
applicable waiting period thereunder relating to the Sale shall have expired or
been terminated; and (ii) the securing of all material Federal, state and local
filing and licensing requirements and regulatory approvals and consents required
to be satisfied and obtained in order to consummate the Sale.
5. Intent of the Parties.
----------------------
It is understood that this Letter of Intent does not contain all
matters upon which agreement must be reached in order for the Sale to be
consummated and does not constitute a binding agreement of commitment with
respect to the Sale. Notwithstanding any statement, oral or written, made by
any party hereto prior to or after the date of this Letter of Intent, a binding
commitment with respect to the Sale will result only from the execution and
delivery of the Sale Agreement, subject to the terms and conditions expressed
therein. TCGI specifically understands that the Sale requires the approval of
the board of directors of Viacom Inc. No liabilities or obligations of any kind
are intended to be created herein.
6. Governing Law.
--------------
This Letter of Intent shall be construed in accordance with the
internal laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Letter of Intent as of the day and year first above written.
VIACOM TELECOM, INC. TELEPORT COMMUNICATIONS
GROUP INC.
By: /s/ Michael Fricklas By: /s/ John A. Scarpati
--------------------------- ---------------------------
Title: Senior Vice President Title: Senior Vice President & CFO
------------------------ ---------------------------
<PAGE>
EXHIBIT 10.35
LETTER OF INTENT
LETTER OF INTENT dated May 30, 1996 (this "Letter of Intent"), between
Viacom Telecom, Inc., a Delaware corporation ("Viacom"), and Teleport
Communications Group Inc., a Delaware corporation ("TCGI").
1. Purpose of Letter of Intent.
----------------------------
This Letter of Intent memorializes the non-binding intent of the
parties to consummate the sale by Viacom to TCGI of Viacom's Partnership
Interest in TCG San Francisco ("TCG") (the "Sale"). Capitalized terms used but
not defined herein shall have the respective meanings assigned to such terms in
the Partnership Agreement of TCG dated January 1, 1994.
2. Purchase Price.
---------------
The purchase price for Viacom's Partnership Interest in TCG will be
$32,074,000, plus an amount equal to any Capital Contribution hereafter made by
Viacom together with an interest amount on any such Capital Contribution from
the date made until the closing of the Sale (the "Closing") at a rate equal, for
any day during such period, to the LIBOR rate for such day plus 75 basis points.
The parties contemplate that the Partners may agree thereafter to make loans to
TCG in lieu of any Capital Contributions. In such event, at the Closing, TCGI
would either cause TCG to repay any such loans hereafter made by Viacom in full,
together with accrued interest thereon, or would purchase such loans from Viacom
at par plus accrued interest. All amounts payable to Viacom hereunder would be
paid in cash, and in full, at the Closing.
3. Definitive Documents.
---------------------
(a) The parties intend to work towards the prompt execution and
delivery of a mutually acceptable definitive agreement (the "Sale Agreement")
providing for the Sale.
(b) TCGI understands that affiliates of Viacom are parties to
certain agreements with TeleCommunications, Inc. and TCI Communications, Inc.
(collectively, "TCI"), and their affiliates, which contemplate a series of
transactions as a result of which TCI may acquire indirect ownership of Viacom's
Partnership Interests (the "Pending Transactions"). Viacom may elect either to
consummate the Sale, with TCI's consent, prior to the consummation or
termination of the Pending Transactions or to defer consummation of the Sale
until, and condition such consummation upon, the termination of the Pending
Transactions.
(c) The parties intend that the Sale Agreement will contain
provisions pursuant to which Viacom consents to the other Partners in TCG
transferring their respective Partnership Interests in TCG to TCGI (TCGI
understands that Viacom may require TCI's consent to Viacom in turn granting
such consent). In any event, the Sale Agreement will contain provisions
acceptable to Viacom protecting Viacom's rights and interests with respect to
transfers of the
<PAGE>
Partnership Interests of the other Partners prior to consummation of the
Closing consistent with the terms of the Partnership Agreement.
4. Regulatory and Other Approvals.
-------------------------------
The obligation of each of Viacom and TCGI to consummate the Sale
shall be subject to the following conditions (i) if the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, and the rules and regulations
promulgated thereunder (collectively, the "HSR Act"), apply to the Sale, any
applicable waiting period thereunder relating to the Sale shall have expired or
been terminated; and (ii) the securing of all material Federal, state and local
filing and licensing requirements and regulatory approvals and consents required
to be satisfied and obtained in order to consummate the Sale.
5. Intent of the Parties.
----------------------
It is understood that this Letter of Intent does not contain all
matters upon which agreement must be reached in order for the Sale to be
consummated and does not constitute a binding agreement of commitment with
respect to the Sale. Notwithstanding any statement, oral or written, made by
any party hereto prior to or after the date of this Letter of Intent, a binding
commitment with respect to the Sale will result only from the execution and
delivery of the Sale Agreement, subject to the terms and conditions expressed
therein. TCGI specifically understands that the Sale requires the approval of
the board of directors of Viacom Inc. No liabilities or obligations of any kind
are intended to be created herein.
6. Governing Law.
--------------
This Letter of Intent shall be construed in accordance with the
internal laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Letter of Intent as of the day and year first above written.
VIACOM TELECOM, INC. TELEPORT COMMMUNICATIONS
GROUP INC.
By: /s/ Michael Fricklas By: /s/ John A. Scarpati
----------------------------- ----------------------------
Title: Senior Vice President Title: Senior Vice President & CFO
-------------------------- ---------------------------
<PAGE>
EXHIBIT 10.36
FIRST AMENDMENT TO THE
TELEPORT COMMUNICATIONS GROUP INC.
1996 EQUITY INCENTIVE PLAN
Pursuant to the power reserved to the Compensation and Benefits Committee
(the "Committee") of the Board of Directors of Teleport Communications Group
Inc. (the "Company") under Article IX of the Teleport Communications Group Inc.
1996 Equity Incentive Plan (the "Plan"), the Plan is hereby amended as follows,
subject to the approval of the Board of Directors and the shareholders of the
Company.
1.
Article IV of the Plan is amended by adding the following sentence to the
end thereof:
"Notwithstanding the foregoing, the President and Chief Executive
Officer of the Company shall not be eligible under the Plan."
2.
Section 5.1 of the Plan is amended by adding the following sentence to the
end thereof:
"In no event shall the total number of Shares granted to an Employee
under the Plan exceed 54,000."
3.
Article VI of the Plan is amended by deleting that Article in its entirety
and by substituting the following new Article VI in its place:
"The Employee shall at the time he or she elects to participate in the
Plan choose a Determination Date for valuing his Share award under the
Plan. For Shares awarded in exchange for 1992 UAP awards, the
Determination Date shall be the last business day of any calendar
quarter and may be as early as the second anniversary of the Effective
Date or as late as the fifth anniversary of the Effective Date,
provided that the Employee may select a later Determination Date with
the written consent of the Committee. For Shares awarded in exchange
<PAGE>
for 1993 UAP awards, the Determination Date shall be the last business
day of any calendar quarter and may be as early as the third
anniversary of the Effective Date or as late as the sixth anniversary
of the Effective Date, provided that the Employee may select a later
Determination Date with the written consent of the Committee. If the
Employee fails to elect a Determination Date, the Determination Date
shall be June 30, 1998 in the case of Shares exchanged for 1992 UAP
awards or in the case of Shares exchanged for 1993 UAP awards, June
30, 1999. Notwithstanding any election by the Employee, the
Determination Date shall not be later than the last day of Employee's
active employment with the Company, or at the discretion of the
Committee, the last day of Employee's active employment with the
Company or an affiliate thereof. Any election of a Determination Date
shall be irrevocable."
4.
Subject to the approval of the Board of Directors and the shareholders of
the Company, Article VII of the Plan is amended by adding the following sentence
at the end thereof:
"The Company shall reserve 637,792 shares of Class A common stock from
its authorized and unissued shares for issuance to Employees under the
Plan in the event the Committee determines to provide for the payment
of benefits in the form of Class A common stock as provided in this
Article."
The above amendment shall be effective as of the effective date of the
initial public offering of the Class A common stock of the Company.
<PAGE>
EXHIBIT 10.37
STOCKHOLDERS' AGREEMENT
OF
COMCAST CAP OF PHILADELPHIA, INC.
June 30, 1993
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 DEFINITIONS AND OTHER GENERAL MATTERS.............. 1
1.1 Definitions................................... 1
1.2 Voting; Written Consent....................... 10
ARTICLE 2 BOARD OF DIRECTORS AND STOCKHOLDERS................ 10
2.1 Composition of the Board...................... 10
2.2 Removal of Directors.......................... 11
2.3 Vacancies..................................... 11
2.4 Conflicting Charter or By-law
Provisions.................................... 11
2.5 Action by the Board of Directors.............. 12
2.6 ETC Board..................................... 13
ARTICLE 3 TRANSFERS.......................................... 14
3.1 Restrictions on Transfer...................... 14
3.2 Legend........................................ 15
3.3 Exceptions to Restrictions on Transfers....... 15
3.4 Right of First Refusal........................ 16
3.5 Preemptive Rights............................. 20
3.6 Transferee Consenting Stockholders............ 21
3.7 Prohibited Transfers.......................... 22
ARTICLE 4 MINORITY REDEMPTION AND NORTHERN TELECOM
REDEMPTION......................................... 22
4.1 Minority Put.................................. 22
4.2 Minority Call................................. 23
4.3 TCGI Buy Out Option........................... 24
4.4 Comcast Buy Back Option....................... 25
4.5 Fair Market Value............................. 26
4.6 Northern Telecom Redemption................... 28
4.7 Exercise of Rights under ETC Documents........ 28
4.8 Closing of Transfers.......................... 29
ARTICLE 5 ADDITIONAL AGREEMENTS.............................. 29
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
5.1 Confidentiality.............................. 29
5.2 Acquisitions Prior to Minority
Redemption................................... 30
5.3 Indebtedness for Borrowed Money.............. 30
5.4 Amendments to and Compliance with ETC
Documents.................................... 30
5.5 Use of TCGI Name............................. 31
ARTICLE 6 EVENTS OF DEFAULT AND REMEDIES.................... 31
6.1 Events of Default............................ 31
6.2 Remedies..................................... 32
6.3 Purchase of Defaulting Stockholder's
Common Stock................................. 34
ARTICLE 7 MISCELLANEOUS..................................... 34
7.1 Expiration and Termination................... 34
7.2 Assignment................................... 35
7.3 Financial Reports and Notices of
Material Litigation.......................... 35
7.4 Tax Matters.................................. 36
7.5 Notices...................................... 39
7.6 Entire Agreement............................. 40
7.7 Amendment and Waiver......................... 40
7.8 Governing Law................................ 41
7.9 Severability................................. 41
7.10 Consent to Jurisdiction; Specific
Performance.................................. 41
7.11 Counterparts................................. 42
7.12 Headings..................................... 42
</TABLE>
<PAGE>
Exhibit 10.37
STOCKHOLDERS' AGREEMENT
-----------------------
THIS STOCKHOLDERS' AGREEMENT is made as of June 30, 1993, by and among
COMCAST CAP OF PHILADELPHIA, INC., a Delaware corporation (the "Company"),
-------
COMCAST CORPORATION, a Pennsylvania corporation ("Comcast"), and TELEPORT
-------
COMMUNICATIONS GROUP INC., a Delaware corporation ("TCGI").
----
R E C I T A L S:
---------------
The parties hereto other than the Company own all of the issued and
outstanding Common Stock of the Company. The parties desire to set forth herein
their agreement concerning the management of the Company and such other matters
as are set forth herein.
A G R E E M E N T S:
-------------------
In consideration of the foregoing and of the promises and covenants
contained in this Agreement, the parties agree as follows:
ARTICLE 1 DEFINITIONS AND OTHER GENERAL MATTERS
1.1 Definitions. The following terms shall be used in this
-----------
Agreement with the meanings set forth in this Section 1.1:
"Affiliate" means, with respect to any Entity, any other Entity that
---------
directly or indirectly through one or more intermediates controls, is controlled
by or is under common control with the first specified Entity. For purposes of
this Agreement, neither the Company, nor any Entity controlled by the
<PAGE>
Company, shall be deemed to be an Affiliate of a Consenting Stockholder.
"Agreement" means this Stockholders' Agreement, as it may be amended,
---------
restated, modified or supplemented from time to time in accordance with its
terms.
"Board" means the Board of Directors of the Company.
-----
"Business" has the meaning assigned to that term in Exhibit B to the
--------
ETC Stockholders' Agreement, as in effect as of the date hereof.
"Business Day" means any day (other than a day which is a Saturday or
------------
Sunday) on which banks are permitted to be open for business in the City of New
York.
"CAP Percentage", with respect to any Consenting Stockholder at any
--------------
time, means the percentage of outstanding shares of Common Stock held by such
Consenting Stockholder and its Affiliates at such time.
"CEO" means the officer elected by the Board as the chief executive
---
officer of the Company.
"Change in Control", with respect to a Consenting Stockholder, means
-----------------
any transaction as a result of which such Consenting Stockholder ceases to be a
Subsidiary of the Entity which was its Parent immediately prior to such
transaction.
"Comcast Cap Purchase Agreement" means the Stock Purchase Agreement
------------------------------
dated as of May 5, 1993, among the Company, Comcast and TCGI.
"Common Stock" means the common stock, $0.01 par value, of the
------------
Company.
"Consenting Stockholder" means any beneficial owner of shares of
----------------------
Common Stock that is a party to this Agreement.
- 2 -
<PAGE>
"control" means possession, directly or indirectly, of the power to
-------
direct or cause the direction of the management and policies of a person whether
through the ownership of equity interests or voting securities, by contract or
otherwise.
"Defaulting Stockholder" has the meaning set forth in Section 6.1
----------------------
hereof.
"Entity" means any individual, general partnership, limited
------
partnership, corporation, limited-liability company, joint venture, trust,
business trust, cooperative or association, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such Entity
where the context so admits.
"ETC" means Eastern TeleLogic Corporation, a Delaware corporation.
---
"ETC Board" means the Board of Directors of ETC.
---------
"ETC Business Area" means the greater Philadelphia metropolitan area
-----------------
and the State of Delaware.
"ETC Percentage", with respect to any Consenting Stockholder at any
--------------
time, means the product of the CAP Percentage of such Consenting Stockholder at
such time times the percentage of the outstanding shares of capital stock of ETC
represented by the ETC Shares on a "Fully-Diluted Basis", as that term is
defined in the ETC Stockholders' Agreement.
"ETC Purchase Agreement" means the Agreement for Purchase of Stock and
----------------------
Plan of Reorganization, dated as of July 13, 1992, among the Company, Comcast,
ETC and the other stockholders of ETC.
"ETC Shares" means the 604,115 shares of common stock of ETC acquired
----------
by the Company pursuant to the ETC Purchase Agreement together with any other
shares of the common stock of ETC acquired by the Company at any time by any
means.
- 3 -
<PAGE>
"ETC Stockholders' Agreement" means the Stockholders' Agreement dated
---------------------------
as of November 5, 1992, among ETC and its stockholders, as it may be amended,
restated, modified or supplemented from time to time in accordance with its
terms and in accordance with Section 5.4 hereof.
"Indirect Transfer" has the meaning set forth in Section 3.1(a)
-----------------
hereof.
"Majority Stockholder" means a Consenting Stockholder which
--------------------
beneficially owns more than 50.00% of the then outstanding shares of Common
Stock.
"Minority Call" means the "Call" as that term is defined in Section
-------------
7(b) of the ETC Stockholders' Agreement.
"Minority Put" means the "Put" as that term is defined in Section 7(a)
------------
of the ETC Stockholders' Agreement.
"Minority Redemption" means the redemption by ETC of all of the
-------------------
Minority Shares pursuant to the Minority Call, the Minority Put or otherwise.
"Minority Shares" means all stock, options, warrants and other equity
---------------
securities and securities convertible into equity securities and rights to
acquire equity securities of ETC held by the "Non-Comcast Stockholders" (as that
term is defined in the ETC Stockholders' Agreement).
"New Capital Stock" has the meaning set forth in Section 3.5(a)
-----------------
hereof.
"Northern Telecom Call" means the right of ETC to purchase the
---------------------
Northern Telecom Warrant and the Northern Telecom Shares pursuant to Section 6
of the Northern Telecom Warrant.
"Northern Telecom Put" means the right of the Northern Telecom
--------------------
Stockholders to sell to ETC the Northern Telecom Warrant and the Northern
Telecom Shares pursuant to Section 6 of the Northern Telecom Warrant.
- 4 -
<PAGE>
"Northern Telecom Redemption" means the redemption by ETC of all of
---------------------------
the Northern Telecom Shares pursuant to the Northern Telecom Call, the Northern
Telecom Put or otherwise.
"Northern Telecom Shares" means all stock, options, warrants and other
-----------------------
equity securities and securities convertible into equity securities and rights
to acquire equity securities of ETC held by the Northern Telecom Stockholders.
"Northern Telecom Stockholders" has the meaning assigned to that term
-----------------------------
in Section 1(b)(i)(D)(2) of the ETC Stockholders' Agreement.
"Northern Telecom Warrant" means the Stock Purchase Warrant and Put
------------------------
and Call Agreement, dated as of September 23, 1988, as amended, between Northern
Telecom Finance Corporation and ETC.
"Parent", with respect to any Entity as of any relevant date, means
------
the ultimate corporate or partnership parent entity (within the meaning of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder, as in effect on the date hereof) of such
Entity.
"Parent Undertaking" means the form of Undertaking of Parent attached
------------------
hereto as Exhibit A.
"Significant Transaction" means (i) prior to the consummation of the
-----------------------
Minority Redemption, with respect to the Company, ETC or any other Entity
controlled by the Company, any of the following actions:
(a) the conduct of any business by the Company, other than the
ownership of the ETC Shares, or the conduct of any business by ETC, other than
the Business in the ETC Business Area;
(b) the sale or other disposition of any of the ETC Shares except
pursuant to any foreclosure on any pledge of the ETC shares made to secure
indebtedness,
- 5 -
<PAGE>
the incurrence of which was approved in accordance with Section 2.5 hereof;
(c) any amendment to or modification of any provision of the
Certificate of Incorporation, as amended, By-laws or other organizational
documents (including partnership agreements) of the Company, ETC or any other
Entity controlled by the Company (other than a Wholly Owned Subsidiary),
including, without limitation, any amendment or modification regarding the
designation of directors or the number of directors required to approve a
Significant Transaction;
(d) any change in the auditors for the Company or ETC;
(e) subject to the proviso to Section 2.5(b) hereof, entering into
any agreement or obtaining any license or franchise which restricts the transfer
of shares of Common Stock or the ETC Shares or subjects the shares of Common
Stock or the ETC Shares to any security interests, liens, claims, pledges,
options, rights of first refusal, limitations on voting rights, charges or other
encumbrances of any nature whatsoever other than pursuant to a pledge of the ETC
Shares to secure indebtedness the incurrence of which is approved in accordance
with Section 2.5 hereof;
(f) removal of the CEO or appointment of a successor CEO;
(g) the incurrence of any indebtedness for borrowed money, other than
any indebtedness for borrowed money which ETC is permitted to incur under the
terms of the Term Loan Agreement dated as of August 25, 1988, as amended,
between ETC and Northern Telecom Finance Corporation, or under any replacement
senior credit agreement approved in accordance with the provisions of Section
2.5 hereof (for purposes of this paragraph (i), "indebtedness for borrowed
money" shall include, without duplication, (A) guarantees by the
----- -------
- 6 -
<PAGE>
Company, ETC or any other Entity controlled by the Company of indebtedness for
borrowed money of any other Entity and (B) obligations of the Company, ETC or
any other Entity controlled by the Company as lessee under leases that have been
or should be, in accordance with generally accepted accounting principles,
recorded as capital leases);
(h) any consolidation or merger of the Company, ETC or any other
Entity controlled by the Company with or into any other Entity (other than a
merger of a Wholly Owned Subsidiary into the Company or another Wholly Owned
Subsidiary), any binding share exchange to which the Company, ETC or any other
Entity controlled by the Company is a party, the dissolution of the Company, ETC
or any other Entity controlled by the Company (other than a Wholly Owned
Subsidiary) or the sale of all or substantially all of the assets of the
Company, ETC or any other Entity controlled by the Company (other than a sale to
the Company or a Wholly Owned Subsidiary);
(i) the adoption of the annual budget for either the Company or ETC
to the extent the expenditure limits set forth in either such budget exceed by
15% the higher of (I) the aggregate monetary expenditure limits in the
corresponding budget for the immediately prior year and (II) the actual
aggregate monetary expenditures of the Company or ETC, as appropriate, for such
immediately prior year;
(j) the adoption of any amendment to any budget for the Company or
ETC or entering into or approving any commitment which requires, or is
reasonably likely to require, an aggregate monetary expenditure by the Company,
ETC or any other Entity controlled by the Company in an amount in excess of the
amount previously budgeted for such expenditure;
(k) the declaration of any dividends on the Common Stock, or the
declaration of dividends, or the
- 7 -
<PAGE>
making of distributions, to the stockholders or partners, as the case may be, of
ETC or any other Entity controlled by the Company, or, except as provided in
Section 6.2(a) hereof), the redemption or purchase by the Company of any shares
of Common Stock; and
(l) commencing or settling any dispute, litigation, suit, action or
other proceeding before any court or other governmental, administrative or
taxing authority which is reasonably likely to have a material adverse effect
upon a Consenting Stockholder or an Affiliate of a Consenting Stockholder, other
than as a result of a diminution in the value of the Common Stock held by such
Consenting Stockholder or in the ETC Shares where such diminution in value
affects all Consenting Stockholders and such Affiliates equally; and
(ii) on or after the consummation of the Minority Redemption, with respect to
the Company, ETC or any other Entity controlled by the Company, any of the
following actions:
(a) the conduct of any business by the Company, other than the
ownership of the ETC Shares, or the conduct of any business by ETC, other than
the Business in the ETC Business Area;
(b) any acquisition of any assets by the Company (other than the ETC
Shares) and the acquisition by ETC or any other Entity controlled by the Company
of any assets (including stock or other equity interests) in a transaction or
series of transactions (I) having an aggregate purchase price in excess of
$1,000,000 individually or (II) having an aggregate purchase price which,
together with the purchase price for each prior acquisition in the preceding
twelve month period by the Company, ETC or any other Entity controlled by the
Company, is in excess of $3,000,000; provided, however, that the Northern
-------- -------
Telecom Redemption shall not
- 8 -
<PAGE>
constitute an acquisition for purposes of application of this paragraph (b);
(c) any disposition by the Company of the ETC Shares and any other
disposition by the Company, ETC or any other Entity controlled by the Company
(including one made pursuant to a sale/leaseback or similar transaction) of any
assets (including stock or other equity interests) in a transaction or series of
transactions (I) having an aggregate value in excess of $1,000,000 individually
or (II) having an aggregate value which, together with the value for each prior
disposition in the preceding twelve month period by the Company, ETC or any
other Entity controlled by the Company, is in excess of $3,000,000;
(d) any amendment to or modification of any provision of the
Certificate of Incorporation, as amended, By-laws or other organizational
documents (including partnership agreements) of the Company, ETC or any other
Entity controlled by the Company (other than a Wholly Owned Subsidiary),
including, without limitation, any amendment or modification regarding the
designation of directors or the number of directors required to approve a
Significant Transaction;
(e) any change in the auditors for the Company or ETC;
(f) subject to the proviso to Section 2.5(b) hereof, entering into
any agreement or obtaining any license or franchise which restricts the transfer
of shares of Common Stock or the ETC Shares or subjects the shares of Common
Stock or the ETC Shares to any security interests, liens, claims, pledges,
options, rights of first refusal, limitations on voting rights, charges or other
encumbrances of any nature whatsoever other than pursuant to a pledge of the ETC
Shares to secure indebtedness the incurrence of which is approved in accordance
with Section 2.5 hereof;
- 9 -
<PAGE>
(g) removal of the CEO or appointment of a successor CEO;
(h) the incurrence of indebtedness for borrowed money in an aggregate
amount, which, together with all indebtedness for borrowed money of the Company,
ETC and all other Entities controlled by the Company, is in excess of $100,000
(for purposes of this paragraph (h), "indebtedness for borrowed money" shall
-----
include, without duplication, (A) guarantees by the Company, ETC or any other
- - -------
Entity controlled by the Company of indebtedness for borrowed money of any other
Entity and (B) obligations of the Company, ETC or any other Entity controlled by
the Company as lessee under leases that have been or should be, in accordance
with generally accepted accounting principles, recorded as capital leases);
(i) any consolidation or merger of the Company, ETC or any other
Entity controlled by the Company with or into any other Entity (other than a
merger of a Wholly Owned Subsidiary into the Company or another Wholly Owned
Subsidiary), any binding share exchange to which the Company, ETC or any other
Entity controlled by the Company is a party, the dissolution of the Company, ETC
or any other Entity controlled by the Company (other than a Wholly Owned
Subsidiary) or the sale of all or substantially all of the assets of the
Company, ETC or any other Entity controlled by the Company (other than a sale to
the Company or a Wholly Owned Subsidiary);
(j) the adoption of the annual budget for either the Company or ETC
to the extent the expenditure limits set forth in either such budget exceed by
15% the higher of (I) the aggregate monetary expenditure limits in the
corresponding budget for the immediately prior year and (II) the actual
aggregate monetary expenditures of the Company or ETC, as appropriate, for such
immediately prior year;
- 10 -
<PAGE>
(k) the adoption of any amendment to any budget for the Company or
ETC or entering into or approving any commitment which requires, or is
reasonably likely to require, an aggregate monetary expenditure by the Company,
ETC or any other Entity controlled by the Company in an amount in excess of the
amount previously budgeted for such expenditure;
(l) the declaration of any dividends on the Common Stock, or the
declaration of dividends, or the making of distributions, to the stockholders or
partners, as the case may be, of ETC or any other Entity controlled by the
Company, or, except as provided in Section 6.2(a) hereof), the redemption or
purchase by the Company of any shares of Common Stock; and
(m) commencing or settling any dispute, litigation, suit, action or
other proceeding before any court or other governmental, administrative or
taxing authority which is reasonably likely to have a material adverse effect
upon a Consenting Stockholder or an Affiliate of a Consenting Stockholder, other
than as a result of a diminution in the value of the Common Stock held by such
Consenting Stockholder or the ETC Shares where such diminution in value affects
all Consenting Stockholders and such Affiliates equally.
"Subsidiary" of any Parent means an Entity (i) more than fifty percent
----------
of whose outstanding shares or securities (representing the right to vote for
the election of directors or other managing authority) are owned or controlled,
directly or indirectly through one or more Subsidiaries, by such Parent or (ii)
which does not have outstanding shares or securities, but more than fifty
percent of whose ownership interests representing the right to make the
decisions for such Entity is owned or controlled, directly or indirectly through
one or more Subsidiaries, by such Parent; provided, however, that in each case,
-------- -------
such Entity shall be deemed to be a Subsidiary only so long as such ownership or
control exists.
- 11 -
<PAGE>
"Wholly Owned Subsidiary" means any Entity as to which the Company
-----------------------
owns, directly or indirectly, (a) all of the voting power and (b) (i) if such
Entity is a corporation, all of the outstanding capital stock and (ii) if such
Entity is not a corporation, all of the equity and profits interests.
1.2 Voting; Written Consent.
-----------------------
(a) Any agreement by the Consenting Stockholders herein to vote their
shares of Common Stock in a certain manner shall be deemed, in each instance, to
include an agreement by each Consenting Stockholder to use such Consenting
Stockholder's best efforts and to take all actions necessary to call, or cause
the Company and the appropriate officers and directors of the Company to call,
as promptly as practicable, a special or annual meeting of stockholders or to
act by written consent.
(b) When any action is required to be taken by a Consenting
Stockholder pursuant to this Agreement, such Consenting Stockholder shall take
all steps necessary to implement such action, including without limitation,
executing or causing to be executed, as promptly as practicable, a consent in
writing in lieu of an annual or special meeting of the stockholders pursuant to
Section 228 of the General Corporation Law of Delaware or any successor statute
thereto to effect such stockholder action.
(c) Unless expressly stated to the contrary herein, any action
requiring the vote of the directors (or any committee thereof) may be effected
by consent in lieu of a meeting of the directors or committee members, as the
case may be, pursuant to Section 141(f) of the General Corporation Law of
Delaware or any successor statute thereto.
- 12 -
<PAGE>
ARTICLE 2 BOARD OF DIRECTORS AND STOCKHOLDERS
2.1 Composition of the Board. The Board shall consist of five
------------------------
directors. The Majority Stockholder shall have the right to designate three
individuals to serve as directors on the Board, and the other Consenting
Stockholder shall have the right to designate two individuals to serve as
directors on the Board. Members of the Board shall be designated by the
Consenting Stockholders promptly following the date hereof to serve until the
next annual meeting of the stockholders of the Company. Thereafter, at each
annual meeting of the stockholders of the Company, members shall be designated
to serve for one year terms; provided, however, that promptly following any
-------- -------
acquisition after the date hereof by a Consenting Stockholder of Common Stock
sufficient to make it a Majority Stockholder, members shall be designated in
accordance with this Section 2.1 at a special meeting of stockholders or by
written consent to serve until the next annual meeting of stockholders. In
determining the number of directors a Consenting Stockholder shall be entitled
to designate pursuant to the foregoing provisions of this Section, Consenting
Stockholders that are Subsidiaries of the same Parent shall be considered as one
Consenting Stockholder and the shares of Common Stock owned by them shall be
aggregated in calculating the percentage of outstanding shares owned. Each
Consenting Stockholder hereby agrees to vote all shares of Common Stock owned by
such Consenting Stockholder to cause the election to the Board of the
individuals designated by the Consenting Stockholders in accordance with this
Section 2.1.
2.2 Removal of Directors. Each Consenting Stockholder shall vote all
--------------------
shares of Common Stock owned by such Consenting Stockholder for the removal
(with or without cause) of any director designated and elected pursuant to
Section 2.1 hereof if the Consenting Stockholder who designated such director
pursuant to Section 2.1 hereof (i) requests such removal by notice to the other
Consenting Stockholders or (ii) ceases to hold such number of shares of Common
Stock as entitled such Consenting Stockholder to designate such director
pursuant to Section 2.1 hereof.
- 13 -
<PAGE>
2.3 Vacancies. If, as a result of death, disability, retirement,
---------
resignation, removal (with or without cause) or otherwise there shall exist or
occur any vacancy on the Board,
(a) the Consenting Stockholder entitled to designate (pursuant to
Section 2.1 hereof) the director whose death, disability, retirement,
resignation or removal resulted in such vacancy may designate another individual
to fill such vacancy and to serve as a director of the Company for the remainder
of the term of the director who caused the vacancy (so long as such Consenting
Stockholder continues to hold at the time of such vacancy such number of shares
of Common Stock as entitled such Consenting Stockholder to elect, pursuant to
Section 2.1 hereof, the director whose death, disability, retirement,
resignation or removal resulted in such vacancy) and
(b) in the event the remaining directors on the Board fail to cause
such individual to be appointed a director to fill such vacancy, each Consenting
Stockholder shall vote its respective shares in favor of the individual
designated in accordance with clause (a) above to fill such vacancy.
2.4 Conflicting Charter or By-law Provisions. Each Consenting
----------------------------------------
Stockholder shall vote its shares of Common Stock, and shall take all other
actions necessary, to ensure that the Company's Certificate of Incorporation, as
amended, and By-laws, as amended, facilitate and do not at any time conflict
with the provisions of this Agreement.
2.5 Action by the Board of Directors.
--------------------------------
(a) Except as otherwise provided in Sections 2.5(b) and (c), all
actions of the Board and committees thereof shall require the affirmative vote
of a majority of the total number of directors comprising the Board or committee
thereof or, in lieu of a meeting, by the unanimous written consent of the
members of the Board or committee thereof.
(b) The Company shall not, and shall not permit ETC or any other
Entity controlled by the Company to, and no party to this Agreement shall cause
the Company, ETC or any other
- 14 -
<PAGE>
Entity controlled by the Company to, take any action with respect to any
Significant Transaction without
(i) providing to the directors at least ten Business Days prior
notice of any meeting of the Board at which a Significant Transaction is
proposed to be approved, which notice shall describe such proposed Significant
Transaction and
(ii) the prior approval of not less than four of the directors at any
time that the Majority Stockholder has an ETC Percentage of 90% or less, and the
prior approval of not less than three of the directors at any time that the
Majority Stockholder has an ETC Percentage of greater than 90%;
provided, however, that in each case the approval of all of the directors
- - -------- -------
designated by the Consenting Stockholders shall be required to enter into any
agreement or to obtain any license or franchise which restricts the transfer of
shares of Common Stock or of the ETC Shares, or subjects the shares of Common
Stock or the ETC Shares to any security interests, liens, claims, pledges,
options, rights of first refusal, limitations on voting rights, charges or other
encumbrances of any nature whatsoever, in each case in a manner that
discriminates among Consenting Stockholders.
(c) Notwithstanding the provisions of Sections 2.5(a) and (b), in
lieu of any other approval provided in such Sections,
(i) the approval of all of the disinterested members of the Board
shall be required to approve any transaction (other than a transaction described
in clause (ii) of this Section 2.5(c)) between the Company or any Affiliate of
the Company and a Consenting Stockholder or an Affiliate of a Consenting
Stockholder if such transaction involves, or is reasonably likely to involve, an
aggregate value in excess of $250,000 per annum;
(ii) the unanimous consent of all of the disinterested members of the
Board shall be required to approve any transaction between the Company or any
Affiliate of the
- 15 -
<PAGE>
Company and a Consenting Stockholder or an Affiliate of a
Consenting Stockholder (other than a transaction expressly contemplated in this
Agreement) that is on terms less favorable to the Company or the Affiliate of
the Company (as the case may be) than could be otherwise obtained from an
unaffiliated third party; provided, however, that neither the Company nor ETC
-------- -------
nor any other Affiliate of the Company shall engage in any transaction with a
Consenting Stockholder or any Affiliate of a Consenting Stockholder that is not
on commercially reasonable terms; and
(iii) the approval of all of the members of the Board shall be
required before any action may be taken to issue or sell any shares of (or to
issue or sell any warrants, options or rights to acquire or securities
convertible into or exchangeable for) capital stock of the Company (other than
the Common Stock) or other equity or debt securities that would provide the
holders thereof with the right to vote for directors of the Company (whether
generally, for a specified number of directors or upon the occurrence of a
contingency).
2.6 ETC Board. The Company and its transferees have the right
---------
pursuant to the ETC Stockholders' Agreement, prior to the Minority Redemption,
to designate three of the five directors to the ETC Board. Prior to the
Minority Redemption, the Company shall cause ETC (a) to notify TCGI of each
stockholder and director meeting of ETC, (b) to provide to TCGI, at the same
time they are provided to the directors and stockholders of ETC, copies of all
stockholder and director resolutions and consents, of all minutes of all
stockholder and director meetings and of all other information provided to the
stockholders and the directors of ETC, and (c) to invite a representative of
TCGI to attend each stockholder and director meeting of ETC. The Company and
the Majority Stockholder shall take such action(s) as may be necessary to permit
such TCGI representative to participate in all discussions at such stockholder
and director meetings, but such TCGI representative shall not be entitled to
vote at any such meeting. After the Minority Redemption, the Majority
Stockholder shall designate three individuals to serve on the ETC Board and the
other Consenting Stockholder shall designate two individuals to serve on the ETC
Board.
- 16 -
<PAGE>
ARTICLE 3 TRANSFERS
3.1 Restrictions on Transfer.
------------------------
(a) A Consenting Stockholder shall not, directly or indirectly,
offer, sell, transfer, assign, grant a participation in or option with respect
to, pledge, encumber or otherwise dispose of any of its shares of Common Stock
except in a transaction that is expressly permitted by this Agreement and:
(i) is in accordance with agreements entered into by the Company with
third parties to which transfers of interests in the Company are subject,
including, without limitation, the ETC Stockholders' Agreement (unless the
breach of such agreements, other than this Agreement and the ETC Stockholders'
Agreement, would not have a material adverse effect on the Company), and
(ii) in which the transferee becomes a party to this Agreement.
A transfer of control of a Consenting Stockholder or of an Entity (other than
the Parent of such Consenting Stockholder) of which such Consenting Stockholder
is a direct or indirect subsidiary to any Entity (an "Indirect Transfer") shall
-----------------
constitute a transfer by such Consenting Stockholder subject to the provisions
of this Article 3 (unless the Entity to which control is transferred is itself a
Subsidiary of the Parent of such Consenting Stockholder both before and after
such transfer). Any attempt to sell, transfer, assign, grant a participation in
or option with respect to, pledge, encumber or otherwise dispose of any shares
of Common Stock in a manner that does not comply with this Agreement shall be
ineffective.
(b) Except as expressly permitted by this Agreement, each Consenting
Stockholder shall (i) be the record and beneficial owner of such shares of
Common Stock and other securities of the Company indicated in the Company's
records as being owned by such Consenting Stockholder, in each case free and
clear of any pledge, lien, security interest, charge, claim,
- 17 -
<PAGE>
equity, option or encumbrance of any kind (except pursuant to the terms and
conditions of the Pledge Agreement), and (ii) have sole voting power with
respect to such Consenting Stockholder's shares of Common Stock and will not
grant any proxy with respect to such shares, enter into any voting trust or
other voting agreement or arrangement with respect to such shares or grant any
other rights to vote such shares; provided, however, that the foregoing shall
-------- -------
not be construed to limit the ability of a Consenting Stockholder to enter into
agreements with respect to sales permitted by Section 3.1(a) or to enter into
agreements not inconsistent with this Agreement that restrict such Consenting
Stockholder's ability to transfer shares of Common Stock.
3.2 Legend. Each certificate evidencing outstanding shares of Common
------
Stock held by a Consenting Stockholder shall bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO, AND TRANSFERABLE
ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF A STOCKHOLDERS' AGREEMENT, AS
AMENDED, DATED AS OF JUNE 30, 1993, AMONG COMCAST CAP OF PHILADELPHIA, INC. AND
CERTAIN STOCKHOLDERS THEREOF. A COPY OF THIS AGREEMENT IS ON FILE AT THE
PRINCIPAL EXECUTIVE OFFICE OF COMCAST CAP OF PHILADELPHIA, INC. AT 1234 MARKET
STREET, 16TH FLOOR, PHILADELPHIA, PA. 19107.
All certificates evidencing shares of Common Stock hereafter issued by the
Company to a Consenting Stockholder shall bear the legend set forth above. Upon
termination of this Agreement and then upon surrender to the Company of any
certificates bearing the legend set forth above, the Company shall reissue such
certificates to the owner thereof without such legend.
3.3 Exceptions to Restrictions on Transfers. The restrictions
---------------------------------------
contained in Section 3.4 shall not apply to any of the following:
(a) a transfer by a Consenting Stockholder to any Subsidiary of it or
of its Parent of shares of Common Stock, provided, however, that, in each case,
-------- -------
the transferee assumes the
- 18 -
<PAGE>
obligations of the transferor under this Agreement with respect to such shares
and becomes a party to this Agreement;
(b) the grant by TCGI to Comcast of a security interest in the Common
Stock pursuant to the Pledge Agreement of even date herewith between TCGI and
Comcast to secure TCGI's obligation to pay the purchase price for the
acquisition of such Common Stock and the foreclosure by Comcast of such security
interest pursuant to the terms of such Pledge Agreement; or
(c) a transfer that results directly or indirectly from the sale or
other disposition of all or substantially all of the assets or stock (including
by merger, consolidation or share exchange) of the Parent of a Consenting
Stockholder, provided that, in each case, the transferee, or its Parent, as
applicable, assumes the obligations of the transferor under this Agreement and
becomes a party to this Agreement or executes a Parent Undertaking, as
applicable.
3.4 Right of First Refusal.
----------------------
(a) If, other than pursuant to Section 3.3 hereof, any Consenting
Stockholder (the "Selling Stockholder"), at any time after the earlier of
-------------------
October 1, 1997, and the date of exercise of the Minority Put, desires to sell
all, but not less than all, of its shares of Common Stock, whether by sale of
such Common Stock, sale of all of the equity interests of such Selling
Stockholder, or the sale of equity interests of an Entity that would result in a
Change in Control of the Selling Stockholder (in each such case, the portion
thereof consisting of the Common Stock only being the "Offered Shares"), to an
--------------
unaffiliated third party offeror who has made a bona fide written offer to
purchase the Offered Shares (or assets of which the Common Stock forms a part)
and who is financially capable of consummating such purchase (the "Offeror"),
-------
such Consenting Stockholder shall deliver to the other Consenting Stockholders
(for purposes of this Section 3.4, the "Non-Selling Stockholders") a notice (a
------------------------
"Notice of Sale") of its intention to sell the Offered Shares to the Offeror.
- - ---------------
The Notice of Sale shall include the economic terms and conditions of such
offer, including the name of the Offeror and controlling owners, principal
officers and directors (subject
- 19 -
<PAGE>
to any legal or contractual restrictions on the disclosure of such identity) and
the price and payment terms for the Offered Shares and shall contain the Selling
Stockholder's offer to sell the Offered Shares to the Non-Selling Stockholders
on the same terms and conditions as proposed by the Offeror. If the offer from
the Offeror is given or received in connection with a transaction pursuant to
which assets or ownership interests in addition to the Offered Shares are
proposed to be disposed of (including, without limitation, pursuant to an
Indirect Transfer), the Notice of Sale shall also contain the Selling
Stockholder's good faith estimate, based on reasonable allocation and
attribution methods, of the portion of the aggregate consideration for the
assets or ownership interests to be disposed of which is reasonably allocated to
the Offered Shares, which shall be the purchase price for the Offered Shares
(which price shall, unless otherwise agreed by the Electing Stockholders (as
defined below), be payable in cash). The non-Selling Stockholders shall enter
into appropriate confidentiality agreements as reasonably requested by the
Selling Stockholder in connection with the offer from the Offeror and the
information contained in the Notice of Sale. If a non-Selling Stockholder
desires to accept the offer set forth in a Notice of Sale as to at least its pro
rata portion (based on the number of shares of Common Stock owned by it and the
number of shares of Common Stock owned by all Non-Selling Stockholders) of the
Offered Shares, such Non-Selling Stockholder (an "Electing Stockholder") shall,
--------------------
within fourteen days of receipt of such Notice of Sale, notify the Selling
Stockholder of its intention to acquire its full pro rata portion of the Offered
Shares and deliver a copy of such notice to each other non-Selling Stockholder.
If a non-Selling Stockholder does not elect to acquire its pro rata portion of
the Offered Shares, the Selling Stockholder shall notify the Electing
Stockholders of the portion of the Offered Shares remaining, and each Electing
Stockholder shall then have ten days after the later of receipt of such notice
and the expiration of the fourteen day period described above to notify the
Selling Stockholder of its intention to acquire such unacquired
portion of the Offered Shares (the "Uncommitted Portion") (and, if more than one
-------------------
Electing Stockholder notifies the Selling Stockholder of its willingness to
purchase the Uncommitted Portion then, unless otherwise agreed by such Electing
Stockholders, the Uncommitted
- 20 -
<PAGE>
Portion shall be allocated among the Electing Stockholders who have so notified
the Selling Stockholder pro rata on the basis of the respective numbers of
shares of Common Stock owned by them). The Electing Stockholders shall have
ninety days after the termination of the foregoing procedure to enter into a
binding agreement with the Selling Stockholder to acquire all of the Offered
Shares on the economic terms and conditions set forth in the Notice of Sale;
provided, however, that if the payment of the purchase price set forth in the
- - -------- -------
Notice of Sale is not to be made entirely in cash, the Selling Stockholder and
the Electing Stockholders shall negotiate in good faith as to the value of the
non-cash consideration, and the Electing Stockholders shall have the right to
pay the purchase price for the Offered Shares all in cash. The Selling
Stockholder and the Electing Stockholders shall negotiate in good faith to enter
into a binding agreement with respect to the sale of the Offered Shares, which
binding agreement shall contain:
(i) the representation and warranty of the Selling Stockholder that
the Electing Stockholders will receive good and valid title to the Offered
Shares, free and clear of all security interests, liens, claims, pledges,
options, rights of first refusal, limitations on voting rights, charges and
other encumbrances of any nature whatsoever except as set forth in this
Agreement or otherwise applicable to all of the Common Stock and except for
governmental, regulatory and other third party consents and approvals required
for transfers of shares of Common Stock generally;
(ii) the following conditions to the closing of such sale:
(A) all applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder, shall have expired or been terminated;
- 21 -
<PAGE>
(B) all governmental approvals and other third party consents
expressly required with respect to the transactions to be consummated at such
closing shall have been obtained, to the extent the failure to obtain such
approvals or consents would prevent the Selling Stockholder from performing any
of its material obligations under the transaction documents or would result in
any materially adverse change in, or materially adverse effect on, the business,
assets, results of operations, financial condition or prospects of the Company,
ETC and the other Entities controlled by the Company taken as a whole;
(C) there shall be no preliminary or permanent injunction or other
order by any court of competent jurisdiction restricting, preventing or
prohibiting the consummation of the transactions to be consummated at such
closing; and
(D) the representation and warranty of the Selling Stockholder
contemplated by clause (i) of this sentence shall be true and correct at the
closing of such sale with the same force and effect as if then made; and
(iii) such other representations, warranties, conditions and
indemnifications as may be agreed upon by the Selling Stockholder and the
Electing Stockholders.
The closing of any acquisition under such agreement shall take place as promptly
as practicable, but in any event within sixty days after the execution thereof,
subject to extension for a maximum of 180 additional days to the extent required
to obtain all required governmental, regulatory and other third party consents
and approvals.
(b) If non-Selling Stockholders do not notify the Selling Stockholder
of their intention to acquire, in the
- 22 -
<PAGE>
aggregate, all the Offered Shares within the period set forth in Section 3.4(a)
hereof or if a binding agreement to purchase all of the Offered Shares covered
by the Notice of Sale is not entered into within the ninety day period set forth
in Section 3.4(a) hereof for any reason other than a violation of this Section
3.4 or wrongful acts or willful bad faith on the part of the Selling
Stockholder, or if a purchase covered by such a binding agreement is not
consummated within the sixty day period (subject to extension for a maximum of
180 additional days to the extent required to obtain all required governmental,
regulatory and other third party consents and approvals) set forth in Section
3.4(a) for any reason other than a breach by the Selling Stockholder of any of
its covenants, representations or warranties in such binding agreement that are
a condition to consummation of such purchase, the Selling Stockholder shall have
the right, at any time during the 180 days after the expiration of the relevant
period, to close, subject to compliance with the requirements of Section 3.1, on
a sale of all of the Offered Shares to the Offeror on economic terms and
conditions no less favorable in the aggregate to the Selling Stockholder than
those set forth in the Notice of Sale. The Selling Stockholder shall, as
promptly as practicable and prior to the closing of such sale, provide to the
Non-Selling Stockholders a copy of the agreement for the sale of the Offered
Shares so as to permit the non-Selling Stockholders to confirm for themselves
that the economic terms and conditions of such sale are no less favorable in the
aggregate to the Selling Stockholder than those set forth in the Notice of Sale.
If the Selling Stockholder does not close the sale of the Offered Shares to the
Offeror during such 180 day period, the procedure set forth above with respect
to the Notice of Sale shall be repeated with respect to any subsequent proposed
sale of the Common Stock of the Selling Stockholder (whether by sale of such
Common Stock, sale of all of the equity interests of such Selling Stockholder,
or the sale of equity interests of an Entity that would result in a Change in
Control of the Selling Stockholder).
(c) In furtherance of the rights set forth above in this Section 3.4,
each Consenting Stockholder and the Company agree that, on reasonable notice
following the delivery of a Notice of Sale, at reasonable times and without
interfering with
- 23 -
<PAGE>
the business or operations of the Company, they will take all necessary action
to:
(i) provide to third parties full and free access to all books and
records of the Company and ETC and any and all reports, budgets, proposals or
other written material prepared by or on behalf of the Company or ETC;
(ii) make the officers and employees of the Company and ETC available
for meetings with third parties;
(iii) permit on-site visits to the Company's and ETC's facilities by
third parties;
(iv) provide full and free access to a data room to third parties;
(v) assist the Selling Stockholder in obtaining all necessary
consents to any disposition of the Offered Shares; and
(vi) assist in the preparation of any descriptive memoranda or other
sales materials relating to the Company and ETC and give the Selling Stockholder
the right to share such information with third parties,
provided, in each case, that
(Y) the Selling Stockholder and its representatives and such third
parties have entered into an appropriate confidentiality agreement with the
Company, which shall be in form and substance reasonably satisfactory to the
Company, and
(Z) the Selling Stockholder agrees to reimburse the Non-Selling
Stockholders, the Company and ETC for any out of pocket expenses incurred by
them in connection with the foregoing actions.
Notwithstanding the foregoing, if non-Selling Stockholders have timely notified
the Selling Stockholder pursuant to Section
- 24 -
<PAGE>
3.4(a) of their intention to acquire, in the aggregate, not less than all of the
Offered Shares, then the Company and the Consenting Stockholders shall not be
obligated to comply with the covenants contained in this Section 3.4(c) during
the period that a binding agreement for such acquisition is being negotiated or
thereafter (subject to such binding agreement being executed and the closing
thereunder occurring within the applicable time limitations set forth in Section
3.4(a)).
3.5 Preemptive Rights.
-----------------
(a) Except as provided below, each Consenting Stockholder shall have
a right to purchase its aggregate pro rata portion, based on its CAP Percentage,
of any new capital stock, including authorized but unissued shares of Common
Stock and options, warrants or rights to acquire and securities convertible or
exchangeable for such new capital stock ("New Capital Stock"), which the Company
-----------------
may, from time to time, propose to issue; provided, however, that no Consenting
-------- -------
Stockholder shall have any such preemptive right with respect to any New Capital
Stock which, pursuant to Section 2.5, has been approved for issuance by the
Company in connection with (i) an acquisition (including by way of merger or
consolidation or share exchange) by the Company of the stock or assets of
another Entity in a transaction permitted by this Agreement pursuant to which
the purchase price is paid in whole or in part by the delivery of such New
Capital Stock to the seller or (ii) the funding of any Minority Put, Minority
Call, Northern Telecom Put or Northern Telecom Call by a Consenting Stockholder
pursuant to Section 4.1 or 4.2 hereof. This right with respect to any such
proposed issuance shall terminate if unexercised within thirty days after
receipt of the Preemption Notice (as defined below).
(b) In the event the Company proposes to undertake an issuance of New
Capital Stock, it shall give each Consenting Stockholder written notice (a
"Preemption Notice") of its intention, describing the type of New Capital Stock,
- - ------------------
the amount to be issued, the price and the general terms upon which the Company
proposes to issue the same. Each Consenting Stockholder shall have thirty days
after receipt of the Preemption Notice to agree to purchase all or any portion
of its
- 25 -
<PAGE>
pro rata share of such New Capital Stock (as determined pursuant to Section
3.5(a)) for the price and upon the terms specified in the Preemption Notice by
giving notice to the Company within such thirty day period and stating therein
the quantity (including amounts, if any, such Consenting Stockholder would be
willing to purchase over and above its pro rata portion) of New Capital Stock to
be purchased. If any Consenting Stockholder does not elect to purchase its full
pro rata portion of the shares of New Capital Stock proposed to be issued, such
shares shall be apportioned proportionately (as provided in Section 3.5(a))
among the Consenting Stockholders who have indicated a willingness to purchase
shares in excess of their respective pro rata portions, until all such shares
have been allocated among such Consenting Stockholders or until each such
Consenting Stockholder shall have obtained by such process of apportionment the
total number of shares of New Capital Stock it has indicated a desire to
acquire.
3.6 Transferee Consenting Stockholders. A Consenting Stockholder
----------------------------------
shall remain a Consenting Stockholder for so long as it owns any Common Stock
regardless of the percentage of Common Stock it may own from time to time. Any
transferee of a Consenting Stockholder required to become a party to this
Agreement pursuant to Section 3.1 or 3.3, and any purchaser of New Capital Stock
of the Company which is required pursuant to the terms of its purchase to become
a party to this Agreement, shall become a Consenting Stockholder by delivering
to the Company (which shall promptly send notice thereof to the Consenting
Stockholders) a counterpart signature page to this Agreement and shall deliver
to the Company a Parent Undertaking by its Parent (if any). No further action
by the Company or the Consenting Stockholders shall be required for such person
to become a party to this Agreement. It shall be a condition of any Indirect
Transfer permitted by this Agreement that the transferee thereunder deliver to
the Company a Parent Undertaking by its Parent, if any.
3.7 Prohibited Transfers. Notwithstanding anything to the contrary
--------------------
contained herein, no Consenting Stockholder may transfer any of its shares of
Common Stock or permit the Company or ETC to issue any stock or take any other
action if, after giving effect to such transfer, issuance or action, such
- 26 -
<PAGE>
Consenting Stockholder would be unable to comply with its obligations under
Section 4.3 or 4.4 hereof.
ARTICLE 4 MINORITY REDEMPTION AND NORTHERN TELECOM REDEMPTION
4.1 Minority Put. If the Minority Put is exercised, Comcast shall
------------
promptly notify the Company and TCGI of such exercise. Following such exercise,
the Consenting Stockholders shall act in accordance with the following:
(a) Within sixty days after the exercise of the Minority Put, Comcast
shall notify the Company and TCGI whether or not it will cause the Company to
cause ETC to fund the Minority Redemption. If Comcast elects to cause the
Company to cause ETC to fund the Minority Redemption, the Company shall issue
and sell to Comcast, and Comcast shall purchase from the Company, additional
shares of Common Stock, and the Company shall contribute the proceeds of such
issuance and sale of Common Stock to ETC and cause ETC to consummate the
Minority Redemption, such that, after giving effect to such transactions and the
Minority Redemption, TCGI's ETC Percentage is exactly what it was immediately
prior to the consummation of the Minority Redemption assuming, for purposes of
such calculation, that any cash available to ETC other than from the Company
which the ETC Board determines to make available in connection with such
redemption (the "ETC Available Cash") is used by ETC prior to the Minority
------------------
Redemption to purchase Minority Shares for a per share price equal to the per
share price actually paid for the Minority Shares pursuant to the Minority
Redemption. The aggregate purchase price for such additional shares of Common
Stock shall be an amount equal to the purchase price payable in connection with
the Minority Redemption pursuant to Section 7 of the ETC Stockholders' Agreement
less an amount equal to the ETC Available Cash. Comcast shall notify TCGI
promptly following the consummation of the Minority Redemption.
(b) If Comcast fails to give notice within the sixty day period
referenced in clause 4.1(a) above, or if Comcast notifies the Company and TCGI
that it elects not to cause the
- 27 -
<PAGE>
Company to cause ETC to fund the Minority Redemption, then TCGI shall have the
right, for the sixty day period commencing on the earlier of TCGI's receipt of
such notice from Comcast or the expiration of such sixty day period, to request
that Comcast cause the Company to cause ETC to fund the Minority Redemption, and
Comcast shall do so upon receipt of such request. If TCGI elects to cause the
Company to cause ETC to fund the Minority Redemption, the Company shall issue
and sell to TCGI, and TCGI shall purchase from the Company, additional shares of
Common Stock, and the Company shall contribute the proceeds of such issuance and
sale of Common Stock to ETC and cause ETC to consummate the Minority Redemption,
such that, after giving effect to such transactions and the Minority Redemption,
Comcast's ETC Percentage is exactly what it was immediately prior to the
consummation of the Minority Redemption assuming, for purposes of such
calculation, that the ETC Available Cash is used by ETC prior to the Minority
Redemption to purchase Minority Shares for a per share price equal to the per
share price actually paid for the Minority Shares pursuant to the Minority
Redemption. The aggregate purchase price for such additional shares of Common
Stock shall be an amount equal to the purchase price payable in connection with
the Minority Redemption pursuant to Section 7 of the ETC Stockholders' Agreement
less an amount equal to the ETC Available Cash.
4.2 Minority Call. During the thirty-day period commencing on each
-------------
October 1, beginning with October 1, 1997, and continuing until the Minority
Redemption has been consummated, Comcast shall notify the Company and TCGI
whether it will cause the Company to cause ETC to exercise the Minority Call
during the ninety-day period commencing on such October 1.
(a) If Comcast elects to cause the Company to cause ETC to exercise
the Minority Call, the Company shall issue and sell to Comcast, and Comcast
shall purchase from the Company, additional shares of Common Stock, and the
Company shall contribute the proceeds of such issuance and sale of Common Stock
to ETC and cause ETC to consummate the Minority Redemption, such that, after
giving effect to such transactions and the Minority Redemption, TCGI's ETC
Percentage is exactly what it was immediately prior to the consummation of the
Minority Redemption
- 28 -
<PAGE>
assuming, for purposes of such calculation, that the ETC Available Cash is used
by ETC prior to the Minority Redemption to purchase Minority Shares for a per
share price equal to the per share price actually paid for the Minority Shares
pursuant to the Minority Redemption. The aggregate purchase price for such
additional shares of Common Stock shall be an amount equal to the purchase price
payable in connection with the Minority Redemption pursuant to Section 7 of the
ETC Stockholders' Agreement less an amount equal to the ETC Available Cash.
Comcast shall notify TCGI promptly following the consummation of the Minority
Redemption.
(b) If Comcast fails to notify the Company and TCGI of its election
within the sixty day period referenced in clause 4.2(a) above, or if Comcast
notifies the Company and TCGI that it elects not to cause the Company to cause
ETC to exercise the Minority Call, then TCGI shall have the right, for the sixty
day period commencing on the earlier of TCGI's receipt of such notice from
Comcast or the expiration of such sixty day period, to request that Comcast
cause the Company to cause ETC to exercise the Minority Call, and Comcast shall
do so upon receipt of such request. If TCGI elects to cause the Company to
cause ETC to exercise the Minority Call, the Company shall issue and sell to
TCGI, and TCGI shall purchase from the Company, additional shares of Common
Stock, and the Company shall contribute the proceeds of such issuance and sale
of Common Stock to ETC and cause ETC to consummate the Minority Redemption, such
that, after giving effect to such transactions and the Minority Redemption,
Comcast's ETC Percentage is exactly what it was immediately prior to the
consummation of the Minority Redemption assuming, for purposes of such
calculation, that the ETC Available Cash is used by ETC prior to the Minority
Redemption to purchase Minority Shares for a per share price equal to the per
share price actually paid for the Minority Shares pursuant to the Minority
Redemption. The aggregate purchase price for such additional shares of Common
Stock shall be an amount equal to the purchase price payable in connection with
the Minority Redemption pursuant to Section 7 of the ETC Stockholders' Agreement
less an amount equal to the ETC Available Cash.
4.3 TCGI Buy Out Option.
-------------------
- 29 -
<PAGE>
(a) If immediately following the consummation of the Minority
Redemption TCGI has an ETC Percentage of less than 60%, TCGI shall have the
right, for a period of 180 days after its receipt of notice of the consummation
of the Minority Redemption, to purchase from Comcast up to that number of shares
of Common Stock having an ETC Percentage which, when added to the ETC Percentage
of TCGI immediately following consummation of the Minority Redemption, equals
(a) 60% if the Northern Telecom Redemption has occurred and (b) 58.36% if the
Northern Telecom Redemption has not occurred. The purchase price for such
shares shall be an amount equal to the product of the amount paid by Comcast
pursuant to Section 4.1(a) or 4.2(a) above times a fraction, the numerator of
which is the increase in TCGI's ETC Percentage resulting from the purchase of
shares of Common Stock by TCGI pursuant to this Section 4.3 and the denominator
of which is the increase in Comcast's ETC Percentage resulting from the Minority
Redemption. In addition, if (i) the Company has sold any New Capital Stock
since the date hereof and (ii) Comcast has purchased more than its pro rata
share of such New Capital Stock pursuant to Section 3.5(b) (such shares of
Common Stock purchased by Comcast in excess of its pro rata share of such New
Capital Stock being referred to hereinafter as the "Comcast Excess Shares"),
---------------------
TCGI shall pay to Comcast, with respect to that number of Comcast Excess Shares
purchased by TCGI pursuant to this Section 4.3 up to the number of shares TCGI
would have bought if it had bought its pro rata share of all such New Capital
Stock, interest computed at the rate of 10% per annum from the date or dates
Comcast purchased such Comcast Excess Shares to the date of payment by TCGI
compounded annually on the amount paid by Comcast for such Comcast Excess
Shares, which amount shall be paid by TCGI with the purchase price for the
shares of Common Stock purchased pursuant to this Section 4.3. In calculating
the amount provided in the foregoing sentence, it shall be assumed that the
Comcast Excess Shares are the first shares purchased by TCGI pursuant to this
Section.
(b) The option provided in Section 4.3(a) may only be exercised once
regardless of whether TCGI exercises such option for the entire number of shares
it is entitled to purchase. The percentages expressed in Section 4.3(a), the
number of shares which TCGI may purchase and the purchase price
- 30 -
<PAGE>
for such shares are all based on the assumptions that (i) Comcast and TCGI are
the only stockholders of the Company and (ii) the Company, Northern Telecom and
the holders of the Minority Shares are the only equity holders of ETC. If either
such assumption ceases to be correct as a result of the admission of an
additional stockholder to either ETC or the Company, the provisions of that
Section shall be appropriately adjusted to reflect the revised capital structure
of the Company or ETC, as the case may be, to preserve the parties' intent that
TCGI have the opportunity to acquire a substantial majority interest in the
Company and ETC.
4.4 Comcast Buy Back Option.
-----------------------
(a) If immediately following the consummation of the Minority
Redemption, Comcast has an ETC Percentage of less than 40%, then Comcast shall
have the right, for a period of two years after the date of consummation of the
Minority Redemption, to purchase from TCGI up to that number of shares of Common
Stock having an ETC Percentage which, when added to the ETC Percentage of
Comcast immediately following the consummation of the Minority Redemption,
equals 40%. If Comcast exercises such right by delivery to TCGI of notice of
exercise within 180 days of such consummation, the purchase price for such
shares shall be an amount equal to the product of the amount paid by TCGI
pursuant to Section 4.1(b) or 4.2(b) above times a fraction, the numerator of
which is the increase in Comcast's ETC Percentage resulting from the purchase of
shares of Common Stock by Comcast pursuant to this Section 4.4 and the
denominator of which is the increase in TCGI's ETC Percentage resulting from the
Minority Redemption. If Comcast exercises such right by delivery to TCGI of
notice of exercise more than 180 days after such consummation (but not later
than two years after such date of consummation), the purchase price for such
shares shall be an amount equal to the Fair Market Value of such shares as of
the date of exercise of such right determined in accordance with Section 4.5
hereof. In addition, if (i) the Company has sold any New Capital Stock since
the date hereof and (ii) TCGI has purchased more than its pro rata share of such
New Capital Stock pursuant to Section 3.5(b) (such shares of Common Stock
purchased by TCGI in excess of its pro rata share of such New Capital Stock
being referred to
- 31 -
<PAGE>
hereinafter as the "TCGI Excess Shares"), Comcast shall pay to
------------------
TCGI, with respect to that number of TCGI Excess Shares purchased by Comcast
pursuant to this Section 4.4 up to the number of shares Comcast would have
bought if it had bought its pro rata share of such New Capital Stock, interest
computed at the rate of 10% per annum from the date or dates TCGI purchased such
TCGI Excess Shares to the date of payment by Comcast compounded annually on the
amount paid by TCGI for such TCGI Excess Shares, which amount shall be paid by
Comcast with the purchase price for the shares of Common Stock purchased
pursuant to this Section 4.4. In calculating the amount provided in the
foregoing sentence, it shall be assumed that the TCGI Excess Shares are the
first shares purchased by Comcast pursuant to this Section.
(b) The option provided in Section 4.4(a) may only be exercised once
regardless of whether Comcast exercises such option for the entire number of
shares it is entitled to purchase. The percentages expressed in Section 4.4(a),
the number of shares which Comcast may purchase and the purchase price for such
shares are all based on the assumptions that (i) Comcast and TCGI are the only
stockholders of the Company and (ii) the Company, Northern Telecom and the
holders of the Minority Shares are the only equity holders of ETC. If either
such assumption is not correct as of the time Comcast elects to exercise the
option set forth in Section 4.4(a), the provisions of that Section shall be
appropriately adjusted to reflect the revised capital structure of the Company
or ETC, as the case may be, to preserve the parties' intent that Comcast have
the opportunity to maintain a substantial minority interest in the Company and
ETC.
4.5 Fair Market Value. For purposes of this Agreement, "Fair Market
----------------- -----------
Value" of shares of Common Stock means the product of (i) the CAP Percentage
- - -----
represented by the shares of Common Stock as to which Fair Market Value is to be
determined as of the date of determination of Fair Market Value times (ii) the
price at which a willing seller (being under no compulsion to sell) would sell,
and a willing buyer (having full knowledge of the facts and being under no
compulsion to buy) would buy, all of the business and assets of the Company as a
going concern (or all of the outstanding Common Stock, if that would yield a
higher
- 32 -
<PAGE>
price), in a single arm's-length transaction without time constraints.
The price so determined for the business and assets of the Company shall,
without duplication or deduction, be reduced by the amount of all liabilities of
the Company. Fair Market Value shall be determined by mutual agreement of the
parties to this Agreement; provided, however, that if such agreement cannot be
-------- -------
reached (i) within ten Business Days after the election is made pursuant to
Section 6.2(a)(i) hereof to cause the Company (or its designee(s)) to purchase
the shares as to which Fair Market Value is being determined or (ii) within
thirty Business Days after the occurrence of any other event that requires the
determination of Fair Market Value, then such determination shall be made by
independent appraisal, such appraisal to be made by a qualified appraiser
selected by the Consenting Stockholder whose Common Stock is being appraised
(the "Appraisal Stockholder") and the Consenting Stockholders holding a majority
---------------------
of the outstanding Common Stock (excluding the Common Stock of the Appraisal
Stockholder). If the Consenting Stockholders have not agreed on the selection
of an appraiser within five Business Days after the expiration of such ten
Business Day or thirty Business Day period (as the case may be), then the
Appraisal Stockholder shall select one appraiser and the Consenting Stockholders
holding a majority of the outstanding Common Stock (excluding the Common Stock
of the Appraisal Stockholder) shall select a second appraiser, such selections
to be made promptly and in any event within ten Business Days after the
expiration of the foregoing five Business Day period. (If only one appraiser is
timely selected within such ten Business Day period, the appraisal shall be made
solely by such timely-selected appraiser.) The appraiser, or each appraiser in
the event of more than one appraiser, shall submit its determination of the Fair
Market Value of the Appraisal Stockholder's Common Stock within forty-five
Business Days of the date of its selection. If there are two appraisers and the
lower determination of such Fair Market Value varies by 10% or less of the
higher of such determinations, the Fair Market Value of the Appraisal
Stockholder's Common Stock shall be the average of the two determinations. If
such lower determination varies by more than 10% of the higher of such
determinations, the determination of the Fair Market Value of the Appraisal
Stockholder's Common Stock shall be decided by arbitration by the office of the
- 33 -
<PAGE>
American Arbitration Association located in or nearest to the ETC Business Area
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association. Any determination of Fair Market Value shall be final and binding
on the Consenting Stockholders. No appraiser selected pursuant to this Section
shall be affiliated with any Consenting Stockholder and each shall be an
investment banker or other qualified person with prior experience in appraising
businesses comparable to the business of the Company. The fees and expenses of
any appraisers or arbitrators shall be paid by the Company.
4.6 Northern Telecom Redemption. If the Northern Telecom Call or the
---------------------------
Northern Telecom Put is exercised and the ETC Board determines in good faith
that ETC does not have sufficient funds to fund the Northern Telecom Redemption
and that it is not able on commercially reasonable terms to borrow such funds,
then the Majority Stockholder shall purchase from the Company and the Company
shall issue and sell to the Majority Stockholder that number of shares of Common
Stock having an ETC Percentage equal to the percentage represented by the ETC
Shares immediately following the Northern Telecom Redemption minus such
percentage immediately prior to the Northern Telecom Redemption. The aggregate
purchase price for such shares of Common Stock shall be equal to the amount
payable by ETC in connection with the Northern Telecom Redemption. The Company
shall contribute the proceeds of such issuance and sale of Common Stock to ETC
and cause ETC to consummate the Northern Telecom Redemption. If TCGI is not the
Majority Stockholder at the time of the exercise of the Northern Telecom Put or
Call, as the case may be, Comcast shall notify TCGI of the exercise of the
Northern Telecom Put or the Northern Telecom Call, as the case may, and of the
consummation of the Northern Telecom Redemption.
4.7 Exercise of Rights under ETC Documents. The Company has certain
--------------------------------------
rights under the ETC Stockholders' Agreement under certain circumstances to
acquire shares of stock in ETC, such as (but not limited to) preemptive rights,
rights of first refusal and an option to acquire shares of an ETC stockholder
which has suffered an involuntary transfer of its shares in ETC. Comcast shall
notify TCGI when any such rights arise and whether it intends to cause the
Company to exercise such rights. If
- 34 -
<PAGE>
Comcast elects not to cause the Company to exercise such rights, TCGI shall have
the right to cause the Company to do so. If TCGI so elects, the Company shall
issue and sell to TCGI pursuant to Section 3.5, and TCGI shall purchase from the
Company that number of shares of Common Stock such that Comcast's ETC Percentage
after such issuance is exactly what it would have been if TCGI had not elected
to cause the Company to exercise such rights. The purchase price for such sale
shall equal the amount required by the Company under the ETC Stockholders'
Agreement to exercise such rights. The Company shall use the proceeds of any
such issuance and sale of Common Stock to exercise the rights which TCGI elected
to have it exercise.
4.8 Closing of Transfers. Unless otherwise agreed between the buyer
--------------------
and seller, the closing of a purchase and sale of Common Stock contemplated by
this Article 4 shall take place at the offices of the Company on or before the
thirtieth day after the later of:
(a) the completion of any applicable appraisal process;
(b) the expiration or termination of all applicable governmental
waiting periods;
(c) the receipt of all necessary governmental consents needed to
approve the transactions contemplated herein, which consents have not been
reversed, stayed, enjoined, set aside, annulled or suspended, and with respect
to which no requests are pending for administrative or judicial review,
reconsideration, appeal or stay, and the time for filing any such requests and
the time for the issuer of such consent to set aside the action on its own
motion have expired;
(d) the receipt of all material third party consents needed to
approve the transactions contemplated herein; and
- 35 -
<PAGE>
(e) the termination of any applicable preliminary or permanent
injunction or other order by any court of competent jurisdiction restricting,
preventing or prohibiting the consummation of such purchase and sale.
At said closing, the purchaser shall pay the total purchase price against the
seller's delivery to the purchaser of certificates evidencing the shares of
Common Stock purchased, all duly endorsed and accompanied by assignments as are
sufficient to effect due transfer of the ownership of such interest to the
purchaser, free and clear of all liens, security interests and other
encumbrances.
ARTICLE 5 ADDITIONAL AGREEMENTS
5.1 Confidentiality. Each Consenting Stockholder agrees that it will
---------------
not, directly or indirectly, without the prior written consent of each of the
other Consenting Stockholders, use or disclose to any Entity any information,
trade secrets, confidential customer information, technical data or know-how
relating to the products, processes, methods, equipment or business practices of
the Company, ETC or any of the Company's other Subsidiaries, (a) except to the
extent any of the foregoing is or becomes available to the public other than as
a result of disclosure by such Consenting Stockholder or any of its Affiliates
or the directors, officers, employees, agents, advisors and controlling persons
of it or any of its Affiliates, (b) except as necessary to effect a transaction
under and in compliance with Article 3, (c) except as may be required by law and
(d) except as any Consenting Stockholder may disclose to its lenders, rating
agencies and business, legal and financial advisors. In the event any
Consenting Stockholder is required by applicable law or regulation or by legal
process to disclose any of the foregoing, it will provide the Company and the
other Consenting Stockholders with prompt notice thereof to enable them to seek
an appropriate protective order. The covenants made by a Consenting Stockholder
in this Section 5.1 shall continue to apply for a period of two years after such
Consenting Stockholder ceases to be a Consenting Stockholder (subject, however,
to Section 7.1 hereof).
- 36 -
<PAGE>
5.2 Acquisitions Prior to Minority Redemption. If at any time that
-----------------------------------------
TCGI is not the Majority Stockholder, the holders of the Minority Shares notify
the Company or Comcast that they desire to cause ETC to make an acquisition of
assets or equity interests which may be used by ETC in the conduct of the
Business in the ETC Business Area and which involves an expenditure in an amount
in excess of $1,000,000 (a "Minority Approved Acquisition"), Comcast shall so
-----------------------------
notify TCGI. In addition, if at any time that it is not the Majority
Stockholder TCGI desires to cause ETC to make a Minority Approved Acquisition,
Comcast shall cause the Company to present to the ETC Board a proposal for ETC
to make such acquisition. If the ETC directors appointed by the holders of the
Minority Shares vote in favor of such proposal, then Comcast shall cause the
Company to cause ETC to make such acquisition and to take all actions necessary,
including, but not limited to, issuing New Capital Stock or borrowing funds
necessary to fund such acquisition, to implement such acquisition.
5.3 Indebtedness for Borrowed Money. The Company shall not, and
-------------------------------
shall not permit ETC or any other Entity controlled by the Company to, incur any
indebtedness for borrowed money the terms of which permit the creditor under
such indebtedness to have recourse against a Consenting Stockholder without the
express written consent of that Consenting Stockholder.
5.4 Amendments to and Compliance with ETC Documents. Neither Comcast
-----------------------------------------------
nor the Company shall agree to any amendment, modification or waiver of any
provision of the ETC Stockholders' Agreement, the ETC Purchase Agreement or any
document or instrument entered into in connection therewith without the prior
written consent of TCGI, which consent shall not be unreasonably withheld.
Comcast and the Company shall each comply in all material respects with the
provisions of the ETC Stockholders' Agreement and shall not take any action
which, under the ETC Stockholders' Agreement, requires the consent of the
holders of the Minority Shares, without the consent of such holders.
5.5 Use of TCGI Name. The Company shall not, and shall not permit
----------------
ETC to, use "TCG", "TC", "Teleport" or "Teleport
- 37 -
<PAGE>
Communications" or any name or initials similar thereto as part or all of its
name or trade name, without the prior written consent of TCGI.
ARTICLE 6 EVENTS OF DEFAULT AND REMEDIES
6.1 Events of Default. An "Event of Default" shall be considered to
----------------- ----------------
have occurred with respect to a Consenting Stockholder (together with the
Subsidiaries of its Parent that are also Consenting Stockholders, a "Defaulting
----------
Stockholder") if:
- - -----------
(a) such Consenting Stockholder, directly or indirectly, sells,
assigns, transfers, grants a participation in or option with respect to,
pledges, encumbers or otherwise disposes of all or any part of its Common Stock,
except as permitted by this Agreement; provided, however, that no Event of
-------- -------
Default shall be considered to have occurred for thirty days following the
involuntary encumbrance of all or any part of such Common Stock if during such
thirty day period such Consenting Stockholder acts diligently to, and does,
remove any such encumbrance, including, but not limited to, effecting the
posting of a bond to prevent foreclosure where necessary;
(b) such Consenting Stockholder fails to perform or violates any
other material term or condition of this Agreement and such failure or violation
continues for thirty days after written notice thereof has been given to such
Consenting Stockholder by the Company or any other Consenting Stockholder or any
representation or warranty of such Consenting Stockholder made herein was false
in any material respect when made; or
(c) such Consenting Stockholder institutes proceedings of any nature
under the Federal Bankruptcy Code, or any similar state or Federal law for the
relief of debtors (a "Bankruptcy Law"), wherein such Consenting Stockholder
--------------
seeks relief as a debtor; such Consenting Stockholder makes a general assignment
for
- 38 -
<PAGE>
the benefit of creditors; or such Consenting Stockholder has instituted
against it proceedings under any section of any Bankruptcy Law, which
proceedings are not dismissed, stayed or discharged within sixty days after the
filing thereof or, if stayed, such stay is thereafter lifted without a
contemporaneous discharge or dismissal of such proceedings (such Consenting
Stockholder may be referred to hereinafter as a "Bankrupt Stockholder").
--------------------
6.2 Remedies.
--------
(a) Upon the occurrence and during the continuance of an Event of
Default with respect to a Defaulting Stockholder, the Board may elect (by the
vote of a majority of the disinterested members):
(i) with the approval of those Consenting Stockholders who are not
Defaulting Stockholders ("non-Defaulting Stockholders") and whose aggregate
---------------------------
number of shares of outstanding Common Stock constitutes not less than a
majority of the aggregate number of shares of Common Stock owned by all non-
Defaulting Stockholders, to cause the Company, or its designee(s), to purchase
the Common Stock of such Defaulting Stockholder pursuant to Section 6.3; or
(ii) to seek to enjoin such default or to obtain specific performance
of a Defaulting Stockholder's obligations or to seek Damages (as defined and
subject to the limitations specified below).
(b) The election of a remedy specified in clause 6.2(a) above may be
exercised by notice given to the Defaulting Stockholder (x), in the case of an
Event of Default specified in clause 6.1(b), at any time, or (y), in the case of
any other Event of Default, within ninety days after the Board or any other
Consenting Stockholder obtains actual knowledge of the Event of Default;
provided, however, that, if an election pursuant to clause 6.2(a)(ii) above is
- - -------- -------
made to seek an injunction, specific
- 39 -
<PAGE>
performance or other equitable relief and a final judgment in such action is
rendered denying such equitable remedy, then, within ninety days thereafter, the
Board may elect to pursue the remedy specified in clause 6.2(a)(i) above
(subject to the prior approval of the non-Defaulting Stockholders contemplated
by Section 6.2(a)(i) hereof) unless, prior to the giving of such notice, the
Defaulting Stockholder has cured (or caused to be cured) the Event of Default in
full or the final judgment denying equitable relief specifically held that there
was no Event of Default, and no other Event of Default with respect to such
Defaulting Stockholder has occurred and is continuing.
(c) The remedies set forth in Section 6.2(a) above shall not be
deemed mutually exclusive, and selection or resort to either thereof shall not
preclude selection or resort to the other; provided, however, that, if the Board
-------- -------
makes an election pursuant to clause 6.2(a)(i) above in respect of any Event of
Default, then it may not pursue any other remedy in respect of that Event of
Default. Except for the resort to the remedy set forth in clause 6.2(a)(i)
above, the resort to any remedy pursuant to this Section 6.2 shall not for any
purpose be deemed to be a waiver of any other remedy available under this
Agreement or under applicable law.
(d) Unless an Event of Default shall have been waived in writing or
cured, the Company and the non-Defaulting Stockholders shall be entitled to
recover from the Defaulting Stockholder (or its Parent pursuant to the
applicable Parent Undertaking) in an appropriate proceeding any and all damages,
losses and expenses (including reasonable attorneys' fees and disbursements)
(collectively "Damages") suffered or incurred by the Company or the non-
-------
Defaulting Stockholders, as the case may be, as a result of such Event of
Default; provided, however, that neither the Company nor the non-Defaulting
-------- -------
Stockholders shall have or assert any claim against the Defaulting Stockholder
or any of its Affiliates for punitive Damages or for indirect, special or
consequential Damages suffered as a result of such Event of Default.
(e) Upon the occurrence and during the continuance of an Event of
Default, and notwithstanding any other
- 40 -
<PAGE>
provision of this Agreement to the contrary, the Consenting Stockholders shall
take all necessary action to remove from the Board each director designated by
the Defaulting Stockholder and cause the size of the Board to be decreased by
the number of directors so removed. Notwithstanding any provision to the
contrary in this Agreement, the Defaulting Stockholder shall have no right to
designate directors to the Board pursuant to Article 2 hereof until such time as
such Event of Default is cured in full or waived by the Company and each non-
Defaulting Stockholder and no other Event of Default with respect to such
Defaulting Stockholder has occurred and is continuing. In all other respects a
Defaulting Stockholder shall continue to have all of the rights and obligations
of a Consenting Stockholder under this Agreement and applicable law. The non-
Defaulting Stockholders shall negotiate in good faith an amendment to Article II
hereof which carries out the intent and purpose of such Article and provides for
an equitable and suitable adjustment in, among other things, the percentage
ownership required to designate a director to the Board and the number of
directors required to approve a Significant Transaction or any other transaction
in accordance with Section 2.5 hereof. Any such amendment shall require the
approval of the non-Defaulting Stockholders only.
6.3 Purchase of Defaulting Stockholder's Common Stock.
-------------------------------------------------
(a) If an election is made pursuant to clause 6.2(a)(i), the closing
of the purchase of the Defaulting Stockholder's Common Stock shall take place at
the principal office of the Company within thirty days of the later of the
making of such election or the determination of Fair Market Value (as that term
is defined in Section 4.5 hereof). The Company (or its designee(s)) shall pay a
purchase price for the Defaulting Stockholder's Common Stock (which shall be
payable in cash) equal to 50% of the Fair Market Value of such Common Stock as
of the date of occurrence of the Event of Default in respect of which the
election pursuant to clause 6.2(a)(i) has been made. Upon payment of the
purchase price to the Defaulting Stockholder, the Defaulting Stockholder shall
take all actions and deliver to the Company (or its designee(s)) all documents
necessary to transfer to the Company (or its designee(s)) good title to its
Common Stock, free and clear of all liens, security interests and other
- 41 -
<PAGE>
encumbrances. Immediately following such closing the remaining Consenting
Stockholders shall take any actions that are necessary or appropriate to reflect
the withdrawal of the Defaulting Stockholder, including, without limitation,
amending this Agreement.
(b) Notwithstanding Section 6.3(a), if an election is made pursuant
to clause 6.2(a)(i) and the only Event of Default that has occurred and is
continuing is that the Defaulting Stockholder is a Bankrupt Stockholder, then
the time, place and manner of the purchase of such Defaulting Stockholder's
Common Stock shall be as provided in Section 6.3(a), except that the Company (or
its designee(s)) shall pay a purchase price for such Common Stock (which shall
be payable in cash) equal to 90% of the Fair Market Value of such Common Stock
as of the date of occurrence of such Event of Default.
(c) The provisions of Article 3 shall not apply to any purchase by
the Company (or its designee(s)) of shares of Common Stock from a Defaulting
Stockholder.
ARTICLE 7 MISCELLANEOUS
7.1 Expiration and Termination. This Agreement shall expire on the
--------------------------
twenty-fifth anniversary of this Agreement and shall terminate earlier if and
when less than 50% of the outstanding Common Stock is owned beneficially by
Consenting Stockholders; provided, however, that the voting agreements set forth
-------- -------
in Articles 1 and 2 shall in any event terminate by no later than the tenth
anniversary of this Agreement, subject to extension by the consent of all
Consenting Stockholders in accordance with Delaware law.
7.2 Assignment. The provisions of this Agreement shall be binding
----------
upon and inure to the benefit of the parties and their respective successors and
permitted assigns. Notwithstanding the preceding sentence, neither this
Agreement nor any right, remedy, obligation or liability arising hereunder or by
reason hereof shall be assignable by the Company or any Consenting Stockholder
without the prior written consent of the
- 42 -
<PAGE>
other Consenting Stockholders; provided, however, that no such consent shall
-------- -------
be required in the event that:
(i) a Consenting Stockholder assigns all or any part of its rights and
obligations under this Agreement to a Subsidiary of its Parent in connection
with the transfer of all or any part of such party's shares of Common Stock to
such Subsidiary in accordance with Section 3.3; or
(ii) a Consenting Stockholder assigns all or a portion of its rights,
remedies, obligations and liabilities hereunder in connection with the sale of
all or a portion, as the case may be, of such Consenting Stockholder's shares of
Common Stock to any purchaser in a transaction that is otherwise permitted by
this Agreement.
7.3 Financial Reports and Notices of Material Litigation. The
----------------------------------------------------
Company shall prepare and deliver to each Consenting Stockholder:
(a) Promptly upon availability, but in any event within thirty days
of the end of each month, (i) a balance sheet for ETC as of the end of such
month; and (ii) statements of income or loss and of cash flows for ETC for the
interim period beginning with the beginning of the fiscal year in which such
month occurs through the end of such month and for the month then ended, and
setting forth in each case in comparative form the figures for such previous
fiscal periods as any Consenting Stockholder may reasonably request and
comparisons to budget;
(b) Promptly upon availability but in any event within forty days of
the end of each quarter, (i) a balance sheet for ETC as of the end of such
quarter; and (ii) statements of income or loss and of cash flows for ETC for the
interim period beginning with the beginning of the fiscal year in which such
month occurs through the end of such quarter and for the quarter then ended, and
setting forth in each case in comparative form the figures for such previous
fiscal periods as any Consenting Stockholder may reasonably request and
comparisons to budget;
- 43 -
<PAGE>
(c) Promptly upon availability, but in any event within eighty-five
days of the end of each fiscal year of ETC, a balance sheet of ETC as of the end
of such fiscal year, and a statement of income or loss and a statement of cash
flows for such fiscal year, all in reasonable detail, setting forth in each case
in comparative form the figures for the previous year, certified by ETC's
auditors, which shall be a nationally recognized accounting firm;
(d) Promptly upon availability, but in any event within eighty-five
days of the end of each fiscal year of the Company, a balance sheet of the
Company as of the end of such fiscal year, and a statement of income or loss for
such fiscal year, all in reasonable detail, setting forth in each case in
comparative form the figures for the previous year;
(e) With reasonable promptness, such other financial information and
reports, which shall include (without limitation) a summary of intercompany
transactions and payments and transactions among the Company, ETC and their
respective stockholders and a statement of income for each subsidiary of the
Company and such projections as from time to time may be requested by a
Consenting Stockholder; and
(f) prompt notice of the commencement or institution by or against
the Company or ETC of any dispute, litigation, suit, action or other proceeding
before any court or other governmental, administrative or taxing authority which
the Company in good faith determines is reasonably likely to have a material
adverse effect upon a Consenting Stockholder or an Affiliate of a Consenting
Stockholder, other than as a result of a diminution in the value of the Common
Stock held by such Consenting Stockholder or the ETC Shares where such
diminution in value affects all Consenting Stockholders and their Affiliates
equally.
7.4 Tax Matters.
-----------
(a) For purposes of this Section 7.4, the following terms shall have
the following meanings (terms defined in the plural have the same meaning when
used in the singular):
- 44 -
<PAGE>
(1) "Tax" or "Taxes" means all federal, state, local and foreign
--- -----
income, gross receipts, sales, use, employment, franchise, profits, excise,
property, or other taxes, estimated taxes, fees, stamp taxes and duties,
assessments or charges of any kind whatsoever (whether payable directly or by
withholding), together with any interest and any penalties, additions to tax or
additional amounts imposed by any taxing authority with respect thereto.
(2) "Tax Return" or "Tax Returns" means all returns or reports
---------- -----------
required to be filed under any statute, rule or regulation relating to Taxes.
(3) "Internal Revenue Code" means the Internal Revenue Code of 1986,
---------------------
as amended from time to time and any subsequent federal law of similar import.
(b) Except for a consolidated or combined Tax Return of the Company
and ETC, neither the Company nor ETC shall be included in any consolidated or
combined Tax Return with any other entity except with the prior written consent
of each Consenting Stockholder; provided, however, that such consent shall not
be required if the Company or ETC, as applicable, is required by applicable law
to be included in a consolidated or combined Tax Return. If the Company or ETC
is included in a consolidated or combined return with another Entity, then the
Company shall (or, in the case of ETC, the Company shall cause ETC to) enter
into a tax sharing agreement which shall provide that the liability of the
Company or ETC, as applicable, for the respective Tax as a member of the
combined or consolidated group shall not be greater than the liability of the
Company or ETC, as applicable, for such Tax would be if separate returns were
filed.
(c) Taxes of the Company for the period after the date of this
Agreement shall be the responsibility of the Company. The Company shall prepare
and file in a timely manner all Tax Returns required to be filed, or required to
be furnished to shareholders or other persons or entities, in respect of Taxes
with respect to the Company for any taxable period ending after the date of this
Agreement, and, except as otherwise provided in
- 45 -
<PAGE>
the Comcast Cap Purchase Agreement, the Company shall be responsible for the
contents of such returns. Subject to the provisions of the Comcast Cap Purchase
Agreement, the Company shall pay or cause to be paid when due and payable all
Taxes which accrue with respect to the Company which are required to be reported
on Tax Returns required to be filed by the Company hereunder.
(d) Except as otherwise provided in the ETC Purchase Agreement, all
Taxes of ETC shall be the responsibility of ETC. The Company shall cause ETC to
prepare and file in a timely manner all Tax Returns required to be filed, or
required to be furnished to shareholders or other persons or entities, in
respect of Taxes with respect to ETC and, except as otherwise provided in the
ETC Purchase Agreement, ETC shall be responsible for the contents of such
returns. Subject to the provisions of the ETC Purchase Agreement, the Company
shall cause ETC to pay or cause to be paid when due and payable all Taxes which
accrue with respect to ETC which are required to be reported on Tax Returns
required to be filed by ETC.
(e) The Company shall provide to each Consenting Stockholder copies
of all Tax Returns of the Company and ETC proposed to be filed at least thirty
days prior to the due date for filing such returns (including extensions). A
Consenting Stockholder shall notify the Company of any dispute with respect to
any such Tax Return within ten days of its receipt of such proposed return. In
the event of such a dispute, the Company and the Consenting Stockholders agree
to consult and to attempt in good faith to resolve such dispute. If any such
dispute is not resolved at least ten days prior to the due date for filing the
respective return, such dispute shall be resolved by ETC's outside accounting
firm (currently Arthur Andersen) and the determination of such accounting firm
shall be utilized in filing the particular Tax Return binding upon all parties.
The fees of such outside accounting firm shall be borne by the Company and the
Consenting Stockholder(s) that gave notice of dispute in the same proportion as
the proportion of the dollar amounts as to which each did not prevail in such
dispute bears to the total amount in dispute.
- 46 -
<PAGE>
(f) The Company shall promptly notify the Consenting Stockholders in
writing of the commencement of any Tax audit or administrative or judicial
proceeding or any demand or claim related to Taxes or Tax Returns of the Company
or ETC. Thereafter, the Company shall diligently keep each Consenting
Stockholder apprised of all developments in such regard, and shall promptly
respond to all requests for information with respect to such audit from any
Consenting Stockholder. Each Consenting Stockholder, if it receives written
notice thereof (other than pursuant to the preceding sentence), shall promptly
notify the Company and the other Consenting Stockholders in writing of its
receipt of notice of the commencement of any Tax audit or administrative or
judicial proceeding or any demand or claim which relates to any taxable year or
portion thereof of the Company or ETC. The Company shall have the right to
control any such proceeding; provided, however, that each Consenting Stockholder
-------- -------
shall have the right to participate in such audit or other proceeding at its own
expense. The Company shall provide to each Consenting Stockholder copies of any
information received by it from ETC relating to Taxes or Tax Returns of ETC.
(g) The Company and the Consenting Stockholders will provide each
other with such cooperation and information on a timely basis as either the
Company or any Consenting Stockholder reasonably may request in filing any Tax
Return, amended Tax Return or claim for refund, determining a liability for
Taxes or a right to a refund of Taxes or participating in or conducting any
audit or other proceeding in respect of Taxes. Such cooperation and information
shall include providing copies of relevant Tax Returns of the Company and ETC or
portions thereof, together with accompanying schedules and related work papers
and documents relating to rulings or other determinations by Tax authorities,
but in no event shall any Consenting Stockholder be required by any provision of
this Agreement to disclose to any other party any information relating to its
operations other than those of the Company and ETC. The Company shall make its
employees available (and shall cause ETC to make its employees available) on a
mutually convenient basis to provide explanations of any documents or
information provided by it hereunder. The Company shall make available (and
shall cause ETC to make available) to each of the Consenting Stockholders, on
- 47 -
<PAGE>
a mutually convenient basis, such personnel as would be reasonably necessary or
helpful to each of the Consenting Stockholders in connection with the conduct of
any audit or administrative or judicial proceeding with respect to which any
Consenting Stockholder has any potential liability. The Company shall retain
(and shall cause ETC to retain) all returns, schedules and work papers and all
records or other documents relating to tax matters of the Company and ETC until
the later of (i) 90 days following the expiration of the statute of limitations
of the taxable periods to which such returns and other documents relate
(including extensions to the extent such party has notice of such extensions for
the respective tax periods), or (ii) six years following the due date (without
extension) for such returns. Notwithstanding the foregoing, the Company shall
not dispose of (and shall not permit ETC to dispose of) any records or any other
documents relating to Tax matters unless it has previously notified each
Consenting Stockholder and each Consenting Stockholder has declined to take
custody of such records or other documents. Any information obtained under this
Section 7.4(g) shall be kept confidential, except as may otherwise be necessary
in connection with the filing of returns or claims for refund or in conducting
an audit or other proceeding.
7.5 Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered if delivered by hand, by telecopier device
(confirmed by hand delivery or overnight courier service) or by overnight
courier service to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
if to the Company or Comcast, to:
Comcast Corporation
1234 Market Street
16th Floor
Philadelphia, PA 19107
Attention: General Counsel
- 48 -
<PAGE>
if to TCGI, to:
Teleport Communications Group Inc.
1 Teleport Drive, Suite 301
Staten Island, NY 10311-1011
Attention: Robert Annunziata, Chairman and Chief
Executive Officer
and
John W. Thomson, Esquire, Vice President
and General Counsel
with copies to each other Consenting Stockholder and to:
Dow, Lohnes & Albertson
1255 Twenty-Third Street, N.W.
Washington, DC 20037
Attention: Kevin F. Reed, Esq.
7.6 Entire Agreement. This Agreement represents the entire
----------------
understanding of the parties with reference to the matters set forth herein.
This Agreement supersedes all prior negotiations, discussions, correspondence,
communications and prior agreements among the parties relating to the subject
matter herein.
7.7 Amendment and Waiver. Sections 2.1 and 2.5 hereof may be amended
--------------------
in connection with any Entity's becoming a Consenting Stockholder hereunder with
the consent of Consenting Stockholders which are entitled to designate at least
that number of directors sufficient to approve a Significant Transaction
pursuant to Section 2.5 above. Subject to Sections 3.6 and 6.2(e) hereof, this
Agreement may not be amended or modified in any other respect except by an
instrument in writing signed by all of the parties hereto. Any failure of any
party hereto to comply with any obligation, covenant, agreement or condition
contained herein may be waived by the party entitled to the benefits thereof,
but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
- 49 -
<PAGE>
7.8 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware (without regard
to its laws pertaining to conflicts of law) applicable to contracts executed in
and to be performed entirely in such state.
7.9 Severability. If any term or other provision of this Agreement
------------
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the greatest extent possible.
7.10 Consent to Jurisdiction; Specific Performance.
---------------------------------------------
(a) Each Consenting Stockholder hereby irrevocably submits to the
non-exclusive jurisdiction of any Delaware State or Federal court in any action
or proceeding arising out of or relating to this Agreement, and each Consenting
Stockholder hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in such Delaware State or Federal
court. Each Consenting Stockholder hereby irrevocably waives, to the fullest
extent they may effectively do so, the defense of an inconvenient forum to the
maintenance of such action or proceeding.
(b) Nothing in this Section 7.10 shall affect the right of any party
to serve legal process in any other manner permitted by law or affect the right
of any party to bring any action or proceeding against any other party or its
property in the courts of any other jurisdictions. The consents to jurisdiction
set forth in this Section 7.10 shall not constitute general consents to service
of process in the State of Delaware and shall have no effect for any purpose
except as provided in
- 50 -
<PAGE>
this Section 7.10 and shall not be deemed to confer rights on any Entity other
than the parties to this Agreement.
(c) Without intending to limit the remedies available to any of the
parties hereto, each of the parties hereto acknowledges and agrees that a
violation by such party of any term of this Agreement will cause the other
parties hereto irreparable injury for which an adequate remedy at law is not
available. Therefore, the parties hereto agree that each such party shall be
entitled to an injunction, restraining order or other form of equitable relief
from any court of competent jurisdiction restraining any other party hereto from
committing any breach or threatened breach of, or otherwise specifically to
enforce, any provision of this Agreement.
7.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same agreement.
7.12 Headings. The section headings used in this Agreement are for
--------
reference purposes only and shall not affect the meaning or interpretation of
any term or provision of this Agreement.
7.13 Recapitalizations; New Capital Stock. In the event of (i) a
------------------------------------
recapitalization or other change in the Company's capital structure affecting
the Common Stock or (ii) the issuance of any New Capital Stock, other than
Common Stock, or other securities which provide the holders with the right to
vote for directors of the Company (whether generally, for a specified number of
directors or upon the occurrence of a contingency), the Consenting Stockholders
shall negotiate in good faith an amendment to this Agreement to provide for
equitable and suitable adjustment in (i) the percentage of shares of Common
Stock specified in any provision of this Agreement (including without limitation
under Section 2.1) under which the effectiveness or enforceability of a right
granted to any Consenting Stockholder is stated to depend upon a specified
percentage of shares of Common Stock, (ii) the types of securities that the
Consenting Stockholders are required to vote under any provisions of this
- 51 -
<PAGE>
Agreement and (iii) the types of securities subject to the restrictions on
transfer and other provisions of Article 3 and the repurchase provisions of
Article 6.
- 52 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stockholders'
Agreement as of the date and year first above written.
COMCAST CAP OF PHILADELPHIA, INC.
By:___________________________
Name:_________________________
Title:________________________
COMCAST CORPORATION
By:___________________________
Name:_________________________
Title:________________________
TELEPORT COMMUNICATIONS GROUP INC.
By:___________________________
Name:_________________________
Title:________________________
- 53 -
<PAGE>
Exhibit A
---------
[FORM OF PARENT'S UNDERTAKING]
UNDERTAKING OF _____________
Dated ______________, ____
The undersigned, being the Parent of _______________ (the
"Subsidiary"), does hereby covenant and confirm, to and for the benefit of the
----------
Company and each other Consenting Stockholder, that it will not violate or seek
to circumvent the provisions of Article 3 of the Stockholders' Agreement (as
that term is defined below) which are applicable to the Subsidiary. Capitalized
terms used and not otherwise defined in this undertaking have the meanings
ascribed thereto in the Stockholders' Agreement, dated as of June 30, 1993, as
amended, by and among Comcast Cap of Philadelphia, Inc., Comcast Corporation and
Teleport Communications Group Inc. (the "Stockholders' Agreement").
-----------------------
[PARENT]
By:______________________
Title:___________________
<PAGE>
EXHIBIT 12
TCGI AND TCGP
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE FOR THE
REORGANIZATION FOR THE THREE REORGANIZATION
AND OFFERINGS FOR MONTHS ENDED AND OFFERINGS FOR
FOR THE YEAR ENDED DECEMBER 31, THE YEAR ENDED MARCH 31, THE THREE MONTHS
--------------------------------------------- DECEMBER 31, ------------------ ENDED MARCH 31,
1991 1992 1993 1994 1995 1995 1995 1996 1996
------ ------- -------- -------- -------- ----------------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income
(Loss)........... $2,457 $(4,428) $(18,271) $(29,989) $(53,804) $(168,573) $(11,538) $(18,692) $(47,839)
Add (Deduct):
Income Tax
Provision
(Benefit)........ (484) -- (4,149) 433 401 401 335 225 225
Less: Minority
Interest......... -- -- (796) (1,395) (663) (2,673) (201) (150) (855)
------ ------- -------- -------- -------- --------- -------- -------- --------
Pre Tax Income
(Loss)........... 1,973 (4,428) (23,216) (30,951) (54,066) (170,845) (11,404) (18,617) (48,469)
------ ------- -------- -------- -------- --------- -------- -------- --------
Add: Fixed Charges
Interest......... 885 1,508 2,548 8,867 27,206 112,359 5,331 9,222 28,540
Amortization of
debt expense.... -- -- -- -- 116 116 -- 42 42
------ ------- -------- -------- -------- --------- -------- -------- --------
Total fixed
charges........ 885 1,508 2,548 8,867 27,322 112,475 5,331 9,264 28,582
------ ------- -------- -------- -------- --------- -------- -------- --------
$2,858 $(2,920) $(20,668) $(22,084) $(26,744) $ (58,370) $ (6,073) $ (9,353) $(19,887)
====== ======= ======== ======== ======== ========= ======== ======== ========
Fixed Charges..... $ 885 $ 1,508 $ 2,548 $ 8,867 $ 27,322 $ 112,475 $ 5,331 $ 9,264 $ 28,582
====== ======= ======== ======== ======== ========= ======== ======== ========
Ratio of Earnings
to Fixed
Charges.......... 3.23x NA NA NA NA NA NA NA NA
Deficiency of
Earnings to Fixed
Charges.......... NA $ 4,428 $ 23,216 $ 30,951 $ 54,066 $ 170,845 $ 11,404 $ 18,617 $ 48,469
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 2 to Registration Statement No. 333-
3984 of Teleport Communications Group Inc. of our report on the combined
financial statements of Teleport Communications Group Inc. and its
subsidiaries and TCG Partners dated February 16, 1996 (April 24, 1996 as to
Note 1, May 13, 1996 as to Note 12 and June 25, 1996 as to Note 6) and our
report on the combined financial statements of Local Market Partnerships to be
Acquired by Teleport Communications Group Inc. dated February 16, 1996 (May
13, 1996 as to Note 9) appearing in the Prospectus, which is a part of such
Registration Statement, and to the reference to us under the headings "Summary
Combined Financial and Other Operating Data," "Selected Combined Financial
Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
New York, New York
June 25, 1996
