<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-33117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ECONOPHONE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEW YORK 4813 11-3132722
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
45 BROADWAY
NEW YORK, NEW YORK 10006
(212) 444-6991
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
ALAN L. LEVY
PRESIDENT, CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER
45 BROADWAY
NEW YORK, NEW YORK 10006
(212) 444-6991
(Name, address, including zip code, and telephone number
including area code, of agent for service)
------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
ANDRE WEISS, ESQ.
SCHULTE ROTH & ZABEL LLP
900 THIRD AVENUE
NEW YORK, NEW YORK 10022
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: / /
------------------------
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 THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ECONOPHONE, INC.
CROSS REFERENCE SHEET TO FORM S-4
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Forepart of the Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. Prospectus Summary; Risk Factors; Summary Selected
Consolidated Financial Data
4. Terms of the Transaction............................. Prospectus Summary; Risk Factors; The Exchange Offer;
Description of the Exchange Notes; Certain Federal
Income Tax Considerations
5. Pro Forma Financial Information...................... Prospectus Summary; Capitalization; Summary Selected
Consolidated Financial Data
6. Material Contracts with the Company Being Acquired... *
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... *
8. Interests of Named Experts and Counsel............... *
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Management
10. Information with Respect to S-3 Registrants.......... *
11. Incorporation of Certain Information by Reference.... *
12. Information with Respect to S-2 or S-3 Registrants... *
13. Incorporation of Certain Information by Reference.... *
14. Information with Respect to Registrants other than
S-3 or S-2 Registrants............................. Cover Page of Registration Statement; Available
Information; Prospectus Summary; Risk Factors; Use
of Proceeds; Capitalization; Selected Consolidated
Financial Data: Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Description of
the Exchange Notes; Financial Statements
15. Information with Respect to S-3 Companies............ *
16. Information with Respect to S-2 or S-3 Companies..... *
17. Information with Respect to Companies other than S-2
or S-3 Companies................................... *
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ *
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer.... Management; Certain Transactions; Description of
Certain Indebtedness; Principal Stockholders;
Financial Statements
</TABLE>
- ------------------------
* Item is omitted because answer is negative or the item is inapplicable.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 25, 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ECONOPHONE, INC.
OFFER TO EXCHANGE $155,000,000 OF NEW
13 1/2% SENIOR NOTES DUE 2007
FOR $155,000,000 OF ANY AND ALL OUTSTANDING
13 1/2% SENIOR NOTES DUE 2007
Econophone, Inc., a New York corporation ("Econophone" or the "Company"),
hereby offers to exchange (the "Exchange Offer"), upon the terms and conditions
set forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), up to $155,000,000 in aggregate
principal amount of its 13 1/2% Senior Notes due 2007 (the "Exchange Notes") for
a like principal amount of its 13 1/2% Senior Notes due 2007 (the "Original
Notes" and, together with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes will generally be freely transferable by holders
thereof (each, a "Holder" and, collectively, the "Holders"), (except as provided
herein), and are not subject to any covenant of the Company regarding
registration. The Exchange Notes will be issued under the indenture governing
the Original Notes. For a description of the principal terms of the Exchange
Notes, see "Description of the Exchange Notes."
Interest on the Exchange Notes will be payable semi-annually on January 15
and July 15 of each year, commencing January 15, 1998. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after July 15, 2002, at the redemption prices set forth herein, plus accrued and
unpaid interest if any, thereon to the date of redemption. In addition, at any
time prior to July 15, 2000, the Company may, in its discretion, redeem up to
35% of the original principal amount of the Notes at a redemption price equal to
113.50% of the principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of redemption, with the net proceeds of one or more
Public Equity Offerings (as defined); provided that (1) at least $100.00 million
in principal amount of the Notes remains outstanding after each such redemption
and (2) each such redemption occurs within 180 days of the related Public Equity
Offering. The Exchange Notes will not be subject to any mandatory sinking fund.
In the event of a Change of Control (as defined), each holder of the Notes will
have the right to require the Company to purchase all or any part of such
Holder's Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of purchase. See "Description of the Exchange Notes" and
"Capitalization."
The Original Notes were issued and sold on July 1, 1997, in a transaction
(the "Offering") not registered under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon the exemptions provided in Section 4(2)
of the Securities Act and Rule 144A and Regulation S under the Securities Act.
Accordingly, the Original Notes may not be reoffered, resold or otherwise
pledged, hypothecated or transferred unless so registered or unless an
applicable exemption from the registration
(COVER PAGE CONTINUED)
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 14, FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE>
(COVER PAGE CONTINUED)
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy certain of the obligations of the Company
under a registration rights agreement relating to the Original Notes. See "The
Exchange Offer--Purpose of the Exchange Offer." The Company is making the
Exchange Offer in reliance upon an interpretation by the staff of the Securities
and Exchange Commission (the "Commission") set forth in a series of no-action
letters issued to third parties, although the Company has not sought, and does
not intend to seek, its own no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Based upon the Commission's interpretations, the Company
believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Original Notes may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any Holder that is (i) an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Original Notes directly from the
Company or (iii) a broker-dealer who acquired Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such Holders'
business and such Holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Any Holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "The Exchange Offer--Procedures Applicable to All Holders."
Each broker-dealer who receives Exchange Notes pursuant to the Exchange
Offer in exchange for Original Notes acquired for its own account as a result of
market-making activities or other trading activities may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal that is filed as an exhibit to the
Registration Statement of which this Prospectus is a part states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Original Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes.
The Original Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. The Exchange
Notes constitute a new issue of securities for which there is no established
trading market. Any Original Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent Original Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered, and
tendered but unaccepted, Original Notes could be adversely affected. Following
consummation of the Exchange Offer, the Holders of Original Notes will continue
to be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such Holders to provide for the registration
under the Securities Act of the Original Notes. No assurance can be given as to
the liquidity of the trading market for either the Original Notes or the
Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange but is otherwise subject to
customary conditions. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , unless extended by the Company to such other date and
time as the Company, in its sole discretion, may determine (the "Expiration
Date"). The date of acceptance for exchange of the Original Notes (the "Exchange
Date") will be the first business day following the Expiration Date. Original
Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date; otherwise such tenders are irrevocable. There will be no
cash proceeds to the Company from the Exchange Offer.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of Exchange Notes received
for Original Notes where such Original Notes were acquired for its own account
as a result of market-making activities or other trading activities. The Company
will make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission. Statements made in this
Prospectus as to any contract, agreement or other document are summaries of the
material terms of such contracts, agreements or other documents and are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Exchange Offer, the Company will file periodic reports and
other information with the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Company is required by the terms of the Indenture, dated as of
July 1, 1997 (the "Indenture"), between the Company and The Bank of New York, as
trustee (the "Trustee"), under which the Original Notes were issued and under
which the Exchange Notes are to be issued, at all times from and after January
15, 1998, whether or not the Company is then required to file reports with the
Commission, so long as any of the Notes are outstanding, to furnish, to the
Trustee and each Holder, or supply to the Trustee for forwarding to each such
Holder, without cost to such Holder, such reports and other information as it
would be required to file with the Commission by Sections 13(a) or 15(d) under
the Exchange Act if it were subject thereto. In addition, at all times prior to
the registration of the Original Notes, the Company has agreed to furnish to any
Holder of Notes, and prospective investors upon their request, the information
required to be delivered pursuant to Rule 144A under the Securities Act.
Reports and other information filed by the Company with the Commission, and
the Registration Statement and the exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street (suite
1400), Chicago, Illinois 60661. Copies of such materials may also be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Also, the Company will file such
reports and other information with the Commission pursuant to the Commission's
EDGAR system. The Commission maintains a Web site that contains reports and
other information regarding registrants that file electronically with the
Commission pursuant to the EDGAR system. The address of the Commission's Web
site is http://www.sec.gov.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS
USED HEREIN, THE TERMS "COMPANY" AND "ECONOPHONE" REFER TO ECONOPHONE, INC. AND
ITS SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES. STATEMENTS CONTAINED IN
THIS PROSPECTUS REGARDING ECONOPHONE'S EXPECTATIONS WITH RESPECT TO FUTURE
OPERATIONS AND OTHER MATTERS, WHICH CAN BE IDENTIFIED BY USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, ARE FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS" FOR CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING IMPORTANT RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM RESULTS REFERRED TO IN THE FORWARD-LOOKING
STATEMENTS. INDUSTRY DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED FROM
INDUSTRY PUBLICATIONS AND HAS NOT BEEN INDEPENDENTLY VERIFIED BY ECONOPHONE. SEE
"GLOSSARY" FOR A DESCRIPTION OF CERTAIN TERMS THAT MAY BE HELPFUL FOR
UNDERSTANDING CERTAIN TECHNICAL MATTERS DISCUSSED IN THIS PROSPECTUS.
THE EXCHANGE OFFER
Econophone completed on July 1, 1997 the Offering of 155,000 units (each a
"Unit"), each Unit consisting of one 13 1/2% Senior Note due 2007 of Econophone
and one warrant (each a "Warrant") to purchase 8.167 shares of common stock of
Econophone (the "Common Stock"). The Units were sold for an aggregate purchase
price of $155.0 million.
Econophone entered into a Notes Registration Rights Agreement with Morgan
Stanley & Co. Incorporated ("Morgan Stanley" or the "Placement Agent") in
connection with the Offering in which it agreed, among other things, to deliver
to Holders this Prospectus and to complete the Exchange Offer on or prior to
January 15, 1998. Holders are entitled to exchange in the Exchange Offer their
Original Notes for Exchange Notes with substantially identical terms. If the
Exchange Offer is not completed on or prior to January 15, 1998, interest (in
addition to interest otherwise due on the Notes) will accrue at a rate of .5%
per annum, payable in cash semiannually in arrears. See the discussion under the
heading "Summary of Terms of the Exchange Notes" and "Description of the
Exchange Notes" for further information regarding the Exchange Notes.
Econophone believes that Exchange Notes issued in the Exchange Offer may be
resold by Holders without compliance with the registration and prospectus
delivery provisions of the Securities Act, subject to certain conditions.
Holders should read the discussion under the headings "Summary of the Exchange
Offer" and "The Exchange Offer" for further information regarding the Exchange
Offer and resales of Exchange Notes.
THE COMPANY
Econophone is a switch-based provider of long distance telecommunications
services in certain major U.S. and western European markets. Econophone's
customer base consists primarily of small- and medium-sized businesses,
residential customers and other telecommunications carriers, with a focus on
customers with significant international calling needs. In the United States and
the United Kingdom, Econophone provides principally international and domestic
long distance, calling card, prepaid and carrier services. In western Europe,
Econophone provides principally international long distance, calling card and
prepaid services.
Through internal growth, Econophone's consolidated revenues have increased
from $3.5 million in 1993 to $45.1 million in 1996. Consolidated revenues for
the first six months of 1997 were $30.4 million. During that time, the United
States, western Europe and the United Kingdom accounted for 62%, 24% and 14% of
Econophone's consolidated revenues, respectively. Econophone's strategy is to
expand into new geographic markets in western Europe and the United States, with
a focus on large markets that generate substantial international calling
traffic, add customers in its existing markets and deliver an expanded portfolio
of features and services to its customers. Over time, Econophone expects its
European markets to contribute an increasingly larger percentage of its
revenues.
4
<PAGE>
International telecommunications is one of the fastest growing segments of
the long distance industry, having experienced a compounded growth in total
minutes of 14% per annum from 1989 to 1995. The European international long
distance market is the largest in the world, with approximately 26 billion
minutes or 43% of international calling volume originating in Europe in 1995.
The continental European state-owned telecommunications organizations (the
"PTOs") generally have had monopolies on providing telephone services from their
respective countries, making the cost of international telephone calls from
continental Europe much higher than comparable calls initiated from the United
States or the United Kingdom. Furthermore, customers in many continental
European markets generally have not been able to obtain from their PTO
value-added features that are readily available in the United States, such as
itemized billing, speed dial, redial and voice mail. Regulatory liberalization,
together with significant advances in technology that have decreased the cost of
providing services and allowed the provision of sophisticated value-added
features, is facilitating competition with European PTOs by emerging
telecommunications service providers.
Econophone has rapidly increased its network infrastructure over the past
twelve months, and is continuing to expand significantly its European network.
The location and dates of installation and commercial operation of Econophone's
switches, nodes and points of presence are as follows:
<TABLE>
<CAPTION>
NETWORK INSTALLATION COMMERCIAL
MARKET ELEMENT DATE OPERATION DATE
- ------------------ ------------------ ------------- -----------------
New York Switch 3Q93 3Q93
<S> <C> <C> <C>
- ------------------------------------------------------------------------
London Switch Partition 4Q95 4Q95
Point of
Baltimore Presence 4Q96 1Q97
Hamburg Node 4Q96 1Q97
Point of
New Jersey Presence 4Q96 1Q97
Point of
Philadelphia Presence 4Q96 1Q97
Point of
Washington, D.C. Presence 4Q96 1Q97
- ------------------------------------------------------------------------
Antwerp Node 1Q97 1Q97
- ------------------------------------------------------------------------
Brussels Switch 1Q97 1Q97
- ------------------------------------------------------------------------
Point of
Connecticut Presence 1Q97 1Q97
- ------------------------------------------------------------------------
London Switch 1Q97 2Q97
- ------------------------------------------------------------------------
Paris Switch 1Q97 1Q97
Amsterdam* Node 4Q97 4Q97
Athens* Node 4Q97 4Q97
Berlin* Node 4Q97 4Q97
Zurich* Node 4Q97 4Q97
</TABLE>
-------------------------------------
* Planned network expansion.
Econophone's network elements are interconnected by a combination of owned
indefeasible rights of use ("IRUs") and leased lines. In 1998, Econophone
intends to further expand its network to additional markets in western Europe
and the United States, as market and regulatory conditions warrant.
Econophone also is in the process of expanding its sales and marketing
activities. Econophone primarily sells its services through independent sales
representatives, who until recently had not been supported or supplemented by a
significant internal sales force. In many of its markets, Econophone's strategy
has been to retain independent sales representatives to market its services in
order to rapidly generate revenues and create local brand awareness. Econophone
recently has established and is expanding its internal sales forces in its
European network cities, which include Antwerp, Brussels, Hamburg, London and
Paris. In the United States, during 1997, Econophone has hired senior sales
personnel and sales managers for Baltimore, Connecticut, New Jersey and New
York. Going forward, Econophone's internal sales forces generally will
concentrate on sales to small- and medium-sized businesses and to other
carriers, while supporting local independent sales representatives, and
independent sales representatives will concentrate on residential sales.
In 1996, Econophone changed its distribution strategy in the United Kingdom.
In order to achieve greater strategic and operating flexibility in the United
Kingdom, Econophone terminated its U.K. sales and marketing joint venture in the
second quarter of 1996 and established a new operation, Telco Global
5
<PAGE>
Communications Ltd. ("Telco"). Telco concentrates on residential sales,
primarily through independent sales representatives.
Econophone believes that its principal competitive strengths are its carrier
grade network and internally developed supporting software, both of which enable
it to provide greater reliability and services and features not offered by many
of its competitors, its emphasis on technological innovation and its low cost
structure, which enables it to offer competitive pricing. In addition, in
continental Europe, Econophone believes that it provides more responsive
customer service than the PTOs and that it responds more quickly to new business
opportunities than the PTOs and other large competitors. Econophone also
believes that its relatively early entry as an alternative telecommunications
provider into continental European markets and the experience of certain members
of its management team in those markets provide it with a competitive advantage
over less experienced emerging competitors.
Econophone's successful implementation of its strategy will require the
continued expansion and development of its network in Europe and the United
States, as well as the continued expansion and development of related
back-office capacity, including billing systems, and the hiring and retention of
highly productive internal sales personnel and independent sales agents.
Execution of Econophone's expansion plans is subject to a variety of risks,
including, but not limited to, operating and technical problems, regulatory
uncertainties and competition, and there can be no assurance that Econophone
will be able to successfully implement such plans. Econophone has had, and
expects to continue to have, as hereinafter discussed, operating losses, net
losses, deficiencies of earnings to fixed charges, negative EBITDA and negative
cash flow. Econophone had a net loss of $7.8 million for the six months ended
June 30, 1997 and, on a pro forma basis, assuming that the Offering had been
consummated on January 1, 1997, a net loss of $18.9 million. Econophone had a
deficiency of earnings to fixed charges of $6.5 million ($18.6 million on a pro
forma basis) and negative EBITDA of $6.4 million for the six months ended June
30, 1997. Net cash used in operating activities for such six month period was
$7.7 million. Econophone expects to have operating losses, net losses and a
deficiency of earnings to fixed charges for at least the next several years and
negative EBITDA and negative cash flow from operations until at least 1999. See
"Risk Factors" for a discussion of certain risks associated with Econophone's
business and "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
contained herein for further information concerning Econophone's historical
financial performance.
On November 1, 1996, Princes Gate Investors II, L.P. and certain of its
affiliates (collectively, "Princes Gate") purchased 140,000 shares of Series A
Redeemable Convertible Preferred Stock, par value $.01 per share, of Econophone
("Series A Preferred Stock") for $14.0 million, less certain fees. Princes Gate
is an affiliate of Morgan Stanley, the Placement Agent in the Offering. The
Series A Preferred Stock is convertible into shares of Common Stock representing
approximately 14.6% of the Common Stock of Econophone on an as converted basis
(determined as of September 1, 1997 without giving effect to the issuance or
exercise of the Warrants or any options issued by Econophone). The President of
the General Partner of Princes Gate is a director of Econophone. On April 24,
1997, Econophone entered into a Note Purchase Agreement (the "Note Purchase
Agreement") with Morgan Stanley Group Inc., an affiliate of Morgan Stanley
("Morgan Stanley Group"), pursuant to which Morgan Stanley Group agreed to
purchase from Econophone up to $15.0 million of First Secured Increasing Rate
Notes due April 24, 1998 (the "Bridge Notes"). Econophone sold a total of $7.0
million of Bridge Notes to Morgan Stanley Group and, upon consummation of the
Offering, all of the outstanding Bridge Notes were redeemed and all accrued
interest thereon was paid. At such time, the facility represented by the Note
Purchase Agreement was terminated. Prior to the Offering and the investments by
Princes Gate and Morgan Stanley Group, Econophone's growth had been funded
primarily through founders' capital, internally generated funds and equipment
financings.
Econophone's principal executive offices are located at 45 Broadway, New
York, New York 10006. Its main telephone number is (212) 444-6991.
6
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
Registration Rights
Agreement............. Holders are entitled to exchange the Original Notes for Notes
registered under the Securities Act with substantially identical
terms. The Exchange Offer is intended to satisfy these rights.
After the Exchange Offer is complete, Holders will no longer be
entitled to any exchange or registration rights with respect to
the Original Notes.
The Exchange Offer...... The Company is offering to exchange $1,000 principal amount of
Exchange Notes that have been registered under the Securities Act
for each $1,000 principal amount of the Original Notes. In order
to be exchanged, an outstanding note must be properly tendered
and accepted. All outstanding notes that are validly tendered and
not validly withdrawn will be exchanged.
As of this date, there are $155.0 million principal amount of the
Original Notes outstanding.
The Company will issue registered Exchange Notes on or promptly
after the expiration of the Exchange Offer. Each of the Original
Notes was originally issued as part of a Unit consisting of one
Original Note and a Warrant to purchase 8.167 shares of the
Common Stock of the Company. These Warrants will be separately
traded on the commencement of the Exchange Offer and the Company
is not offering to exchange them.
Resales................. Except as indicated herein, the Company believes that the
Exchange Notes may be offered for resale, resold and otherwise
transferred by Holders without compliance with the registration
and prospectus delivery provisions of the Securities Act,
provided that:
(i) the Exchange Notes are being acquired in the ordinary
course of a Holder's business;
(ii) a Holder is not participating, does not intend to
participate, and has no arrangement or understanding with any
person to participate, in the distribution of the Exchange
Notes; and
(iii) a Holder is not an "affiliate" of the Company.
If the Company's belief is inaccurate and a Holder transfers any
Exchange Note without delivering a prospectus meeting the
requirements of the Securities Act or without an exemption from
such requirements, such Holder may incur liability under the
Securities Act. The Company does not assume or indemnify Holders
against such liability.
Each broker-dealer that is issued Exchange Notes for its own
account in exchange for Original Notes which were acquired by
such broker-dealer as a result of market-making or other trading
activities must acknowledge that it will deliver a Prospectus
meeting the requirements of the Securities Act in connection with
any resale of the notes issued in the Exchange Offer. A
broker-dealer may use this Prospectus for an offer to resell,
resale or other retransfer of the Exchange Notes.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Expiration Date......... The Exchange Offer will expire at 5:00 p.m., New York City time,
, unless the Company decides to extend the Expiration Date.
Conditions to the
Exchange Offer........ The Exchange Offer is not subject to any condition other than
that the Exchange Offer not violate applicable law or any
applicable interpretation of the Staff of the Commission.
Procedures for Tendering
Outstanding Notes held
in the Form of Book-
Entry Interests....... The Original Notes were issued as global securities without
interest coupons. The Original Notes were deposited with The Bank
of New York, as book-entry depositary, when they were issued. The
Bank of New York issued a certificateless depositary interest in
each Original Note, which represents a 100% interest in the
Original Note, to The Depository Trust Company ("DTC").
Beneficial interests in the Original Notes, which are held by
direct or indirect participants in DTC through the
certificateless depositary interests (the "Book-Entry
Interests"), are shown on, and transfers of such Original Notes
can be made only through, records maintained in book-entry form
by DTC (with respect to its participants) and its participants.
Holders of Original Notes held in the form of a Book-Entry
Interest who wish to tender their Book-Entry Interest for
exchange pursuant to the Exchange Offer must transmit to The Bank
of New York, as exchange agent (the "Exchange Agent"), on or
prior to the Expiration Date:
(i) either:
(a) a properly completed and duly executed Letter of
Transmittal, which accompanies this Prospectus, or a facsimile
of the Letter of Transmittal, including all other documents
required by the Letter of Transmittal, to the Exchange Agent at
the address set forth on the cover page of the Letter of
Transmittal; or
(b) a computer-generated message transmitted by means of DTC's
Automated Tender Offer Program system and received by the
Exchange Agent and forming a part of a confirmation of
book-entry transfer in which such Holder acknowledges and
agrees to be bound by the terms of the Letter of Transmittal;
and (ii) either:
(a) a timely confirmation of book-entry transfer of such
Holder's Original Notes into the Exchange Agent's account at
DTC, pursuant to the procedure for book-entry transfers
described in this Prospectus under the heading "The Exchange
Offer--Book-Entry Transfer," received by the Exchange Agent on
or prior to the Expiration Date; or
(b) the documents necessary for compliance with the guaranteed
delivery procedures described below.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Procedures for Tendering
Definitive Registered
Notes................. Subject to certain conditions, a holder of Book-Entry Interests
in the Original Notes is entitled to receive, in exchange for its
Book-Entry Interests, registered Original Notes which are in
equal principal amounts to its Book-Entry Interests. However, as
of this date, no registered Original Notes are issued and
outstanding. If a Holder acquires registered Original Notes prior
to the Expiration Date, such Holder must tender its registered
Original Notes in accordance with the procedures described in
this Prospectus under the heading "The Exchange Offer--Procedures
for Tendering Definitive Registered Notes."
Special Procedures for
Beneficial Owners..... A beneficial owner of Book-Entry Interests whose name does not
appear on a security position listing of DTC as the holder of
such Book-Entry Interests or a beneficial owner of registered
Original Notes that are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee that
wishes to tender such Book-Entry Interests or registered Original
Notes in the Exchange Offer should contact such person in whose
name its Book-Entry Interests or registered Original Notes are
registered promptly and instruct such person to tender on its
behalf.
Guaranteed Delivery
Procedures............ If Holders wish to tender their Original Notes and time will not
permit the required documents to reach the Exchange Agent by the
Expiration Date, or the procedure for book-entry transfer cannot
be completed on time or certificates for registered Original
Notes cannot be delivered on time, such Holders may tender their
Original Notes pursuant to the procedures described in this
Prospectus under the heading "The Exchange Offer-- Guaranteed
Delivery Procedures."
Withdrawal Rights....... Holders may withdraw the tender of their Notes at any time prior
to 5:00 p.m. New York City time on .
Certain U.S. Federal
Income Tax
Consequences.......... The exchange of Original Notes will not be a taxable exchange for
United States federal income tax purposes. Holders will not
recognize any taxable gain or loss or any interest income as a
result of such exchange.
Use of Proceeds......... The Company will not receive any proceeds from the issuance of
the Exchange Notes pursuant to the Exchange Offer. The Company
will pay all expenses incident to the Exchange Offer.
Exchange Agent.......... The Bank of New York is serving as Exchange Agent in connection
with the Exchange Offer.
</TABLE>
9
<PAGE>
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the notes to be issued in the Exchange Offer are the
same as the form and terms of the Original Notes, except that the Exchange Notes
will be registered under the Securities Act and, therefore, will not bear
legends restricting their transfer and generally will not be entitled to
registration under the Securities Act. The Exchange Notes will evidence the same
debt as the Original Notes and both the Original Notes and the Exchange Notes
are governed by the same Indenture.
<TABLE>
<S> <C>
Aggregate Amount........ $155.0 million principal amount of 13 1/2% Senior Notes due 2007
of Econophone.
Maturity................ July 15, 2007.
Yield and Interest...... Interest on the Notes will be payable in cash at a rate of
13 1/2% per annum, semi-annually in arrears on each January 15
and July 15, commencing January 15, 1998. In addition to stated
interest, for U.S. federal income tax purposes, purchasers of the
Notes will be required to include amounts attributable to
original issue discount in their gross income in advance of
receipt of the cash payment to which such income is attributable.
See "Certain Federal Income Tax Considerations."
Security................ Econophone has used approximately $57.4 million of the net
proceeds from the issuance of the Original Notes to purchase a
portfolio of securities, consisting of U.S. government securities
(the "Pledged Securities"), that has been pledged as security for
the payment of the first six scheduled interest payments due on
the Notes. Proceeds from the Pledged Securities will be used by
Econophone to make the first six scheduled interest payments on
the Notes. See "Description of the Exchange Notes--Security." The
Pledged Securities are being held by the Trustee (as defined
herein) under the Pledge Agreement (as defined herein) pending
disbursement.
Optional Redemption..... On or after July 15, 2002, the Notes will be redeemable, at the
option of Econophone, in whole or in part, at any time or from
time to time, at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the date of redemption.
In addition, prior to July 15, 2000, up to 35% of the aggregate
principal amount of the Notes may be redeemed with the proceeds
of Public Equity Offerings (as defined herein). See "Description
of the Exchange Notes--Optional Redemption."
Change of Control....... Upon a Change of Control (as defined herein), Econophone is
required to make an offer to purchase the Notes at a purchase
price equal to 101% of the aggregate principal amount thereof,
plus accrued interest, if any. There can be no assurance that
Econophone will have sufficient funds available at the time of a
Change of Control to fund any repurchase of Notes required by the
foregoing covenant. See "Description of the Exchange Notes--
Repurchase of Notes upon a Change of Control."
Ranking................. The Notes are unsecured, unsubordinated indebtedness of
Econophone, rank PARI PASSU in right of payment with all existing
and future unsubordinated indebtedness of Econophone, and are
senior in right of payment to all existing and future
subordinated indebtedness of Econophone. As of August 31, 1997,
excluding the Notes, Econophone had $5.4 million of indebtedness
outstanding, all of which was senior indebtedness and $5.1
million of which was secured. The Notes are effectively
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
subordinated to such secured indebtedness to the extent of the
security interests relating thereto.
Certain Covenants....... The Indenture contains certain covenants, which, among other
things and subject to certain exceptions, restrict the ability of
Econophone and its Restricted Subsidiaries to incur additional
indebtedness, make restricted payments, create restrictions on
the ability of Restricted Subsidiaries to make payments to
Econophone, issue capital stock of Restricted Subsidiaries, issue
guarantees, enter into transactions with stockholders and affili-
ates, create liens, engage in sale-leaseback transactions, sell
assets and, with respect to Econophone, consolidate, merge or
sell all or substantially all of its assets. See "Description of
the Exchange Notes--Covenants."
Original Issue
Discount.............. The Exchange Notes should be treated as a continuation of the
Original Notes for federal income tax purposes. The Original
Notes were issued with original issue discount. For federal
income tax purposes, holders of the Notes will be required to
include the amount of original issue discount in income in
advance of receipt of cash to which the income is attributable.
See "Certain Federal Income Tax Considerations."
</TABLE>
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
THE FOLLOWING SUMMARY CONSOLIDATED FINANCIAL DATA (EXCEPT FOR CERTAIN DATA
UNDER OTHER DATA AND DATA UNDER REGIONAL DATA) FOR THE YEARS ENDED DECEMBER 31,
1994, 1995 AND 1996 WAS DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS OF ECONOPHONE. THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
ECONOPHONE AS OF DECEMBER 31, 1995 AND 1996 AND FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED DECEMBER 31, 1996, TOGETHER WITH THE NOTES THERETO AND THE
RELATED REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT ACCOUNTANTS, ARE INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THE SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE
YEARS ENDED DECEMBER 31, 1992 AND 1993 IS DERIVED FROM UNAUDITED FINANCIAL
STATEMENTS OF ECONOPHONE, WHICH, IN THE OPINION OF MANAGEMENT, INCLUDE ALL
ADJUSTMENTS NECESSARY FOR A FAIR PRESENTATION OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF ECONOPHONE FOR SUCH PERIODS. THE FOLLOWING SUMMARY
FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 WAS
DERIVED FROM THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF ECONOPHONE AND
REFLECTS ALL ADJUSTMENTS (CONSISTING OF NORMAL RECURRING ADJUSTMENTS) WHICH ARE,
IN THE OPINION OF MANAGEMENT, NECESSARY FOR A FAIR PRESENTATION OF THE
CONSOLIDATED FINANCIAL INFORMATION FOR THOSE PERIODS. THE INFORMATION CONTAINED
BELOW SHOULD BE READ IN CONJUNCTION WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND THE FINANCIAL STATEMENTS
OF ECONOPHONE AND THE NOTES RELATED THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992(1) 1993(1) 1994 1995 1996 1996 1997
----------- ----------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT NET INCOME (LOSS) PER SHARE,
REVENUE PER MINUTE AND RATIO OF EARNINGS TO FIXED CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 3,268 $ 3,528 $ 8,523 $ 27,490 $ 45,103 $ 22,992 $ 30,446
Cost of services............................ 2,659 2,761 5,540 19,735 35,369 16,333 24,012
Selling, general and administrative
expense................................... 474 497 2,013 7,087 14,834 7,805 12,896
Depreciation and amortization............... 12 51 168 389 1,127 394 1,136
----------- ----------- --------- --------- --------- --------- ---------
Income (loss) from operations............... 123 219 802 279 (6,227) (1,540) (7,598)
Other income (expense)...................... -- 6 100 (10) 133 11 58
Interest expense, net....................... -- (19) (103) (148) (295) (78) (285)
Provision (benefit) for taxes............... 2 -- 73 -- -- -- --
----------- ----------- --------- --------- --------- --------- ---------
Net income (loss)........................... $ 121 $ 206 $ 726 $ 121 $ (6,389) $ (1,607) $ (7,825)
----------- ----------- --------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- --------- ---------
Net income (loss) per share(3).............. $ .01 $ .01 $ .04 $ .01 $ (.32) $ (.08) $ (.39)
OTHER DATA:
Capital expenditures(4)..................... $ 118 $ 605 $ 906 $ 1,677 $ 4,670 $ 2,152 $ 5,758
EBITDA(5)................................... 135 276 1,070 658 (4,967) (1,135) (6,404)
Dividends declared.......................... -- -- -- 449 508 226 879
Net cash (used in) provided by operating
activities(6)............................. -- (190) 474 2,037 (6,006) 60 (7,698)
Revenue per minute.......................... .70 .57 .43 .56 .29
Minutes..................................... 12,196 47,859 104,566 40,869 104,615
Ratio of earnings to fixed charges(7)....... 2.5x 8.6x 7.2x 1.5x -- -- --
Deficiency of earnings available to cover
fixed charges............................. -- -- -- -- $ (5,584) $ (1,487) $ (6,462)
REGIONAL DATA:
Revenues
United States............................. $ 2,728 $ 8,292 $ 18,185 $ 6,876 $ 18,896
United Kingdom............................ 3,143 14,173 15,477 10,910 4,201
Continental Europe........................ 2,652 5,025 11,441 5,206 7,349
Minutes
United States............................. 5,707 23,411 68,247 20,744 87,747
United Kingdom............................ 4,532 20,592 27,968 16,390 10,136
Continental Europe........................ 1,957 3,856 8,351 3,735 6,732
<CAPTION>
<S> <C>
AS ADJUSTED
1997(2)
--------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 30,446
Cost of services............................ 24,012
Selling, general and administrative
expense................................... 12,896
Depreciation and amortization............... 1,481
--------------
Income (loss) from operations............... (7,943)
Other income (expense)...................... 58
Interest expense, net....................... (11,028)
Provision (benefit) for taxes............... --
--------------
Net income (loss)........................... $ (18,913)
--------------
--------------
Net income (loss) per share(3).............. $ (.95)
OTHER DATA:
Capital expenditures(4).....................
EBITDA(5)...................................
Dividends declared..........................
Net cash (used in) provided by operating
activities(6).............................
Revenue per minute..........................
Minutes.....................................
Ratio of earnings to fixed charges(7)....... --
Deficiency of earnings available to cover
fixed charges............................. $ (18,568)
REGIONAL DATA:
Revenues
United States.............................
United Kingdom............................
Continental Europe........................
Minutes
United States.............................
United Kingdom............................
Continental Europe........................
</TABLE>
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<TABLE>
<CAPTION>
AT JUNE
AT DECEMBER 31, 1996 30, 1997
----------------------------------------------------- ---------
1992 1993 1994 1995 1996 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 12 $ 120 $ 86 $ 106 $ 6,272 $ 632
Current assets................................................ 519 852 2,588 7,616 14,729 15,063
Restricted cash............................................... -- -- -- -- -- --
Total assets.................................................. 609 1,541 4,034 10,508 24,678 30,079
Current portion of borrowings................................. 420 510 480 558 3,020 8,300
Long-term borrowings, less current portion.................... -- 39 639 719 2,263 4,799
Redeemable Convertible Preferred Stock........................ -- -- -- -- 13,358 14,282
Total stockholders' equity (deficit).......................... 118 708 1,088 710 (6,202) (14,962)
<CAPTION>
AS ADJUSTED(2)
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 90,295
Current assets................................................ 123,872
Restricted cash............................................... 57,437
Total assets.................................................. 184,079
Current portion of borrowings................................. 7,300
Long-term borrowings, less current portion.................... 154,199
Redeemable Convertible Preferred Stock........................ 14,282
Total stockholders' equity (deficit).......................... (9,362)
</TABLE>
- ------------------------
(1) Regional revenue data and minute data for 1992 and 1993 are not available.
(2) The as adjusted data gives effect to (i) the issuance of the Units and the
accrual and accretion of interest associated with the Notes, (ii) the
amortization of the deferred financing costs associated with the Offering,
(iii) the repayment of approximately $.6 million owed to IDT Corporation
("IDT") and (iv) the repayment of certain equipment financings totaling
approximately $.4 million in the aggregate, as if such events had occurred
on January 1, 1997 (for statement of operations purposes) and June 30, 1997
(for balance sheet purposes). See "Use of Proceeds." As adjusted data does
not give effect to any interest income on the proceeds of the Units.
(3) Net income (loss) per share is computed using the weighted average number of
shares outstanding during the period.
(4) Capital expenditures include assets acquired through capital lease financing
and other debt.
(5) EBITDA represents net income (loss) plus interest expense, income tax
expense, and depreciation and amortization expense. Econophone has included
information concerning EBITDA herein because such information is commonly
used in the telecommunications industry as one measure of an issuer's
operating performance and historical ability to service debt. EBITDA is not
determined in accordance with generally accepted accounting principles, is
not indicative of cash provided by operating activities, is not necessarily
comparable to similarly titled measures of other companies, should not be
used as a measure of operating income and cash flows from operations as
determined under generally accepted accounting principles and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles.
(6) Net cash (used in) provided by operations for the year ended December 31,
1992 is not available.
(7) Earnings available to cover fixed charges consist of earnings (losses)
before income taxes. Fixed charges consist of interest on debt, the interest
component of rent expense (deemed to be one-third of the total) and
dividends accrued on preferred stock.
13
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RISK FACTORS
AN INVESTMENT IN THE EXCHANGE NOTES INVOLVES A HIGH DEGREE OF RISK. THE
FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE PURCHASING THE EXCHANGE NOTES.
THE TERM "NOTE" OR "NOTES" INCLUDES THE ORIGINAL NOTES AND THE EXCHANGE NOTES.
LIMITED OPERATING HISTORY
Econophone commenced operations in 1989, and prior to 1994 engaged only in
limited operations, and, therefore, has a limited operating history upon which
potential investors may base an evaluation of its performance. Econophone's
principal operations have been in the United Kingdom (principally in the London
area), the United States (principally in the New York area) and Belgium
(principally in the Antwerp area). Econophone began providing services in its
other continental European and U.S. markets only in 1996 and 1997 and, to date,
its business activities in such markets have been limited. See
"Business--Services."
Econophone intends to significantly expand its operations in its current
markets and to enter into a number of markets where it currently does not have
operations. In many of its existing and future markets, Econophone also plans to
offer services that have been provided in the past to a large extent only by
PTOs. Furthermore, in certain of such markets, Econophone also intends to
utilize access and transmission methods with respect to which it has limited
operating experience. Econophone's prospects must, therefore, be considered in
light of the risks, expenses, problems and delays inherent in substantially
expanding a business and in establishing a new business in additional markets in
an evolving industry. See "--Implementation of Expansion Plans," "--Need for
Local Connectivity," "--Dependence on Third Party Sales Organizations,"
"--Competition," "--Risks Associated with Rapid Growth," "--Risks Associated
with Rapidly Changing Industry; Significant Price Declines," "--Dependence on
Effective Information Systems," "--Dependence Upon Key Personnel; Integration of
Management," "--Dependence on Equipment Supplier" and "Business--Services."
HIGH LEVERAGE, FUTURE LOSSES, DEFICIENCY OF EARNINGS TO FIXED CHARGES AND
NEGATIVE CASH FLOW
At June 30, 1997, on an as adjusted basis after giving effect to the
Offering, Econophone would have had total consolidated indebtedness of
approximately $161.5 million and negative stockholders' equity of approximately
$9.4 million. Econophone anticipates that it will incur additional indebtedness,
primarily in connection with equipment financings. Econophone had a net loss of
$6.4 million and $7.8 million for the year ended December 31, 1996 and for the
six months ended June 30, 1997, respectively. On a pro forma basis, assuming the
Offering had been consummated on January 1, 1997, Econophone would have had a
net loss of $18.9 million for the six months ended June 30, 1997, and, assuming
the Offering had been consummated on January 1, 1996, Econophone would have had
a net loss of $28.5 million for 1996. In addition, for the six months ended June
30, 1997, Econophone's deficiency of earnings to fixed charges was $6.5 million
and, for the year ended December 31, 1996, the deficiency was $5.6 million.
Econophone also had negative EBITDA of $5.0 million and $6.4 million for the
year ended December 31, 1996 and for the six months ended June 30, 1997,
respectively. Furthermore, Econophone had net cash used in operating activities
of $6.0 million and $7.7 million for the year ended December 31, 1996 and the
six months ended June 30, 1997, respectively. Econophone expects to have
operating losses, net losses and a deficiency of earnings to fixed charges for
at least the next several years and negative EBITDA and negative cash flow from
operations until at least 1999. See "Capitalization" and "Selected Consolidated
Financial Data."
The ability of Econophone to meet its debt service obligations will depend
upon its future performance, which, in turn, is subject to Econophone's
successful implementation of its strategy, as well as to financial, competitive,
business, regulatory, technical and other factors, substantially all of which
are beyond Econophone's control. There can be no assurance that Econophone will
ever operate at profitable levels, have positive EBITDA or eliminate its
deficiency of earnings to fixed charges. If Econophone is unable to generate
cash flow from operations that, together with its restricted cash, is sufficient
to meet its debt service requirements, it may be required to refinance all or a
portion of its indebtedness. There can be
14
<PAGE>
no assurance that any such refinancing would be possible on terms that would be
acceptable to Econophone, if at all. If such refinancing were not possible or if
additional financing were not available, Econophone could be forced to default
on its obligations with respect to the Notes.
The Indenture contains certain restrictive covenants. Such restrictions
affect, and in many respects significantly limit, among other things, the
ability of Econophone to incur indebtedness, make prepayments of subordinated
indebtedness, pay dividends, make investments, engage in transactions with
stockholders and affiliates, issue capital stock of restricted subsidiaries,
create liens, sell assets and engage in mergers and consolidations. See
"Description of the Exchange Notes--Covenants." The terms of Econophone's Series
A Preferred Stock and the Amended and Restated Equipment Loan and Security
Agreement between Econophone and NTFC Capital Corporation ("NTFC") (as amended,
the "NTFC Agreement") also place restrictions on the ability of Econophone to
incur indebtedness and to engage in certain other transactions. These
restrictions, in combination with Econophone's high leverage, could limit the
ability of Econophone to effect financings or other corporate activities.
Furthermore, the high level of Econophone's indebtedness could restrict its
flexibility in responding to changing business and economic conditions, its
ability to take advantage of business opportunities and its ability to pay
principal and interest on the Notes. See "Description of Certain
Indebtedness--NTFC Vendor Financing" and "Certain Transactions-- Investment by
Princes Gate--Series A Preferred Stock."
The level of Econophone's indebtedness could have important consequences to
holders of the Notes, including the following: (i) the debt service requirements
of other indebtedness could make it more difficult for Econophone to make
payments on the Notes (other than the first six scheduled interest payments),
(ii) the ability of Econophone to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements or other
purposes may be limited; (iii) a substantial portion of Econophone's future cash
flow from operations, if any, may be dedicated to the payment of principal and
interest on its indebtedness and other obligations and might not be available
for Econophone's business; (iv) Econophone's level of indebtedness could limit
its flexibility in planning for, or reacting to changes in, its business; (v)
Econophone will be more highly leveraged than certain of its competitors, which
may place it at a competitive disadvantage; and (vi) Econophone's high degree of
indebtedness could make it more vulnerable in the event of a downturn in its
business. Econophone's high level of indebtedness may have a material adverse
effect on its ability to pay principal and interest on the Notes. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
IMPLEMENTATION OF EXPANSION PLANS
Econophone's successful implementation of its strategy will require the
continued expansion and development of its network in Europe and the United
States, as well as the continued expansion and development of related
back-office capacity, including billing systems, and the hiring and retention of
highly productive internal sales personnel and independent sales agents.
Execution of Econophone's expansion plans is subject to a variety of risks,
including, but not limited to, operating and technical problems, regulatory
uncertainties and competition, and there can be no assurance that Econophone
will be able to successfully implement such plans.
As Econophone expands its network, it will incur significant fixed costs,
relating principally to switching equipment costs, IRUs and leased lines and
network management costs. The installation and expansion of Econophone's network
has entailed and will continue to entail considerable expenses in advance of
anticipated revenues and may cause substantial fluctuations in Econophone's
operating results. Econophone will use its network primarily to originate, but
not terminate, calls. Therefore, the economic benefits of Econophone's network
primarily will be limited to originating calls where Econophone has a switch,
node or point of presence. There can be no assurance that Econophone will be
able to expand its network successfully or that Econophone will generate traffic
volumes sufficient to enjoy significant economies of scale, which Econophone
believes are critical to the overall success of its strategy. Failure by
15
<PAGE>
Econophone to implement its expansion plans would have a material adverse effect
on Econophone's financial condition and results of operations and its ability to
pay principal of and interest on the Notes.
COMPETITION
The provision of telecommunications services is extremely competitive and
will become increasingly so as the regulatory barriers to entry into
telecommunications markets are reduced or eliminated. Econophone believes that
its non-US markets will experience increased competition and will begin to
resemble the competitive landscape in the United States, in part as a result of
regulatory initiatives.
Competition for customers is primarily on the basis of price and, to a
lesser extent, on the type and quality of services offered and customer service.
Econophone has no control over the prices set by its competitors. Econophone has
a large number of competitors which may use their substantial financial
resources to cause severe price competition in the markets in which Econophone
operates, which would require Econophone to reduce its prices in order to remain
competitive. For example, Sprint recently announced a program offering $.10 per
minute rates on certain calls to the United Kingdom. Econophone has focused on
users that make these calls. In the United Kingdom, the Office of
Telecommunications ("Oftel"), the U.K. telecommunications regulatory authority,
is expected to continue to require British Telecom to reduce its retail prices.
In the United States, the Federal Communications Commission (the "FCC"), the
U.S. telecommunications regulatory authority, also has proposed rules (which may
or may not be adopted in their proposed form or in a revised form) which are
designed to bring downward pressure on international telephone rates. The FCC is
proposing to require U.S. international facilities-based carriers to pay lower
settlement rates to correspondent foreign carriers that deliver calls in foreign
jurisdictions. Any resulting savings to the U.S. facilities-based carriers might
be passed along to their customers in the form of reduced rates for
international calls. Corresponding price reductions by Econophone could reduce
Econophone's revenue and margins, which could have a material adverse effect on
Econophone's business, financial condition and results of operations and its
ability to pay interest on and principal of the Notes. Econophone has
experienced, and expects to continue to experience, declining revenue per
billable minute in all of its markets, in part as a result of increasing
worldwide competition within the telecommunications industry. Econophone also
experiences customer attrition, or "churn," as a result of the highly
competitive nature of its markets and expects current levels of churn to
continue or increase.
Econophone's success will depend upon its ability to compete with a variety
of other telecommunications providers in each of its markets. In Europe,
Econophone's competitors include (i) PTOs, (ii) alliances such as AT&T's
alliance with Unisource (itself a joint venture among Telecom Netherlands, Telia
AB and Swiss Telecom PTT), known as "Uniworld," and the corresponding alliance
with WorldPartners, MCI's alliance with British Telecom, known as "Concert," and
Sprint's alliance with Deutsche Telekom and France Telecom, known as "Global
One," (iii) companies offering resold international telecommunications services,
such as Esprit Telecom, Viatel and RSL Communications, and (iv) other companies
with business plans similar in varying degrees to Econophone's, including
emerging public telephone operators who are constructing their own networks.
Unisource recently announced that its venture partners would contribute their
international facilities and personnel to a newly formed company, and some
commentators have speculated that AT&T might do the same. The resulting company
is likely to be a substantially more formidable competitor. In addition,
Econophone anticipates that numerous new competitors will enter the European
telecommunications market.
Because all of Econophone's current and intended European markets (other
than the United Kingdom, which already has a substantially liberalized
telecommunications market) still are in the process of liberalizing the
provision of telephone services, customers in most of these markets are not
accustomed to obtaining services from competitors to PTOs and may be reluctant
to use new providers, such as Econophone. In particular, Econophone's target
customers, small- and medium-sized businesses and residential users with
significant international calling needs, may be reluctant to entrust their
telecommunications needs to new operators that are believed to be unproven. In
addition, in continental Europe, certain of Econophone's competitors (including
the PTOs) provide potential customers with a
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broader range of services than Econophone currently offers or can offer due to
regulatory restrictions. PTOs also generally have certain competitive advantages
over Econophone and other providers due to their control of local
inter-connectivity, their extensive ownership of facilities, their ability to
delay or prevent equal access to lines and the reluctance of some regulators to
adopt policies and grant regulatory approvals that will result in increased
competition for the local PTO. If the PTO in any jurisdiction uses its
competitive advantages to their fullest extent, Econophone's operations in such
jurisdiction would be adversely affected.
In the United States, Econophone's competitors include AT&T, MCI, Sprint and
numerous other carriers for domestic and international long distance calls.
Congress has substantially amended the Communications Act of 1934 (the "1934
Act") by enacting the Telecommunications Act of 1996 (the "1996 Act"), making
the regional Bell operating companies (the "RBOCs") eligible, subject to FCC
approval, to offer domestic long distance and international telecommunications
services in their "in region" service areas, where they control essential
facilities such as local lines connecting to the premises of customers. The use
of these facilities is necessary at reasonable and non-discriminatory rates, and
on reasonable and nondiscriminatory conditions, to enable new market entrants,
including long distance carriers, to compete effectively with the RBOCs and
other carriers. The RBOCs have the incentive to overcharge for the use of their
essential facilities for the dual purposes of retarding competition from new
local market entrants and cross-subsidizing their proposed new long distance
services. The RBOCs also may offer domestic long distance and international
services outside of their service areas, or "out-of-region" services. In
addition, the FCC is now permitting foreign telecommunications entities to enter
the U.S. international telecommunications market, including dominant foreign
entities whose home markets are conducive to competition. The FCC also has
substantially reduced the regulatory constraints on AT&T, Econophone's largest
competitor, by declaring AT&T to be "non-dominant," first in the domestic long
distance market and more recently in the international market, thus, granting
AT&T more pricing and service flexibility and permitting it to compete more
effectively with smaller inter-exchange carriers such as Econophone.
The World Trade Organization (the "WTO") recently concluded an agreement,
known as the WTO Basic Telecommunications Service Agreement (the "WTO
Agreement"), which would open the telecommunications markets of the signatory
countries to foreign carriers on varying dates beginning January 1, 1998. The
WTO Agreement is subject to legislative ratification in many of the 70 signatory
countries. Pursuant to the WTO Agreement, U.S. companies would have foreign
market access for local, long distance and international services, either on a
facilities basis or through resale of existing network capacity. U.S. companies
also would be permitted to acquire, establish or hold a significant stake in
telecommunications companies around the world. Conversely, foreign companies
would be permitted to enter the domestic U.S. telecommunications market and
acquire ownership interests in U.S. service providers. Although the WTO
Agreement may open additional markets to Econophone or broaden the permissible
services that Econophone can provide in certain markets, the WTO Agreement also
may subject Econophone to greater competitive pressures in its markets, with the
risk of losing customers to other carriers and reductions in Econophone's rates.
In addition, there are pending major consolidations in the
telecommunications industry which could result in even more powerful competitors
to Econophone in its major markets. For example, the acquisition of MCI by
British Telecom could adversely impact Econophone in the market for calling
between the United Kingdom and the United States and the creation of a new
company with the international facilities of the Unisource partners could result
in downward pressure on prices without a corresponding reduction in transmission
costs. In addition, the recent merger between Bell Atlantic and NYNEX may result
in increased price competition.
Econophone also may experience competition in one or more of its markets
from competitors utilizing new or alternative technologies and/or transmission
methods, including cable television companies, wireless telephone companies,
satellite owners and resellers, Internet service providers, electric and other
utilities, railways, microwave carriers and large end users that have private
networks.
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Many of Econophone's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than Econophone, control transmission lines and have long-standing
relationships with Econophone's target customers. If any of Econophone's
competitors were to devote additional resources to the provision of
international and/or domestic long distance voice telecommunication services to
Econophone's target customer base, there could be a material adverse effect on
Econophone's ability to pay principal of and interest on the Notes.
Each of the markets in which Econophone offers or intends to offer its
services will present unique competitive factors. There can be no assurance that
Econophone will be able to effectively compete in any given market and the
success of Econophone's strategy in any one market is not necessarily indicative
of its ability to succeed in any other market. See "Business--Competition."
DEPENDENCE ON THIRD PARTY SALES ORGANIZATIONS
Econophone historically has sold substantially all, and intends to continue
selling a substantial percentage of, its services through indirect channels of
distribution, consisting of independent sales agents and resellers. For the six
months ended June 30, 1997, 50% of Econophone's revenues were attributable to
independent sales agents. Substantially all of Econophone's U.S. calling card
sales are attributable to VoiceNet (which constituted 26% of Econophone's
revenues during the six months ended June 30, 1997), a reseller that sells
Econophone's calling card services to end users. VoiceNet's relationship with
Econophone is non-exclusive and can be terminated at will by either party.
Although Econophone believes that it offers its independent sales agents and
resellers sufficient incentives to market and sell its services, Econophone does
not have direct control over such persons and there can be no assurance that
they will perform in a satisfactory manner. Econophone has, in the past,
experienced disputes with certain of its independent sales agents. In connection
with its change in distribution strategy, in the United Kingdom, Econophone
entered into a settlement agreement with Europhone International ("EI"), its
former partner in its U.K. sales and marketing joint venture. Pursuant to the
terms of the settlement, among other things, EI retained all of the rights in
the customer list of the joint venture, which included approximately 21,700
names, and Econophone agreed not to solicit sales from such customers, subject
to certain permitted exceptions. For 1996, Econophone's joint venture with EI
and sales of carrier services to EI contributed 32% of Econophone's consolidated
revenues and 91% of its U.K. originated revenues. See "-- Dependence on Carrier
and Other Principal Customers," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
Econophone believes that its relationships with its current independent
sales agents and resellers are good. However, there can be no assurance that
Econophone will not in the future experience material disputes with any such
person or that Econophone and/or any such person will not decide to terminate
their business relationship. Such disputes or terminations could adversely
affect the number of customers obtained and/or retained by Econophone, which
could have a material adverse effect on Econophone's ability to pay principal of
and interest on the Notes.
DEPENDENCE ON CARRIER AND OTHER PRINCIPAL CUSTOMERS
Revenues derived from carrier customers accounted for 25% of Econophone's
revenues during 1996 and 20% during the first six months of 1997, and revenues
derived from VoiceNet accounted for 26% of Econophone's revenues during the
first six months of 1997. Such revenues are produced by a limited number of
carrier customers. Accordingly, the loss of revenue from one or more carrier
customers could have a material adverse effect upon Econophone's business and
its ability to pay interest on and principal of the Notes.
From June through November 1996, following the changing of its U.K.
distribution strategy, Econophone provided carrier services to EI. This
relationship was terminated as a result of disputes between Econophone and EI
following payment delinquencies by EI. In connection with such termination,
Econophone extended the payment period for receivables from EI and agreed not to
solicit sales from former customers of Econophone's joint venture with EI,
subject to certain permitted exceptions. EI
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accounted for 21% of Econophone's revenues during the time it was a carrier
customer and such carrier sales and revenues attributable to the U.K. sales and
marketing joint venture between EI and Econophone accounted for 91% of U.K. and
32% of consolidated revenues for 1996. In the United States, Econophone's five
largest carrier customers accounted in the aggregate for 25% of U.S. revenues
and 10% of consolidated revenues in 1996 and 20% of U.S. revenues and 13% of
consolidated revenues during the first six months of 1997. In addition,
VoiceNet, a reseller that sells Econophone's calling card services to end users,
accounted for 42% of U.S. revenues and 26% of consolidated revenues during the
first six months of 1997. VoiceNet's relationship with Econophone is
non-exclusive and can be terminated at will by either party. See "--Dependence
on Third Party Sales Organizations" "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
Carrier customers are extremely price sensitive, generate very low margin
business and frequently choose to move their business based solely on small
price changes. In addition, smaller carrier customers generally are perceived in
the telecommunications industry as presenting a higher risk of payment
delinquency or non-payment than other customers. While Econophone believes that
its credit criteria enables it to reduce its exposure to the higher payment
risks generally associated with carrier customers, no assurance can be given
that such criteria will afford adequate protection against such risks.
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY; SIGNIFICANT PRICE DECLINES
The international telecommunications industry is changing rapidly due to,
among other things, regulatory liberalization, upon which much of Econophone's
planned growth in continental Europe is predicated, privatization of PTOs, the
expansion of telecommunications infrastructure and the globalization of the
world's economies. The telecommunications industry also is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increased satellite and fiber optic cable transmission capacity
for services similar to those provided by Econophone, including utilization of
the Internet for voice and data communications. See "--Competition."
There can be no assurance that one or more of the foregoing factors will not
vary unpredictably, which could have a material adverse effect on Econophone and
its ability to pay principal of and interest on the Notes. There also can be no
assurance, even if such factors turn out as anticipated by Econophone, that
Econophone will be able to implement its strategy or that its strategy will be
successful in the rapidly evolving telecommunications market. In addition, there
can be no assurance that Econophone will be able to compete effectively or
adjust its contemplated plan of development to meet changing market conditions.
Furthermore, Econophone is unable to predict which of the many possible future
service offerings will be important to establish and maintain a competitive
position or what expenditures will be required to develop and provide such
services. Econophone's profitability will depend, in part, on its ability to
anticipate and adapt to rapid technological changes occurring in the
telecommunications industry and on its ability to offer, on a timely basis,
services that satisfy evolving industry standards. The failure by Econophone to
respond to new technologies on a timely basis, penetrate new markets in a timely
manner in response to changing market conditions or customer requirements or
achieve a significant degree of market acceptance of new or enhanced services
could have a material adverse effect on Econophone's business, financial
condition and results of operations and its ability to pay interest on and
principal of the Notes.
Prices for international long distance calls historically have been
determined by international settlement rates. Because these rates historically
have been negotiated between national telephone monopolies, they have been
artificially high and have allowed carriers to enjoy artificially high gross
margins on international calls. However, many observers believe that, given the
negligible marginal cost to a facilities-based carrier of carrying an
international call and given the emergence of competition in many countries
(particularly in western Europe, where Econophone's principal target markets are
located), the international settlement rate system is in the process of
collapsing. This has begun to be reflected in international rates, particularly
the rates charged for calls between countries where competition exists. For
example, Sprint recently reduced its rates on certain calls between the United
States and the United
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Kingdom to $.10 per minute. This represents a steep decline from rates charged
for such calls as recently as several years ago and Econophone expects rates on
international calls, particularly between the United States and the United
Kingdom, to continue to decline significantly. Furthermore, the FCC has proposed
rules designed to bring downward pressure on international telephone rates that
would require U.S. international facilities-based carriers to pay lower
settlement rates to their correspondent foreign carriers. Industry observers
predict that, early in the next decade, telephone charges will no longer be
based on the distance a call is carried. As a consequence, Econophone would
experience a substantial reduction in its margins on international calls, which,
absent a substantial increase in billable minutes of traffic carried or charges
for additional services, would have a material adverse effect on Econophone's
ability to pay principal of and interest on the Notes.
RISKS ASSOCIATED WITH RAPID GROWTH
Econophone has experienced rapid growth. Econophone's revenues were $3.5
million for 1993, and increased to $8.5 million, $27.5 million and $45.1 million
for 1994, 1995 and 1996, respectively. Revenues during the first six months of
1997 were $30.4 million.
Econophone's strategy contemplates continued growth primarily through
further expansion of its existing operations and the establishment of new
operations. Econophone's ability to manage its anticipated future growth will
depend on its ability to evaluate new markets, secure, retain and motivate
independent sales agents and its internal sales forces, monitor operations,
control costs, maintain effective quality controls, provide customer service,
obtain satisfactory and cost-effective lease rights from, and interconnection
with, competitors that own transmission lines (in many cases, intra-national
transmission lines may be available only from the PTO), and significantly expand
its internal management, technical, accounting and customer billing systems.
Econophone's rapid growth has placed, and its planned future growth will
continue to place, a significant and increasing strain on its financial,
management and operational resources. There can be no assurance that
Econophone's financial, management and operational systems and infrastructure
will be adequate to maintain and effectively monitor future growth or that
Econophone will be able to successfully attract, train and manage additional
employees and/or independent sales agents. The failure to continue to upgrade
Econophone's financial, management and operational control systems and
infrastructure or the occurrence of unexpected expansion difficulties could have
a material adverse effect on Econophone's ability to pay principal of and
interest on the Notes. See "--Dependence on Effective Information Systems" and
"--Dependence on Key Personnel; Integration of Management."
SUBSTANTIAL CAPITAL REQUIREMENTS
Econophone will require substantial capital expenditures significantly in
excess of historical levels to implement its business strategy. Econophone has
used and will continue to use a portion of the net proceeds of the Offering to
meet its capital expenditure requirements. See "Use of Proceeds." The net
proceeds from the Offering are expected to be sufficient to fund Econophone's
planned expansion of its operations and operating losses until such time as
Econophone begins to generate operating income; however, this is a
forward-looking statement and there can be no assurance in this regard. Actual
capital expenditures and operating income may vary significantly from
Econophone's estimates depending on a number of factors, including the pace,
extent and cost of network expansion, sales levels, competitive pressures and
regulatory actions. If Econophone's plans or assumptions change, its assumptions
prove to be inaccurate, it experiences unanticipated costs or competitive
pressures, the net proceeds from the Offering prove to be insufficient or it
consummates acquisitions, Econophone may be required to seek additional capital.
Econophone may seek to raise additional equity or debt capital from public or
private sources. There can be no assurance that Econophone will be able to raise
such capital on satisfactory terms or at all. Furthermore, the restrictive
covenants contained in the Indenture and the NTFC Agreement, and the terms of
the Series A Preferred Stock, limit Econophone's ability to incur additional
indebtedness. If Econophone raises additional funds through the incurrence of
indebtedness, Econophone may become
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subject to additional or more restrictive covenants. In the event that
Econophone is unable to obtain such additional capital or is unable to obtain
such additional capital on acceptable terms, Econophone may be required to
reduce the scope of its expansion, which could materially adversely affect
Econophone's ability to pay principal of and interest on the Notes.
RISKS ASSOCIATED WITH IMPOSITION OF VAT
A value added tax ("VAT") is a tax charged on goods and services that is
designed to be borne by the ultimate end user of the goods or services. The rate
of VAT varies among European Union ("EU") member states but typically is between
15% and 20% of the cost of the goods or services. Pursuant to the Sixth VAT
Directive adopted in 1977 (the "VAT Directive"), providers of telecommunications
services in the EU are liable for VAT in the EU member state where the provider
of the services is "established." The provider, in turn, charges VAT to its
customers at the rate prevailing in the provider's state of establishment. Under
VAT rules, most businesses are permitted to offset the VAT charged to them with
the VAT that they charge to their customers. Residential customers and certain
categories of businesses to which Econophone does not market its services,
however, cannot offset VAT and, therefore, bear the cost of the tax. As a
result, in countries where it has not been an established provider, Econophone
has had a competitive price advantage over competitors who are required to
charge VAT to residential customers, including the PTOs. "Establishment" has
been determined under national law and, in most of the EU member states where it
has engaged in business, Econophone has not until recently been required to
charge VAT.
In March 1997, the Council of the European Union issued derogations to the
VAT Directive (the "VAT Derogation") that, as of January 1, 1997, permitted
individual EU member states to amend their laws so as to treat
telecommunications services as being provided where the customer is located
rather than where the telecommunications provider is established. In the case of
sales by a telecommunications provider to residential customers, the VAT
Derogation permits EU member states to require all providers to collect and
remit VAT. With effect between January 1, 1997 and July 1, 1997, all EU member
states have adopted rules that subject all telecommunications services provided
to residential customers in such states to VAT.
There can be no assurance that, in order to remain competitive, Econophone
will not need to reduce prices in the future in one or more EU markets in order
to offset VAT that it is required to charge. Any such reduction could have a
material adverse effect on Econophone's business, financial condition and
results of operations and its ability to pay interest on and principal of the
Notes. See "Business-- Regulation."
DEVALUATION AND CURRENCY RISKS
A substantial portion of Econophone's revenues and expenses are denominated
in non-U.S. currencies, consisting principally of the British pound, Belgian
franc and the French franc. Furthermore, Econophone's business strategy
contemplates that, although an increasing portion of its revenues and expenses
will be denominated in non-U.S. currencies, a disproportionate portion of
Econophone's expenses, including interest and principal on the Notes, will be
denominated in dollars. Except in respect of its operations in the United
Kingdom, Econophone has not hedged against foreign currency exchange transaction
risks. Because of the number of currencies involved, Econophone's constantly
changing currency exposure and the fact that all foreign currencies do not
fluctuate in the same manner against the dollar, Econophone cannot quantify the
effect of exchange rate fluctuations on its future financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
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REGULATORY RESTRICTIONS
National and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which
Econophone currently operates and intends to operate. The interpretation and
enforcement of such laws and regulations varies and could limit Econophone's
ability to provide certain telecommunications services in certain markets. There
can be no assurance that future regulatory, judicial and legislative changes
will not have a material adverse effect on Econophone, that domestic or
international regulators or third parties will not raise material issues with
regard to Econophone's compliance or noncompliance with applicable laws and
regulations or that other regulatory activities will not have a material adverse
effect on Econophone. See "Business--Regulation."
A substantial portion of Econophone's strategy is based upon the expected
regulatory liberalization of certain EU markets on January 1, 1998 based on
current EC directives. In anticipation of such liberalization, Econophone is
establishing operations and making capital expenditures in certain EU countries.
Although liberalization is a legal obligation required by EC directives, a
substantial portion of the more detailed EU regulatory framework to apply in the
liberalized environment after January 1, 1998, including further directives,
still requires adoption by the Council of the European Communities. Certain EU
member states have been granted a derogation from liberalizing their
telecommunication markets on January 1, 1998. Ireland and Portugal have been
granted a derogation until January 1, 2000. Spain has requested a derogation
entitling it to delay liberalization until November 30, 1998. Luxembourg and
Greece have requested derogations entitling them to delay full liberalization
until January 1, 2000 and January 1, 2003, respectively. There can be no
assurance that each EU member state will proceed with the expected
liberalization on schedule, if at all, or that the trend towards liberalization
will not be stopped or reversed. Accordingly, Econophone faces the risk that it
will establish operations and make capital expenditures in a given country in
anticipation of regulatory liberalization which does not subsequently occur.
The national governments of EU member states must pass legislation to
liberalize the markets within their countries to give effect to EC directives.
This applies not only to the liberalization requirements set out in EC
directives that already have been adopted, but also requirements to be contained
in those directives which still remain to be adopted by the Council of the
European Communities. Econophone's provision of services in Europe may be
materially adversely affected if any EU member state imposes greater
restrictions on non-EU international services than on international services
within the EU. Some EU member states have inconsistently and, in some instances,
unclearly implemented EC telecommunications directives, which could limit,
constrain or otherwise adversely affect Econophone's ability to provide certain
services. Furthermore, national governments may not necessarily pass legislation
enacting an EC directive in the form required, if at all, or may pass such
legislation only after a significant delay. Even if a national legislature
enacts appropriate regulations within the time frame established by the European
Union, there may be significant resistance to the implementation of such
legislation from PTOs, regulators, trade unions and other sources. For example,
in the United Kingdom, Mercury resorted to legal action against the Post Office
Engineering Union because the union refused to connect customers to Mercury's
switches. In France, the telecommunications union has stated its objection to
the current move towards liberalization. In Italy, the government has, in the
past, failed to adopt requisite legislation liberalizing its telecommunications
markets on a timely basis. These and other potential obstacles to liberalization
could have a material adverse effect on Econophone's operations by preventing
Econophone from expanding its operations as currently intended, as well as a
material adverse effect on Econophone's ability to pay interest on and principal
of the Notes.
In the United States, Econophone's authority to engage in the resale of
international private lines to provide international telephone service is
pursuant to an authorization (the "Section 214 Private Line Authorization")
granted under Section 214 of the 1934 Act. Certain rules of the FCC prohibit
Econophone from (i) transmitting calls routed over leased lines between New York
and London onward over a leased
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line to continental Europe (other than to a country which the FCC deems to be
"equivalent," which currently is only Sweden) or (ii) transmitting calls from
continental European countries (other than those deemed to be equivalent) over
leased lines to London and then onward over a leased line between London and New
York. FCC restrictions thus may materially limit the optimal and most profitable
use of Econophone's leased lines between New York and London and result in
increased transmission costs on certain calls, which Econophone may not be able
to pass on to its customers.
In the United States, the FCC and relevant state public service commissions
("PSCs") have the authority to regulate interstate and intrastate telephone
rates, respectively, ownership of transmission facilities and the terms and
conditions under which certain of Econophone's services are provided. Federal
and state regulations and regulatory trends have had, and in the future are
likely to have, both positive and negative effects on Econophone and its ability
to compete. The recent trend in both Federal and state regulation of
telecommunications service providers has been in the direction of reduced
regulation. In general, neither the FCC nor the relevant state PSCs currently
regulate Econophone's domestic long distance rates or profit levels, although
either or both may do so in the future. There can be no assurance that changes
in current or future Federal or state regulations or future judicial changes
would not have a material adverse effect on Econophone. See
"Business--Regulation."
In order to provide their services, inter-exchange carriers, including
Econophone, must generally purchase "access" from local exchange carriers
("LECs") to originate calls from and terminate calls in the local exchange
telephone networks. In the United States, access charges generally are regulated
by the FCC and the relevant state PSCs. Under the terms of the AT&T Divestiture
Decree, a court order entered in 1982 which, among other things, required AT&T
to divest its 22 wholly-owned RBOCs from its long distance division (the "AT&T
Divestiture Decree"), the RBOCs were required to price the "local transport"
portion of such access charges on an "equal price per unit of traffic" basis.
The FCC has adopted, subject to reconsideration, a change in the access charge
structure, which reduces per minute access charges, but applies additional per
line charges for business users. This change in access charge structure may
disproportionately disadvantage smaller carriers such as Econophone. Under
alternative access charge rate structures proposed to the FCC, LECs would be
permitted to allow volume discounts in the pricing of access charges. If these
rate structures are adopted, access charges for AT&T and other large
inter-exchange carriers would decrease and access charges for small
inter-exchange carriers would increase. While the outcome of these proceedings
is uncertain, should the FCC adopt permanent access charge rules along the lines
of the proposed structures, Econophone would be at a cost disadvantage with
regard to access charges in comparison to AT&T and other large inter-exchange
carrier competitors. The FCC also has, subject to reconsideration, announced
that it will impose charges on inter-exchange carriers, including Econophone, to
support subsidies for telecommunications services for schools, libraries, rural
health care centers and low income persons. Econophone does not expect these
charges to be material to Econophone, although there can be no assurance that
this will be the case.
The FCC requires long distance carriers to pay access charges to payphone
providers for calls made from payphones to toll free numbers administered by
long distance carriers. The FCC had required the immediate payment of such
access charges by long distance carriers with toll revenues of $100 million or
more per annum. The FCC had also required, after October 7, 1997, all long
distance carriers, irrespective of their annual toll revenues, to pay to each
payphone operator $.35 for each access or toll free call made from the
operator's payphones unless the payphone operator and the long distance carrier
agree upon a different rate of compensation. The FCC payphone order was reversed
by an appellate court. This matter was remanded to the FCC by the court for
further consideration. The FCC may re-adopt the $.35 rate, or some different
rate, effective on October 7, or at some later date. Econophone's card-based
services in the United States are accessed by customers through a toll free
number, often from payphones. Econophone has marketed its services at a discount
to prices charged by larger carriers which recently have begun charging this
$.35 access charge. Irrespective of the effective date and the amount ultimately
adopted, when Econophone becomes subject to the access charge, there can be no
assurance that Econophone will
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be able to fully pass this cost on to its customers or that doing so will not
result in a loss of customers. Furthermore, larger carriers are likely to be
able to negotiate lower payphone access charges than Econophone, which could
result in such carriers offering lower pricing on card-based services in the
United States accessed from payphones than that offered by Econophone.
If Econophone's interpretation of applicable laws and regulations proves
incorrect, it could lose, or be unable to obtain, regulatory approvals necessary
to provide certain of its services or to use certain of its transmission
methods. Econophone also could have substantial monetary fines and penalties
imposed against it. In addition, Econophone's Section 214 Private Line
Authorization requires that services be provided in a manner consistent with the
laws and regulations of the countries in which Econophone operates. There can be
no assurance that Econophone has accurately interpreted or will accurately
interpret applicable laws and regulations in particular jurisdictions, or that
regulators or third parties will not raise material issues with regard to
Econophone's compliance with applicable laws or regulations.
If Econophone is unable to provide the services it is presently providing or
intends to provide or to use its existing or contemplated access or transmission
methods due to its inability to receive or retain formal or informal approvals
for such services or access or transmission methods, or for any other reason
related to regulatory compliance or the lack thereof, Econophone's business,
financial condition and results of operations would be materially and adversely
affected and the ability of Econophone to pay interest on and principal of the
Notes could be materially adversely affected. See "Business--Regulation."
NEED FOR LOCAL CONNECTIVITY
To originate and terminate calls, Econophone requires "local connectivity,"
which is the right to use the public switched telephone network (the "PSTN"). In
Europe, although Econophone has been successful to date in obtaining local
connectivity in each of its existing network cities, there can be no assurance
that Econophone will be able to maintain local connectivity, obtain additional
local connectivity in such cities to the extent necessary or desirable or obtain
local connectivity in additional cities, in each case either on acceptable terms
or at all. Econophone obtains its local connectivity in the United Kingdom from
British Telecom, the PTO in the United Kingdom and a principal competitor of
Econophone in the United Kingdom. In continental Europe, Econophone obtains its
local connectivity from PTOs which are, and are expected to continue to be,
among Econophone's primary competitors in continental Europe. In the United
States, Econophone obtains local connectivity from LECs, which also are
competitors of Econophone. Furthermore, in the United States, access and
termination costs charged by LECs to long distance providers constitute a
significant portion of the total cost of domestic long distance calls. There can
be no assurance that any of the foregoing competitors will make local
connectivity available to Econophone at commercially reasonable rates, on a
timely basis, or, in the case of Europe, at all. The availability and rates of
local connectivity are, and will continue to be, determined on a
country-by-country basis. The failure to obtain local connectivity on
commercially acceptable terms could have a material adverse effect on Econophone
and its ability to pay principal of and interest on the Notes.
DEPENDENCE ON LEASED LINES
Econophone does not own most of the telecommunications transmission lines
that it uses. The telephone calls made by Econophone's customers are and will
continue to be connected, at least in part, through transmission lines that
Econophone leases. Many of the lessors of such lines are competitors of
Econophone. In many countries, the only provider of transmission facilities is
the PTO. Accordingly, prior to full liberalization, there may be only one source
of intra-national transmission lines in these countries and Econophone may be
required to lease transmission capacity at artificially high rates from a
provider that occupies a monopoly or near monopoly position on the portion of a
call transmitted in that provider's country. Such rates may be too high to allow
Econophone to generate gross profit on international calls routed to an
Econophone switch or node by means of such intra-national lines. In addition,
PTOs will not necessarily be required by law to allow Econophone to lease
transmission lines. Even where applicable law
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requires PTOs to lease transmission lines to Econophone, delays may nevertheless
be encountered with respect to the commencement of operations and extensive
delays may occur with respect to the negotiation of leases and interconnection
agreements. In addition, disputes may occur with respect to pricing terms and
billing.
Econophone leases capacity for point-to-point circuits on a monthly or
longer-term fixed cost basis. Econophone is vulnerable to changes in its lease
arrangements, such as price increases and service cancellations. The negotiation
of lease agreements involves estimates regarding future supply and demand for
transmission capacity as well as estimates of the calling patterns and traffic
levels of Econophone's existing and future customers. Econophone's profitability
depends, in part, on its ability to obtain and utilize leased capacity on a
cost-effective basis. Depending upon the rate, Econophone could suffer
competitive disadvantages if it entered into leases with inappropriate durations
or leases based on per-minute charges for high volume routes (or leases with
fixed monthly rates for low volume routes), or if it failed to meet any minimum
volume requirements thereunder. Econophone also is vulnerable to service
interruptions and poor transmission quality from leased lines. The deterioration
or termination of Econophone's relationships with one or more of its carrier
vendors could have a material adverse effect upon Econophone's business,
financial condition and results of operations and its ability to pay interest on
and principal of the Notes.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, Econophone must record and process large amounts of
data quickly and accurately. While Econophone believes its management
information systems currently are adequate, substantial investment therein will
be required to satisfy anticipated billing needs. Econophone has budgeted
approximately $2.0 million for the last two quarters of 1997 for enhancing
current, and purchasing and developing new network management and information
systems. Econophone believes that the successful implementation and integration
of these enhanced and new information systems is important to its continued
growth and its ability to monitor costs, bill customers and achieve operating
efficiencies, but there can be no assurance that Econophone will not encounter
delays or cost-overruns or suffer adverse consequences in implementing such
systems. In addition, as Econophone's information systems suppliers revise and
upgrade their hardware, software and equipment technology, there can be no
assurance that Econophone will not encounter difficulties in integrating such
new technology into its business or that the new systems will be appropriate for
Econophone's business. See "Business-- Information Technology."
DEPENDENCE ON KEY PERSONNEL; INTEGRATION OF MANAGEMENT
The success of Econophone is dependent, in large part, upon its key
management. The loss of services of any of the members of Econophone's senior
management team, particularly Alfred West, the Chief Executive Officer and
Chairman of the Board of Directors of Econophone and Alan L. Levy, the
President, Chief Operating Officer and Chief Financial Officer and a Director of
Econophone, could have a material adverse effect on Econophone and its ability
to successfully implement its business plan (including, without limitation, the
roll-out of its network infrastructure, its sales and marketing initiatives and
the expansion of its back-office capabilities) and to pay interest and principal
on the Notes. Messrs. West and Levy are parties to employment agreements with
Econophone, expiring on December 31, 1999 and July 31, 1999, respectively. Other
than Messrs. West and Levy, Econophone has not entered into employment
agreements with members of management. See "Management--Executive
Compensation--Employment Agreements and Arrangements." Econophone maintains "key
man" life insurance policies on Mr. West that provide for payment of $10.0
million to Econophone in the event of the death or long-term disability of Mr.
West. Under the terms of the Series A Preferred Stock, Econophone is required to
maintain such policy in full force and effect until November 1, 2000.
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Pursuant to the NTFC Agreement, Econophone may not cease to employ Alfred
West or suffer to exist any competition by Mr. West with the business now or
hereafter conducted by Econophone. Failure to comply with the foregoing
requirement would constitute a default under the NTFC Agreement, which, if not
cured, could require the prepayment of all amounts outstanding thereunder. In
addition, any holder of Series A Preferred Stock has the option to cause
Econophone to redeem its shares if Alfred West ceases to own voting securities
representing at least 25% of the total voting power of the outstanding voting
securities of Econophone or a person or group becomes the beneficial owner of
voting securities representing more voting power than the voting securities then
owned by Mr. West. See "Certain Transactions--Investment by Princes Gate" and
"Description of Certain Indebtedness--NTFC Vendor Financing."
Econophone has significantly increased the size of its management team since
the beginning of the fourth quarter of 1996. Econophone's management team has
limited experience in working together and any delays in the integration of new
members of Econophone's management team could result in delays in the
implementation of Econophone's strategy.
Econophone's success also will depend on its ability to attract, retain and
motivate additional qualified management, marketing, technical and sales
executives and other personnel who are in high demand and are often subject to
competing employment opportunities, including qualified independent sales
agents. The loss of the services of key personnel, or the inability to attract
additional qualified personnel, could have a material adverse effect on
Econophone's business, financial condition and results of operations. There can
be no assurance that Econophone will be successful in attracting, retaining and
motivating such personnel. Although members of management participate in
Econophone's incentive plan, other than Mr. Levy, their options do not provide
the right to acquire a significant portion of the equity of Econophone. See
"Management--Executive Compensation--1996 Flexible Incentive Plan."
DEPENDENCE ON EQUIPMENT SUPPLIER
Econophone purchases a significant portion of its switching equipment from
Northern Telecom. Certain of the switches acquired by Econophone from Northern
Telecom utilize new technologies. There can be no assurance that Econophone will
be able to integrate such switches into its network on a timely basis or at all,
or that such switches will provide satisfactory performance. There also can be
no assurance that Econophone will be able to acquire the switches that it will
require from Northern Telecom or from another manufacturer of compatible
equipment. Any inability of Econophone to acquire such switches on a timely
basis or at a similar price, or any failure by Econophone to successfully
integrate such switches into its network, could result in delays, operational
problems or increased expenses, which could have a material adverse effect on
Econophone's business, financial condition and results of operations and its
ability to pay principal and interest on the Notes. See "Business--Network
Infrastructure."
INABILITY TO REPAY NOTES UPON A CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control
thereunder, Econophone must make an offer to purchase all of the Notes issued
and then outstanding at a purchase price equal to 101% of the principal amount
thereof plus accrued interest (if any) thereon to the Payment Date (as defined
in the Indenture). Under the NTFC Agreement, a change of control (as such term
is used in such agreement) occurring without the prior written consent of NTFC
would constitute a default thereunder, which would permit NTFC to accelerate
repayment of all amounts outstanding under the NTFC Agreement. In addition,
pursuant to the Certificate of Incorporation of Econophone, a change of control
(as such term is used therein) would, subject to approval by NTFC, permit
holders of the Series A Preferred, at their option, to require Econophone to
redeem all shares of Series A Preferred held by them. If an event were to occur
that would constitute a "change of control" pursuant to the NTFC Agreement
and/or the Certificate of Incorporation, prior to, or simultaneously with any
payment to the holders of the Notes in connection with a repurchase offer
resulting from a Change of Control pursuant to the Indenture,
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NTFC would be entitled to receive payment of all outstanding obligations under
the NTFC Agreement and the holders of the Series A Preferred would be entitled
to redemption of such securities. If a Change of Control were to occur, there
can be no assurance that Econophone would be able to satisfy its obligations
under the NTFC Agreement, the Certificate of Incorporation and the Notes. Such a
failure to purchase Notes tendered pursuant to such a repurchase offer would
constitute an Event of Default under the Indenture and the NTFC Agreement. See
"Description of the Exchange Notes--Repurchase of Notes Upon a Change of
Control", "Description of the Exchange Notes--Events of Default", "Certain
Transactions--Investment by Princes Gate" and "Description of Certain
Indebtedness--NTFC Vendor Financing."
CONTROL BY PRINCIPAL STOCKHOLDERS
Alfred West, the Chief Executive Officer of Econophone and Chairman of its
Board of Directors, Steven West, the brother of Alfred West and a member of the
Board of Directors of Econophone, and Gary Bondi, a member of the Board of
Directors of Econophone, own, in the aggregate, approximately 85.4% of the
outstanding shares of Common Stock (assuming conversion of the Series A
Preferred Stock at September 1, 1997, but not giving effect to the issuance or
exercise of the Warrants or any options issued by Econophone). Such stockholders
will have the ability to control the election of all members of Econophone's
Board of Directors, other than one director that is elected by the holders of
the Series A Preferred Stock, the outcome of all matters submitted to a vote of
the holders of Common Stock and generally will be able to direct the affairs of
Econophone. The approval of the holders of a majority of the shares of Series A
Preferred Stock is required for Econophone to take certain actions, including
the sale of all or substantially all of the assets, a merger, consolidation,
recapitalization or liquidation of Econophone, the declaration or payment of
certain dividends, the acquisition or redemption of any class of capital stock
or an amendment to the certificate of incorporation adversely affecting the
rights, powers or preferences of the Series A Preferred Stock. See "Certain
Transactions--Investment by Princes Gate--Series A Preferred Stock." The
exercise of these powers may present conflicts of interest between these
individuals and the holders of the Notes. See "Principal Stockholders."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Exchange Notes should be treated as a continuation of the Original Notes
for federal income tax purposes. The Original Notes were treated as having been
issued at a discount for U.S. federal income tax purposes. Prospective investors
should consult their tax advisors about the application of federal income tax
law, as well as any applicable state, local or foreign tax laws. This Prospectus
contains no information regarding taxation other than under certain laws of the
United States.
If a bankruptcy case is commenced by or against Econophone under the United
States Bankruptcy Code, the claim of a holder of Notes may be limited to an
amount equal to the sum of the issue price as determined by the bankruptcy court
and that portion of the original issue discount which is deemed to accrue from
the issue date to the date of any such bankruptcy filing.
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CONSEQUENCES OF FAILURE TO EXCHANGE
The issuance of the Exchange Notes in exchange for the Original Notes
pursuant to the Exchange Offer will be made only after a timely receipt by the
Company of such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of Original
Notes desiring to tender such Original Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to the
tenders of Original Notes for exchange.
Original Notes that are not validly tendered will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to provide for the registration under the Securities Act of such
Original Notes. In addition, any holder of Original Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. To
the extent that Original Notes are tendered in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Original Notes could be
adversely affected. Each broker or dealer that receives Exchange Notes for its
own account in exchange for Original Notes where such Exchange Notes were
acquired by such broker or dealer as a result of market-making activities or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
LACK OF PUBLIC MARKET
The Exchange Notes are a new issue of securities for which there is
currently no active trading market. The Company does not intend to list the
Exchange Notes on any national securities exchange or to seek approval for
quotation through any automated quotation system. There can be no assurance that
an active trading market for the Exchange Notes will develop or as to the
liquidity of or the trading market for the Exchange Notes. If a trading market
does not develop, Holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market could cease to continue at any
time. If a trading market develops for the Exchange Notes, they may trade at a
discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities and other factors, including general
economic conditions and the financial condition, performance of and prospects
for the Company.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were initially issued and sold by Econophone on July 1,
1997 (the "Closing Date") to Morgan Stanley, the Placement Agent thereof,
pursuant to a Placement Agreement, dated June 26, 1997 (the "Placement
Agreement"). The Placement Agent subsequently resold the Original Notes to
qualified institutional buyers in reliance on Rule 144A under the Securities Act
and to non-U.S. persons pursuant to Regulation S under the Securities Act.
Pursuant to the Placement Agreement, Econophone and the Placement Agent entered
into a Notes Registration Rights Agreement on July 1, 1997 (the "Registration
Rights Agreement"). Pursuant to the Registration Rights Agreement, Econophone
agreed to use its best efforts to consummate the Exchange Offer on or prior to
January 15, 1998. A copy of the Registration Rights Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part and
the description of the terms of the Registration Rights Agreement is qualified
in its entirety by reference thereto. The Registration Statement of which this
Prospectus is a part is intended to satisfy Econophone's obligations with
respect to the registration of Original Notes in accordance with the terms of
the Registration Rights Agreement and the Indenture.
Following the consummation of the Exchange Offer, holders of Original Notes
not validly tendered in the Exchange Offer and holders of Exchange Notes will
not have any further registration rights (other than certain registration rights
granted to Morgan Stanley, as hereinafter indicated). In addition, holders of
Original Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for Original Notes could be adversely
affected. See "Risk Factors--Consequences of Failure to Exchange."
The Original Notes were issued in Units together with the Warrants. Upon the
effectiveness of the registration statement for the Exchange Notes, the Warrants
will be separately traded from the Original Notes and are not part of the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Econophone intends the following terms to provide for the conduct of the
Exchange Offer in accordance with the provisions of the Registration Rights
Agreement, the Indenture, the applicable requirements of the Securities Act and
the rules and regulations of the Commission thereunder. Upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal, Econophone will accept any and all Original Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time on , or
such later time and date to which the Exchange Offer is extended by Econophone
in its sole discretion, which time and date, as indicated herein or as extended,
is referred to herein as the "Expiration Date". Econophone will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal amount
of Original Notes accepted in the Exchange Offer. Holders may tender some or all
of their Original Notes pursuant to the Exchange Offer.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and thus will not bear restrictive legends
restricting their transfer pursuant to the Securities Act and (ii) the Exchange
Notes will not be subject to any covenant regarding registration under the
Securities Act, including any such rights under the Registration Rights
Agreement or the Indenture, which rights, in any event, will terminate with
respect to the Original Notes upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture, which also authorized the issuance of the Original Notes, such that
both the Exchange Notes and the Original Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $155.0 million in aggregate principal
amount of Original Notes was outstanding. There will be no fixed record date for
determining holders of the Original Notes entitled to participate in the
Exchange Offer.
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Econophone shall be deemed to have accepted validly tendered Original Notes
when, as and if Econophone has given oral or written notice thereof (oral notice
being promptly confirmed in writing) to The Bank of New York, as Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of the Original
Notes for the purposes of receiving the Exchange Notes from Econophone.
Holders of Notes who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer. Econophone will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXTENSION; AMENDMENTS
In order to extend the Exchange Offer, Econophone will notify the Exchange
Agent of any extension by oral or written notice (oral notice being promptly
confirmed in writing) and will make public announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
Econophone reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Expiration Date, (iii) if any
of the conditions set forth below under "--Conditions of the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer, or (iv) to amend
the terms of the Exchange Offer in any manner, by giving oral or written notice
(oral notice being promptly confirmed in writing) of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by Econophone to constitute a material change, Econophone will
promptly disclose such amendments by means of a prospectus supplement that will
be distributed to DTC and Econophone will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the amendment
and the manner of disclosure to the registered holders, if the Exchange Offer
would otherwise expire during such five to ten business day period.
Without limiting the manner in which Econophone may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, Econophone shall not have an obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
PROCEDURES FOR TENDERING BOOK-ENTRY INTERESTS
The Original Notes (which for purposes of the Exchange Offer include
Book-Entry Interests and Original Notes in registered form ("Definitive
Registered Notes"), if any) were issued as global securities without interest
coupons (each, a "Global Note"). Concurrently with the issuance thereof, the
Global Notes were deposited with The Bank of New York, as Book-Entry Depositary
(the "Book-Entry Depositary"), which issued a certificateless depositary
interest (each, a "Depositary Interest") in each Global Note representing a 100%
interest therein to DTC. Book-Entry Interests, which are beneficial interests in
the Global Notes held by direct or indirect participants in DTC through the
Depositary Interests, are shown on, and transfers thereof are effected only
through, records maintained in book-entry form by DTC (with respect to its
participants) and its participants.
Each Holder (which for purposes of the Exchange Offer, includes any
participant in DTC whose name appears on a security position listing as a holder
of Book-Entry Interests) of Original Notes held in the form of Book-Entry
Interests who wishes to tender such Book-Entry Interests for exchange pursuant
to the Exchange Offer must transmit to the Exchange Agent on or prior to the
Expiration Date either (i) a properly completed and duly executed Letter of
Transmittal or a facsimile thereof, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth on
the cover page of the Letter of Transmittal or (ii) a computer-generated message
(an "Agent's Message"), transmitted by means of DTC's Automated Tender Offer
Program ("ATOP") system and received by the
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Exchange Agent and forming a part of a book-entry transfer (a "Book-Entry
Confirmation"), in which such Holder acknowledges and agrees to be bound by the
terms of the Letter of Transmittal. In addition, in order to deliver Original
Notes held in the form of Book-Entry Interests, (i) a timely Book-Entry
Confirmation of book-entry transfer of such Original Notes into the Exchange
Agent's account at DTC pursuant to the procedure for book-entry transfers
described below under "--Book-Entry Transfer" must be received by the Exchange
Agent prior to the Expiration Date or (ii) the Holder must comply with the
guaranteed delivery procedures described below.
The valid tender of an Original Note by a Holder that is not withdrawn prior
to the Expiration Date will constitute an agreement between such Holder and
Econophone in accordance with the terms and subject to the conditions set forth
hereunder and in the Letter of Transmittal.
DELIVERY OF BOOK-ENTRY INTERESTS MUST BE EFFECTED BY BOOK-ENTRY TRANSFER AS
DESCRIBED UNDER "--BOOK-ENTRY TRANSFER." THE METHOD OF DELIVERY OF THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL SHOULD BE SENT TO
ECONOPHONE.
PROCEDURES FOR TENDERING DEFINITIVE REGISTERED NOTES
Only registered holders of Definitive Registered Notes may tender such
Original Notes in the Exchange Offer. Each Holder of Definitive Registered Notes
who wishes to tender such Definitive Registered Notes for exchange pursuant to
the Exchange Offer must transmit to the Exchange Agent on or prior to the
Expiration Date a properly completed and duly executed Letter of Transmittal or
a facsimile thereof, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth below under
"--Exchange Agent." In addition, in order to deliver Definitive Registered Notes
(i) the certificates representing such Definitive Registered Notes must be
received by the Exchange Agent prior to the Expiration Date or (ii) the Holder
must comply with the guaranteed delivery procedures described below.
The valid tender by a Holder (not withdrawn prior to Expiration Date) will
constitute an agreement between such Holder and Econophone in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF THE DEFINITIVE REGISTERED NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR CERTIFICATES FOR DEFINITIVE
REGISTERED NOTES SHOULD BE SENT TO ECONOPHONE. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
PROCEDURES APPLICABLE TO ALL HOLDERS
Any beneficial owner of Book-Entry Interests whose name does not appear on a
security position listing of DTC as a holder of such Book-Entry Interests and
any beneficial owner of Definitive Registered Notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender such Book-Entry Interests or Definitive Registered Notes in
the Exchange Offer should contact such person in whose name such Book-Entry
Interests or Definitive
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Registered Notes are registered promptly and instruct such Holder to tender on
such beneficial owner's behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Original Notes surrendered for exchange
pursuant to the Letter of Transmittal or to which the notice of withdrawal
pertains are tendered (i) by a Holder of the Original Notes who has not
completed the box entitled "Special Issuance Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution (as defined
below). In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by a firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States (collectively, "Eligible Institutions").
If the Letter of Transmittal or notice of withdrawal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing and, unless waived by Econophone, proper
evidence satisfactory to Econophone of its authority to so act must be
submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by Econophone in its sole discretion, which determination will be
final and binding. Econophone reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes Econophone's
acceptance of which would, in the opinion of counsel for Econophone, be
unlawful. Econophone also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes.
Econophone's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of the Original Notes must be cured within such time as
Econophone shall determine. Although Econophone intends to notify holders of
defects or irregularities with respect to tenders of the Original Notes, none of
Econophone, the Exchange Agent or any other person shall incur any liability for
failure to give such notification. Tenders of the Original Notes will not be
deemed to have been made until any and all such defects or irregularities have
been cured or waived.
While Econophone has no present plan to acquire any Original Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Original Notes that are not tendered in the Exchange Offer,
Econophone reserves the right in its sole discretion to purchase or make offers
for any Original Notes that remain outstanding subsequent to the Expiration Date
or, as set forth below under "--Conditions of the Exchange Offer," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase
Original Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By transmitting an Agent's Message or executing a Letter of Transmittal,
each Holder will represent to Econophone and agree that, among other things, (i)
the Exchange Notes or interests therein to be acquired by such Holder and any
beneficial owners thereof (the "Beneficial Owner(s)") in the Exchange Offer are
being acquired by such Holder and any Beneficial Owner(s) in the ordinary course
of business of the Holder and any such Beneficial Owner(s), (ii) the Holder and
each Beneficial Owner are not participating, do not intend to participate and
have no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) the Holder and each Beneficial Owner
acknowledge and agree that any person who is a broker-dealer registered under
the Exchange Act or is participating in the Exchange Offer for the purpose of
distributing the Exchange Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the Exchange Notes and any interest therein acquired by
such person and cannot rely on the position of the staff of the SEC set forth in
certain no-action letters (see "--Resales of the Exchange Notes"), (iv) the
Holder and each Beneficial Owner understands that a secondary resale transaction
described in clause (iii) above and any resales of the Exchange Notes and any
interest therein
32
<PAGE>
obtained by such Holder in exchange for the Original Notes originally acquired
by such Holder directly from Econophone should be covered by an effective
registration statement containing the selling security holder information
required by Items 507 and 508, as applicable, of Regulation S-K of the
Commission and (v) neither the Holder nor any Beneficial Owner(s) is an
"affiliate," as defined in Rule 405 promulgated under the Securities Act, of
Econophone. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Original Notes must represent that the Original Notes tendered
in the Exchange Offer were acquired by such broker-dealer as a result of
market-making activities or other trading activities and must acknowledge that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with the resales of Exchange Notes received in exchange for
Original Notes where Original Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. Econophone has
indicated its intention to make this Prospectus (as it may be amended or
supplemented) available to any broker-dealer for use in connection with any such
resale for a period of 180 days after the last Exchange Date. See "Plan of
Distribution."
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
Econophone will accept, promptly after the Expiration Date, all Original Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Original Notes. See "--Conditions of the Exchange Offer." For purposes of
the Exchange Offer, Econophone shall be deemed to have accepted properly
tendered Original Notes for exchange when, as and if Econophone has given oral
or written notice thereof (oral notice being promptly confirmed in writing) to
the Exchange Agent.
RETURN OF ORIGINAL NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the Holders
thereof desire to exchange, then such unaccepted, withdrawn or non-exchanged
Original Notes will be returned without expense to the tendering Holder thereof.
Under such circumstances, Book-Entry Interests in Original Notes will be
credited to an account maintained with DTC as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Book-Entry
Interests at DTC for purposes of the Exchange Offer promptly after the date of
this Prospectus. All deliveries of Book-Entry Interests must be made by
book-entry transfer to the account maintained by the Exchange Agent at DTC. Any
financial institution that is a participant in DTC's systems may make book-entry
delivery of Book-Entry Interests by causing DTC to transfer such Book-Entry
Interests into the Exchange Agent's account in accordance with DTC's ATOP
procedures for transfer. Holders of Book-Entry Interests who are unable to
deliver a Book-Entry Confirmation of the tender of their Book-Entry Interests
into the Exchange Agent's account at DTC or all other documents required by the
Letter of Transmittal to the Exchange Agent on or prior to the Expiration Date,
must tender their Book-Entry Interests according to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a Holder of Original Notes desires to tender such Original Notes and time
will not permit such Holder's required documents to reach the Exchange Agent, or
the procedure for book-entry transfer cannot be completed or the certificates
relating to Definitive Registered Notes cannot be delivered, in each case, on or
prior to the Expiration Date, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) on or prior to the Expiration Date, the
Exchange Agent receives from such Eligible
33
<PAGE>
Institution (a) either a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) or a properly transmitted Agent's Message
and (b) a Notice of Guaranteed Delivery, substantially in the form provided by
Econophone (by facsimile transmission, mail or hand delivery), setting forth the
name and address of such Holder of Original Notes and the amount of Original
Notes tendered, stating that the tender is being made thereby and guaranteeing
that within five business days after the date of execution of the Notice of
Guaranteed Delivery, a Book-Entry Confirmation or the certificates relating to
the Definitive Registered Notes and all other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) a Book-Entry Confirmation or the certificates relating to the
Definitive Registered Notes and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days after
the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
A tender of Original Notes may be withdrawn any time prior to the Expiration
Date.
For a withdrawal to be effective, (i) a written notice must be received by
the Exchange Agent at the address set forth below under "--Exchange Agent" or
(ii) the appropriate procedures of DTC's ATOP system must be complied with. Any
such notice of withdrawal with respect to Book-Entry Interests must (i) specify
the name of the person having tendered the Original Notes to be withdrawn and
identify the Original Notes to be withdrawn (including the principal amount of
such Original Notes) and (ii) specify the name and number of the account at DTC
to be credited with the withdrawn Original Notes and otherwise comply with the
procedures of DTC. Any such notice of withdrawal with respect to Definitive
Registered Notes must (x) specify the name of the person having tendered the
Definitive Registered Notes to be withdrawn and (y) identify the Definitive
Registered Notes to be withdrawn (including the certificate number and principal
amount of Original Notes). Any such written withdrawal must be signed by the
Holder in the same manner as the original signature on the Letter of Transmittal
by which such Original Notes were tendered (including required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by Econophone, in its sole
discretion and whose determination shall be final and binding on all parties.
Any Original Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Properly withdrawn Original
Notes may be retendered by following one of the procedures described above at
any time on or prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, Econophone shall not
be required to accept for exchange, or exchange Exchange Notes for, any Original
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Original Notes:
(a) if, in the sole judgment of Econophone, the Exchange Offer would
violate any law, statute, rule or regulation or an interpretation thereof of
the Commission staff; or
(b) with respect to all Book-Entry Interests tendered, if on the
Expiration Date, the Book-Entry Depositary does not present the Global Notes
to The Bank of New York, as Trustee.
If Econophone determines in its sole discretion that any of the conditions
are not satisfied, Econophone may (i) refuse to accept any Original Notes and
return all tendered Original Notes to the tendering Holders, (ii) extend the
Exchange Offer and retain all Original Notes tendered prior to the Expiration
Date, subject, however, to the rights of Holders to withdraw such Original Notes
(see "--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all validly tendered Original Notes
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, Econophone will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders and
Econophone will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and
34
<PAGE>
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests of or Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
The Bank of New York
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
Attention: Shilpa Trivedi
or
BY FACSIMILE:
The Bank of New York
Attention: Shilpa Trivedi
Facsimile Number: (212) 815-6339
In addition, Letters of Transmittal and any other required documentation
should be sent to the Exchange Agent at the address set forth above, except
where facsimile transmission is specifically authorized (E.G., withdrawals and
Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF TRANSMITTAL TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Econophone. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of Econophone and its affiliates.
Econophone has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. Econophone, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
its reasonable out-of-pocket expenses in connection therewith.
Econophone will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of the Original Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to the tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Original Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Original Notes may be resold only (i)
to Econophone or any subsidiary thereof, (ii) so long as the Original Notes are
eligible for resale pursuant to Rule 144A, to a person whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act, purchasing for its own account or for the
account of a qualified institutional buyer to whom notice is given that the
resale,
35
<PAGE>
pledge or other transfer is being made in reliance on Rule 144A, (iii) outside
the United States to non-U.S. persons in an offshore transaction in compliance
with Rule 904 under the Securities Act, (iv) pursuant to an exemption from
registration in accordance with Rule 144 (if available), (v) to an institutional
"accredited investor" that, prior to such transfer, furnishes to the Trustee a
signed letter containing certain representations and agreements relating to the
registration of transfer of the Original Notes and, if such transfer is in
respect of a principal amount of Original Notes at the time of transfer of less
than $250,000, an opinion of counsel acceptable to Econophone that such transfer
is in compliance with the Securities Act, and (vi) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States and subject to
certain requirements of the Trustee being met. The liquidity of the Original
Notes could be adversely affected by the Exchange Offer. See "Risk
Factors--Consequences of Failure to Exchange." Following the consummation of the
Exchange Offer, holders of the Original Notes will have no further registration
rights under the Registration Rights Agreement (other than certain registration
rights granted to Morgan Stanley).
RESALES OF THE EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
certain no-action letters issued to third parties, Econophone believes that the
Exchange Notes or interests therein issued pursuant to the Exchange Offer in
exchange for Original Notes or interests therein may be offered for resale,
resold and otherwise transferred by a Holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes directly from Econophone to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" of Econophone within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery requirements of the Securities Act,
PROVIDED that the Holder is acquiring the Exchange Notes in the ordinary course
of its business and not participating, and had no arrangement or understanding
with any person to participate, in the distribution of Exchange Notes. Each
broker-dealer that receives the Exchange Notes for its own account in exchange
for the Original Notes must represent that the Original Notes tendered in the
Exchange Offer were acquired by such broker-dealer as a result of market-making
activities or other trading activities and must acknowledge that it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time or time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Original
Notes where such Original Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. Econophone has
indicated its intention to make this Prospectus (as it may be amended or
supplemented) available to any broker-dealer for use in connection with any such
resale for a period of 180 days after the last Exchange Date. See "Plan of
Distribution."
36
<PAGE>
USE OF PROCEEDS
The Exchange Offer is being effected to satisfy Econophone's obligations
under the Original Notes, the Indenture and the Registration Rights Agreement.
Econophone will not receive any cash proceeds from the Exchange Offer. In
consideration of issuing the Exchange Notes in the Exchange Offer, Econophone
will receive an equal principal amount of Original Notes. Original Notes that
are properly tendered in the Exchange Offer and not validly withdrawn will be
accepted, canceled and retired and cannot be reissued.
The net proceeds to Econophone from the Offering were approximately $148.1
million, after deducting commissions and other expenses paid by Econophone.
Approximately $57.4 million of the net proceeds were used to purchase the
Pledged Securities, which will be used to make the first six scheduled interest
payments on the Notes. In addition, approximately $7.2 million was used to
redeem the Bridge Notes and to pay all accrued interest thereon and
approximately $1.0 million is expected to be used to repay certain other
indebtedness in advance of its maturity date. Econophone also has used a portion
of the net proceeds for and plans to continue to use net proceeds for (i)
telecommunications equipment and IRUs, (ii) customer service, billing, financial
reporting and other management information systems, (iii) network management
systems, (iv) the expansion of Econophone's internal sales forces and (v)
operating losses. Proceeds from the Offering also may be used for future
investments, acquisitions or strategic alliances in companies that are
complementary to Econophone's current operations. Although Econophone currently
is evaluating certain potential investment opportunities, it does not have any
present commitments or agreements with respect to any such investment,
acquisition or strategic alliance.
Net proceeds from the Offering not immediately required for the purposes
described above are invested in short term, interest-bearing, investment grade
securities, subject to restrictions in the Indenture.
The Bridge Notes, which were redeemed in connection with the Offering, were
sold between April 24, 1997 and May 30, 1997 to Morgan Stanley Group, an
affiliate of Morgan Stanley. The net proceeds of such sales were used to fund
the purchase of equipment, other capital expenditures and operating losses.
Following the redemption of the Bridge Notes, Econophone was not entitled to
place any additional Bridge Notes under the Note Purchase Agreement and the
facility represented by the Note Purchase Agreement terminated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions--Bridge
Funding by Morgan Stanley Group."
37
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of Econophone at
June 30, 1997 and as adjusted to give effect to the Offering and to the
repayment of certain indebtedness, as described under "Use of Proceeds." This
information should be read in conjunction with the Financial Statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(1)
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and restricted cash........................... $ 632 $ 147,732(2)
---------- -----------
---------- -----------
Short term borrowings, current portion of long-term debt, capital
lease obligations and notes payable-related parties................ $ 8,300 $ 7,300
Long-term debt and capital lease obligations:
Capital leases..................................................... 386 386
Notes offered hereby(4)............................................ -- 149,400
Other long-term debt(5)............................................ 4,413 4,413
---------- -----------
Total long-term debt and capital lease obligations............. 4,799 154,199
Redeemable Convertible Preferred Stock............................... 14,282 14,282
Stockholders' equity (deficit):
Common Stock, $.0001 par value, 29,250,000 shares authorized,
20,000,000 shares issued and outstanding(6)...................... 2 2
Non-Voting Common Stock, $.0001 par value, 500,000 shares
authorized, no shares issued and outstanding(6).................. -- --
Warrants(7)........................................................ -- 5,600
Additional paid-in capital......................................... 482 482
Cumulative translation adjustment.................................... (11) (11)
Accumulated deficit................................................ (15,435) (15,435)
---------- -----------
Total stockholders' equity (deficit)........................... (14,962) (9,362)
---------- -----------
Total capitalization....................................... $ 12,419 $ 166,419
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
(1) The as adjusted data gives effect to (i) the issuance of the Units, (ii) the
repayment of approximately $.6 million owed to IDT and (iii) the repayment
of certain equipment financings totalling approximately $.4 million in the
aggregate, as if such events had occurred on June 30, 1997.
(2) At August 31, 1997, Econophone had cash, cash equivalents and restricted
cash totaling $134,452,793.
(3) Through December 31, 2002, the current long-term indebtedness of Econophone
matures as follows:
<TABLE>
<CAPTION>
YEAR OF MATURITY AMOUNT
- -------------------------------------------------------------------------------------- ---------
<S> <C>
1997.................................................................................. $ 704,713
1998.................................................................................. $1,124,890
1999.................................................................................. $1,009,407
2000.................................................................................. $ 981,335
2001.................................................................................. $ 592,655
2002.................................................................................. --
</TABLE>
(4) The annual interest requirement on the Notes is $20,925,000.
(5) As adjusted cash, cash equivalents and restricted cash includes actual cash
of $.6 million, plus the net proceeds of the Notes (approximately $148.1
million) less $1.0 million that will be used to retire indebtedness. See
"Use of Proceeds."
(6) Based on the number of shares outstanding on June 30, 1997. Does not include
(i) 2,626,500 shares of Common Stock issuable upon the exercise of options
to employees at a weighted average exercise price of $2.50, (ii) 3,420,701
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock at August 1, 1997 or (iii) any of the shares of Common Stock issuable
upon exercise of the Warrants issued in connection with the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Management--Executive
Compensation--1996 Flexible Incentive Plan" and "Certain
Transactions--Investment by Princes Gate."
(7) Represents the portion of the issue price for the Units attributable to the
fair value of the Warrants. Such amount has been recognized as a discount on
the Notes and will be amortized over the term of the Notes. Each Warrant may
be exercised for 8.167 shares of Common Stock at an exercise price of $.01
per share. The Warrants are exercisable for 1,265,885 shares of Common
Stock, in the aggregate. The fair value of the shares issuable upon exercise
of the Warrants was determined to be $4.43 per share based on an agreement
among Econophone and the Placement Agent in connection with the Offering.
Among the factors considered in making such determination were the history
of the prospects for the industry in which Econophone competes, an
assessment of Econophone's management, the present operations of Econophone,
the historical results of operations of Econophone and the trend of its
revenues and earnings, the prospects for future earnings of Econophone, the
general condition of the securities markets at the time of the Offering, and
the prices of similar securities of generally comparable companies. The
Warrants expire on June 30, 2007.
38
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (except for certain data
under Other Data and data under Regional Data) for the years ended December 31,
1994, 1995 and 1996 was derived from the audited consolidated financial
statements of Econophone. The audited consolidated financial statements of
Econophone as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996, together with the notes thereto and the
related report of Arthur Andersen LLP, independent accountants, are included
elsewhere in this Prospectus. The selected consolidated financial data for the
years ended December 31, 1992 and 1993 is derived from unaudited financial
statements of Econophone, which, in the opinion of management, include all
adjustments necessary for a fair presentation of the financial condition and
results of operations of Econophone for such periods. The following selected
financial information for the six months ended June 30, 1996 and 1997 was
derived from the unaudited interim financial statements of Econophone and
reflects all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated financial information for those periods. The information contained
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
of Econophone and the notes related thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992(1) 1993(1) 1994 1995 1996 1996 1997
------------- ----------- ----------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT NET INCOME (LOSS) PER SHARE,
REVENUE PER MINUTE AND RATIO OF EARNINGS TO FIXED CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 3,268 $ 3,528 $ 8,523 $ 27,490 $ 45,103 $ 22,992 $ 30,446
Cost of services................. 2,659 2,761 5,540 19,735 35,369 16,333 24,012
Selling, general and
administrative expense......... 474 497 2,013 7,087 14,834 7,805 12,896
Depreciation and amortization.... 12 51 168 389 1,127 394 1,136
------ ----------- ----------- --------- --------- --------- ---------
Income (loss) from operations.... 123 219 802 279 (6,227) (1,540) (7,598)
Other income (expense)........... -- 6 100 (10) 133 11 58
Interest expense, net............ -- (19) (103) (148) (295) (78) (285)
Provision (benefit) for taxes.... 2 -- 73 -- -- -- --
------ ----------- ----------- --------- --------- --------- ---------
Net income (loss)................ $ 121 $ 206 $ 726 $ 121 $ (6,389) $ (1,607) $ (7,825)
------ ----------- ----------- --------- --------- --------- ---------
------ ----------- ----------- --------- --------- --------- ---------
Net income (loss) per share(3)... $ .01 $ .01 $ .04 $ .01 $ (.32) $ (.08) $ (.39)
OTHER DATA:
Capital expenditures(4).......... $ 118 $ 605 $ 906 $ 1,677 $ 4,670 $ 2,152 $ 5,758
EBITDA(5)........................ 135 276 1,070 658 (4,967) (1,135) (6,404)
Dividends declared............... -- -- -- 449 508 226 879
Net cash (used in) provided by
operating activities(6)........ -- (190) 474 2,037 (6,006) 60 (7,698)
Revenue per minute............... .70 .57 .43 .56 .29
Minutes.......................... 12,196 47,859 104,566 40,869 104,615
Ratio of earnings to fixed
charges(7)..................... 2.5x 8.6x 7.2x 1.5x -- -- --
Deficiency of earnings available
to cover fixed charges......... -- -- -- -- $ (5,584) $ (1,487) $ (6,462)
REGIONAL DATA:
Revenues
United States.................. $ 2,728 $ 8,292 $ 18,185 $ 6,876 $ 18,896
United Kingdom................. 3,143 14,173 15,477 10,910 4,201
Continental Europe............. 2,652 5,025 11,441 5,206 7,349
Minutes
United States.................. 5,707 23,411 68,247 20,744 87,747
United Kingdom................. 4,532 20,592 27,968 16,390 10,136
Continental Europe............. 1,957 3,856 8,351 3,735 6,732
<CAPTION>
<S> <C>
AS ADJUSTED
1997(2)
--------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 30,446
Cost of services................. 24,012
Selling, general and
administrative expense......... 12,896
Depreciation and amortization.... 1,481
--------------
Income (loss) from operations.... (7,943)
Other income (expense)........... 58
Interest expense, net............ (11,028)
Provision (benefit) for taxes.... --
--------------
Net income (loss)................ $ (18,913)
--------------
--------------
Net income (loss) per share(3)... $ (.95)
OTHER DATA:
Capital expenditures(4)..........
EBITDA(5)........................
Dividends declared...............
Net cash (used in) provided by
operating activities(6)........
Revenue per minute...............
Minutes..........................
Ratio of earnings to fixed
charges(7)..................... --
Deficiency of earnings available
to cover fixed charges......... $ (18,568)
REGIONAL DATA:
Revenues
United States..................
United Kingdom.................
Continental Europe.............
Minutes
United States..................
United Kingdom.................
Continental Europe.............
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
AT JUNE
AT DECEMBER 31, 30, 1997
----------------------------------------------------- ---------
1992 1993 1994 1995 1996 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 12 $ 120 $ 86 $ 106 $ 6,272 $ 632
Current assets...................................... 519 852 2,588 7,616 14,729 15,063
Restricted cash..................................... -- -- -- -- -- --
Total assets........................................ 609 1,541 4,034 10,508 24,678 30,079
Current portion of borrowings....................... 420 510 480 558 3,020 8,300
Long-term borrowings, less current portion.......... -- 39 639 719 2,263 4,799
Redeemable Convertible Preferred Stock.............. -- -- -- -- 13,358 14,282
Total stockholders' equity (deficit)................ 118 708 1,088 710 (6,202) (14,962)
<CAPTION>
AS ADJUSTED(2)
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 90,295
Current assets...................................... 123,872
Restricted cash..................................... 57,437
Total assets........................................ 184,079
Current portion of borrowings....................... 7,300
Long-term borrowings, less current portion.......... 154,199
Redeemable Convertible Preferred Stock.............. 14,282
Total stockholders' equity (deficit)................ (9,362)
</TABLE>
- ------------------------
(1) Regional revenue data and minute data for 1992 and 1993 are not available.
(2) The as adjusted data gives effect to (i) the issuance of the Units and the
accrual and accretion of interest associated with the Notes, (ii) the
amortization of the deferred financing costs associated with the Offering,
(iii) the repayment of approximately $.6 million owed to IDT and (iv) the
repayment of certain equipment financings totaling approximately $.4 million
in the aggregate, as if such events had occurred on January 1, 1997 (for
statement of operations purposes) and June 30, 1997 (for balance sheet
purposes). See "Use of Proceeds." As adjusted data does not give effect to
any interest income on the proceeds of the Units.
(3) Net income (loss) per share is computed using the weighted average number of
shares outstanding during the period.
(4) Capital expenditures include assets acquired through capital lease financing
and other debt.
(5) EBITDA represents net income (loss) plus interest expense, income tax
expense and depreciation and amortization expense. Econophone has included
information concerning EBITDA herein because such information is commonly
used in the telecommunications industry as one measure of an issuer's
operating performance and historical ability to service debt. EBITDA is not
determined in accordance with generally accepted accounting principles, is
not indicative of cash provided by operating activities, is not necessarily
comparable to similarly titled measures of other companies, should not be
used as a measure of operating income and cash flows from operations as
determined under generally accepted accounting principles and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles.
(6) Net cash provided by (used in) operations for the year ended December 31,
1992 is not available.
(7) Earnings available to cover fixed charges consist of earnings (losses)
before income taxes. Fixed charges consist of interest on debt, the interest
component of rent expense (deemed to be one-third of the total) and
dividends accrued on preferred stock.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ECONOPHONE'S
FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION INCLUDES CERTAIN
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS, INCLUDING,
BUT NOT LIMITED TO, CONTINUED DEVELOPMENT OF ECONOPHONE'S BUSINESS, ACTIONS OF
REGULATORY AUTHORITIES AND COMPETITORS, PRICE DECLINES AND OTHER FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS, SEE "RISK FACTORS."
OVERVIEW
REVENUES; PRICE DECLINES
Econophone derives its revenues from the provision of long distance
telecommunications services in certain major western European and U.S. markets.
In the United States and the United Kingdom, Econophone provides principally
international and domestic long distance, calling card, prepaid and carrier
services. In continental Europe, Econophone provides principally international
long distance, calling card and prepaid services. Econophone's services utilize
various access methods, including "1xxx," "1+," local dial-up, national toll
free and international toll free access. See "Business--Services" and
"Business--Network Infrastructure--Access Methods."
Econophone's revenues are derived from minutes of telecommunications traffic
carried. The following table shows the total revenue and billable minutes of use
attributable to Econophone's U.K., continental European and U.S. operations for
the years ended December 31, 1994, 1995 and 1996 and the six months ended June
30, 1996 and 1997. Over time, Econophone expects its European markets to
contribute an increasingly larger percentage of its revenues.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE
United States............................ $ 2,728 $ 8,292 $ 18,185 $ 6,876 $18,896
United Kingdom........................... 3,143 14,173 15,477 10,910 4,201
Continental Europe....................... 2,652 5,025 11,441 5,206 7,349
BILLABLE MINUTES OF USE
United States............................ 5,707 23,411 68,247 20,744 87,747
United Kingdom........................... 4,532 20,592 27,968 16,390 10,136
Continental Europe....................... 1,957 3,856 8,351 3,735 6,732
</TABLE>
Econophone generally prices its services at a discount to the primary
carrier (or carriers) in each of its target markets. Econophone has experienced
and expects to continue to experience declining revenue per minute in all of its
markets as a result of increased competition worldwide, although, due to
technological innovation and substantial available transmission capacity,
transmission costs in the telecommunications industry historically have declined
at a more rapid rate than prices. There can be no assurance that this cost trend
will continue. Industry observers predict that, early in the next decade,
telephone charges will no longer be based on the distance a call is carried. As
a consequence, Econophone would experience a substantial reduction in its
margins on international calls which, absent a significant increase in billable
minutes of traffic carried or charges for additional services, would have a
material adverse effect on Econophone's ability to pay principal of and interest
on the Notes. See "Risk Factors--Risks Associated with Rapidly Changing
Industry; Significant Price Declines" and "Business--Industry Overview."
41
<PAGE>
For prepaid cards, Econophone's revenues are reported net of selling
discounts and commissions and upon usage rather than sale.
Econophone's U.K. revenues were limited in 1996 and during the first six
months of 1997 due to a restructuring of Econophone's U.K. sales and marketing
arrangements resulting from a change in its distribution strategy. In September
1994, Econophone entered into a sales and marketing joint venture with EI in the
United Kingdom. EI engaged in sales and marketing, while Econophone provided
network support, billing and transmission services. Revenues attributable to
sales by the joint venture were included in Econophone's consolidated revenues
and customers of the joint venture were included as customers of Econophone.
After deducting transmission expenses and direct selling expenses incurred by
EI, Econophone was entitled to 50% of the net profits on sales by EI. In
connection with Econophone's change in U.K. distribution strategy, Econophone's
joint marketing arrangement with EI was modified on June 1, 1996, at which time
EI effectively became a carrier customer. This arrangement subsequently was
terminated during December 1996. Econophone's services now are sold in the
United Kingdom primarily through Telco, a majority-owned subsidiary of
Econophone. Telco began marketing efforts during the first quarter of 1997.
During the first six months of 1997, Econophone's U.K. revenues, which primarily
were generated by Telco, were $4.2 million. See "Business--Sales and Marketing."
Econophone has had a competetive advantage in certain EU markets where it
has not been required to charge VAT until recently. The European Union issued a
derogation from the VAT Directive in March 1997. As a result of this derogation,
EU member states, with effect from between January 1, 1997 and July 1, 1997,
began to require telecommunications providers "established" outside of the EU to
charge VAT on telecommunications services provided to EU customers, including
residential customers (who cannot offset the VAT charged to them). The foregoing
change in the VAT regulations may require Econophone to reduce the prices of its
services offered to residential customers in one or more of its EU markets in
order to remain competitive. See "Risk Factors--Risks Associated With Imposition
of VAT."
COST OF SERVICES
Econophone's cost of services is composed of the costs associated with
acquiring switched transmission and leased line capacity. Switched transmission
capacity is acquired on a per-minute basis (with volume discounts) and is,
therefore, a variable cost. Virtually all calls carried by Econophone must be
originated or terminated over another carrier's facilities. Termination and
origination charges on calls generally are paid by Econophone, although in
continental Europe origination charges on calls utilizing local dial-up access
are paid by Econophone's customers and do not constitute costs of Econophone.
Leased transmission capacity is acquired on a fixed cost basis, generally
involving monthly payments regardless of usage levels. Accordingly, once certain
volume levels are reached, leased line capacity is more cost effective than
switched transmission capacity. As Econophone's minutes of traffic carried have
grown, Econophone has obtained better pricing on switched transmission capacity
and from leased lines. The marginal cost of services also has decreased,
independent of volume discounts, due to greater usage of owned transmission
capacity, technological innovation and substantial available third-party
transmission capacity.
The cost of calls transmitted between Econophone's London and New York
switches consists of leased line and IRU costs. Leased line and IRU costs, the
latter of which are included in depreciation and amortization, involve only
fixed costs and no per minute charges and are, therefore, more cost-effective
means of transmitting traffic once certain volume levels are reached. Econophone
has, over time, reduced the average costs of transmitting the London to New York
portion of its calls by increasing its customer traffic. Econophone intends to
acquire the five half-circuits on PTAT-1 and the one on Cantat-3 that correspond
to its existing IRUs during the fourth quarter of 1997. As Econophone expands
its customer base, it will require additional transmission capacity. Its actual
infrastructure requirements will depend upon the capacity of the switches, nodes
and points of presence installed by Econophone and the extent to which it
utilizes compression technology to transmit calls. Based on current and
anticipated availability of
42
<PAGE>
switching and compression equipment and owned and leased transmission capacity,
Econophone believes that it will be able to meet its capacity requirements for
the foreseeable future, although there can be no assurance that this will be the
case. See "Business--Network Infrastructure--Transmission Capacity."
Beginning in October 1997, Econophone will be required to pay a $.35 access
charge to payphone operators for each call made using toll free access from a
payphone in the United States. There can be no assurance that Econophone will be
able to fully pass this cost on to its U.S. calling card and prepaid card
customers or that doing so will not result in a loss of customers. Furthermore,
larger carriers are likely to be able to negotiate lower payphone access charges
than Econophone, which could result in lower pricing on card-based services in
the United States accessed from payphones than that offered by Econophone. The
FCC also has, subject to reconsideration, announced that it will impose charges
on inter-exchange carriers, including Econophone, to support subsidies for
telecommunications services for schools, libraries, rural health care centers
and low income persons. Econophone does not expect these charges to be material
to Econophone, although there can be no assurance that this will be the case.
See "Risk Factors-- Regulatory Restrictions."
SELLING EXPENSES
Econophone has historically sold its services primarily through independent
sales channels in both Europe and the United States. Selling expenses have,
therefore, primarily consisted of commissions paid to agents and EI. To a lesser
extent, Econophone also has incurred selling expenses arising out of advertising
and promotion costs and sales by Econophone employees and expenses related to
its customer service department.
In the fourth quarter of 1996, Econophone began to establish its internal
sales forces in Hamburg, London and Paris, and, in the first quarter of 1997,
Econophone began to establish its internal sales force in Brussels. Beginning in
the fourth quarter of 1996, Econophone also hired senior sales personnel in
continental Europe. The establishment and expansion by Econophone of its
internal sales forces and the hiring of senior sales personnel will increase
significantly its selling expenses due to costs associated with operating and
staffing sales offices. After an initial increase in these costs, Econophone
expects them to decline as a percentage of its continental European revenues
over time. Econophone will continue to utilize indirect channels of distribution
in its European network cities, although these channels will be managed by its
internal sales forces. See "Business--Sales and Marketing."
In the United States, during 1997, Econophone hired senior sales personnel
and sales managers for Baltimore, Connecticut, New Jersey and New York.
Econophone also intends to hire sales managers for other U.S. markets in which
it has or intends to establish a network presence. The addition of sales and
marketing personnel will result in an increase in U.S. selling expenses. After
an initial increase in advance of anticipated revenues, these costs are expected
to decline as a percentage of U.S. revenues over time. See "Business--Sales and
Marketing."
GENERAL AND ADMINISTRATIVE EXPENSES
During 1996, Econophone significantly increased the size of its management
team and established new sales offices in London, Paris, Brussels and Hamburg,
all of which resulted in an increase in general and administrative expenses.
Econophone intends to establish additional sales offices in all of its network
cities, which will further increase general and administrative expenses. General
and administrative expenses will increase substantially as Econophone applies a
portion of the proceeds from the Offering to expand its customer service,
billing, financial reporting and other management information systems and
network management systems and for organizational expenses related to entering
additional markets. Such expenses will be incurred in advance of anticipated
related revenues. After an initial increase in advance of anticipated revenues,
such expenses are expected to decline as a percentage of revenues over time.
43
<PAGE>
FOREIGN CURRENCY EXPOSURE
Econophone is exposed to fluctuations in foreign currencies relative to the
U.S. dollar because Econophone bills in local currency, while transmission costs
are largely incurred in U.S. dollars and interest expense on the Notes will be
in U.S. dollars. For the years ended 1994, 1995 and 1996 and the first six
months of 1997, approximately 66%, 60%, 40% and 37%, respectively, of
Econophone's revenues were billed in currencies other than the U.S. dollar,
consisting primarily of British pounds, Belgian francs and French francs. The
effect of these fluctuations on Econophone's margins for the six months ended
June 30, 1997 was $.5 million or 2.3% of gross margin. As Econophone expands its
operations, a higher percentage of revenues is expected to be billed in
currencies other than the U.S. dollar. Econophone from time to time uses foreign
exchange contracts relating to its receivables to hedge foreign currency
exposure and to control risks relating to currency fluctuations. Econophone does
not use derivative financial instruments for speculative purposes and, at
December 31, 1996 and August 31, 1997, Econophone had no open foreign currency
hedging positions. As Econophone's operations in Europe expand, it intends to
utilize hedging contracts to control risks relating to currency fluctuations.
See "Risk Factors--Devaluation and Currency Risks."
NEW ACCOUNTING PRONOUNCEMENTS
Subsequent to December 31, 1996, the Financial Accounting Standards Board
(the "FASB") issued SFAS No. 128, "Earnings Per Share." This statement
establishes standards for computing and presenting earnings per share ("EPS"),
replacing the presentation of currently required primary EPS with a presentation
of Basic EPS. For entities with complex capital structures, the statement
requires the dual presentation of Basic EPS and Diluted EPS on the face of the
statement of operations. Under this new standard, Basic EPS is computed based on
weighted average shares outstanding and excludes any potential dilution. Diluted
EPS reflects potential dilution from the exercise or conversion of securities
into common stock or from other contracts to issue common stock and is similar
to the currently-required fully diluted EPS. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, Econophone will be required to restate its EPS data for all prior
periods presented. The adoption of this statement is not expected to have a
material effect on Econophone's financial statements.
RESULTS OF OPERATIONS
The following table presents certain data concerning Econophone's results of
operations for the years ended December 31, 1994, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 8,523 $ 27,490 $ 45,103 $ 22,992 $ 30,446
Cost of services...................................... 5,540 19,735 35,369 16,333 24,012
Selling expenses...................................... 549 3,934 5,821 4,101 3,979
General and administrative expenses................... 1,464 3,153 9,013 3,704 8,917
Depreciation and amortization......................... 168 389 1,127 394 1,136
Net income (loss)..................................... 726 121 (6,389) (1,607) (7,825)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Total revenues for the six months ended June 30, 1997 increased
by 32% to $30.4 million on 104.6 million billable minutes of use from $23.0
million on 40.9 million billable minutes of use for the six months ended June
30, 1996. Growth in revenues during the six months ended June 30, 1997 primarily
44
<PAGE>
was attributable to additional minutes of use, particularly in the United
States, offset in part by a substantial decline in prices. At June 30, 1997,
Econophone had approximately 66,200 customer accounts compared to 35,200
customer accounts at June 30, 1996. The increase was primarily attributable to
sales by VoiceNet, which were $8.0 million for the six months ended June 30,
1997 and which accounted for approximately 45,800 customer accounts at June 30,
1997. VoiceNet's relationship with Econophone is non-exclusive and can be
terminated at will by either party.
In the United Kingdom, revenues decreased to $4.2 million from $10.9 million
as a result of the termination of Econophone's joint venture with EI, which had
accounted for all of the U.K. revenue in the first half of 1996, in connection
with Econophone's change in U.K. distribution strategy. This decrease partially
was offset by revenues of $2.6 million during the first half of 1997 from
international and domestic long distance and prepaid card services primarily
attributable to Telco, as well as from carrier services. Average U.K. revenue
per minute decreased from $.67 per minute during the six months ended June 30,
1996 to $.41 per minute during the six months ended June 30, 1997. This
reduction was attributable to price decreases resulting from increased price
competition, as well as lower prices being charged by Telco to its customers
than by Econophone to its joint venture with EI.
In continental Europe, revenues increased by 40% to $7.3 million from $5.2
million. This increase was attributable to an increase in prepaid card services,
primarily in France. Belgian revenues remained flat due to increased price
competition. As a result of the installation of a switch in Brussels and a node
in Antwerp during the first quarter of 1997, Econophone believes that it will be
able to more effectively compete in both of these markets. Average continental
European revenue per minute decreased from $1.39 per minute during the six
months ended June 30, 1996 to $1.09 per minute during the six months ended June
30, 1997. This decrease was due to Econophone's decision to price services more
aggressively to gain market share, in anticipation of its network coming on
line.
In the United States, revenues grew by 174% to $18.9 million from $6.9
million. This increase was due principally to calling card revenues attributable
to sales by VoiceNet, which were $8.0 million during the first half of 1997.
VoiceNet began reselling Econophone's calling card services to end users during
the second quarter of 1996. The remainder of the increase, $2.4 million,
resulted from increases in sales of carrier services, and, to a lesser extent,
international and domestic long distance and prepaid card services. Average U.S.
revenue per minute decreased to $.22 per minute during the six months ended June
30, 1997 from $.33 per minute during the six months ended June 30, 1996. This
reduction was due principally to a reduction in rates by Econophone in response
to increased competition, pricing reductions by larger carriers and sales of a
larger percentage of domestic long distance minutes, which are sold at lower
rates than international minutes.
During the first six months of 1997, Econophone experienced a customer
turnover or "churn" rate of approximately 5%. To date, Econophone's revenues and
margins have not been materially impacted by its "churn" rate.
COST OF SERVICES. Cost of services increased to $24.0 million for the six
months ended June 30, 1997 from $16.3 million for the six months ended June 30,
1996. As a percentage of revenues, cost of services increased to approximately
79% for the six months ended June 30, 1997 from approximately 71% for the six
months ended June 30, 1996. This trend was primarily due to a shift from higher
margin revenue attributable to EI to lower margin revenue attributable to Telco,
and, to a lesser extent, an increase in U.S. carrier traffic. Average cost per
minute for the six month period ended June 30, 1997 decreased to $.23 from $.40
for the six month period ended June 30, 1996.
SELLING EXPENSES. Selling expenses increased to $4.0 million for the six
months ended June 30, 1997 from $4.1 million for the six months ended June 30,
1996, and, as a percentage of revenue, were 13% for the six months ended June
30, 1997 and 18% for the six months ended June 30, 1996. For the six months
ended June 30, 1997, selling expenses primarily consisted of $1.0 million in
expenses associated with Econophone's sales offices in London, Brussels, Hamburg
and Paris, which were opened after June 30,
45
<PAGE>
1996, commissions totalling $2.0 million paid to independent sales
representatives ($.1 million) and VoiceNet ($1.9 million), a reseller selling
Econophone's U.S. calling card services to end users, and expenses ($.5 million)
attributable to Econophone's customer service department, which has been
substantially enlarged since June 30, 1996. For the six months ended June 30,
1996, selling expenses primarily consisted of expenses related to EI and
commissions paid to independent sales agents.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $8.9 million for the six months ended June 30, 1997 from $3.7
million for the six months ended June 30, 1996, and, as a percentage of
revenues, increased to 29% for the six months ended June 30, 1997 from 16% for
the six months ended June 30, 1996. The increase in general and administrative
expenses of $2.4 million was attributable primarily to payroll costs of
additional management and staff in the areas of finance, network management and
information systems at Econophone's New York, New York, Brooklyn, New York and
College Station, Texas facilities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $1.1 million for the six months ended June 30, 1997 from $.4
million for the six months ended June 30, 1996. This increase was substantially
due to the depreciation expense associated with upgrades in Econophone's switch
in New York and installation of multiplexing equipment in New York (totalling
$.7 million) and London ($.2 million) and the depreciation of IRUs and other
equipment ($.2 million).
BAD DEBT WRITE-OFFS. Econophone had bad debt write-offs of $.7 million for
the first six months of 1997, as compared to $.7 million for the first six
months of 1996. To date, bad debt write-offs have not had a material effect on
Econophone's revenues or margins.
INTEREST EXPENSE. Econophone had $285,000 of interest expense during the
first half of 1997, as compared to interest expense of $78,000 during the first
half of 1996. Interest expense will increase substantially as a result of the
Offering.
NET LOSS. Econophone had a net loss of $7.8 million during the first half
of 1997, compared to a net loss of $1.6 million during the first half of 1996.
Net loss will increase substantially over the near term as Econophone incurs
interest expense on the Notes and uses the proceeds of the Offering in advance
of anticipated related revenues.
1996 COMPARED TO 1995
REVENUES. Total revenues for 1996 increased by 64% to $45.1 million on
104.6 million billable minutes of use from $27.5 million on 47.9 million
billable minutes of use for 1995. Growth in revenues during 1996 was generated
primarily from an increase in minutes of traffic in existing markets, offset in
part by declining prices. At December 31, 1996, Econophone had approximately
24,700 customer accounts, compared to approximately 26,400 customer accounts at
December 31, 1995. The reduction in the number of customer accounts was
attributable to the termination of Econophone's relationship with EI discussed
below.
In the United Kingdom, revenues grew 9% to $15.5 million. Econophone's U.K.
revenues were limited in 1996 due to a restructuring of Econophone's U.K. sales
and marketing arrangements resulting from a change in its distribution strategy.
For the first five months of 1996, U.K. revenues increased substantially over
the corresponding period in 1995. On June 1, 1996, Econophone effectively
terminated its joint venture with EI, pursuant to which EI had the exclusive
right to sell Econophone's services in the United Kingdom. In exchange for
Econophone being granted the right to compete in the United Kingdom, Econophone
forgave a net receivable of $2.0 million and agreed to sell transmission to EI
at lower rates than transmission was sold to the joint venture, thereby
substantially reducing revenues on U.K. sales during the second half of 1996 as
compared to the corresponding period in 1995. Econophone ceased providing
transmission services to EI during November 1996 due to payment delinquencies by
EI and terminated its relationship with EI during December 1996. In connection
with the termination, EI agreed
46
<PAGE>
to pay Econophone $2.2 million on an agreed upon payment schedule, substantially
all of which has been paid. In addition, Econophone agreed not to solicit sales
from customers of the joint venture, subject to certain permitted exceptions.
See "Risk Factors--Dependence on Carrier and Other Principal Customers," and
"Business--Sales and Marketing."
During 1996, average U.K. revenue per minute was $.55, down from $.69 in
1995. This reduction was attributable to price decreases resulting from
increased price competition, as well as the modification of Econophone's
relationship with EI on June 1, 1996, which included a reduction in prices
charged to EI as compared to the prices charged to Econophone's joint venture
with EI.
In continental Europe, revenues increased by 128% to $11.4 million. This
increase was attributable primarily to growth in prepaid card services of $7.2
million due to full year sales and increased marketing and, to a lesser extent,
growth in calling card services of $4.2 million. Average continental European
revenue per minute was $1.37, up from $1.30 in 1995. This increase was
principally due to an increase in higher priced prepaid card traffic.
In the United States, Econophone's revenues grew 119% to $18.2 million,
primarily as a result of substantial increases in sales of international and
domestic long distance services of $7.8 million, prepaid card services of $2.6
million (which were introduced during the second half of 1995 and generated
minimal revenue during such year) and carrier services of $5.9 million, as well
as the introduction of calling card services of $1.9 million, which were sold
primarily through VoiceNet. Average U.S. revenue per minute was $.27 in 1996,
down from $.35 in 1995. This decrease was due principally to a reduction in
rates resulting from increased price competition attributable to pricing
reductions by larger carriers and sales of a larger percentage of domestic long
distance minutes, which are sold at lower rates than international minutes.
COST OF SERVICES. Cost of services increased to $35.4 million for 1996 from
$19.7 million for 1995 and, as a percentage of revenues, increased to 78% for
1996 from 72% for 1995. The increase as a percentage of revenues was primarily
due to the modification of Econophone's relationship with EI on June 1, 1996,
pursuant to which Econophone agreed to charge a lower transmission rate to EI,
thereby reducing margins on sales to EI. Average costs per minute for 1996
decreased to $.34 from $.41 for 1995. This decrease was attributable to volume
discounts resulting from the higher volume of traffic carried and general price
reductions on transmission capacity.
SELLING EXPENSES. Selling expenses increased to $5.8 million for 1996 from
$3.9 million for 1995, and, as a percentage of revenues, decreased to 13% in
1996 from 14% in 1995. These expenses consisted primarily of expenses related to
EI and commissions paid to independent sales agents.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $9.0 million for 1996 from $3.2 million for 1995, and, as
percentage of revenues, increased to 20% in 1996 from 11% in 1995, respectively.
This increase was primarily due to increases in the size of Econophone's
customer service department and, starting in August 1996, a substantial increase
in Econophone's management and staff in the areas of finance, network management
and information systems at its New York, New York, Brooklyn, New York and
College Station, Texas facilities, and the establishment of sales offices in
London during the second quarter of 1996 and in Paris, Brussels and Hamburg
during the third quarter of 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $1.1 million for 1996 from $.4 million for 1995. This increase was
substantially due to the depreciation expense associated with upgrades in
Econophone's switch in New York and installation of multiplexing equipment in
New York and London.
BAD DEBT WRITE-OFFS. Econophone had bad debt write-offs of $.2 million
during 1996, compared to bad debt write-offs of $.2 million during 1995.
47
<PAGE>
1995 COMPARED TO 1994
REVENUES. Total revenues for 1995 increased to $27.5 million on 47.9
million billable minutes of use from $8.5 million on 12.2 million billable
minutes of use for 1994. Growth in revenues during 1995 was generated primarily
from an increase in minutes of traffic in existing markets and the introduction
of prepaid card services. At December 31, 1995, Econophone had approximately
26,400 customer accounts, compared to approximately 8,100 customer accounts at
December 31, 1994.
In the United Kingdom, revenues grew to $14.2 million from $3.1 million
primarily as a result of increased sales of calling card services by EI, which
began operations during September 1994, as well as the initiation of prepaid
card services by EI. During both 1995 and 1994, average U.K. revenue per minute
was $.69.
In continental Europe, revenues increased to $5.0 million from $2.7 million.
This increase was attributable to increases in calling card sales and the
introduction of prepaid card services, in each case primarily in Belgium. During
1995, average continental European revenue per minute was $1.30, down from $1.36
in 1994. This decrease was due to a permanent price reduction by Econophone in
Belgium in response to a large rate reduction by the local PTO.
In the United States, revenues grew to $8.3 million from $2.7 million. This
growth was attributable to substantial increases in sales of international and
domestic long distance services and carrier services. During 1995, average U.S.
revenue per minute was $.35, down from $.48 in 1994. This decrease was
principally due to increased carrier traffic which has lower revenue per minute
than other traffic.
COST OF SERVICES. Cost of services increased to $19.7 million for 1995 from
$5.5 million for 1994, and, as a percentage of revenues, increased to 72% for
1995 from 65% for 1994. This trend was primarily due to changes in geographic
and service revenue mix. Average cost per minute for 1995 decreased to $.41 from
$.45 for 1994.
SELLING EXPENSES. Selling expenses increased to $3.9 million for 1995 from
$.5 million for 1994 and, as a percentage of revenues, increased to 14% in 1995
from 6% in 1994. These expenses principally consisted of commissions paid to
independent sales representatives and EI and the increase was attributable to a
higher rate of commission paid on sales by EI than on other sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.2 million for 1995 from $1.5 million for 1994 and, as a
percentage of revenues, decreased to 11% from 17% for 1995 and 1994,
respectively. This decrease was due to significant growth in revenues during
1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $.4 million for 1995 from $.2 million for 1994. This increase was
due to the depreciation expense associated with upgrades in Econophone's New
York switch and multiplexing equipment and the depreciation of IRUs between New
York and London.
BAD DEBT WRITE-OFFS. Econophone had bad debt write-offs of $.2 million
during 1995, compared to bad debt write-offs of $.2 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1997, Econophone had approximately $78.0 million in cash and
cash equivalents, excluding the Pledged Securities but including unused net
proceeds of the Offering, which are invested in short term, interest-bearing,
investment grade securites. Econophone's net cash used by operating activities
was $7.7 million for the six months ended June 30, 1997, primarily due to a net
loss of $7.8 million and an increase in accounts receivable of $4.8 million,
offset by an increase in accounts payable of $4.9 million and depreciation and
amortization of $1.1 million. Cash used for investing in property and equipment
of $3.3 million for the six months ended June 30, 1997 was primarily
attributable to the
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implementation and expansion of Econophone's European network. Cash provided by
financing activities of $5.3 million was related to cash received from the sale
of the Bridge Notes of $7.0 million, and debt incurred to finance capital
expenditures of $.1 million offset by regular monthly payments totalling $.1
million and certain accelerated payments on existing debt totalling $1.7
million.
Econophone's net cash used by operating activities was $6.0 million for 1996
and net cash provided by operating activities was $2.0 million and $.5 million
for 1995 and 1994, respectively. Negative cash flow from operating activities in
1996 primarily was attributable to an operating loss of $6.4 million for such
year. Cash used for investing in property and equipment was $4.2 million, $1.2
million and $.7 million for 1996, 1995 and 1994, respectively. Such property and
equipment was primarily utilized in connection with the implementation and
expansion of Econophone's network. Cash provided by financing activities was
$16.4 million in 1996, primarily reflecting net cash proceeds of $13.1 million
from the sale of Series A Preferred Stock to Princes Gate, an affiliate of
Morgan Stanley, net borrowings of $3.6 million less shareholder distributions,
in order to pay income taxes with respect to the period in which Econophone was
a sub-Chapter S corporation, of $.2 million. Cash used in financing activities
was $.8 million in 1995, reflecting net debt repayments of $.3 million and
shareholder distributions, in order to pay income taxes with respect to the
period in which Econophone was a sub-Chapter S corporation, of $.5 million. Cash
provided by financing activities was $.3 million in 1994 and was attributable to
net borrowings.
Econophone expects capital expenditures during 1997 to be approximately
$14.0 million, of which $5.8 million was expended during the first half of 1997.
Capital expenditures for 1997 relate primarily to the further implementation and
expansion of Econophone's network, including the upgrade of Econophone's New
York switch and the purchase of switches or nodes for Amsterdam, Antwerp,
Athens, Berlin, Brussels, Hamburg, London, Paris and Zurich, the purchase of
additional transatlantic IRUs and the expansion of Econophone's back-office
capabilities, including its management information and network management
systems. Econophone intends to fund its capital expenditures for the foreseeable
future with the proceeds of the Offering and, to the extent available on
attractive terms, vendor financing. Econophone expects to continue to make
significant capital expenditures in future years as it continues to expand the
geographic scope of its services in Europe and the United States and to increase
its network capabilities and network infrastructure. Econophone's actual capital
expenditures and cash requirements will depend on numerous factors, including
the nature of future expansion, economic conditions, competition, regulatory
developments and the ability to incur debt and make capital expenditures under
the Indenture, the NTFC Agreement and the terms of the Series A Preferred Stock.
From its inception until November 1996, Econophone relied primarily on
founders' capital, equipment financing and internally generated funds to finance
its operations and growth. From November 1996 until the consummation of the
Offering, Econophone had three primary sources of funding: (i) Princes Gate;
(ii) NTFC; and (iii) the Note Purchase Agreement.
On November 1, 1996, Princes Gate purchased 140,000 shares of Series A
Preferred Stock for $14.0 million, less certain fees, resulting in net proceeds
to Econophone of $13.1 million. As of September 1, 1997, the shares of Series A
Preferred Stock purchased by Princes Gate were convertible into shares of Common
Stock representing approximately 14.6% of the Common Stock of Econophone on an
as converted basis (without giving effect to the issuance or exercise of the
Warrants or any options issued by Econophone). The proceeds of the issuance to
Princes Gate were used to fund the expansion of Econophone's network, the
implementation of its marketing strategy and operations generally, including
operating losses. See "Certain Transactions--Investment by Princes Gate" and
"Certain Transactions-- Investment by Princes Gate--Series A Preferred Stock."
On May 28, 1996, Econophone entered into a credit facility with NTFC, which
was increased on March 27, 1997 pursuant to the NTFC Agreement, permitting
Econophone to borrow up to $5.0 million to purchase equipment and to pay certain
other related expenses. As of August 31, 1997, $4.2 million, some of which has
been repaid, has been drawn down under two tranches of the facility to purchase
equipment and
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to pay certain other related expenses. These tranches are to be paid in 60 equal
monthly installments and mature between July 1, 2001 and April 1, 2002 at an
interest rate equal to the 90-day commercial paper rate plus 395 basis points,
which will be adjusted quarterly. As of August 31, 1997, $4.2 million of
indebtedness was outstanding under the NTFC Agreement at an interest rate of
5.63%. All of the equipment purchased using borrowings from NTFC has been
pledged to NTFC to secure such borrowings. See "Description of Certain
Indebtedness--NTFC Vendor Financing."
On April 24, 1997, Econophone entered into the Note Purchase Agreement with
Morgan Stanley Group, pursuant to which Morgan Stanley Group agreed to purchase
from Econophone up to $15,000,000 of Bridge Notes. At such time, Econophone paid
to Morgan Stanley Group a commitment fee of $225,000 and agreed to pay a further
fee of 2% of the principal amount of each issuance after the aggregate principal
amount of Bridge Notes issued exceeded $5.0 million. A total of $7.0 million of
Bridge Notes were issued under the Note Purchase Agreement. The net proceeds
from the Bridge Notes purchased by Econophone were $6.6 million and were used to
fund equipment and other capital expenditures and operations. Immediately
following the consummation of the Offering, all of the outstanding Bridge Notes
were redeemed and all accrued interest thereon was paid. Econophone is not
entitled to place any additional Bridge Notes under the Note Purchase Agreement
and the facility represented by the Note Purchase Agreement has terminated. See
"Certain Transactions--Bridge Funding by Morgan Stanley Group."
On July 1, 1997, Econophone consummated the Offering. In connection with the
Offering, Econophone issued $155.0 million in aggregate principal amount of
Original Notes and Warrants to purchase in the aggregate 1,265,885 shares of
Common Stock. The net proceeds of the Offering were approximately $148.1
million. Of this amount, approximately $57.4 million was used to purchase the
Pledged Securities, which will be used to make the first six scheduled interest
payments on the Notes. The net proceeds of the Offering are expected to be used
as set forth under "Use of Proceeds."
The net proceeds from the Offering are expected to fund Econophone's planned
expansion and operating losses until it generates positive cash flow; however,
this is a forward-looking statement and there can be no assurance in this
regard. The ability of Econophone to generate more than insignificant positive
cash flow, which is not expected to occur prior to 1999, and to meet its debt
service obligations will be subject to Econophone's successful implementation of
its operating strategy, as well as to financial, competitive, business,
regulatory and other factors beyond Econophone's control. If Econophone is
unable to generate cash flow from operations that, together with its restricted
cash, is sufficient to meet its debt service requirements, it may be required to
refinance all or a portion of its indebtedness or raise additional capital.
There can be no assurance that any such refinancing would be possible on terms
that would be acceptable to Econophone or that any additional financing could be
obtained. See "Risk Factors--High Leverage; Future Losses and Negative Cash
Flow."
See "Certain Indebtedness" for a description of certain other outstanding
indebtedness of Econophone. Econophone's scheduled principal and interest
payments in respect of such other indebtedness during the last six months of
1997 and during 1998 are $1.5 million and $1.9 million, respectively.
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BUSINESS
Econophone is a switch-based provider of long distance telecommunications
services in certain major U.S. and western European markets. Econophone's
customer base consists primarily of small- and medium-sized businesses,
residential customers and other telecommunications carriers, with a focus on
customers with significant international calling needs. In the United States and
the United Kingdom, Econophone provides principally international and domestic
long distance, calling card, prepaid and carrier services. In continental
Europe, Econophone provides principally international long distance, calling
card and prepaid services.
Econophone is a New York corporation. Econophone was originally formed in
1992 under the name of "Switchtel Communications Corp." In 1992 it changed its
name to "Econophone, Inc." Its principal executive offices are located at 45
Broadway, New York, New York 10006. Its main telephone number is (212) 444-6991.
INDUSTRY OVERVIEW
International telecommunications is one of the fastest growing segments of
the long distance industry, having experienced a compounded growth in total
minutes of 14% per annum from 1989 to 1995. Forecasts by the International
Telecommunications Union (the "ITU"), a worldwide telecommunications
organization under the auspices of the United Nations, project this growth to
continue at approximately 12% per annum through the year 2000. Based on this
estimate, worldwide international long distance traffic is projected to increase
from approximately 60 billion minutes in 1995 to over 100 billion minutes by the
year 2000. The market for these services is highly concentrated in more
developed countries, with approximately 43% and 26% of 1995 worldwide
international long distance traffic originating in Europe and the United States,
respectively.
The international telecommunications industry has been undergoing regulatory
liberalization generally, which has resulted in increased competition, lower
prices and increased demand for telecommunications services worldwide.
Liberalization has coincided with the construction of additional infrastructure
and technological innovation in the telecommunications industry. Fiber optic
cable, which has widely replaced wire lines for the transmission of the long
distance portion of calls, improvements in computer software and digital
compression technology have dramatically increased the capacity, speed and
flexibility of telephone lines and have substantially eliminated capacity
constraints as a technical barrier to entry for new international telephone
companies. Liberalization of the regulation of telecommunications services and
technological developments have also resulted in the broadening of service
offerings, including advanced and enhanced services such as voicemail, faxmail
and electronic mail, itemized billing, calling cards and intranet and Internet
services. Also as a result of these trends, the marginal transmission costs per
minute of an international call have decreased substantially and at a more rapid
rate than the decline in prices to customers.
CONTINENTAL EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
The continental European international long distance market is the largest
in the world, generating approximately 22 billion minutes or 36% of
international calling volume originating in continental Europe in 1995. The
continental European PTOs generally have had monopolies on providing telephone
services from their respective countries, making the price of international
telephone calls from continental Europe much higher than comparable calls
initiated from the United States or the United Kingdom. Furthermore, customers
in many continental European markets have generally not been able to obtain
value-added features that are readily available in the United States, such as
touch tone dialing, voice mail and other enhanced services. Regulatory
liberalization, together with significant advances in technology that have
decreased the cost of providing services and allowed the provision of
sophisticated value-added features, is facilitating competition with European
PTOs by emerging telecommunications service providers.
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Econophone believes that the regulatory liberalization currently underway in
many countries in continental Europe could lead to market developments similar
to those that occurred in the United States and the United Kingdom upon
regulatory liberalization of long distance telecommunications services in those
countries. Regulatory liberalization in the United States and the United Kingdom
has resulted in an increase in call traffic and the emergence of multiple new
telecommunications service providers of varying sizes. In addition, significant
reductions in prices, particularly for domestic long distance calls, as well as
improvements in both the services offered and the level of overall
responsiveness to customers, have occurred. Although pricing has become
competitive in both the United States and the United Kingdom, marginal costs
have declined significantly. There can be no assurance, however, that the
continental European experience will mirror those in the United States or the
United Kingdom or that competitive and other factors will not adversely impact
profitability of companies in the industry.
UNITED KINGDOM LONG DISTANCE MARKET
Since 1991, the U.K. government has sought to encourage increased
competition in telecommunications services, including international
telecommunications services. The price of international calls made from the
United Kingdom has decreased significantly since 1991 due to increased
competition and the downward pressure exerted on British Telecom's prices by
Oftel. As a consequence of these actions, the United Kingdom now has a dynamic
telecommunications market, with over 150 public telecommunications operators
licensed to operate in the U.K. market.
The interconnection regime in the United Kingdom provides operators with the
ability to obtain cost based, non-discriminatory charges for interconnection
services. Oftel regulates the interconnection charges charged to other operators
by British Telecom and other PTOs. Oftel also has the power to intervene and
determine charges and other terms if an operator believes that it is not being
offered fair pricing. Oftel has stated that the category of companies that
qualify for interconnection services consist of those network operators that are
making a significant contribution to infrastructure competition by installing
transmission capacity or any international simple resale operator making a
significant contribution to competition in the international market. Econophone
believes it qualifies as one of the latter.
In August 1996, the U.K. government opened up to competition the provision
of international facilities-based services, which until then only British
Telecom and Mercury had been authorized to provide. Econophone was awarded an
international facilities based license (an "IFL") during the second quarter of
1997, which enables Econophone to provide international services over its own
international facilities. As a result of acquiring an IFL, Econophone intends to
acquire the six half-circuits on PTAT-1 and Cantat-3 that correspond to those
owned by Econophone during the fourth quarter of 1997. See "-- Network
Infrastructure--Transmission Capacity."
The United Kingdom is the favored hub for international traffic originating
in continental Europe due to the availability of relatively inexpensive
transmission capacity to and from the United Kingdom. This preference is
expected to continue as rates for international services are further reduced as
a result of additional competition.
UNITED STATES LONG DISTANCE MARKET
Approximately 15.9 billion minutes or 26% of global international calling
volume originated in the United States in 1995. According to estimates by the
FCC, the industry is large and has grown consistently, with aggregate
U.S.-originated international long distance telephone traffic rising from
approximately 6.8 billion minutes in 1989 to approximately 15.9 billion minutes
in 1995, a compound annual growth rate of approximately 15%. The growth of the
U.S.-originated international long distance market was initially attributable to
regulatory liberalization and the decrease in prices that accompanied the onset
of competition. Regulatory liberalization and the resulting competition also
have led to improvements in service offerings and customer service.
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The profitability of the U.S.-originated international long distance market
is principally driven by the difference between billed revenues and settlement
rates (i.e., the rates paid to other carriers to terminate an international
call). Increased competition arising from regulatory liberalization and pressure
arising from increased global trade have brought about reductions in settlement
rates and end-user prices, reducing termination costs for U.S. based carriers.
Based on FCC data for the period 1989 through 1995, per minute settlement
payments by U.S. based carriers to foreign PTOs fell 30%, from $.70 per minute
to $.49 per minute. However, over this same period, per minute international
billed revenues fell only 13%, from $1.02 in 1989 to $.89 in 1995. As a result,
gross profit per outbound international minute (before local access charges)
grew from $.32 in 1989 to $.40 in 1995, a 28% increase. Econophone believes that
international long distance will continue to provide substantial gross profit
per minute, although there can be no assurance in this regard and some industry
observers have predicted otherwise. See "Risk Factors-- Risks Associated with
Rapidly Changing Industry; Significant Price Declines."
Although Econophone focuses on the international telecommunications market,
it also provides domestic long distance services to many of its customers and,
as part of its strategy, is increasing its U.S. domestic long distance business.
Although the domestic market is much larger than the U.S.-originated
international long distance market, the profit per minute of use for
international traffic has generally been higher than for domestic traffic.
STRATEGY
Econophone's strategy is to expand into additional geographic markets in
western Europe and the United States, with a focus on markets that generate
substantial international calling traffic, add customers in its existing markets
and deliver an expanded portfolio of features and services to its customers.
Econophone intends to implement its strategy by continuing to expand its
network, broadening its sales and marketing efforts and developing and
introducing innovative services and features. Over time, Econophone expects its
European markets to contribute an increasing percentage of its revenues.
- EXPAND INTO NEW MARKETS. Econophone recently has installed switches in
Brussels, London and Paris and nodes in Antwerp and Hamburg and intends to
install nodes in Amsterdam, Athens, Berlin and Zurich during the remainder
of 1997. Each of these cities will be connected by leased line or IRU to
another Econophone network city. Econophone has or will establish internal
sales forces and retain independent sales representatives in each of these
cities. Econophone intends to enter additional markets in western Europe
and the United States as market and regulatory conditions warrant. See
"--The Econophone Network--European Expansion," "--The Econophone
Network--U.S. Expansion" and "--Regulation."
- ADD CUSTOMERS IN EXISTING MARKETS. To date, Econophone primarily has sold
its services through independent sales representatives, who have not been
supported or supplemented by a significant internal sales force. Since the
fourth quarter of 1996, Econophone has begun to establish internal sales
forces in its network cities, substantially increase its number of
independent sales representatives and hire senior sales personnel. Under
Econophone's marketing strategy, its internal sales forces generally
provide support to independent sales representatives and concentrate on
sales to small- and medium-sized businesses and to other carriers, while
independent sales representatives generally concentrate on residential
sales. Econophone's internal sales forces also make local advertising
decisions and enhance Econophone's local presence. Econophone believes
that local internal sales forces will substantially enhance market
acceptance of the Econophone brand and improve the performance of its
independent sales representatives. See "--Sales and Marketing."
- CONTINUE TO DEVELOP AND INTRODUCE INNOVATIVE SERVICES AND FEATURES.
Econophone's software development group designs value-added features and
integrates these features into Econophone's services and network. During
1997, Econophone plans to introduce voice mail, conference calling,
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the ability to access account information via the Internet and "E-Gram,"
an enhanced e-mail service. See "--Services--Value-added Features."
SERVICES
The following table summarizes Econophone's current service offerings by
principal geographic market:
<TABLE>
<CAPTION>
GEOGRAPHIC MARKET
-------------------------------------------------
<S> <C> <C> <C>
UNITED CONTINENTAL UNITED
KINGDOM EUROPE(1) STATES
--------------- ----------------- ------
International Long Distance.................................. x x x
Domestic Long Distance....................................... x x
Calling Card Services........................................ x x x
Prepaid Services............................................. x x x
Carrier Services............................................. x x
</TABLE>
- ------------------------
(1) Consists of selected cities in Belgium, France, Germany, Greece and The
Netherlands. Not all services listed are provided in all continental
European markets.
INTERNATIONAL AND DOMESTIC LONG DISTANCE SERVICE
"International and domestic long distance service" is service that is
accessed from the customer's billing location using "1xxx" access in the United
Kingdom, "1+" access in the United States or local dial-up access in continental
Europe. Econophone's international and domestic long distance service generally
enables customers to call to any destination. However, in continental Europe,
due to regulatory restrictions, to a lesser extent, Econophone also intends to
market this service as a virtual private network or "closed user group" service,
which provides customers with calling to a preprogrammed group of locations.
Virtual private network customers are able to access the local Econophone switch
or node and any destination in their preprogrammed calling group using
abbreviated dialing codes. See "--Network Infrastructure--Access Methods."
Econophone introduced international and domestic long distance service using
"lxxx" access in the United Kingdom in the third quarter of 1996, although it
did not begin aggressively marketing these services until 1997. These services
accounted for $100,000 (less than 1%) of Econophone's total revenues in 1996 and
$1.4 million or 5% of total revenues during the first six months of 1997,
although Econophone also generated U.K. revenues during the same periods from
international and domestic long distance calls using calling cards. In 1996,
international and domestic long distance service in the United States accounted
for $7.7 million or 17% of Econophone's revenues. During the first six months of
1997, these services accounted for $4.3 million or 14% of Econophone's revenues.
Econophone began offering international long distance service in continental
Europe at the end of the first quarter of 1997, and such services accounted for
less than $100,000 (less than 1%) of Econophone's total revenues during the
first six months of 1997.
UNITED KINGDOM. Econophone has provided international and domestic long
distance service in the London area since the third quarter of 1996. Since April
1997, Econophone has been able to provide this service on a U.K.-wide basis and
is in the process of introducing this service in selected additional U.K.
markets. Prior to that time, Econophone was able to provide U.K. international
and domestic long distance service only in London. See "--The Econophone
Network--European Expansion" and "--Network Infrastructure."
CONTINENTAL EUROPE. Econophone has offered international long distance
service to customers in Athens since 1996, to customers in Hamburg since
February 1997 and to customers in Antwerp, Brussels
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and Paris since March 1997. Econophone also intends to introduce international
long distance service in Amsterdam, Berlin and Zurich during 1997. Due to
regulatory restrictions, Econophone does not presently offer domestic long
distance service in continental Europe and, at present, Econophone cannot offer
intra-European international long distance service other than from its network
cities on a cost efficient basis. In addition, until January 1, 1998, in France,
applicable regulations prohibit Econophone and other private service providers
from providing unrestricted international long distance service utilizing local
dial-up access. However, prior to that time, Econophone may use its Paris switch
to collect virtual private network traffic. In France, Econophone also may
continue to provide card-based services utilizing international toll free
access. See "--Regulation--France."
UNITED STATES. Econophone has offered international and domestic long
distance service in the New York metropolitan area since March 1994 and began to
offer these services in Baltimore, Connecticut, New Jersey, Philadelphia and
Washington, D.C. during the first quarter of 1997. Econophone intends to
introduce these services in certain other geographic areas (primarily cities)
that generate substantial international long distance calling traffic. See
"--The Econophone Network--U.S. Expansion."
CALLING CARD SERVICES
In continental Europe, Econophone believes that a substantial portion of its
calling card customers use Econophone's service from their home or office as an
alternative to the PTO for international calls. In contrast, in the United
Kingdom and the United States, Econophone's calling cards are sold to customers
who use its calling card service for convenience when traveling. Over time, in
each of its continental European network cities, Econophone intends to migrate
its home- and office-based calling card customers to its international long
distance service. Its calling card service will continue to be offered in
continental Europe as a premium travel service.
Econophone's calling card customers are issued an identification or "PIN"
number that permits them to access Econophone's network. Econophone's calling
card services are sold in both Europe and the United States and can be used in
over 40 countries.
In the United Kingdom and the United States, Econophone's calling card
service is accessed by dialing a national toll free number. From other
countries, calling card customers access Econophone's services by dialing an
international toll free number.
Econophone offers calling card customers in the United Kingdom and the
United States competitive rates on calls to domestic and international
locations. In continental Europe, Econophone offers calling card customers
competitive rates on intercontinental card-based calls. Due to the high costs
resulting from international toll free access, which involves the transmission
of calls to Econophone's New York or London switch, and subsequent transmission
of calls back to continental Europe, Econophone is unable to offer competitive
rates on intra-European calls made by calling card customers. See "--The
Econophone Network."
In 1996, calling card service in the United Kingdom, continental Europe and
the United States accounted for $8.9 million, $4.2 million and $1.9 million, or
20%, 9% and 4%, of Econophone's revenues, respectively. During the first six
months of 1997, calling card service in the United Kingdom, continental Europe
and the United States accounted for $.3 million, $2.0 million and $8.0 million,
or 1%, 6% and 26%, of Econophone's revenues, respectively. Substantially all of
Econophone's U.S. calling card sales currently are attributable to VoiceNet, a
reseller of Econophone's calling card services. See "Risk Factors-- Dependence
on Carriers and Other Principal Customers."
PREPAID SERVICES
Econophone's prepaid card service is a pre-paid version of its calling card.
Econophone's prepaid card has similar features and is used in the same manner as
its calling card. Econophone's prepaid card
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generally can be used from the United Kingdom, the United States, Belgium,
Canada, Germany, France, Israel, The Netherlands, and Switzerland, although it
also sells prepaid cards that can be used only from the country in which they
are sold. Econophone believes that it is an early entrant into the market for
prepaid services in continental Europe.
In 1996, prepaid card services in the United Kingdom, continental Europe and
the United States accounted for $1.0 million, $7.2 million and $2.6 million, or
2%, 16% and 6%, of Econophone's revenues, respectively. During the first six
months of 1997, prepaid card services in the United Kingdom, continental Europe
and the United States accounted for $.9 million, $5.6 million and $1.7 million,
or 3%, 18% and 6%, of Econophone's revenues, respectively.
Econophone's software development group has developed a new prepaid service
called "Debit Phone," which currently is in testing and is expected to be
introduced by the end of 1997. Debit Phone will allow customers in the United
Kingdom and the United States to access Econophone's services from their homes
on a prepaid basis utilizing "1xxx" or "1+" access. When the customer makes a
domestic or international long distance call, Econophone's switch automatically
will recognize the customer's telephone number and deduct the cost of the call
from the customer's prepaid account balance. Debit Phone customers will be able
to replenish their balances on line by credit card or by purchasing vouchers.
Customers also will be able to access their balance by phone using voice
prompts. Econophone believes that this service will enable it to broaden its
addressable market by appealing to cost-conscious callers.
CARRIER SERVICES
In both the United Kingdom and the United States, Econophone resells
transmission capacity to carrier customers who use the transmission capacity to
service their end-user customers.
Carrier services are sold at substantially lower margins than Econophone's
other services. However, because carrier customers purchase transmission
capacity in bulk, these services allow Econophone to increase the amount of
transmission capacity that it purchases, enabling it to obtain volume discounts
on transmission capacity from its vendors and, therefore, generate higher
margins and/or offer better pricing on its other services. In addition, the sale
of transmission capacity on Econophone's IRUs and leased lines allows Econophone
to generate additional revenues on transmission lines operating at less than
full capacity without incurring significant marginal costs.
Carrier customers frequently change vendors based on small differences in
price and certain carrier customers have subjected and could in the future
subject Econophone to credit risks. Econophone ceased providing transmission
services to EI as a result of disputes following payment delinquencies by the
latter. Among other things, the parties agreed to restructure EI's payment
terms. Substantially all amounts due to Econophone by EI pursuant to the terms
of the restructing have been paid. See "Risk Factors-- Dependence on Carrier and
Other Principal Customers" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In 1996, sales of transmission capacity to carrier customers in the United
Kingdom and the United States accounted for $5.5 million and $6.0 million, or
12% and 13%, of Econophone's revenues, respectively, or 25% of total revenues.
During the first six months of 1997, these sales in the United Kingdom and the
United States accounted for $1.2 million and $5.0 million, or 4% and 16%, of
Econophone's revenues, respectively, or 20% of total revenues.
In January 1997, Econophone entered into an agreement (the "UniqueAir
Agreement"), with UniqueAir Limited, one of the largest independent cellular
service providers in the United Kingdom. Pursuant to the UniqueAir Agreement,
Econophone will provide international transmission services for a portion of
UniqueAir's international calls. The interconnection between Econophone and
UniqueAir is in testing and Econophone has been providing transmission services
to UniqueAir since the third quarter of 1997. The UniqueAir Agreement also
contemplates that Econophone may provide international and
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domestic long distance and calling card service to UniqueAir's customers. The
UniqueAir Agreement is not exclusive and is terminable by either party on six
months' prior notice.
OTHER SERVICES
TOLL FREE SERVICE. Econophone provides domestic toll free service (i.e.,
"800" or "888" service) to customers in the United States and the United
Kingdom. This service is targeted at customers who have a substantial number of
incoming domestic long distance calls, such as mail order companies. Customers
of Econophone's toll free service are assigned a toll free number. Calls to the
toll free number are routed to an Econophone switch. From there, the call is
transmitted to the customer's location in the same manner as other calls routed
through the switch.
DEDICATED ACCESS SERVICE. Customers using this service lease a transmission
line that connects the customer's business directly to an Econophone switch or
node. By leasing a direct line, the customer avoids local access charges and can
reduce its cost of services. This service is marketed to high volume customers.
Econophone presently offers dedicated access service in the United States and
intends to introduce dedicated access service in the United Kingdom and in its
continental European network cities during 1997.
During 1996 and the first six months of 1997, sales of toll free and
dedicated access service accounted for an insignificant amount of Econophone's
revenues. In its markets other than Athens, where Econophone intends to
primarily offer dedicated access service, Econophone expects that revenues from
these services will represent a relatively small portion of its revenues.
VALUE-ADDED FEATURES
Econophone's software development group designs value-added features and
integrates these features into Econophone's services and network. Econophone
provides customers with value-added features such as speed dialing, redial and
multi-lingual voice prompts. In addition, Econophone's customers can obtain
detailed billing information, which is particularly important for business
users, including breakdowns of usage by account code and department. Customers
also are able to obtain pricing and certain other information via the Internet.
Callers in many European markets are not able to obtain these value-added
features from their PTO.
Econophone intends to continue to introduce new value-added features. For
example, during 1997, Econophone intends to introduce voicemail, conference
calling capability and the ability to access account information via the
Internet. Econophone believes that its emphasis on technological innovation and
quality is one of its principal competitive strengths.
In addition, during 1997, Econophone intends to introduce "E-Gram," an
enhanced e-mail service. E-Gram is expected to enable customers with Econophone
e-mail accounts to have a computer synthesized voice read them their e-mail.
E-Gram also is expected to enable customers to instruct the e-mail system to fax
them one or more pieces of e-mail, to save the e-mail for faxing at a later time
or to fax e-mail messages to third parties. Econophone believes that these
features will be particularly attractive to business travelers and will enhance
its ability to attract small- and medium-sized business customers. E-Gram is
being developed by E-Gram Corporation, 100% of the capital stock of which
currently is owned by Alfred West, the Chief Executive Officer and President of
Econophone. E-Gram will be licensed by Econophone on a non-exclusive basis from
E-Gram Corporation. Upon the commercialization of E-Gram Corporation's
technology, Mr. West has agreed to transfer 10% of the stock of E-Gram
corporation to Princes Gate. See "Certain Transactions--E-Gram."
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THE ECONOPHONE NETWORK
Econophone's network consists of (i) carrier grade Northern Telecom switches
in New York, London, Brussels and Paris, (ii) nodes in Antwerp and Hamburg,
(iii) points of presence in Baltimore, Connecticut, New Jersey, Philadelphia and
Washington, D.C., (iv) IRUs and leased trans-Atlantic telecommunications lines
and (v) leased lines in Europe and the United States. A key element in
Econophone's growth strategy is the continued build-out of its network in Europe
and the United States. As Econophone expands its network, it expects to be able
to provide service on an increasingly cost effective basis to a greater number
of customers. See "Risk Factors--Implementation of Expansion Plans" and
"Business--Strategy."
Econophone's network is designed to enable it to provide competitively
priced service from its network cities by reducing its total transmission costs
(i.e., the sum of its variable and fixed transmission costs) on calls
originating from these cities. Econophone's network enables it to reduce its
variable transmission costs because, among other things, (i) Econophone does not
incur any significant marginal costs for calls carried over its IRUs or leased
lines, (ii) calls routed by Econophone's switches can be delivered on a "least
cost" basis and (iii) in markets with switches, nodes or points of presence,
customers use local access instead of more expensive toll free access.
The fixed costs associated with Econophone's network relate principally to
switching equipment, leased lines and IRUs, rental charges, local connectivity
and facility/network management. Once sufficient traffic levels are attained,
Econophone's total costs of carrying calls are expected to decline as a
percentage of revenue, although there can be no assurance in this regard,
particularly given continuing signficant price reductions. See "Risk
Factors--Implementation of Expansion Plans," "Risk Factors--Competition" and
"Risk Factors--Risks Associated with Rapidly Changing Industry; Significant
Price Declines."
EUROPEAN EXPANSION
Econophone is expanding its network to include additional switches or nodes
in selected continental European cities. During the first quarter of 1997,
Econophone installed switches in Brussels and Paris that are connected to its
New York and London switches by leased line. Econophone also installed nodes in
Antwerp and Hamburg that are connected to the Brussels and London switches by
leased line. The node in Hamburg began collecting traffic during February 1997
and the switches in Brussels and Paris and the node in Antwerp begun collecting
traffic during March 1997. During the first quarter of 1997, Econophone
installed its own switch in London, which became operational during the second
quarter of 1997. Prior to that time, Econophone had leased a portion of Colt's
London switch. Nodes in Amsterdam, Athens, Berlin and Zurich also are expected
to be installed and become operational during 1997. The nodes in Amsterdam,
Athens and Zurich will be connected to Econophone's London switch by leased
line. The Berlin node will be connected to the Hamburg node by leased line.
Further European expansion plans provide for switches and nodes to be added in
additional cities. See "--Strategy."
In addition to increasing its addressable market, the expansion of
Econophone's network into continental Europe enables it to provide
intra-European international long distance service from continental European
cities with a switch or node on a cost-competitive basis. Prior to establishing
its network in continental Europe, Econophone was not able to transmit
intra-European international long distance calls on a cost-competitive basis
because of the high cost of transmitting those calls to its New York or London
switch using international toll free access and routing the calls back to
continental Europe over the PSTN. Calls that originate in cities with a switch
or node use less expensive local dial-up access instead of international toll
free access. Econophone's network does not enable it to competitively price
intra-European card-based calls, as these calls utilize international toll free
access rather than local dial-up access. However, in continental Europe,
Econophone's card based services are not marketed as discount services. Its
calling card service is marketed as a premium travel service and its prepaid
card service is marketed to users primarily calling destinations outside of
Europe. See "--Services--Calling Card Services" and "--Services--Prepaid
Services."
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U.S. EXPANSION
Econophone also intends to expand its network in the United States.
Econophone intends to install a carrier grade Northern Telecom DMS 250 switch in
Los Angeles that will enable Econophone to offer international and domestic long
distance service through "1+" access and carrier services in the Los Angeles
area. Econophone's switch in Los Angeles is expected to be installed and
operational by the end of the first quarter of 1998. Once this switch is
operational, Econophone intends to connect its Los Angeles and New York switches
by leased line, which will enable it to carry traffic between the New York and
Los Angeles areas (including traffic from Los Angeles to Europe) with lower
variable cost, which, upon attaining certain volume levels, should result in
lower total cost than at present. Econophone presently leases a portion of
another carrier's switch in Los Angeles, which its uses to offer carrier
services in the Los Angeles area.
Econophone intends to establish points of presence in certain other U.S.
markets that generate substantial international long distance calling traffic.
Econophone is able to offer international and domestic long distance service
through "1+" access in markets where its switches or points of presence are
located.
NETWORK INFRASTRUCTURE
NETWORK HARDWARE
Econophone's network employs carrier grade switches. In New York, Econophone
utilizes a Northern Telecom DMS 250/300 switch. In Brussels and Paris,
Econophone has installed Northern Telecom multi-media carrier grade switches. In
London, Econophone has installed a DMS 100 switch. Carrier grade switch
technology is primarily employed by large carriers and not by smaller
competitors. Certain advantages of Econophone's carrier grade network are
described below.
QUALITY AND RELIABILITY. Econophone believes that carrier grade switching
enables it to provide higher transmission quality and greater call completion
rates to its customers than are offered by carriers that use smaller, less
powerful switches.
INTERCONNECTION WITH PTOS. Carrier grade switches enable Econophone to
provide international and domestic long distance service utilizing "1xxx" access
in the United Kingdom. In addition, the interconnection to the PSTN of
Econophone's carrier grade switch in London during the second quarter of 1997
enables it to provide service on a U.K.-wide basis. See
"--Services--International and Domestic Long Distance Service--United Kingdom."
Many of Econophone's competitors in the United Kingdom do not utilize
carrier grade switches and, therefore, can provide access for residential or
office-based calling only through longer access numbers and codes (although
British Telecom is able to provide access without use of an access number or
code). Management believes that the comparative ease of use of Econophone's
home- and office-based service provides it with a competitive advantage over
U.K. service providers that do not utilize carrier grade switches.
TRANSMISSION SPEED AND EFFICIENCY. Econophone's switches have call
completion capabilities that reduce the time needed to connect calls, reduce
waiting times and allow for more efficient use of transmission capacity. In
addition, for calls transmitted over Econophone's IRUs between London and New
York (including calls originating in continental Europe), Econophone's network
utilizes "fast signaling" (also known as "SS7" or "CCS7"). Before a call is
completed, "fast signaling" notifies the originating switch if the number being
called is busy, in which case a busy signal will be sent back to the caller
without routing the call, freeing up transmission capacity for calls that can be
completed.
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ABILITY TO PROVIDE ENHANCED SERVICES. The carrier grade switching platforms
used by Econophone, in conjunction with other hardware and software, are capable
of supporting the enhanced services that Econophone currently offers, such as
prepaid card services, as well as other enhanced services that Econophone
intends to introduce, such as voicemail, conference calling and E-Gram.
Econophone's network primarily employs switch architecture that allows for
integration of voice and data onto a single platform.
HARDWARE INTEGRATION. Econophone believes that, by principally utilizing
the equipment of a single supplier, it is able to minimize difficulties
associated with integrating equipment from various sources and with differing
specifications, although this entails certain risks. See "Risk
Factors--Dependence on Equipment Supplier."
TRANSMISSION CAPACITY
Econophone utilizes IRUs and leased lines to transmit the on-network portion
of its calls. If the initial point of network access is a node or point of
presence, the call is then transmitted over a leased line to an Econophone
switch for routing to its destination. Once certain traffic levels are attained,
local dial-up access to the node or point of presence and transmission over a
leased line is a less expensive means of transmitting a call to an Econophone
switch than international toll free access. The reduced transmission costs
result because there is no significant marginal cost to Econophone for carrying
a call over facilities it owns or leases on a fixed cost basis. In order to
increase the capacity of its transmission lines, Econophone utilizes carrier
grade compression, or multiplexing, equipment.
Econophone presently owns five IRUs on the PTAT-1 transatlantic cable and
one IRU on the Cantat-3 transatlantic cable. Econophone's IRUs are half-circuits
(i.e., the portion of the circuit between North America and the mid-point in the
Atlantic Ocean). The corresponding half-circuits on PTAT-1 and Cantat-3 not
owned by Econophone are leased from Mercury. During the second quarter of 1997,
Econophone received an IFL in the United Kingdom, which authorizes it to provide
international telecommunications services over its own international
infrastructure. This license permits Econophone to purchase and operate
half-circuits originating in the United Kingdom. As a result of acquiring an
IFL, Econophone intends to acquire the five corresponding half-circuits on
PTAT-1 and the one on Cantat-3 during the fourth quarter of 1997. As part of its
expansion strategy, Econophone also intends to acquire additional IRUs,
including half-circuits originating in the United Kingdom between the United
Kingdom and selected continental European cities.
In addition to utilizing IRUs to carry traffic, Econophone utilizes leased
lines. Econophone's average aggregate monthly cost for its leased lines for the
eight months ended August 31, 1997 was approximately $210,000. These costs will
substantially increase as Econophone expands its network to the extent that
Econophone leases additional lines instead of purchasing them.
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Listed below are Econophone's IRUs and leased lines and the maximum number
of calls that can be carried at one time over each circuit. Other than
Econophone's half-circuits from New York to London, all of the lines listed
below are leased lines.
<TABLE>
<CAPTION>
SIMULTANEOUS
TRANSMISSION LINES CALLS(1)
- -------------------------------------------------------------------------------- -----------------
<S> <C>
London -- New York(2)........................................................... 600
New Brunswick, New Jersey -- New York........................................... 264
Newark -- New York.............................................................. 192
Brussels -- Antwerp............................................................. 120
Brussels -- New York............................................................ 120
Paris -- London................................................................. 120
Hamburg -- London............................................................... 60
Baltimore -- New York........................................................... 24
Los Angeles -- New York......................................................... 24
New Haven, Connecticut -- New York.............................................. 24
Philadelphia -- New York........................................................ 24
Washington, D.C. -- New York.................................................... 24
</TABLE>
--------------------------------------------
(1) Reflects transmission capacity after taking into account
compression or multiplexing equipment utilized by Econophone on
its intra-European lines and its lines between London and New
York.
(2) Consists of IRUs and the leased half-circuits that correspond
to the IRUs.
Econophone also purchases switched minutes from carriers on a per minute
basis. Such purchases are made on an as-needed basis and do not involve
significant minimum purchase requirements. Econophone's principal suppliers of
switched minutes of use are Sprint and Mercury, from whom it purchases
international toll free services.
As Econophone expands its customer base, it will require additional
transmission capacity. Its actual infrastructure requirements will depend upon
the capacity of the switches, nodes and points of presence installed by
Econophone and the extent to which it utilizes compression technology to
transmit calls. Based on current and anticipated availability of switching and
compression equipment and owned and leased transmission capacity, Econophone
believes that it will be able to meet its capacity requirements for the
foreseeable future, although there can be no assurance that this will be the
case.
NETWORK MANAGEMENT
Econophone's network is controlled from its New York and London switching
centers and its College Station, Texas facility. Centralized network management
enables Econophone to perform network monitoring and selected network
maintenance from these centers, rather than on-site. Econophone has budgeted
approximately $1.0 million to enhancing and developing its network management
systems during 1997, most of which will be spent during the last two quarters of
1997.
ACCESS METHODS
Econophone's services are accessed through a variety of methods, as
described below, depending upon the particular service and the location from
which the customer is calling.
"1XXX" ACCESS. "1xxx" access, or prefix dialing, enables a long distance
customer in the United Kingdom to access Econophone's network from the
customer's home or office by dialing "1" and Econophone's three digit access
code and then the number the customer is calling.
"1+" ACCESS. In the United States, "1+" access enables a long distance
customer to access Econophone's network from the customer's home or office by
dialing "1" and then the number that the
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customer is calling. The customer does not need to dial a special access number
or code. This access method is available where Econophone has a switch or point
of presence.
LOCAL DIAL-UP ACCESS. In cities in continental Europe where Econophone has
installed a switch or node, customers can access Econophone's international long
distance service by dialing a local telephone number. Local dial-up access
reduces transmission costs for Econophone on these calls because it reduces the
cost of accessing an Econophone switch. The reduction in transmission costs
enables Econophone to increase its margins and/or reduce its prices on these
calls, as well as to provide competitively-priced intra-European long distance
service. Until January 1, 1998, local dial-up access may be used in France only
to collect virtual private network traffic. See "--The Econophone Network" and
"--Regulation--France."
INTERNATIONAL TOLL FREE ACCESS. This access method is used to access
Econophone's card-based services outside of the United States and the United
Kingdom. Econophone's calling card customers in its continental European network
cities that use its calling card service for home- and office-based calls will
over time be provided with a local access number to use, subject to applicable
regulatory limitations, because local dial-up access allows Econophone to
provide its services at a substantially lower rate than international toll free
access. See "--Services--Calling Card Services."
NATIONAL TOLL FREE ACCESS. Customers who access Econophone's services in
this manner do so by dialing a national toll free number. This access method is
available to U.S. and U.K. customers who use Econophone's calling card and
prepaid card services.
DEDICATED ACCESS. Carrier customers and high volume end-users in the United
States are connected to Econophone's switch by dedicated leased line. In the
United Kingdom and continental Europe, Econophone intends to introduce dedicated
access during 1997. The advantages of dedicated access are simplified dialing,
faster call set-up times and potentially lower access costs (assuming a
sufficient volume of calls is transmitted over the leased line to generate
economies of scale).
CALL ROUTING
Calls are routed to their destination through one or more Econophone
switches. If the call originates in an Econophone network city with a switch,
the call generally will access the network using "1xxx," "1+" or local dial-up
access. A call originating in a city with a node or point of presence generally
will access the network in the same manner and then be routed to an Econophone
switch over leased line. If the call originates in a city where Econophone does
not have a switch, node or point of presence, the call generally accesses the
network using toll free access, which is substantially less cost efficient than
"1xxx," "1+" or local dial-up access. From an Econophone switch, "least cost
routing" techniques are used to determine whether the call should be transferred
directly to the PSTN or routed to another Econophone switch and then transferred
to the PSTN for termination. Econophone terminates, and will continue to
terminate, all of its traffic over the PSTN.
SALES AND MARKETING
Econophone's services are marketed primarily to small- and medium-sized
businesses and residential customers, with a focus on customers with significant
international calling needs. Econophone also sells transmission capacity to
carriers in the United States and the United Kingdom. As of June 30, 1997,
Econophone had 8,431, 2,866 and 54,868 customer accounts in the United Kingdom,
continental Europe and the United States, respectively, generating approximately
10.1 million, 6.7 million and 87.8 million minutes of calling traffic,
respectively, for the six months then ended.
In the United Kingdom, most of Econophone's sales are made through Telco,
its majority owned subsidiary that was established during the fourth quarter of
1996, although sales to carriers continue to be made directly by Econophone. As
of July 31, 1997, Econophone had retained 9,761 independent sales
representatives in the United Kingdom, primarily through master agents. A
substantial number of these
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sales representatives also sell products and services other than long distance
telephone service of other companies and have not yet begun to make sales on
behalf of Econophone. As of August 31, 1997, Telco also had 14 internal sales
representatives. To date, Econophone's U.K. sales activities have been limited
primarily to the London area. However, since April 1997, Econophone has been
able to provide services on a U.K. wide basis and has begun to market its
services in additional U.K. cities. Prior to the establishment of Telco,
Econophone's services in the United Kingdom were marketed under a joint venture
between Econophone and EI. See "Risk Factors--Dependence on Third Party Sales
Organizations," "Risk Factors--Dependence on Carrier and Other Principal
Customers" and "Management's Discussion of Financial Condition and Results of
Operations."
As of August 31, 1997, Econophone had 15 internal sales representatives and
60 independent sales representatives in continental Europe. Econophone's
internal sales representatives are based in Antwerp, Brussels, Hamburg and
Paris. In all four of these cities, Econophone is expanding its internal sales
forces and recruiting additional independent sales representatives. In addition,
during the fourth quarter of 1996, Econophone hired a Vice President of European
Sales and Marketing. Econophone's strategy to date in its continental European
markets generally has been initially to concentrate on sales of prepaid card
services since prepaid operations limit credit risk and do not require
substantial amounts of start-up capital. Thereafter, after establishing its
local sales and marketing infrastructure and gaining market acceptance,
Econophone has introduced calling card and other services. In each of its
markets, Econophone also has initially concentrated on sales in ethnic
communities and to expatriates since these market segments can be effectively
targeted with limited resources, enabling Econophone to rapidly generate
revenues and create brand awareness.
In the United States, Econophone's services are sold primarily in the New
York metropolitan area. Econophone is expanding its U.S. sales infrastructure
and focusing its marketing efforts on additional U.S. network cities. During the
first two quarters of 1997, Econophone hired sales managers for Baltimore,
Connecticut, New Jersey and New York. As of August 31, 1997, in the United
States, Econophone had 4 internal sales representatives and 237 independent
sales representatives. Substantially all of Econophone's U.S. calling card sales
are attributable to VoiceNet, a reseller that sells Econophone's calling card
services to end-users. See "Risk Factors--Dependence on Third Party Sales
Organizations."
Econophone's internal sales forces concentrate on sales to small-and
medium-sized businesses and to other carriers, while independent sales
representatives concentrate on residential sales. Econophone believes that local
internal sales forces will substantially enhance market acceptance of the
Econophone brand and improve the performance of its independent sales
representatives. Econophone's internal sales forces make local advertising
decisions and provide support for its independent sales representatives.
Internal sales forces also enable Econophone to more effectively focus marketing
efforts on target customer groups. In addition, Econophone believes that
internal sales forces have a higher sales completion rate to business users than
independent sales representatives due to the higher degree of technical
knowledge required to close sales to business users.
As Econophone expands into new network cities, it intends to establish
internal sales forces and recruit independent sales representatives in those
cities.
The terms on which Econophone retains independent sales representatives are
determined on a case-by-case basis and depend on a variety of factors, including
the geographic market, the services being sold by the representative and the
anticipated sales levels of the representative. Econophone's independent sales
representatives are retained on a commission-only basis, with commissions
generally ranging from 6% to 16% of sales. Relationships with independent sales
representatives generally are terminable at will by either party. In certain
cases, Econophone has engaged master sales representatives, who have then
engaged sub-representatives. In other cases, Econophone has engaged individual
independent sales representatives directly.
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INFORMATION TECHNOLOGY
Econophone believes that advanced, effective and flexible billing and
customer service information systems are vital for its operations and
anticipated growth. Econophone engages in design and integration of billing and
customer service information systems at its College Station, Texas and Brooklyn,
New York facilities, where it employs 19 systems engineers. Econophone's systems
engineers have designed direct debit, multi-currency and multi-language billing,
as well as other billing features. By developing systems internally, Econophone
believes that it is able to reduce development costs, improve quality control
and expedite systems development and integration. While Econophone believes that
its current billing and customer service information systems are adequate,
substantial investment will be required to maintain the adequacy of these
systems as Econophone expands its operations. Econophone has budgeted
approximately $2.0 million during the last two quarters of 1997 to enhancing
current and developing new customer service, billing, financial reporting and
other management information systems. In addition, during the second quarter of
1997, Econophone hired a Director of Management Information Systems. See
"Management--Directors, Executive Officers and Other Senior Management."
COMPETITION
The provision of telecommunications services is extremely competitive and
will become increasingly so as the regulatory barriers to entry into
telecommunications markets are increasingly reduced or eliminated. Competition
for customers is primarily on the basis of price and, to a lesser extent, on the
type and quality of services offered and customer service. The
telecommunications industry has relatively insignificant economic and
technological barriers to entry and numerous entities competing for the same
customer. Econophone has experienced, and expects to continue to experience,
declining revenue per billable minute in all of its markets in part as a result
of increasing worldwide competition within the telecommunications industry.
Econophone also experiences customer attrition, or "churn," as a result of the
highly competitive nature of its markets and expects current levels of churn to
continue or increase. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
In Europe, Econophone's competitors include (i) PTOs, (ii) alliances such as
AT&T's alliance with Unisource (itself a joint venture among Telecom
Netherlands, Telia AB and Swiss Telecom PTT), known as "Uniworld," and the
corresponding alliance with WorldPartners, MCI's alliance with British Telecom,
known as "Concert," and Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One," (iii) companies offering resold international
telecommunications services, such as Esprit Telecom, Viatel and RSL
Communications, and (iv) other companies with business plans similar in varying
degrees to Econophone's, including emerging public telephone operators who are
constructing their own networks. Unisource recently announced that its venture
partners would contribute their international facilities and personnel to a
newly formed company, and some commentators have speculated that ATT might do
the same. The resulting company is likely to be a substantially more formidable
competitor. Econophone believes that its non-U.S. markets will experience
increased competition and begin to resemble the competitive landscape in the
United States. In addition, Econophone anticipates that numerous new competitors
will enter the European telecommunications market.
In the United States, Econophone's competitors include AT&T, MCI, Sprint and
other carriers for domestic and international long distance calls. As a result
of the 1996 Act, RBOCs are eligible, subject to FCC approval, to offer domestic
long distance and international telecommunications services in their "in region"
service areas, as well as outside of their service areas. In addition, the FCC
is now also permitting foreign telecommunications entities to enter the U.S.
international telecommunications market, including dominant foreign entities
whose home markets are conducive to competition. The FCC also has substantially
reduced the regulatory constraints on AT&T, Econophone's largest competitor, by
declaring AT&T to be "non-dominant," first, in the domestic long distance
market, and more recently in the
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international market; thus, granting AT&T more pricing and service flexibility
and permitting AT&T to compete more effectively with smaller inter-exchange
carriers, such as Econophone.
In addition, recently consummated and currently pending major consolidations
in the telecommunications industry could result in even more powerful
competitors to Econophone in its major markets. For example, the planned
acquisition of MCI by British Telecom could adversely impact Econophone in the
market for calling between the United Kingdom and the United States and the
merger between Bell Atlantic and NYNEX and the creation of a new company with
the international facilities of the Unisource partners could result in downward
pressure on prices without a corresponding reduction in transmission costs.
Econophone also may experience competition in one or more of its markets
from competitors utilizing new or alternative technologies and/or transmission
methods including cable television companies, wireless telephone companies,
satellite owners and resellers, Internet service providers, electric and other
utilities, railways, microwave carriers and large end users that have private
networks.
As Econophone expands its geographic coverage, it will encounter additional
regional competitors and increased competition. Many of Econophone's competitors
are significantly larger, have substantially greater financial, technical and
marketing resources and larger networks than Econophone, control transmission
lines and have long-standing relationships with Econophone's target customers.
If any of Econophone's competitors were to devote additional resources to the
provision of international and/or domestic long distance voice telecommunication
services to Econophone's target customer base, there could be a material adverse
effect on Econophone's ability to pay principal of and interest on the Notes.
Each of the markets in which Econophone offers or intends to offer its
services will present unique competitive factors. There can be no assurance that
Econophone will be able to effectively compete in any given market and the
success of Econophone's strategy in any one market is not necessarily indicative
of its ability to succeed in any other market. See "Risk Factors--Competition."
REGULATION
A summary discussion of the regulatory frameworks in certain geographic
regions in which Econophone operates or has targeted for penetration is set
forth below. This discussion is intended to provide a general outline of the
more relevant regulations and current regulatory posture of the various
jurisdictions and is not intended as a comprehensive discussion of such
regulations or regulatory posture. There can be no assurance that future
regulatory, judicial and legislative changes will not have a material adverse
effect on Econophone, that domestic or international regulators or third parties
will not raise material issues with regard to Econophone's compliance or
noncompliance with applicable laws and regulations or that other regulatory
activities will not have a material adverse effect on Econophone. See "Risk
Factors--Regulatory Restrictions."
EUROPEAN UNION
Most EU member states (except for countries such as the United Kingdom,
Sweden and Finland, which are already substantially liberalized) are in the
initial stages of regulatory liberalization. Regulatory liberalization in these
countries may occur either because the EU member state decides to open up its
own market (e.g., the United Kingdom, Sweden and Finland) or because it is
directed to do so by the European Commission through one or more directives
issued thereby and/or because the member state may be required to do so in the
future by the Council of the European Communities. National governments must
pass legislation within their countries to give effect to EC directives. See
"Risk Factors--Regulatory Restrictions."
In 1990, the European Commission issued a Directive on Competition in the
Markets for Telecommunications Services (the "Services Directive") requiring
each EU member state to abolish its
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existing monopolies in the provision of all telecommunications services other
than voice telephony. The Services Directive did not require the liberalization
of telecommunications infrastructure, nor did it apply to telex, mobile
telephony, paging or satellite services. The effect of the Services Directive is
to direct EU member states to permit the competitive provision of all services
other than voice telephony, including value-added services and voice services
within closed user groups. However, as a consequence of inconsistent local
implementation of the Services Directive through the adoption of national
legislation, there are differing interpretations as to the definition of voice
telephony, which can be reserved to the PTOs, and permitted value-added and
closed user group services, which can be provided by competitors. The European
Commission generally has taken a narrow view of the definition of voice
telephony, declaring that voice services may not be reserved to the PTOs if (i)
dedicated customer access is used to provide the service, (ii) the service
confers new value-added benefits on users (such as alternative billing methods)
or (iii) calling is limited by a service provider to a group having legal,
economic or professional ties.
In March 1996, the Services Directive was amended by the adoption of the
Full Competition Directive, which required all EU member states, with the
exception of Greece, Ireland, Luxembourg, Portugal and Spain, (i) to allow those
operators which already have licenses to operate telecommunications
infrastructure for specific purposes (such as utility companies or railroad
companies authorized to operate telecommunications networks only for their own
purposes) to supply liberalized services over such "alternative infrastructure"
by July 1, 1996 and (ii) to fully liberalize the supply of all
telecommunications services and the provision of telecommunications
infrastructure by January 1, 1998. The Full Competition Directive encourages EU
member states to accelerate liberalization of voice telephony. Ireland and
Portugal have obtained a derogation from compliance with the Services Directive,
as amended by the Full Competition Directive, until January 1, 2000. Spain has
requested a derogation entitling it to delay compliance with the Services
Directive, as amended, until November 30, 1998 and Luxembourg and Greece each
have requested a derogation entitling it to delay compliance until January 1,
2000 and January 1, 2003, respectively.
The Full Competition Directive provides for the abolishment, as of January
1, 1998, of all special or exclusive rights that restrict the provision of
telecommunications services by companies established in the European Union
without regard to the destination or origin of the communications involved.
However, neither that directive nor the original Services Directive prevent EU
member states from maintaining restrictions on companies which are not
established in the European Union in order to ensure that EU companies are
afforded comparable and effective treatment in third countries. Thus, the United
Kingdom has in the past limited certain international services on routes to
countries that do not have open markets comparable to the U.K.'s liberalized
market. However, in 1994, the United Kingdom ruled that the United States (in
addition to certain other countries) provides an equivalent open market and
since that date has had no restrictions (subject to operators obtaining the
necessary license) on services provided over leased lines between the United
States and the United Kingdom. During August 1996, the United Kingdom
liberalized all international facilities-based services and international simple
resale services between the United Kingdom and other countries, subject to
operators meeting certain proportionate return conditions on routes that are not
considered to be competitive. The ability of EU member states to in the future
enact restrictions in respect of companies which are not established in the
European Union is expected to be limited to the extent that the WTO Agreement
enters into effect within the European Union.
In addition to the abolition of special and exclusive rights, the Council of
the European Communities has stated that it intends to adopt more detailed
regulatory measures in order to harmonize the rules applying in the liberalized
environment after January 1, 1998. In this respect, a directive relating to
licensing in general and a decision relating to the licensing of satellite PCS
services already have been adopted. However, additional directives are expected
to be adopted by the Council of the European Communities, although their final
content and timing of implementation cannot be predicted at this time.
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<PAGE>
Some EU member states, such as The Netherlands and Denmark, are implementing
liberalization in advance of the January 1, 1998 EC deadline, while, in other
member states, such as Germany and France, the majority of the national
legislation which will be required to meet the January 1, 1998 deadline already
has been adopted, together with legislation which anticipates the possible
future requirements of directives of the Council of the European Communities.
Each EU member state in which Econophone currently conducts its business has
a different regulatory regime and such differences are expected to continue
beyond January 1, 1998. The requirements for Econophone to obtain necessary
approvals vary considerably from country to country and are expected to continue
to so vary.
UNITED KINGDOM
The telecommunications services provided by Econophone in the United Kingdom
are subject to and affected by regulations introduced by Oftel. Since the
break-up of the U.K. telecommunications duopoly consisting of British Telecom
and Mercury in 1991, it has been the stated goal of Oftel to create a
competitive marketplace from which detailed regulation could eventually be
withdrawn.
In 1991, a "multi-operator" policy was established to introduce increased
competition in the market for telecommunication services and infrastructure.
Under the multi-operator policy, the U.K. Department of Trade and Industry (the
"DTI") will recommend the grant of a license to operate a telecommunications
network to any applicant that the DTI believes has a reasonable business plan
and where there are no other overriding considerations not to grant such
license. All public telecommunications operators and international simple
resellers operate under individual licenses granted by the Secretary of State
for Trade and Industry pursuant to the Telecommunications Act 1984. Currently,
most telecommunications systems with compatible equipment that are authorized to
be run under an individual license granted under this Act are permitted to
interconnect to British Telecom's network. Under the terms of British Telecom's
license, it is required to allow any such licensed operator to interconnect its
system to British Telecom's system, unless it is not reasonably practicable to
do so (e.g., due to incompatible equipment). Oftel has stated that the
categories of companies that qualify for interconnection services consist of
those network operators that are making significant contributions to
infrastructure competition by installing transmission capacity or international
simple resale operators making significant contributions to competition in their
respective international market. Econophone believes it qualifies as one of the
latter.
Since 1992, the U.K. government has permitted competition in the provision
of "any to any" international services over leased lines where calls originate
and terminate on the PSTN. Econophone, through a subsidiary, holds an
International Simple Resale ("ISR") license in the United Kingdom. An ISR
license entitles Econophone to resell international message, telephone and
private line services. Provided that Oftel is satisfied that the licensee is
making a significant contribution to competition in the market for international
telephony services, the ISR license also enables the licensee to interconnect
with, and lease capacity at wholesale rates from, British Telecom, Mercury and
other public telecommunications operators.
In the United Kingdom, there was until recently a duopoly on ownership of
international cable and satellite facilities vested with British Telecom and
Mercury. All other operators were required to buy leased capacity from British
Telecom or Mercury, rather than acquiring IRUs on existing cable routes. This
constraint was removed in December 1996 when the U.K. government began to issue
IFLs. An IFL authorizes its holder to provide international telecommunication
services over its own international infrastructure. There is no limit on the
number of these licenses that may be issued. Econophone was awarded an IFL
during the second quarter of 1997.
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WORLD TRADE ORGANIZATION INITIATIVES
The WTO recently concluded the WTO Agreement, which would open the
telecommunications markets of the signatory countries to entry by foreign
carriers on varying dates beginning January 1, 1998. The WTO Agreement will be
effective January 1, 1998, subject to legislative ratification in many of the 70
signatory countries. Pursuant to the WTO Agreement, U.S. companies would have
foreign market access for local, long distance and international services,
either on a facilities basis or through resale of existing network capacity.
U.S. companies also would be permitted to acquire, establish or hold a
significant stake in foreign telecommunications companies. Conversely, foreign
companies would be permitted to enter the domestic U.S. telecommunications
markets and acquire ownership interests in U.S. service providers. Although the
WTO Agreement might open additional markets to Econophone or broaden the
permissible services that Econophone now provides in certain markets, the WTO
Agreement also might subject Econophone to greater competitive pressures in its
existing markets, with the risk of customer diversions to competitive carriers
and reductions in Econophone's rates.
BELGIUM
Under the Belgian Law of March 21, 1991 and the Royal Decree of October 28,
1996, the provision of "telephone services" is reserved for the Belgian PTO.
"Telephone services" consist of real-time voice telephony involving switching in
Belgium. Services that do not constitute "telephone services" can be provided by
private service providers that are duly licensed. A subsidiary of Econophone has
been granted a license to provide certain non-reserved services. Pursuant to the
license, the subsidiary may, among other things, provide international service
utilizing international toll free access and local access, as well as card-based
services. Pursuant to the terms of its license, the subsidiary can transmit both
voice and data, and, thus, is able to offer voicemail, e-mail and facsimile
service.
FRANCE
Until recently, France had a single monopoly provider of telecommunications
services, France Telecom. As part of the EU-wide effort to liberalize the
telecommunications industry, the French legislature has taken steps to open its
national market to competition and to make France Telecom gradually subject to
the same rules as its competitors. As part of this process, the French
legislature adopted a law on July 26, 1996 which significantly modified the
French Postal and Telecommunications Code. At present, private service providers
may provide calling card services in France utilizing international toll free
access without a license. Private service providers may also offer data
transmission services to the general public without a license. In addition, no
license is required to provide telecommunications services through authorized
networks (i.e., networks that are licensed in France) to closed user groups,
such as "virtual private networks." In the case of data transmission services or
services offered to closed user groups, the private service provider may utilize
local dial-up access through an authorized network, engaging in switching in
France or routing of calls over leased lines to a second country for switching.
Beginning on January 1, 1998, licensed private service providers may offer
domestic and international long distance voice telephony services to the general
public in France. These services will be permitted to utilize local dial-up
access and may involve switching in France or routing of calls over leased lines
that are part of an authorized network to a second country for switching.
Econophone currently is preparing an application for a license to provide long
distance voice telephony services to the general public and intends to provide
such services utilizing local dial-up access on January 1, 1998 or as soon
thereafter as applicable requirements have been satisfied.
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GERMANY
In Germany, Econophone's activities are governed by the Telecommunications
Act of July 25, 1996 (the "German Telecommunications Act"). Under the German
Telecommunications Act, the provision of "voice telephone service" requires a
license. "Voice telephone service" is defined in the German Telecommunications
Act, in part, as "the commercial provision for the public of the direct
transport and switching of voice in real-time to and from the network
termination points of the public switched network." The provision of
telecommunications services that do not constitute "voice telephone services"
does not require a license. Under current regulatory practice, the provision by
Econophone of international long distance, calling card and prepaid card
services in Germany do not constitute "voice telephone services," and therefore
do not require a license, because Econophone does not switch the calls in
Germany, although Econophone was required to file a notification of the
commencement of services.
UNITED STATES
Econophone's U.S. operations are subject to extensive federal and state
regulation. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state.
FEDERAL. The FCC currently regulates Econophone as a non-dominant carrier
with respect to both its international and domestic long distance services. In
the domestic, as distinguished from the international sector, the FCC abstains
from closely regulating the services and charges of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on Econophone and to change its regulatory classification. In the
current regulatory atmosphere, Econophone believes that the FCC is unlikely to
do so with respect to Econophone's international or domestic service offerings.
FCC policy and rules authorize (without the need to obtain specific service
authorizations) a non-dominant carrier to provide domestic interstate
telecommunications services, and generally to resell international private
leased lines connected to the PSTN in Canada, Sweden, the United Kingdom or New
Zealand. In the international sector, specific FCC authorizations, which
Econophone has acquired, are required for the resale of switched and private
line services of U.S. facilities-based carriers, and to provide
telecommunications services, both switched and private line, as a
facilities-based carrier by acquiring circuits or various undersea cables or
leasing satellite facilities. The FCC reserves the right to condition, modify or
revoke such domestic and international authority for violations of the 1934 Act
or the FCC's regulations, rules or policies promulgated thereunder. Although
Econophone believes the probability to be remote, a rescission by the FCC of
Econophone's domestic or international authority or a refusal by the FCC to
grant additional international authority would have a material adverse effect on
Econophone.
Econophone, as a non-dominant carrier, is required to file with the FCC
domestic and international tariffs containing charges and related practices,
regulations and classifications. The FCC presumes the tariffs of non-dominant
carriers to be lawful. Therefore, the FCC does not carefully review such
tariffs. The FCC could, however, investigate Econophone's tariffs, upon its own
motion or upon complaint by a member of the public. As a result of any such
investigation, the FCC could order Econophone to revise its tariffs, or the FCC
could prescribe revised tariffs.
Generally, authorizations held under Section 214 of the 1934 Act (such as
those held by Econophone) for international services are limited to providing
services or using facilities between the United States and countries specified
in the authorizations. Econophone holds all necessary Section 214 authorizations
for conducting its present business but may need additional authority in the
future. Additionally, carriers may not lease private lines between the United
States and an international point for the purpose of offering switched services
unless the FCC has first determined that the foreign country affords resale
opportunities
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to U.S. carriers equivalent to those available under United States law. The FCC
has made such a determination with respect to Canada, Sweden, the United Kingdom
and New Zealand, and Econophone is authorized to resell international private
lines to these points interconnected to the PSTN for the provision of voice and
data services.
The FCC requires long distance carriers to pay access charges to payphone
providers for calls made from payphones to toll free numbers administered by
long distance carriers. The FCC had required the immediate payment of such
access charges by long distance carriers with toll revenues of $100 million or
more per annum. The FCC had also required, after October 7, 1997, all long
distance carriers, irrespective of their annual toll revenues, must pay to each
payphone operator $.35 for each access or toll free call made from the
operator's payphones unless the payphone operator and the long distance carrier
agree upon a different rate of compensation. The FCC payphone order was reversed
by an appellate court. The matter was remanded to the FCC by the court for
further consideration. The FCC may re-adopt the $.35 rate, or some different
rate, effective on October 7, 1997, or at some later date. Irrespective of the
effective date and the amount ultimately adopted by the FCC, there can be no
assurance that Econophone will be able to fully pass this cost on to its
customers or that doing so will not result in a loss of customers.
The FCC has issued an order designed to bring downward pressure on
international telephone rates. This order directs the U.S. international
facilities-based carriers to negotiate lower settlement rates paid to their
correspondent foreign carriers for international telephone calls. A transition
period is provided for these lower settlement rates of between one and five
years depending upon the country involved. Any resulting savings to the U.S.
facilities-based carriers might be passed along to their customers in the form
of reduced rates for international calls.
STATE. The intrastate long distance operations of Econophone are subject to
various state laws and regulations. Most states require Econophone to apply for
certification to provide intrastate telecommunications services, or to register
or be found exempt from regulation, before commencing intrastate services. Most
states also require Econophone to file and maintain detailed tariffs listing
their rates for intrastate service. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of certified
carriers, assignment of carrier assets, including customer bases, carrier stock
offerings, incurrence by carriers of significant debt obligations and
acquisitions of telecommunications operations. Certificates of authority can
generally be conditioned, modified, cancelled, terminated or revoked by state
regulatory authorities for failure to comply with state law and/or rules,
regulations and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations.
Econophone provides interstate and international long distance service in
all or some portions of 50 states, for which Econophone has filed a tariff with
FCC. Econophone has received authority, pursuant to state regulations,
certifications, tariffs or notifications or on an unregulated basis, to provide
intrastate services in 49 states.
EMPLOYEES
As of August 31, 1997, Econophone had 312 full-time employees worldwide. Of
this total, 183 were based in the United States and 129 were based in Europe.
Econophone's U.S. employees are based principally in its offices in New York,
New York and Brooklyn, New York and in College Station, Texas. In Europe,
Econophone's employees are based principally in its offices in Antwerp,
Brussels, Hamburg, London and Paris.
Econophone has never experienced a work stoppage and its employees are not
represented by a labor union or a collective bargaining agreement. Econophone
considers its employee relations to be good.
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LITIGATION
Econophone is from time to time a party to litigation that arises in the
ordinary course of its business operations or otherwise. Econophone is not
presently a party to any litigation that it believes would have a material
adverse effect on its business or operations.
PROPERTIES
Econophone's executive offices and main operations center are located in New
York City, where Econophone leases approximately 18,000 square feet of space at
two facilities. Econophone also leases approximately 16,000 square feet of
office space in College Station, Texas, 10,500 square feet of office space in
Brooklyn, New York, approximately 2,400 square feet of office space in Los
Angeles, approximately 12,800 square feet in London, approximately 2,400 square
feet in Brussels and approximately 3,150 square feet in Paris, where it
maintains its European sales and marketing headquarters. Econophone maintains
smaller sales offices in Athens, Antwerp and Hamburg.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR MANAGEMENT
The following table sets forth certain information with respect to the
directors, executive officers and other senior management of Econophone.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Alfred West.......................................... 36 Chief Executive Officer and Chairman of the Board of
Directors
Alan L. Levy......................................... 38 President, Chief Operating Officer, Chief Financial
Officer and Director
Patrick Attallah..................................... 31 Vice President of European Sales and Marketing
Paul E. Bilke........................................ 37 Director of Technology
Jeremy S. Kagan...................................... 32 Vice President of Service Systems
Charles D. Briggs.................................... 41 Vice President of Network Operations
Ira M. Riesenberg.................................... 36 Corporate Controller
Mark A. Schulz....................................... 37 Director of Management Information Systems
Gary S. Bondi........................................ 46 Director and Treasurer
Hartley R. Rogers.................................... 37 Director
Steven West.......................................... 47 Director
</TABLE>
Directors of Econophone each serve for a term of one year or until their
successors are elected. Holders of the Series A Preferred Stock are entitled to
elect one director. Officers of Econophone serve at the pleasure of the Board of
Directors, subject to any written arrangements with Econophone. See
"--Executive Compensation--Employment Agreements and Arrangements."
Set forth below is certain information with respect to the directors,
executive officers and other senior management of Econophone.
ALFRED WEST, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF
DIRECTORS. Mr. West founded Econophone in 1989. Prior to founding Econophone,
Mr. West managed a family-owned textile trading company. Mr. West is the brother
of Steven West, a Director of Econophone.
ALAN L. LEVY, PRESIDENT, CHIEF OPERATING OFFICER, CHIEF FINANCIAL OFFICER
AND DIRECTOR. Mr. Levy has served as Econophone's Chief Operating Officer and
Chief Financial Officer since August 1996, as a Director since January 1997 and
as President since August 1997. From October 1993 to July 1996, Mr. Levy served
as Executive Vice President and Managing Director, Europe, as well as Chief
Financial Officer, of Viatel, where, among other things, Mr. Levy was
responsible for the implementation of Viatel's European strategy. From 1989 to
September 1993, Mr. Levy served as an Audit Manager for Edward Isaacs & Company,
an accounting firm. Mr. Levy is a Certified Public Accountant.
PATRICK ATTALLAH, VICE PRESIDENT OF EUROPEAN SALES AND MARKETING. Mr.
Attallah has served as Econophone's Vice President of European Sales and
Marketing since October 1996. From August 1995 to September 1996, Mr. Attallah
served as the General Manager-France and the South Europe Regional Director of
VPN S.A., Viatel's French subsidiary. From October 1994 to July 1995, Mr.
Attallah served as the Senior Account Manager in Paris for Tele Media
International, a division of Telecom Italia, the Italian
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PTO. From March 1989 to September 1994, Mr. Attallah served in various sales
management positions in Paris, Milan and London for Sprint International, most
recently as indirect sales director in Paris.
PAUL E. BILKE, DIRECTOR OF TECHNOLOGY. Mr. Bilke has served as Econophone's
Director of Technology since November 1992. From February 1984 until November
1992, Mr. Bilke was an independent consultant. From December 1980 to January
1984, Mr. Bilke was director of software development at StarTel, Inc., a
regional facilities-based carrier in the southwestern United States. Mr. Bilke
is a principal of Bilke & Associates, an independent consulting firm with which
Econophone has entered into certain transactions. See "Certain
Transactions--Bilke & Associates."
JEREMY S. KAGAN, VICE PRESIDENT OF SERVICE SYSTEMS. Mr. Kagan has served as
Econophone's Vice President of Service Systems since October 1996. From January
1995 to October 1996, he worked at Andersen Consulting as Manager of the Network
Support Solutions Practice in its Communications Industry Group. From March 1987
to January 1995, Mr. Kagan worked at Bellcore as a Product Manager.
CHARLES D. BRIGGS, VICE PRESIDENT OF NETWORK OPERATIONS. Mr. Briggs joined
Econophone as Director of Network Operations in May 1997 and became Vice
President of Network Operations in August 1997. From October 1994 to May 1997,
Mr. Briggs was employed by Kallback/International Telecom LTC as Director of
Switched Services, in which capacity he was responsible for all
telecommunications network design, acquisition and implementation, including
management of Kallback's network control center. From November 1992 through
October 1994, Mr. Briggs was employed at Cypress Semiconductor as Test Lab
Manager. Prior to such time, Mr. Briggs held positions at Rep-Sac Corporation,
Leviton Telcom, and Interglobal Technical Services.
IRA M. RIESENBERG, CORPORATE CONTROLLER. Mr. Riesenberg has served as
Econophone's Corporate Controller since September 1996. From October 1995
through September 1996, Mr. Riesenberg was Director of Finance at Computron
Software, Inc., an international software development company. From April 1994
to September 1995, Mr. Riesenberg was the Assistant Controller at Computron, and
from April 1990 to March 1994 he served as Accounting Manager. Mr. Riesenberg is
a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants.
MARK A. SCHULZ, DIRECTOR OF MANAGEMENT INFORMATION SERVICES. Mr. Schulz has
served as Econophone's Director of Management Information Services since October
1996. Prior to joining Econophone, Mr. Schulz spent fourteen years at Texas A&M
University, where he was responsible for developing and implementing a variety
of management information systems.
GARY S. BONDI, DIRECTOR AND TREASURER. Mr. Bondi has served as a Director
and the Treasurer of Econophone since 1993. Mr. Bondi is the President of Bondi,
Inc., a multinational trading firm specializing in non-ferrous metals that he
founded in 1987.
HARTLEY R. ROGERS, DIRECTOR. Mr. Rogers has served as a Director of
Econophone since November 1996. Mr. Rogers is a Managing Director of Morgan
Stanley and Head of the Private Investment Department, which oversees Princes
Gate's activities and those of the Morgan Stanley Bridge Fund, L.L.C. Mr. Rogers
joined Morgan Stanley in 1981 and has worked in the Mergers, Acquisitions and
Restructuring Department and the Worldwide Corporate Finance Department. Between
May 1993 and June 1995, when he became head of the Private Investment Department
at Morgan Stanley, Mr. Rogers was President of J.G. Fogg & Co. Incorporated, an
investment company specializing in private equity investing in the U.S. and
certain emerging markets.
STEVEN WEST, DIRECTOR. Mr. West has served as a Director of Econophone
since 1993. Mr. West is a founding partner of SO Metals, Inc., a refiner and
reprocessor of precious metals in the New York/New Jersey metropolitan area that
was founded in 1982. Steven West is the brother of Alfred West, the President,
Chief Executive Officer and Chairman of the Board of Directors of Econophone.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Econophone does not have a compensation committee. Decisions with respect to
compensation matters that otherwise would be decided by a compensation committee
are made by the Board of Directors as a whole.
All of the current members of the Board of Directors participated in
deliberations concerning executive officer compensation during 1996. Alfred West
and Alan L. Levy, who are members of the Board of Directors, receive
compensation as officers of Econophone. Hartley R. Rogers, also a member of the
Board of Directors, is a Managing Director of Morgan Stanley and the President
of the General Partner of Princes Gate. Princes Gate, which is an affiliate of
Morgan Stanley, owns 140,000 shares of Series A Preferred Stock representing
approximately 14.6% of the shares of Common Stock on an as converted basis
(without giving effect to the exercise of any options to purchase Common Stock
or the Warrants). Morgan Stanley Group, an affiliate of Morgan Stanley,
previously purchased $7.0 million of Bridge Notes from Econophone, all of which
have been redeemed. In addition, Morgan Stanley was the Placement Agent in
connection with the Offering. See "--Executive Compensation" and "Certain
Transactions."
EXECUTIVE COMPENSATION
At August 31, 1997, the chief executive officer and other four most highly
compensated executive officers of Econophone were Mr. West and Messrs. Levy,
Attallah, Bilke and Kagan. The following table summarizes all 1996 plan and
non-plan compensation awarded to, earned by or paid to Mr. West and Messrs.
Levy, Attallah and Bilke, who, at December 31, 1996, were Econophone's chief
executive officer and other executive officers whose total annual salary and
bonus exceeded $100,000, respectively (Messrs. West, Levy, Attallah, Bilke and
Kagan are referred to herein as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (1) BONUS GRANTED COMPENSATION
- ------------------------------------------------ ------------ ---------- ------------------- ---------------
<S> <C> <C> <C> <C>
Alfred West (2)................................. $ 326,280 $ 163,139 -- $ 5,171.13 (3)
President and Chief Executive Officer
Alan L. Levy (4)................................ 72,000 37,500 2,000,000 --
Chief Financial Officer and Chief Operating
Officer
Patrick Attallah (5)............................ 36,588 15,000 40,000 --
Vice President of European Sales and Marketing
Paul E. Bilke (6)............................... 76,154 -- 30,000 --
Director of Technology
Jeremy S. Kagan (7)............................. 57,884 30,000 30,000 --
</TABLE>
- ------------------------
(1) Does not include the value of certain personal benefits. The estimated value
of such personal benefits for each Named Executive Officer did not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus paid to
the Named Executive Officer in 1996.
(2) See "--Employment Agreements and Arrangements" for a description of Mr.
West's Employment Agreement.
(3) Consists of premiums in respect of life insurance, of which Mr. West's
designee is the beneficiary, paid by Econophone.
(4) Mr. Levy joined Econophone on August 9, 1996. See "--Employment Agreements
and Arrangements" for a description of Mr. Levy's Employment Agreement.
(5) Mr. Attallah joined Econophone on October 4, 1996.
(6) Mr. Bilke joined Econophone on July 1, 1996.
(7) Mr. Kagan joined Econophone on October 11, 1996.
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1996 FLEXIBLE INCENTIVE PLAN
Econophone has adopted the Econophone, Inc. 1996 Flexible Stock Incentive
Plan, as amended (the "Incentive Plan"), which provides for the grant of
incentive stock options ("ISOs") to acquire shares of Common Stock to employees
of Econophone or any of its subsidiaries, the grant of non-qualified stock
options ("NQSOs") to acquire shares of Common Stock, the sale or grant of
Restricted Shares and Unrestricted Shares (each, as defined in the Incentive
Plan) and the grant of stock appreciation rights ("SARs") to employees,
directors and consultants. The Incentive Plan also provides for Tax Offset
Payments (as defined in the Incentive Plan) to employees. The Incentive Plan
provides for the award of up to a maximum of 3,000,000 shares of Common Stock
and is administered by the Board of Directors of Econophone. Econophone is
required to seek the approval of its stockholders to materially increase the
number of shares of Common Stock that may be issued under the Incentive Plan.
The Incentive Plan provides that, in the event of a merger, consolidation,
combination, exchange of shares, separation, spin-off, reorganization,
liquidation or other similar transaction, the Board of Directors of Econophone
may, in its sole discretion, accelerate the lapse of Restricted Periods (as
defined in the Incentive Plan) and other vesting periods and waiting periods and
extend exercise periods applicable to any awards made under the Incentive Plan,
except that, upon a Change of Control (as defined in the Incentive Plan), to the
extent that an employee has been employed by Econophone for the twelve month
period preceding the Change of Control, vesting of any options held by such
employee automatically will accelerate.
As of August 31, 1997, Econophone had issued options to purchase 2,626,500
shares of Common Stock under the Incentive Plan, 748,054 of which were
exercisable as of such date.
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The following table sets forth grants of options to purchase shares of
Common Stock of Econophone made during 1996 to each Named Executive Officer.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES OF
GRANTED TO STOCK PRICE APPRECIATION
NUMBER OF EMPLOYEES IN EXERCISE FOR OPTION TERM
SECURITIES FISCAL YEAR PRICE PER EXPIRATION --------------------------
NAME UNDERLYING OPTIONS 1996 SHARE($) DATE 5% ($) 10%($)
- ----------------------- ------------------ ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Alfred West............ -- -- -- -- -- --
Alan L. Levy........... 2,000,000 76.7% $ 2.50 08/01/2006 $ 3,144,473 $ 7,968,712
Patrick Attallah....... 40,000 1.5% 2.50 10/03/2006 62,889 159,376
Paul E. Bilke.......... 30,000 1.2% 2.50 10/31/2006 47,167 119,531
Jeremy S. Kagan........ 30,000 1.2% 2.50 10/31/2006 47,167 119,531
</TABLE>
The following table sets forth options exercised during 1996 and the fiscal
year-end value of unexercised options for each Named Executive Officer.
OPTION EXERCISES IN 1996 AND 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
SHARES ACQUIRED VALUE REALIZED ---------------------------- ------------------------------------
NAME ON EXERCISE (1) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ------------------- ---------------- ------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Alfred West....... -- -- -- -- -- --
Alan L. Levy...... -- -- 222,222 1,777,778 $ 0 $ 0
Patrick Attallah.. -- -- 2,222 37,778 0 0
Paul E. Bilke..... -- -- 0 30,000 0 0
Jeremy S. Kagan... -- -- 0 30,000 0 0
</TABLE>
- ------------------------
(1) No options were exercised during 1996.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Econophone has entered into an employment agreement with Alfred West (the
"West Employment Agreement"), effective as of January 1, 1997, pursuant to which
Mr. West serves as Chief Executive Officer and Chairman of the Board of
Directors of Econophone. The term of the West Employment Agreement extends until
December 31, 1999, subject to any earlier termination in accordance with the
terms thereof. Pursuant to the West Employment Agreement, Mr. West is entitled
to receive an annual base salary of not less than $330,000 for each year of the
employment term, subject to increases approved from time to time by the Board of
Directors of Econophone or the compensation committee thereof and automatic
increases each January 1 by the percentage increase in the consumer price index
in New York over the consumer price index published the preceding January. In
addition, Mr. West is eligible to participate in Econophone's incentive
compensation programs and to receive such annual bonus or other compensation,
including restricted stock or incentive stock options, as may be determined by
Econophone's Board of Directors. Pursuant to the West Employment Agreement, Mr.
West will be awarded an annual bonus of between 25% and 75% of his annual base
salary, subject to attainment of certain performance goals as determined by the
Board of Directors of Econophone or the compensation committee thereof. If
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Mr. West's employment is terminated prior to December 31, 1999 by Econophone
without just cause or by Mr. West with good reason (including upon a Change of
Control, as defined in the West Employment Agreement), he will be entitled to a
severance payment equal to up to his annual base salary for the greater of one
year or the remainder of the employment term, plus the continuation of his
benefits for up to the greater of two years after the date of termination and
the remainder of his employment term. The West Employment Agreement
automatically will be renewed for successive one year periods unless, at least
six months prior to the expiration of the employment term, either Mr. West or
Econophone shall notify the other that it does not wish to extend the term. If
Econophone does not offer to renew the West Employment Agreement, Mr. West will
be entitled to a severance payment equal to one year's base salary, plus a
continuation of his medical and other welfare benefits for one year.
In August 1996, Econophone entered into an employment agreement with Alan L.
Levy (as thereafter amended, the "Levy Employment Agreement") pursuant to which
Mr. Levy serves as Chief Financial Officer and Chief Operating Officer of
Econophone. Mr. Levy was promoted to President, Chief Operating Officer and
Chief Financial Officer in August 1997. The term of the Levy Employment
Agreement extends until July 31, 1999, subject to any earlier termination in
accordance with the terms thereof. Pursuant to the Levy Employment Agreement,
Mr. Levy is entitled to receive an annual base salary of $210,000 during each
year of the term thereof, subject to increases in the discretion of the Board of
Directors. In addition, Mr. Levy is eligible to participate in Econophone's
incentive compensation programs and to receive such annual bonus or other
compensation, including restricted stock or incentive stock options, as may be
determined by Econophone's Board of Directors. Pursuant to an incentive stock
option agreement dated October 31, 1996, Econophone granted Mr. Levy incentive
stock options to purchase 2,000,000 shares of Common Stock at an exercise price
of $2.50 per share. Mr. Levy is entitled to certain demand and piggyback
registration rights with respect to such shares. If Mr. Levy's employment is
terminated prior to July 31, 1999 by Econophone without just cause or if Mr.
Levy and Econophone do not enter into a new employment agreement prior to the
expiration of the Levy Employment Agreement, he will be entitled to a severance
payment equal to one year's base salary.
Messrs. Attallah, Bilke and Kagan do not have employment agreements with
Econophone. As of August 1, 1997, the annual compensation (exclusive of any
bonus) for Messrs. Attallah, Bilke and Kagan was $125,000, $150,000 and
$125,000, respectively.
LIMITATIONS ON OFFICERS' AND DIRECTORS' LIABILITY
Econophone's Certificate of Incorporation indemnifies its officers and
directors to the fullest extent permitted by the New York Business Corporation
Law (the "BCL"). The BCL permits a corporation to limit or eliminate an
officer's or a director's personal liability to the corporation or the holders
of its capital stock for breach of duty. This limitation is generally
unavailable for acts or omissions by an officer or director which were (i) in
bad faith, (ii) were the result of active and deliberate dishonesty and were
material to the cause of action so adjudicated or (iii) involved a financial
profit or other advantage to which such director was not legally entitled. The
Certificate of Incorporation and the BCL also prohibit limitations on officer or
director liability for acts or omissions which resulted in a violation of a
statute prohibiting certain dividend declarations, certain payments to
stockholders after dissolution and particular types of loans. The effect of
these provisions is to eliminate the rights of Econophone and its stockholders
(through stockholders' derivative suits on behalf of Econophone) to recover
monetary damages against an officer or director for breach of fiduciary duty as
an officer or director (including breaches resulting from grossly negligent
behavior), except in the situations described above.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors or officers of Econophone pursuant to the foreging
provisions, Econophone has been informed that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
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CERTAIN TRANSACTIONS
INVESTMENT BY PRINCES GATE
On November 1, 1996, Princes Gate purchased 140,000 shares of Series A
Preferred Stock for a purchase price of $14.0 million, less $560,000 in fees. As
of September 1, 1997, the Series A Preferred Stock was convertible into
approximately 14.6% of the Common Stock on an as converted basis (without giving
effect to the exercise of the Warrants or any options issued by Econophone).
SERIES A PREFERRED STOCK
Certain of the terms of the Series A Preferred Stock issued to Princes Gate
are described below. As a result of the consummation of the Offering, Econophone
is permitted pursuant to the terms of the Series A Preferred Stock to amend its
Certificate of Incorporation so that the restrictions therein with respect to
limitations on dividends, indebtedness, restricted payments and transactions
with shareholders and affiliates are no more restrictive than the analogous
covenants contained in the Indenture.
RANKING. The Series A Preferred Stock is senior to all other capital stock
of Econophone, whether outstanding as of the date of issuance of the Series A
Preferred Stock or thereafter issued, as to dividend payments and distributions
upon liquidation, dissolution or the winding up of Econophone.
VOTING RIGHTS. In addition to such other vote, if any, as may be required
by New York law, the affirmative vote of the holders of at least a majority of
the outstanding shares of Series A Preferred Stock, voting together as a single
class, shall be necessary to: (i) declare or pay any dividends on, or redeem or
otherwise acquire any other class or series of capital stock of Econophone,
except to the extent provided for pursuant to the terms of any class or series
of capital stock approved by the affirmative vote of the holders of at least a
majority of the then outstanding shares of Series A Preferred Stock; (ii)
authorize an amendment to Econophone's Certificate of Incorporation decreasing
the liquidation preference of the Series A Preferred Stock or otherwise
adversely affecting the preferences, rights or powers of the Series A Preferred
Stock or the Series A Warrants (defined below); (iii) effect a voluntary
liquidation, dissolution or winding up of Econophone or the sale of all or
substantially all of its assets, or the merger, consolidation or
recapitalization of Econophone; or (iv) amend the Certificate of Incorporation
or bylaws in a manner or take any other action that would in any way impair,
limit or delay the ability of the holders of the Series A Preferred Stock to
exercise their voting rights, by written consent or at any meeting of
shareholders of Econophone.
BOARD REPRESENTATION. The holders of Series A Preferred Stock have the
right to vote as a separate class to elect one director. This right terminates
at such time as certain specified holders cease to hold at least 50% of the
outstanding shares of Series A Preferred Stock or Econophone consummates an
initial public offering of its Common Stock generating gross proceeds of at
least $25.0 million and registered with the Commission.
DIVIDENDS. The holders of Series A Preferred Stock were entitled to receive
a dividend payable at the rate of 12% per annum, which was cumulative and
compounded monthly. Dividends ceased to accrue and compound on the Series A
Preferred Stock upon the consummation of the Offering. Dividends will not be
paid on any shares of Series A Preferred Stock prior to any redemption or
liquidation (as described below) of such shares. Subject to certain exceptions,
no dividends or other distributions, and no redemption, purchase or other
acquisition for value, are allowed to be made with respect to any share of, or
right to acquire, any other class or series of Econophone's capital stock other
than the Series A Preferred Stock.
LIQUIDATION. Upon the liquidation, distribution of assets, dissolution or
winding up of Econophone, a holder of Series A Preferred Stock shall be entitled
to receive, prior to the holders of Common Stock, $100 per share plus all
accrued and unpaid dividends thereon.
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CONVERSION. At any time, any holder of Series A Preferred Stock may convert
all or any portion thereof into Common Stock of Econophone. As of September 1,
1997, the shares of Series A Preferred Stock outstanding were convertible into
3,420,701 shares of Common Stock. Notwithstanding the foregoing, until November
2, 1997, the holders of Series A Preferred Stock may only convert an aggregate
of 100,000 shares of Series A Preferred Stock. Econophone may convert any of the
shares of Series A Preferred Stock into Common Stock upon the closing of an
initial public offering of its Common Stock generating gross proceeds of at
least $25.0 million and registered with the Commission. The number of shares of
Common Stock that each share of Series A Preferred Stock is convertible into is
equal to the number of shares of Common Stock outstanding on November 1, 1996
(on a fully diluted basis), which was 22,564,000, multiplied by a fraction (i)
the numerator of which is equal to the stated value with respect to the shares
of Series A Preferred Stock being so converted, plus any dividends accrued
thereon, and (ii) the denominator of which is equal to $100.0 million plus the
number of dollars received by Econophone since November 1, 1996 from the
exercise of specified options or warrants. The number of shares of Common Stock
that each share of Series A Preferred Stock is converted into is subject to
antidilution adjustment in the event of certain issuances of Common Stock or
rights, options, warrants or convertible or exchangeable securities containing
the right to acquire shares of Common Stock at below fair market value.
REDEMPTION. Econophone is required to redeem the Series A Preferred Stock
on October 31, 2006 at a price per share equal to $100 per share plus an amount
equal to all accrued dividends (whether or not declared) on the Series A
Preferred Stock to the date of redemption. Any holder of Series A Preferred
Stock has the option to cause Econophone to redeem its shares in the event of
(i) an occurrence of certain changes of control, including if Alfred West ceases
to own voting securities representing at least 25% of the total voting power of
the outstanding voting securities of Econophone, or a person or group becomes
the beneficial owner of voting securities representing more voting power than
the voting securities then owned by Mr. West, (ii) the taking of any action by
Econophone without the approval, if required, of the holders of a majority of
the shares of the Series A Preferred Stock, (iii) non-compliance by Econophone
with restrictions on certain transactions with affiliates and shareholders, (iv)
Econophone's failure to maintain at least $10.0 million of "key man insurance"
on Mr. Alfred West until November 1, 1999 or (v) Econophone's failure to limit
its business to the telecommunications business (and businesses reasonably
related or ancillary thereto). Except as provided in the foregoing, so long as
the indebtedness under the NTFC Agreement is outstanding, Econophone is not
permitted to redeem the Series A Preferred Stock for cash, unless NTFC (or its
assignee) waives this limitation in advance in writing. In connection with the
Note Purchase Agreement, Econophone agreed to forego the right to redeem up to
40,000 shares of Series A Preferred Stock from Princes Gate at the stated value
of $100 per share plus accrued dividends. See "--Bridge Funding by Morgan
Stanley Group."
LIMITATION ON INDEBTEDNESS. Econophone and certain of its subsidiaries are
not permitted to incur any indebtedness except: (i) indebtedness in an aggregate
principal amount not to exceed $20.0 million outstanding at any time; (ii)
indebtedness incurred solely to fund the acquisition of assets used or useful in
the telecommunications business; (iii) indebtedness issued in a high yield
offering of debt securities having a maturity of at least 7 years and yielding
gross proceeds to Econophone of at least $75.0 million (net of any amount of
proceeds of such offering that is placed in escrow or any similar arrangement to
fund the payment of interest, premium (if any) or principal on such debt
securities); (iv) indebtedness to Econophone or certain subsidiaries; (v)
certain indebtedness or certain capital stock issued in exchange for, or the net
proceeds of which are used to exchange, refinance, refund or defease certain
outstanding indebtedness or capital stock subject to certain exceptions; (vi)
indebtedness (a) in respect of performance bonds, bankers' acceptances and
surety or appeal bonds provided in the ordinary course of business, (b) under
certain currency agreements and interest rate agreements, subject to certain
conditions, and (c) arising from certain agreements providing for
indemnification, adjustment of purchase price or similar options, or from
guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of Econophone or any of its subsidiaries pursuant to such
agreements, in any case incurred in
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connection with the disposition of any business, assets or subsidiary of
Econophone, subject to certain exceptions.
LIMITATION ON RESTRICTED PAYMENTS. Subject to certain exceptions, the
ability of Econophone and certain subsidiaries to make investments is limited,
except for (i) an investment in Econophone or certain subsidiaries; (ii)
specified temporary cash investments; (iii) payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses in accordance with generally accepted accounting principles;
(iv) notes and other evidences of indebtedness, not to exceed $2.0 million at
any one time outstanding; (v) stock, obligations or securities received in
satisfaction of judgments; (vi) relocation and similar loans to employees of
Econophone or its subsidiaries not to exceed $150,000 at any one time
outstanding; (vii) loans to employees of Econophone or its subsidiaries, in each
case evidenced by an unsubordinated promissory note, for the purpose of enabling
such employees to purchase capital stock of Econophone, in an amount not to
exceed $1.5 million at any one time outstanding; (viii) investments, not to
exceed $5.0 million at any one time outstanding, if the Board of Directors of
Econophone has determined that such investments constitute strategic
investments; and (ix) investments in Darcom Limited in an amount not to exceed
the amount of net cash proceeds to Econophone from the incurrence of
indebtedness by, or the issuance of capital stock of, Econophone since November
1, 1996.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. Subject to
certain exceptions, Econophone may not, and may not permit any subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any affiliate of such
holder) of 5% or more of any class of capital stock of Econophone or with any
affiliate of Econophone, except for transactions on terms at least as favorable
to Econophone or such subsidiary as could be obtained on an arm's-length basis
from a person that is not such an affiliate or 5% holder.
LIMITATION ON LIENS. Subject to certain exceptions, Econophone may not, and
may not permit certain subsidiaries to create, incur, assume or suffer to exist
any lien on any of its assets or properties of any character, or any shares of
capital stock or indebtedness.
KEY MAN INSURANCE. Until November 1, 1999, Econophone is required to
maintain in full force and effect "key man" insurance with a benefit of at least
$10.0 million in the event of the death or long term incapacity of Mr. Alfred
West, naming Econophone as sole beneficiary.
MAINTENANCE OF BUSINESS. Econophone and certain of its subsidiaries are
required to limit their business to the telecommunications business and
businesses reasonably related or ancillary thereto.
SECURITYHOLDERS AGREEMENT
Mr. Alfred West, Econophone and Princes Gate entered into a Securityholders
Agreement in connection with Princes Gate's investment in Econophone (the
"Securityholders Agreement"). Certain terms of the Securityholders Agreement are
discussed below.
REGISTRATION RIGHTS. The holders of the Series A Preferred Stock are
entitled to certain registration rights with respect to the shares of Common
Stock issuable upon the conversion of the Series A Preferred Stock and the
exercise of the Series A Warrants (all such shares of Common Stock being
"Registrable Shares"). If Econophone proposes to register any of its securities
under the Securities Act, the holders of the Series A Preferred Stock will be
entitled to notice thereof and, subject to certain restrictions, to include
their Registrable Shares in such registration. From November 1, 1999 until the
consummation by Econophone of an initial public offering of Common Stock,
holders of at least 50% of the outstanding Registrable Shares may (subject to
certain conditions) make a demand that Econophone file a registration statement
under the Securities Act. Thereafter, holders of at least 25% of the outstanding
Registrable
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Shares may make up to two demands of Econophone to file a registration statement
under the Securities Act, subject to certain conditions and limitations and
provided that (i) in the discretion of the lead underwriter of the prior
offering, no demand may be made within 180 days after the effective date of a
prior demand registration and (ii) no two such demands may be made within any
twelve month period. A holder of the Series A Preferred Stock's right to include
shares in an underwritten registration is subject to the right of the
underwriters to limit the number of shares included in the offering. Subject to
certain limitations, Econophone is required to bear all registration, legal and
other expenses in connection with these registrations and must provide
appropriate indemnification.
WARRANTS. If Econophone has not consummated an initial public offering by
November 1, 2000, Econophone will be required to issue warrants (the "Series A
Warrants") to the holders of the Series A Preferred Stock representing, in the
aggregate, 5% of the outstanding shares of Common Stock, calculated on a fully
diluted basis. Thereafter, at six month intervals until the consummation of an
initial public offering, Econophone will be required to issue additional Series
A Warrants to such holders to purchase shares of Common Stock representing, in
the aggregate, 5% of the outstanding shares of Common Stock, calculated on a
fully diluted basis. The right of the holders of the Series A Preferred Stock to
receive additional Series A Warrants shall terminate at such time as the holders
of the Series A Preferred Stock own shares of Common Stock, Series A Preferred
Stock and Series A Warrants representing, in the aggregate, 25% of the Common
Stock, calculated on a fully diluted basis. The Series A Warrants will have an
exercise price of $.01 per share, a 10-year duration and will be subject to a
warrant agreement containing customary provisions acceptable to the holders of
the Series A Preferred Stock (including adjustments for stock splits, reverse
stock splits and reclassifications).
PARTICIPATION IN SALES BY MR. ALFRED WEST. Holders of the Series A
Preferred Stock have the right to participate on a pro rata basis in sales of
Common Stock by Mr. West on the same terms and conditions as Mr. West. Under
certain circumstances, Mr. West has a right to require such persons to transfer
their shares on a pro rata basis on the same terms and conditions as Mr. West.
If the transfer by Mr. West would constitute a change of control pursuant to the
terms of the Series A Preferred Stock, holders of the Series A Preferred Stock
will be entitled to require Econophone to redeem their shares.
BRIDGE FUNDING BY MORGAN STANLEY GROUP
On April 24, 1997, Econophone entered into the Note Purchase Agreement,
pursuant to which Morgan Stanley Group an affiliate of Princes Gate agreed to
purchase from Econophone up to $15,000,000 of Bridge Notes. At such time,
Econophone paid to Morgan Stanley Group a commitment fee of $225,000 and agreed
to pay a further fee of 2% of the principal amount of each issuance after the
aggregate principal amount of Bridge Notes issued exceeded $5.0 million. A total
of $7.0 million of Bridge Notes were issued under the Note Purchase Agreement.
The net proceeds from the Bridge Notes purchased by Econophone were $6.6 million
and were used to fund equipment and other capital expenditures and operations.
Immediately following the consummation of the Offering, all of the
outstanding Bridge Notes were redeemed and all accrued interest thereon paid. At
such time, the facility represented by the Note Purchase Agreement was
terminated. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
In connection with the Note Purchase Agreement, Econophone agreed to (i)
forego the right to redeem up to 40,000 shares of Series A Preferred Stock from
Princes Gate at the stated value of $100 per share plus accrued dividends, (ii)
pay up to $100,000 of fees and expenses incurred by Morgan Stanley Group in
connection with the transactions contemplated by the Note Purchase Agreement and
(iii) grant to Morgan Stanley Group and its affiliates the right to act as sole
underwriter or placement agent in connection with the Offering and to act as
lead underwriter for an initial public offering of Common Stock, if any,
effected before April 24, 2002.
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PRIVATE PLACEMENT BY MORGAN STANLEY
Morgan Stanley, an affiliate of Princes Gate, acted as Placement Agent in
respect of the Offering. In connection with the Offering, Econophone entered
into a Placement Agreement with Morgan Stanley pursuant to which Morgan Stanley
purchased the Units for resale. The Placement Agreement provides, among other
things, that the Company and Morgan Stanley will indemnify each other against
certain liabilities, including liabilities under the Securities Act, and will
contribute to payments the other may be required to make in respect thereof. In
addition, pursuant to the Placement Agreement, Econophone has certain
obligations to register Notes, Warrants and shares of Common Stock on a shelf
registration statement at the request, and for the benefit of, Morgan Stanley
and any successor thereto.
RELATED PARTY LOANS
On December 9, 1992, Econophone borrowed $200,000 from Mrs. Rose West, the
mother of Messrs. Alfred West and Steven West, pursuant to an unsecured
promissory note bearing interest at the rate of 9% per annum, payable on
maturity. The obligation matures on December 8, 1997. On November 16, 1993,
Econophone borrowed $108,000 from Mrs. West pursuant to an unsecured promissory
note that bears interest at a rate of 18% per annum, payable at maturity, and
that matures on November 15, 1998.
Since the third quarter of 1996, Mr. Alfred West has borrowed approximately
$213,522 from Econophone pursuant to unsecured, non-interest bearing notes,
repayable upon demand.
E-GRAM
Alfred West, the President and Chief Executive Officer of Econophone, owns
100% of the stock of E-Gram Corporation. E-Gram Corporation is in the process of
developing an enhanced e-mail service that Econophone intends to license from
E-Gram Corporation on a non-exclusive basis. It is expected that this service
will be available for commercial use by the end of 1997. Pursuant to the
Securityholders Agreement, E-Gram Corporation is required to issue to Princes
Gate shares of E-Gram Corporation equal to 10% of the outstanding capital stock
thereof upon the commercialization of E-Gram Corporation's technology.
BILKE & ASSOCIATES
Econophone has from time to time purchased certain equipment from Bilke &
Associates, an independent consulting firm of which Mr. Paul Bilke, the Director
of Technology of Econophone, is a principal. Such purchases, which were made on
an arm's-length basis, were $227,000 in 1995 and $96,000 in 1996.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NTFC VENDOR FINANCING
On May 28, 1996, Econophone entered into a credit facility with NTFC, which
was increased on March 27, 1997 pursuant to the NTFC Agreement, permitting
Econophone to borrow up to $5.0 million to purchase equipment and to pay certain
other related expenses. As of August 31, 1997, $4.8 million, some of which has
been repaid, has been drawn down under two tranches of the facility to purchase
equipment and to pay certain other related expenses. These tranches are to be
paid in 60 equal monthly installments and mature between July 1, 2001 and April
1, 2002 at an interest rate equal to the 90-day commercial paper rate plus 395
basis points, which will be adjusted quarterly. As of August 31, 1997, $4.2
million of indebtedness was outstanding under the NTFC Agreement at an interest
rate of 5.63%. The NTFC Agreement requires mandatory prepayment of amounts
borrowed thereunder, among certain other circumstances, upon the occurrence of
any event pursuant to which the Series A Preferred Stock may be redeemed.
Prior to the consummation of the Offering, certain covenants of the NTFC
Agreement were amended pursuant to the Second Amendment to the NTFC Agreement,
dated June 26, 1997 (the "Second Amendment"), to substantially conform such
covenants of the NTFC to the analogous covenants contained in the Indenture.
Following the execution and delivery of such amendment, the NTFC Agreement
permits the incurrence of indebtedness, the creation of liens and transactions
with affiliates on substantially the same terms as the Indenture. Pursuant to
the NTFC Agreement, Econophone may not become liable for any contingent
obligation except, in addition to certain other limited exceptions set forth in
the NTFC Agreement, (i) to the extent permitted under the Indenture, (ii) for
indebtedness of a majority-owned subsidiary engaged principally in the
telecommunications business and (iii) for indebtedness related to the purchase
or installation of additional telecommunications equipment or the purchase of
additional capacity.
The NTFC Agreement prohibits Econophone from making any distribution or any
redemption of capital stock, directly or indirectly, other than nominal payments
in lieu of the issuance of fractional shares upon an exercise of options,
warrants or similar agreements or conversion rights and other than any
repurchase of Warrants in connection with a repurchase offer by Econophone.
Except in connection with certain transactions with affiliates not involving a
change of control, Econophone may not enter into or become the subject of, any
merger, acquisition of consolidation, or liquidate, wind-up or dissolve itself
(or suffer any liquidation or dissolution), or convey, sell, lease, transfer or
otherwise dispose of all or any substantial part of its business or assets.
Econophone also may not make investments in, or advances or loans to, any
company not engaged principally in the telecommunications business other than on
arm's-length terms. In addition, Econophone may not enter into any new business
or make any material change in any of its business objectives, purpose and
operations from those related to the telecommunications industry.
Pursuant to the NTFC Agreement, Econophone may not cease to employ Alfred
West or suffer to exist any competition by any of Alfred West, Steven West or
Gary Bondi, with the business now or hereafter conducted by Econophone.
The Second Amendment to the NTFC Agreement requires Econophone to maintain a
Debt Service Coverage Ratio (as defined therein) for each quarter through
December 31, 1999 of not less than 1.10 to 1.00 and for each fiscal quarter
thereafter of not less than 1.25 to 1.00. In addition, Econophone must maintain
a cash balance of not less than $1,500,000. Econophone also must have EBITDA (as
defined in the NTFC Agreement) of not less than: ($10,000,000) for the fiscal
year ending December 31, 1997; ($5,000,000) for the fiscal year ending December
31, 1998; $3,000,000 for the fiscal year ending December 31, 1999; $10,000,000
for the fiscal year ending December 31, 2000; and $10,000,000 for the fiscal
year ending December 31, 2000. Prior to the execution and delivery of the Second
Amendment, Econophone
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was not in compliance with the then existing Debt Service Coverage Ratio,
minimum cash balance and EBITDA requirements of the NTFC Agreement, although
such noncompliance was waived by NTFC. The execution and delivery of the Second
Amendment was a condition to the consummation of the Offering.
Borrowings from NTFC are secured by the equipment purchased therewith and
general intangibles and intangible property that is associated with such
equipment.
IDT CORPORATION
On October 22, 1996, Econophone borrowed $2.9 million from IDT for working
capital purposes. Interest on the loan accrued at a rate of 13% per annum. All
amounts owed to IDT were repaid in advance of their scheduled maturity date in
August, 1997.
TELEGLOBE CANTAT-3 INC.
During December 1996, Econophone entered into an agreement with TeleGlobe
Cantat-3 Inc. ("TC-3"), pursuant to which Econophone acquired an IRU. The
principal balance due thereunder accrues interest at the London Interbank
Offered Rate plus 5% per annum, with payments to be made quarterly through June
2001. As of August 31, 1997, the aggregate balance due thereunder was
approximately $.2 million. The IRU purchased from TC-3 secures Econophone's
obligations to TC-3.
PRIVATE TRANS-ATLANTIC TELECOMMUNICATIONS SYSTEM-1 (N.J.) INC.
During 1994 and 1995, Econophone entered into four agreements with Private
Trans-Atlantic Telecommunications System-1 ("PTAT-1"), pursuant to which
Econophone acquired five IRUs on PTAT-1. The outstanding balance under the
agreements accrues interest at the rate of 12% per annum with payments to be
made quarterly through September 1998. As of August 31, 1997, the aggregate
balance due thereunder was approximately $.2 million. The IRUs purchased from
PTAT-1 secure Econophone's obligations to PTAT-1.
RELATED PARTY LOANS
In addition to the indebtedness described above, see "Certain Transactions"
for a description of certain other indebtedness of Econophone.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Econophone's Common Stock as of September 1, 1997 by (i) each
person known by Econophone to own beneficially more than 5% of the outstanding
Common Stock, (ii) each of Econophone's directors, (iii) each of the chief
executive officer and the other four most highly compensated executive officers
of Econophone and (iv) the directors and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
----------------------------------------
<S> <C> <C>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF
OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK(2)
- -------------------------------------------------------------------------- ------------------- -------------------
Alfred West............................................................... 11,000,000 47.0%
Steven West............................................................... 4,500,000 19.2%
Gary Bondi................................................................ 4,500,000 19.2%
Princes Gate Investors II, L.P............................................ 3,420,701(3) 14.6%
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, NY 10036
Patrick Attallah.......................................................... 13,333(4) *
Paul E. Bilke............................................................. -- (5) *
Jeremy S. Kagan........................................................... -- (6) *
Alan L. Levy.............................................................. 833,335(7) 3.4%
Hartley R. Rogers......................................................... -- --
All Directors and Executive Officers as a Group (8 persons)............... 20,846,668 85.9%
</TABLE>
- ------------------------
* Less than one percent.
(1) Except where otherwise indicated, Econophone believes that all persons
listed in the table, based on information provided by such persons, have
sole voting and dispositive power over the securities beneficially owned by
them, subject to community property laws, where applicable. For purposes of
this table, a person is deemed to be the "beneficial owner" of any shares
that such person has the right to acquire within 60 days from September 1,
1997. For purposes of computing the percentage of outstanding shares held by
each person named above on a given date, any security that such person has
the right to acquire within 60 days is deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except where otherwise indicated, the address
of each person listed in the table is c/o Econophone, Inc., 45 Broadway, New
York, NY 10006.
(2) Determined on an as-converted basis, assuming the conversion of all issued
and outstanding shares of Series A Preferred Stock into Common Stock. As of
September 1, 1997, each share of Series A Preferred Stock was convertible
into 24.43 shares of Common Stock, or a total of 3,420,701 shares of Common
Stock.
(3) Includes 31,704 shares of Series A Preferred Stock, which were convertible
into 774,528 shares of Common Stock on September 1, 1997, owned by
affiliates of Princes Gate over which Princes Gate has sole voting power.
(4) All of such shares are issuable upon the exercise of options. Does not
include options to purchase 26,667 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after September 1,
1997.
(5) Does not include options to purchase 30,000 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after September 1,
1997.
(6) Does not include options to purchase 30,000 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after September 1,
1997.
(7) All of such shares are issuable upon the exercise of options. Does not
include options to purchase 1,166,665 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after September 1,
1997.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes are to be issued under an Indenture, dated as of July 1,
1997, between the Company, as issuer, and The Bank of New York, as Trustee. A
copy of the Indenture is available upon request from the Company. The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part thereof by reference to the Trust Indenture Act of
1939, as amended. Whenever particular defined terms of the Indenture not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference. The term "Note" or "Notes" includes the Original Notes and
the Exchange Notes. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions."
GENERAL
The Notes are unsecured unsubordinated obligations of the Company, limited
to $155.0 million aggregate principal amount at maturity, and mature on July 15,
2007. Interest on the Notes accrues at the rate of 13 1/2% per annum from the
most recent interest payment date on which interest has been paid or provided
for or, if no interest has been paid or provided for, the Closing Date, payable
semiannually (to Holders of record at the close of business on the January 1 or
July 1 immediately preceding the interest payment date) on January 15 and July
15 of each year, commencing January 15, 1998.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, New York,
New York 10286); PROVIDED that, at the option of the Company, payment of
interest may be made by check mailed to the Holders at their addresses as they
appear in the Security Register.
Exchange Notes initially will be represented by Global Notes. See
"--Book-Entry; Delivery and Form".
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after July 15, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holders' last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount at maturity), plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing July 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------------------------------------------- ----------------
<S> <C>
2002 106.750%
2003 103.375%
2004 and thereafter 100.000%
</TABLE>
In addition, at any time prior to July 15, 2000, the Company may redeem up
to 35% of the aggregate principal amount of the Notes with the proceeds of one
or more Public Equity Offerings following which a Public Market occurs, at any
time as a whole, or from time to time in part, at a Redemption Price (expressed
as a percentage of principal amount on the Redemption Date) of 113.50%, plus
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on the relevant Regular Record Date that is on or
prior to the Redemption Date to receive interest due on an Interest Payment
Date); PROVIDED that (1) at least $100.0 million aggregate principal amount at
maturity of Notes remains outstanding after each such redemption and (2) each
such redemption occurs within 180 days of the related Public Equity Offering.
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<PAGE>
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not listed on a national securities exchange, on a pro rata basis, by
lot or by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate; PROVIDED that no Note of $1,000 in principal amount at
maturity or less shall be redeemed in part. If any Note is to be redeemed in
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount at maturity thereof to be redeemed. A new Note
in principal amount at maturity equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original Note.
SECURITY
In accordance with the Indenture, the Company has purchased, and pledged to
the Trustee for the benefit of the Holders of the Notes, the Pledged Securities,
which consist of U.S. government securities, in such amount as will be
sufficient upon receipt of scheduled interest and principal payments of such
securities to provide for payment in full of the first six scheduled interest
payments due on the Notes. The Pledged Securities have been pledged by the
Company to the Trustee for the benefit of the Holders of the Notes pursuant to
the Pledge Agreement and will be held by the Trustee in the Pledge Account.
Pursuant to the Pledge Agreement, immediately prior to an Interest Payment Date
on the Notes, the Company may either deposit with the Trustee from funds
otherwise available to the Company cash sufficient to pay the interest scheduled
to be paid on such Interest Payment Date or the Company may direct the Trustee
to release from the Pledge Account proceeds sufficient to pay interest due on
the Notes on such Interest Payment Date. In the event that the Company exercises
the former option, the Company may thereafter direct the Trustee to release to
the Company proceeds or Pledged Securities from the Pledge Account in like
amount. A failure by the Company to pay interest on the Notes in a timely manner
through the first six scheduled interest payment dates will constitute an
immediate Event of Default under the Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first six scheduled interest payments due on the Notes
(or, in the event an interest payment or payments have been made, an amount
sufficient to provide for payment in full of any interest payments remaining, up
to and including the sixth scheduled interest payment), the Trustee will be
permitted to release to the Company at the Company's request any such excess
amount. The Notes are secured by a first priority security interest in the
Pledged Securities and the Pledge Account.
REGISTRATION RIGHTS
There will be no registration rights with respect to the Exchange Notes,
except that the Company has granted certain registration rights to Morgan
Stanley and that certain brokers or dealers registered under the Exchange Act
who may be deemed to be "underwriters" with respect to the Exchange Notes may be
entitled to continuing registration rights which the Company granted with
respect to the Exchange Notes. See "Plan of Distribution."
RANKING
The indebtedness evidenced by the Notes ranks PARI PASSU in right of payment
with all existing and future unsubordinated indebtedness of the Company and
senior in right of payment to all existing and future subordinated indebtedness
of the Company. As of August 31, 1997, excluding the Notes, Econophone had $5.4
million of indebtedness outstanding, all of which was senior indebtedness and
$5.1 million of which was secured indebtedness. The Notes are effectively
subordinated to such secured indebtedness to the extent of the collateral
therefor.
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<PAGE>
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
terms used herein for which no definition is provided. For purposes of these
definitions the terms "Note" or "Notes" shall mean the Original Notes and the
Exchange Notes.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged into or consolidated
with a Restricted Subsidiary or assumed in connection with an Asset Acquisition
by a Restricted Subsidiary, whether or not Incurred in connection with, or in
anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition; PROVIDED that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person (other than net income or loss
attributable to a Restricted Subsidiary) in which any Person (other than the
Company or any of its Restricted Subsidiaries) has an equity interest and the
net income (or loss) of any Unrestricted Subsidiary, except that Adjusted
Consolidated Net Income for any period shall include the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such other Person or such Unrestricted Subsidiary during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary 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 permitted 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; (iv) any gains or losses attributable to Asset Sales; (v)
except for purposes of calculating the amount of Restricted Payments that may be
made pursuant to clause (C) of the first paragraph of the "Limitation on
Restricted Payments" covenant described below, any amount paid or accrued as
dividends on Preferred Stock of the Company or any Restricted Subsidiary owned
by Persons other than the Company and any of its Restricted Subsidiaries; and
(vi) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the Commission pursuant to the "Commission Reports and Reports to
Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of
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<PAGE>
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary of the Company or (ii) all or substantially all of the
assets that constitute a division or line of business of the Company or any of
its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction but excluding any Lien
granted in compliance with the "Limitation on Liens" covenant ) in one
transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not (A) a Restricted Payment
permitted under the "Limitation on Restricted Payments" covenant or (B) governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of all or substantially all of the assets of the Company; PROVIDED that
"Asset Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales or other dispositions of assets
or the issuance of any Capital Stock of any Restricted Subsidiary or Permitted
Joint Venture for consideration at least equal to the fair market value of the
assets sold or disposed of, provided that the consideration received would
satisfy clause (B) of the "Limitation on Asset Sales" covenant, including
consideration that consists of technology, licenses or expertise useful in the
business of Econophone and its Restricted Subsidiaries, (c) sales or other
dispositions of obsolete or outdated equipment; PROVIDED that each such sale or
other disposition or series of such sales or such other dispositions shall not
involve assets that are material to the business of the Company and its
Restricted Subsidiaries, taken as a whole, and (d) sales or other dispositions
during any 12-month period of assets with an aggregate fair market value not in
excess of $1.0 million.
"Attributable Indebtedness" means when used in connection with a
sale-leaseback transaction referred to in the "Limitation on Sale-Leaseback
Transactions" covenant described below, at any date of determination, the
product of (i) the net proceeds from such sale-leaseback transaction and (ii) a
fraction, the numerator of which is the number of full years of the term of the
lease relating to the property involved in such sale-leaseback transaction
(without regard to any options to renew or extend such term) remaining at the
date of the making of such computation and the denominator of which is the
number of full years of the term of such lease (without regard to any options to
renew or extend such term) measured from the first day of such term.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
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<PAGE>
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the Closing Date, including, without limitation, all Common Stock
and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date and (b) after the occurrence of a Public Market, a
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date; or (ii) individuals who on the Closing Date constitute
the Board of Directors (together with any new directors whose election by the
Board of Directors or whose nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Closing Date" means July 1, 1997, the date on which the Notes originally
were issued under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding prior to or issued after the Closing Date,
including, without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its
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Restricted Subsidiaries divided by (2) the total number of shares of outstanding
Common Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; EXCLUDING, HOWEVER,
(i) any amount of such interest of any Restricted Subsidiary if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission pursuant to the "Commission Reports and Reports to Holders"
covenant described below, or, with respect to quarters for which no reports are
required to be filed, for which such financial statements are then available, as
determined by the Company (such four fiscal quarter period being the "Four
Quarter Period"); PROVIDED that (A) (x) PRO FORMA effect shall be given to any
Indebtedness (including, if applicable, the Notes) Incurred during such Four
Quarter Period or subsequent to the end of such Four Quarter Period and on or
prior to the Transaction Date, in each case as if such Indebtedness had been
Incurred, and the proceeds thereof had been applied, on the first day of such
Four Quarter Period and (y) PRO FORMA effect shall be given to any Indebtedness
that was outstanding during such Four Quarter Period or thereafter but that is
not outstanding or is to be repaid, defeased or satisfied on the Transaction
Date, as if such Indebtedness had been repaid, defeased or satisfied on the
first day of the Four Quarter Period; (B) PRO FORMA effect shall be given to
Asset Dispositions and Asset Acquisitions (including giving PRO FORMA effect to
the application of proceeds of any Asset Disposition) that occur during the
period beginning on the first day of such Four Quarter Period and ending on the
Transaction Date (the "Reference Period"), as if they had occurred and such
proceeds had been applied on the first day of such Reference Period; and (C) PRO
FORMA effect shall be given to asset dispositions and asset acquisitions
(including giving PRO FORMA effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Restricted
Subsidiary or has been merged with or into, or consolidated with, the Company or
any Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; PROVIDED that to the
extent that clause (B) or (C) of this sentence requires that PRO FORMA effect be
given to an Asset Acquisition or Asset Disposition, such PRO FORMA calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date of the Person, or division or line of business of the Person,
that is acquired or disposed for which financial information is available.
"Consolidated Net Tangible Assets" means the total book value of the assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves) after deducting therefrom (i) all
current liabilities of the Company and its consolidated Restricted Subsidiaries
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<PAGE>
(excluding intercompany items) and (ii) all goodwill, trade names, trademarks,
patents, unamortized debt discount and expense and other like intangibles, all
as set forth on the most recently available consolidated balance sheet of the
Company and its consolidated Restricted Subsidiaries, prepared in conformity
with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Existing Stockholders" means Alfred West, Steven West and any spouse or
lineal descendant thereof or any estate thereof or any trust of which any of the
foregoing are the exclusive beneficiaries and Princes Gate.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those 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; PROVIDED, HOWEVER, that all reports and other financial
information provided by the Company to the Holders of the Notes or the Trustee
shall be prepared in accordance with GAAP as in effect on the date of such
report or other financial information. All ratios and computations contained or
referred to in the Indenture shall be
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computed in conformity with GAAP applied on a consistent basis, except that
calculations made for purposes of determining compliance with the terms of the
covenants and with other provisions of the Indenture shall be made without
giving effect to (i) the amortization or write off of any expenses incurred in
connection with the offering of the Notes, the Bridge Notes and the Series A
Preferred Stock and (ii) except as otherwise PROVIDED, the amortization of any
amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and
17.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; PROVIDED that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
PROVIDED (A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the original issue price of such Indebtedness,
(B) that "Indebtedness" shall not include any money borrowed and set aside, at
the time of
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the incurrence of related Indebtedness, to fund cash interest payments on such
related Indebtedness, and shall also not include reasonable deferred
compensation for directors, officers or employees of the Company or its
Restricted Subsidiaries and (C) that "Indebtedness" shall not include any
liability for federal, state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries and Trade
Payables for which the Company or its Restricted Subsidiaries receive fair
market value) or capital contribution to (by means of any transfer of cash or
other property), or any payment for property or services for the account or use
of, or any purchase or acquisition of Capital Stock, bonds, notes, debentures or
other similar instruments issued by, such Person and shall include (i) the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii)
the fair market value of the Capital Stock (or any other Investment), held by
the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary, including, without limitation, by
reason of any transaction permitted by clause (iii) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant. For
purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant described below, (i) "Investment" shall include
the fair market value of the assets (net of liabilities (other than liabilities
to the Company or any of its Subsidiaries)) of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Subsidiaries)) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding Investments
and (iii) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) any relocation expenses and severance or
shut-down costs incurred as a result of such Asset Sale, (iv) payments made to
repay Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or (B)
is required to be paid as a result of such sale and (v) reserves against
adjustments in the sale price of the asset or assets subject to such Asset Sale
and reserves against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset
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Sale, all as determined in conformity with GAAP and (b) with respect to any
issuance or sale of Capital Stock, the proceeds of such issuance or sale in the
form of cash or cash equivalents, including payments in respect of deferred
payment obligations (to the extent corresponding to the principal, but not
interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary of the Company) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest (or original issue discount) pursuant to its terms; (iv) that, unless
the Company defaults in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest (or
original issue discount) on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such Holder, the principal amount at maturity
of Notes delivered for purchase and a statement that such Holder is withdrawing
his election to have such Notes purchased; and (vii) that Holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount at maturity to the unpurchased portion of the Notes surrendered; PROVIDED
that each Note purchased and each new Note issued shall be in a principal amount
at maturity of $1,000 or integral multiples thereof. On the Payment Date, the
Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount at
maturity to any unpurchased portion of the Note surrendered; PROVIDED that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or integral multiples thereof. The Company will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The Trustee shall act as the Paying Agent for an Offer to
Purchase. The Company will comply with 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 the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into, or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP and reasonable advances to sales representatives; (iv)
Investments received in satisfaction of judgments,
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bankruptcy, insolvency, workouts or similar arrangements; (v) loans to employees
of the Company or any Restricted Subsidiary (A) evidenced by unsubordinated
promissory notes, to the extent the proceeds thereof are used to purchase
Capital Stock of the Company, that do not in the aggregate exceed at any one
time outstanding $3.0 million and (B) to pay relocation or similar expenses that
do not in the aggregate exceed at any one time outstanding $500,000; (vi)
Investments in debt securities or other evidences of Indebtedness (A) that are
issued by companies engaged in the telecommunications business and (B) for which
no public market exists; PROVIDED that when each Investment pursuant to this
clause (vi) is made, the aggregate amount of Investments outstanding under this
clause (vi) does not exceed the greater of (I) $2.0 million and (II) 1% of
Consolidated EBITDA for the Four Quarter Period; (vii) Investments existing on
the Closing Date; (viii) Strategic Investments not to exceed $10 million at any
one time outstanding; and (ix) Investments in Permitted Joint Ventures not to
exceed $10 million at any one time outstanding.
"Permitted Joint Venture" means any Unrestricted Subsidiary or any other
Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and whose
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries at the time of determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; PROVIDED that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, (1) to finance the cost
(including the cost of design, development, improvement, construction,
installation or integration) of the item of property or assets subject thereto
and such Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the commencement of
full operation of such property or (2) to refinance any Indebtedness previously
so secured, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to or
cover any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property
or assets under construction arising from progress or partial payments by a
customer of the Company or its Restricted Subsidiaries relating to such property
or assets; (ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
PROVIDED that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property, assets, Capital
Stock or Indebtedness of the Person so acquired; (xii) Liens in favor of the
Company or any Restricted Subsidiary; (xiii) Liens
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arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary of the Company that does not give rise to an Event of
Default; (xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are within
the general parameters customary in the industry and incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed solely
to protect the Company or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities; (xvii) Liens arising
out of conditional sale, title retention, consignment or similar arrangements
for the sale of goods entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company and its Restricted Subsidiaries prior to the Closing
Date; (xviii) Liens on or sales of receivables and (xix) Liens existing on the
Closing Date.
"Pledge Account" means the account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the proceeds from the sale of the
Original Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement, dated
as of July 1, 1997, made by the Company in favor of the Trustee, governing the
disbursement of funds from the Pledge Account, as such Agreement may be amended,
restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the securities originally purchased by the
Company with a portion of the proceeds from the sale of the Notes, which consist
of Government Securities, deposited in the Pledge Account, all in accordance
with the terms of the Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
now outstanding or issued after the Closing Date, including, without limitation,
all series and classes of such preferred stock or preference stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Released Indebtedness" means, with respect to any Asset Sale, Indebtedness
(i) which is owed by the Company or any Restricted Subsidiary (the "Obligors")
prior to such Asset Sale, (ii) which is assumed by the purchaser or any
affiliate thereof in connection with such Asset Sale and (iii) with respect to
which the Obligors receive written, unconditional, valid and enforceable
releases from each creditor, no later than the closing date of such Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of McGraw Hill,
Inc., and its successors.
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"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Investments" means (A) Investments that the Board of Directors
has determined in good faith will enable the Company or any of its Restricted
Subsidiaries to obtain additional business that it might not be able to obtain
without making such Investment and (B) Investments in entities the principal
function of which is to perform research and development with respect to
products and services that may be used or useful in the telecommunications
business; PROVIDED that the Company or one of its Restricted Subsidiaries are
entitled or otherwise reasonably expected to obtain rights to such products or
services as a result of such Investment.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) bankers' acceptances, time deposit accounts, certificates
of deposit and money market deposits maturing within 270 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50 million (or
the foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) commercial paper, maturing not more than 270 days after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according
to S&P, (v) securities with maturities of nine months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's, (vi) direct obligations of the British, Belgian, Dutch, French, German
or Swiss governments or obligations fully and unconditionally guaranteed by any
of such governments and (vii) certificates of deposit, bank promissory notes and
bankers' acceptances denominated in the currency of any country of the European
Union maturing not more than 365 days after the acquisition thereof and issued
or guaranteed by any one of the 20 largest banks (based on assets as of the
immediately preceding December 31) organized under the laws of any country in
the European Union; PROVIDED such bank is not under intervention, receivership
or any similar arrangement at the time of acquisition of such certificates of
deposit, bank promissory notes or bankers' acceptances; PROVIDED that the
aggregate principal amount of all obligations and Indebtedness included in
clauses (vi) and (vii) above shall not exceed at any one time outstanding $10
million.
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"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that immediately after giving effect to such designation (x) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be incurred
for all purposes of the Indenture and (y) no Default or Event of Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); PROVIDED that the Company and any Restricted
Subsidiary may Incur Indebtedness (including Acquired Indebtedness) if, after
giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Consolidated Leverage Ratio would be
greater than zero and (i) less than 5 to 1, for Indebtedness Incurred by the
Company, or (ii) less than 2 to 1, for Indebtedness Incurred by any Restricted
Subsidiary.
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Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $100 million, less any amount of Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness (A) to the Company evidenced by an unsubordinated promissory note
or (B) to any of its Restricted Subsidiaries; provided that any event which
results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of such Indebtedness (other than to the Company or
another Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
renew, extend, defease, refinance or refund, then outstanding Indebtedness,
other than Indebtedness Incurred under clause (i), (ii), (iv), (vi), (viii) or
(ix) of this paragraph, and any refinancings thereof in an amount not to exceed
the amount so renewed, extended, defeased, refinanced or refunded (plus
premiums, accrued interest, fees and expenses); PROVIDED that Indebtedness the
proceeds of which are used to renew, extend, defease, refinance or refund the
Notes in part or Indebtedness that is PARI PASSU with, or subordinated in right
of payment to, the Notes shall only be permitted under this clause (iii) if (A)
in case the Notes are refinanced in part or the Indebtedness to be refinanced is
PARI PASSU with the Notes, such new Indebtedness, by its terms or by the terms
of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made PARI PASSU with, or subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made subordinate in
right of payment to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes; and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be renewed, extended,
defeased, refinanced or refunded, and the Average Life of such new Indebtedness
is at least equal to the remaining Average Life of the Indebtedness to be
renewed, extended, defeased, refinanced or refunded; and PROVIDED FURTHER that
in no event may Indebtedness of the Company be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv)
Indebtedness (A) in respect of performance, surety or appeal bonds provided in
the ordinary course of business, (B) under Currency Agreements and Interest Rate
Agreements; PROVIDED that such agreements (a) are designed solely to protect the
Company or its Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described below under "Defeasance"; (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness Incurred to finance
the cost (including the cost of design, development, construction, installation
or integration) of equipment, inventory or other tangible assets used or useful
in the telecommunications business of the Company and its Restricted
Subsidiaries acquired by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the Net Cash
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Proceeds received by the Company after the Closing Date from the issuance and
sale of its Capital Stock (other than Disqualified Stock) to a Person that is
not a Subsidiary of the Company to the extent such Net Cash Proceeds have not
been used pursuant to clause (C)(2) of the first paragraph of, or clause (iii)
or (iv) of the second paragraph of, the "Limitation on Restricted Payments"
covenant described below to make a Restricted Payment; PROVIDED that such
Indebtedness does not mature prior to the Stated Maturity of the Notes and has
an Average Life longer than the Notes; and (ix) Indebtedness of the Company and
any Restricted Subsidiary; PROVIDED that at the time of the Incurrence of any
Indebtedness under this clause (ix) the amount of Indebtedness under this clause
(ix) does not exceed in aggregate 70% of the accounts receivable (net of
accounts more than 60 days past due and reserves and allowances for doubtful
accounts, determined in accordance with GAAP) of the Company and its Restricted
Subsidiaries on a consolidated basis as set forth on the balance sheet of the
Company most recently filed with the Commission pursuant to the "Commission
Reports and Reports to Holders" covenant.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness, due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens, letters of
credit or other obligations supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, provided that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by Persons
other than the Company or any of its Restricted Subsidiaries, (ii) purchase,
redeem, retire or otherwise acquire for value any shares of Capital Stock of (x)
the Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person other than
the Company or any Wholly Owned Restricted Subsidiary or (y) a Restricted
Subsidiary (including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Affiliate of the Company (other than a Wholly
Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of
5% or more of the Capital Stock of the Company, (iii) make any voluntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of the
Company (other than Indebtedness outstanding on the Closing Date) that is
subordinated in right of payment to the Notes (other than the purchase,
repurchase or the acquisition of Indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in any case
due within one year of the date of acquisition) or (iv) make any Investment,
other than a Permitted Investment, in any Person (such payments or any other
actions described in clauses (i) through (iv) being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment: (A) a Default or Event of Default shall have
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occurred and be continuing, (B) except with respect to Investments, the Company
could not Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss (determined by excluding amounts referred to in clause (3) below))
accrued on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed pursuant to the "Commission
Reports and Reports to Holders" covenant PLUS (2) (A) the aggregate Net Cash
Proceeds received by the Company after the Closing Date from the issuance and
sale permitted by the Indenture of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company, or from the issuance
to a Person who is not a Subsidiary of the Company of any options, warrants or
other rights to acquire Capital Stock of the Company (in each case, exclusive of
any convertible Indebtedness, Disqualified Stock or any options, warrants or
other rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes), (B) the aggregate Net
Cash Proceeds received after the Closing Date by the Company from the issuance
or sale (other than to a Subsidiary of the Company) of debt securities or shares
of Disqualified Stock that have been converted into or exchanged for Common
Stock of the Company, together with the aggregate cash received by the Company
at the time of such conversion or exchange, in each case except to the extent
such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii)
of the second paragraph of the "Limitation on Indebtedness" covenant, and (C)
the amount by which Indebtedness of the Company and its Restricted Subsidiaries
is reduced upon the conversion or exchange subsequent to the Closing Date of any
Indebtedness which is convertible into or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company PLUS (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any such
payment or proceeds are included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock of the Company (other than Disqualified Stock); (iv) the making of
any principal payment or the repurchase, redemption, retirement, defeasance or
other acquisition for value of Indebtedness of the Company which is subordinated
in right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent offering of, shares of the Capital Stock of the Company
(other than Disqualified Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) the purchase,
redemption, acquisition, cancellation or other retirement for value of shares of
Capital Stock of the
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Company to the extent necessary, in the good faith judgment of the Board of
Directors of the Company, to prevent the loss or secure the renewal or
reinstatement of any license or franchise held by the Company or any Restricted
Subsidiary for any governmental agency; (vii) the declaration or payment of
dividends on the Common Stock of the Company following a Public Equity Offering
of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by
the Company in all Public Equity Offerings; (viii) the purchase, redemption,
retirement or other acquisition for value of Capital Stock of the Company, or
options to purchase such shares, held by directors, employees or former
directors or employees of the Company or any Restricted Subsidiary (or their
estates or beneficiaries under their estates) upon death, disability,
retirement, termination of employment or pursuant to the terms of any agreement
under which such shares of Capital Stock or options were issued; PROVIDED that
the aggregate consideration paid for such purchase, redemption, acquisition,
cancellation or other retirement of such shares of Capital Stock or options
after the Closing Date does not exceed $500,000 in any calendar year, or $2.0
million in the aggregate after the Closing Date; (ix) any Investment, to the
extent the consideration therefor paid by the Company and its Restricted
Subsidiaries consists solely of (A) Capital Stock (other than Disqualified
Stock) of the Company or (B) the Net Cash Proceeds from the sale of such Capital
Stock during the six months preceding such Investment, in each case except to
the extent such Capital Stock or Net Cash Proceeds have been used under clause
(iii) or (iv) above; or (x) repurchases of Warrants pursuant to a repurchase
offer by the Company; PROVIDED that, except in the case of clauses (i) and
(iii), no Default or Event of Default shall have occurred and be continuing or
occur as a consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof, the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii) and (iv) thereof and the Restricted Payment referred to in
clause (ix)(A) thereof) shall be included in calculating whether the conditions
of clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of the Company are used
for the redemption, repurchase or other acquisition of the Notes, or
Indebtedness that is PARI PASSU with the Notes, then the Net Cash Proceeds of
such issuance shall be included in clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant only to the extent such proceeds
are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect to
such Investment (up to the amount of such Investment on the date made).
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are
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being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Company or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired, and any extensions, refinancings,
renewals or replacements of the agreement containing such encumbrance or
restriction; PROVIDED that the encumbrances and restrictions in any such
extensions, refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or restrictions that are
then in effect and that are being extended, refinanced, renewed or replaced;
(iv) in the case of clause (iv) of the first paragraph of this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries"
covenant, (A) that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset, (B) existing by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company, or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of the Company or
any Restricted Subsidiary in any manner material to the Company or any
Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock of, or property and assets of,
such Restricted Subsidiary; (vi) contained in the terms of Indebtedness having
an aggregate principal amount not in excess of the greater of (1) $10 million or
(2) 10% of Consolidated EBITDA for the Four Quarter Period or any agreement
pursuant to which such Indebtedness is outstanding (in each case Incurred by a
Restricted Subsidiary in compliance with the "Limitation on Indebtedness"
covenant) if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders than is customary in comparable
financings (as determined by the Company), (C) the Company determines that any
such encumbrance or restriction will not materially affect its ability to make
principal or interest payments on the Notes, (D) if the aggregate principal
amount of such Indebtedness exceeds the greater of (1) $5 million and (2) 5% of
Consolidated EBITDA for the Four Quarter Period, the documents pursuant to which
all such indebtedness in excess of such amount is outstanding expressly state
that such Restricted Subsidiary shall be entitled to take the actions referred
to in clauses (i) through (iv) of the first paragraph of this covenant in an
amount not to exceed 50% of the consolidated net income of such Restricted
Subsidiary (after making adjustments thereto in the nature of the adjustments
referred to in the definition of "Adjusted Consolidated Net Income") and (E) the
Investments made by the Company and its Restricted Subsidiaries in such
Restricted Subsidiary are reasonably related to the business of such Restricted
Subsidiary; and (vii) provisions contained in agreements or instruments which
prohibit the payment of dividends or the making of other distributions with
respect to any particular class of Capital Stock of a Person other than on a PRO
RATA basis. Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital
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Stock of foreign Restricted Subsidiaries, to the extent required by applicable
law; (iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary,
provided any Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the "Limitation on
Restricted Payments" covenant, if made on the date of such issuance or sale;
(iv) issuances or sales of Common Stock, the net cash proceeds of which, if any,
are promptly applied pursuant to clause (A) or (B) of the "Limitation on Asset
Sales" covenant and (v) issuances and sales of up to 6% of the Common Stock of
each Restricted Subsidiary in connection with employee benefit plans or
arrangements.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
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 Subsidiary Guarantee; PROVIDED that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with 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, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view, (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries, (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the
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Company, (iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company files
a consolidated tax return or with which the Company is part of a consolidated
group for tax purposes, (v) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant, (vi) employment agreements with,
and loans and advances to, officers and employees of the Company and its
Restricted Subsidiaries, in each case in the ordinary course of business, (vii)
customary indemnification arrangements in favor of directors and officers of the
Company and its Restricted Subsidiaries or (viii) transactions in accordance
with the provisions of the Series A Preferred Stock of the Company as set forth
in the Certificate of Incorporation of the Company on the Closing Date.
Notwithstanding the foregoing, any transaction covered by the first paragraph of
this "Limitation on Transactions with Shareholders and Affiliates" covenant and
not covered by clauses (ii) through (vi) of this paragraph, the aggregate amount
of which exceeds $3 million in value, must be approved or determined to be fair
in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien unless, after giving effect
thereto, the aggregate amount of any Indebtedness so secured, plus the
Attributable Indebtedness for all sale-leaseback transactions permitted under
the "Limitation on Sale-Leaseback Transactions" covenant, does not exceed 10% of
Consolidated Net Tangible Assets.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of the Company or its Restricted Subsidiaries created in favor of the Holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on assets acquired by the Company or
its Restricted Subsidiaries after the Closing Date, that are not incurred in
contemplation of or in connection with such acquisition; or (vi) Permitted
Liens.
In the event that the Lien the existence of which gives rise to a Lien
securing the Notes pursuant to the provisions of this covenant ceases to exist,
the Lien securing the Notes required by the first paragraph of this covenant
shall automatically be released and the Trustee shall execute appropriate
documentation.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to enter
into any sale-leaseback transaction involving any of its assets or properties
whether now owned or hereafter acquired, whereby the Company or a Restricted
Subsidiary sells or transfers such assets or properties and then or thereafter
leases such assets or properties or any part thereof or any other assets or
properties which the Company or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly
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Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale unless (i) the consideration received by the Company
or such Restricted Subsidiary (including any Released Indebtedness) is at least
equal to the fair market value of the assets sold or disposed of and (ii) at
least 85% of the consideration received (including any Released Indebtedness)
consists of (1) cash, Temporary Cash Investments or Released Indebtedness and
(2) Indebtedness of any Person which is either repaid in cash or sold for cash
within 90 days of such Asset Sale (for purposes of calculating the amount of
such Indebtedness, such Indebtedness shall be valued at its principal amount, if
it matures within 180 days of the consummation of such Asset Sale, or its fair
market value, in all other cases). In the event and to the extent that the Net
Cash Proceeds received by the Company or any of its Restricted Subsidiaries from
one or more Asset Sales occurring on or after the Closing Date in any period of
12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its subsidiaries has
been filed pursuant to the "Commission Reports and Reports to Holders"
covenant), then the Company shall or shall cause the relevant Restricted
Subsidiary to (i) within twelve months after the date Net Cash Proceeds so
received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within twelve months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment and (ii) apply
(no later than the end of the twelve-month period referred to in clause (i))
such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i))
as provided in the following paragraph of this "Limitation on Asset Sales"
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such twelve-month period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes on the relevant Payment Date equal to the
Excess Proceeds on such date, at a purchase price equal to 101% of the principal
amount of the Notes on the relevant Payment Date, plus accrued interest (if any)
to the Payment Date. Upon the consummation of an Offer to Purchase pursuant to
this covenant, the amount of Excess Proceeds shall be deemed to be equal to
zero, plus the amount of any Excess Proceeds not theretofore subject to an Offer
to Purchase.
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REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof on the relevant
Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
Econophone will comply with the requirements of Rules 13e-4 and 14e-1 under
the Exchange Act and any other applicable federal securities laws in connection
with the repurchase of Notes as a result of a Change of Control.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after January 15, 1998, whether or not the Company is
then required to file reports with the Commission, the Company shall deliver for
filing to the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Exchange Act if it were subject thereto. The Company shall supply the Trustee
and each Holder, or shall supply to the Trustee for forwarding to each such
Holder, without cost to such Holder, copies of such reports and other
information. In addition, at all times prior to the Registration, upon the
request of any Holder or any prospective purchaser of the Notes designated by a
Holder, the Company shall supply to such Holder or such prospective purchaser
the information required under Rule 144A under the Securities Act.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
PROVIDED that the failure to make any of the first six scheduled payments of
interest when due will constitute an Event of Default with no grace or cure
period; (c) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or the failure to make or
consummate an Offer to Purchase in accordance with the "Limitation on Asset
Sales" or "Repurchase of Notes upon a Change of Control" covenant; (d) the
Company defaults in the performance of or breaches any other covenant or
agreement of the Company in the Indenture or under the Notes (other than a
default specified in clause (a), (b) or (c) above) and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount at maturity
of the Notes; (e) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an outstanding
principal amount of $5.0 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall hereafter be
created, (I) an event of default that has caused the holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; (f) any final judgment or order (not
covered by insurance) for the
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payment of money in excess of $5.0 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5.0 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Pledge Agreement shall cease
to be in full force and effect or enforceable in accordance with its terms,
other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount at maturity of the outstanding Notes, by written
notice to the Company (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare the
principal amount of, premium, if any, and accrued interest, if any, on the Notes
to be immediately due and payable. Upon a declaration of acceleration, such
principal amount, premium, if any, and accrued interest, if any, shall be
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied or cured by the Company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If an
Event of Default specified in clause (g) or (h) above occurs with respect to the
Company, the principal amount of, premium, if any, and accrued interest, if any,
on the Notes then outstanding 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. The Holders of at least a majority in principal amount at maturity of
the outstanding Notes, by written notice to the Company and to the Trustee, may
waive all past defaults and rescind and annul a declaration of acceleration and
its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal amount of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount at maturity
of the outstanding Notes may 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. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a
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continuing Event of Default; (ii) the Holders of at least 25% in aggregate
principal amount at maturity of outstanding Notes make a written request to the
Trustee to pursue the remedy; (iii) such Holder or Holders offer the Trustee
indemnity satisfactory to the Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within 60 days after receipt
of the request and the offer of indemnity; and (v) during such 60-day period,
the Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes do not give the Trustee a direction that is inconsistent with
the request. However, such limitations do not apply to the right of any Holder
of a Note to receive payment of the principal of, premium, if any, or interest
on, such Note or to bring suit for the enforcement of any such payment, on or
after the due date expressed in the Notes, which right shall not be impaired or
affected without the consent of the Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to any Person or permit any Person to merge with
or into the Company unless: (i) the Company shall be the continuing Person, or
the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis, (A) the Consolidated Leverage Ratio of
the Company, or any Person becoming the successor obligor of the Notes, as the
case may be, is no worse than 110% of the Consolidated Leverage Ratio of the
Company without giving effect to such transaction or (B) the Company, or any
Person becoming the successor obligor of the Notes, as the case may be, could
Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant; PROVIDED that this clause (iv) shall not
apply to a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; PROVIDED that, in connection with any such
merger or consolidation, no consideration (other than Common Stock in the
surviving Person or the Company) shall be issued or distributed to the
stockholders of the Company; and (v) the Company delivers to the Trustee an
Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv)) and Opinion of Counsel, in each case
stating that such consolidation, merger or transfer and such supplemental
indenture complies with this provision and that all conditions precedent
provided for herein relating to such transaction have been complied with;
PROVIDED, HOWEVER, that clauses (iii) and (iv) above do not apply if, in the
good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
PROVIDED FURTHER that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
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DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company, or any of its Subsidiaries is bound, and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clauses (c) and (d) under "Events of Default" with respect to such clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets" and such covenants and
clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default, upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of
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the occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount at maturity of the outstanding Notes; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of each
Holder affected thereby, (i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, (ii) reduce the principal amount of,
or premium, if any, or interest on, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount at maturity of outstanding Notes the consent of whose Holders
is necessary for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture or in any of the Notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer, director, employee or
controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; PROVIDED, HOWEVER, that, if it acquires any conflicting
interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
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So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with applicable procedures of DTC, in addition to those provided for under the
Indenture.
Payments of the principal of, and interest on, the Global Notes will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of Econophone, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Econophone expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note, as shown on the records
of DTC or its nominee. Econophone also expects that payments by participants to
owners of beneficial interests in such Global Note 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 registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a holder
requires physical delivery of a Certificated Note for any reason, such holder
must transfer its interest in the Global Note in accordance with DTC's
applicable procedures.
Econophone expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose accounts the
DTC interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such participant
or participants has or have given such direction. However, if there is an Event
of Default under the Notes, DTC will exchange the applicable Global Note for
certificated notes ("Certificated Notes"), which it will distribute to its
participants.
Econophone understands that: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, 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 Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is 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 ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of DTC,
DTC is under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither Econophone nor the
Trustee will have any responsibility for the performance by DTC or its direct or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED NOTES. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Notes and a successor depositary is not appointed
by Econophone within 90 days, Econophone will issue Certificated Notes in
exchange for the Global Notes.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material tax consequences of
the exchange of the Original Notes for the Exchange Notes and of the ownership
and disposition of the Exchange Notes under U.S. federal income tax laws. The
discussion does not deal with all possible tax consequences relating to an
investment in the Exchange Notes. In particular, the discussion does not address
the tax consequences under state, local and foreign tax laws. In addition, the
discussion does not address U.S. federal income tax consequences to persons who
do not hold the Exchange Notes as capital assets. The discussion also does not
address the tax treatment of holders that may be subject to special tax rules,
such as banks, insurance companies, dealers in securities and holders who hold
the Exchange Notes as part of a straddle or conversion transaction or whose
functional currency is not the dollar. Accordingly, each prospective investor
should consult its tax advisor regarding the tax consequences to it of an
investment in the Exchange Notes. The following discussion is based upon
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, rulings and judicial decisions as of the
date of this Prospectus, and such authorities may be repealed, revoked or
modified so as to result in federal income tax consequences different from those
discussed below, possibly with retroactive effect. As used herein, a "U.S.
Holder" is a beneficial owner who is (i) a citizen or resident of the United
States, (ii) a U.S. domestic corporation, (iii) an estate, the income of which
is subject to United States federal income tax regardless of the source or (iv)
a trust with respect to which a court within the United States is able to
exercise primary supervision over its administration and one or more United
States fiduciaries have the authority to control all its substantial decisions.
"A Non-U.S. Holder" is a beneficial owner who is not a U.S. Holder. The summary
of U.S. federal income tax consequences is based upon the advice of Schulte Roth
& Zabel LLP, counsel to Econophone.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH HOLDER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES AND WARRANTS.
ALLOCATION OF PURCHASE PRICE BETWEEN NOTES AND WARRANTS
THE ORIGINAL NOTES--UNITS
For U.S. federal income tax purposes, the Original Notes were originally
issued and sold as part of a Unit, comprised of one Original Note and one
Warrant to purchase 8.167 shares of Common Stock. The issue price of a Unit was
allocated between the Notes and the Warrants based on the Company's best
judgment of the relative fair market values of each such component of the Unit
on the issue date. The Company allocated $963.90 to each Note and $36.10 to each
Warrant. Under regulations issued under provisions of the Code relating to
original issue discount (the "OID Regulations"), each Holder will be bound by
such allocation for U.S. federal income tax purposes unless such Holder
discloses on a statement attached to its tax return for the taxable year that
includes the acquisition date of such Unit that its allocation differs from that
of the Company. No assurance can be given that the Internal Revenue Service (the
"IRS") will accept the Company's allocation. If the Company's allocation were
successfully challenged by the IRS, the issue price, original issue discount
accrual on the Note and gain or loss on the sale or disposition of a Note would
be different from that resulting under the allocation determined by the Company.
The exchange of Original Notes for Exchange Notes pursuant to the Exchange
Offer will not be a taxable event for federal income tax purposes. As a result,
there will not be any material U.S. federal income tax consequences to a holder
exchanging Original Notes for the Exchange Notes pursuant to the Exchange Offer.
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Because each Exchange Note is a continuation of the corresponding Original
Note, the remainder of this discussion of certain federal income tax
consideration generally refers only to "Notes".
NOTES
TAXATION OF INTEREST
Stated interest payments on the Notes will be taxable to a U.S. Holder when
received or accrued in accordance with such Holder's method of tax accounting.
ORIGINAL ISSUE DISCOUNT
GENERAL
The allocation of issue price to the Notes and the Warrants will generate a
discount element for the Notes. If a debt instrument is originally issued at a
discount that is equal to or greater than .25% multiplied by the product of its
"stated redemption price at maturity" (as defined below) and the number of
complete years to maturity from the issue date, the debt instrument will bear
OID for U.S. federal income tax purposes.
Because the Notes were issued with OID, each U.S. Holder is required to
include in income (regardless of whether such U.S. Holder is a cash or accrual
basis taxpayer) in each taxable year, in advance of the receipt of corresponding
cash payments on such Notes, that portion of the OID, computed on a constant
yield basis, attributable to each day during such year on which the U.S. Holder
held the Notes. See "--Taxation of Original Issue Discount."
The amount of OID with respect to each Note will be equal to the excess of
(i) its "stated redemption price at maturity" over (ii) its issue price. Under
the OID Regulations, the "stated redemption price at maturity" of each Note will
include all payments to be made in respect thereof other than payments of
"qualified stated interest." "Qualified stated interest" payments are payments
of interest which are unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually at a qualifying rate,
including a single fixed rate. The "issue price" of a Note is determined in the
manner described under "--Allocation of Purchase Price Between Notes and
Warrants."
TAXATION OF ORIGINAL ISSUE DISCOUNT
A U.S. Holder of a debt instrument issued with OID is required to include in
gross income for U.S. federal income tax purposes an amount equal to the sum of
the "daily portions" of such OID for all days during the taxable year on which
the Holder holds the debt instrument. The daily portions of OID required to be
included in a Holder's gross income in a taxable year will be determined upon a
constant yield basis by allocating to each day during the taxable year on which
the Holder holds the debt instrument a pro-rata portion of the OID on such debt
instrument which is attributable to the "accrual period" in which such day is
included. Accrual periods with respect to a Note may be of any length and may
vary in length over the term of the Note as long as (i) no accrual period is
longer than one year and (ii) each scheduled payment of interest or principal on
the Note occurs on either the final or first day of an accrual period. The
amount of the OID attributable to each "accrual period" will be the difference
between (A) the product of the "adjusted issue price" at the beginning of such
accrual period and the "yield to maturity" of the debt instrument (stated in a
manner appropriately taking into account the length of the accrual period) and
(B) qualified stated interest allocable to such accrual period. The "yield to
maturity" is the discount rate that, when used in computing the present value of
all payments to be made under the Notes produces an amount equal to the issue
price of the Notes. The "adjusted issue price" of a debt instrument at the
beginning of an accrual period is defined generally as the issue price of the
debt instrument plus the aggregate amount of OID that accrued in all prior
accrual periods, less any cash payments on the debt instrument other than
payments of qualified stated interest. Accordingly, a U.S. Holder of a Note will
be
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required to include OID in gross income for U.S. federal tax purposes in advance
of the receipt of cash in respect of such income. The amount of OID allocable to
an initial short accrual period may be computed using any reasonable method if
all other accrual periods, other than a final short accrual period, are of equal
length. The amount of OID allocable to the final accrual period at maturity of
the Note is the difference between (x) the amount payable at the maturity of the
Note (other than a payment of "qualified stated interest"), and (y) the Note's
adjusted issue price as of the beginning of the final accrual period.
The deduction by the Company of OID with respect to a Note will be denied
since the Note is an "applicable high yield discount obligation," as defined in
Section 163(i) of the Code. Although the Note is characterized as an applicable
high yield discount obligation, the Company would continue to be entitled to
deduct stated interest with respect to the Note as it accrues, but would not be
able to deduct OID with respect to the Note. A U.S. Holder may be entitled to
treat such OID as a dividend, which dividend may qualify for the dividends
received deduction generally available to U.S. Holders that are corporations.
Corporate U.S. Holders of Notes should consult with their own tax advisors as to
the applicability of the dividends received deduction.
ADJUSTED TAX BASIS OF NOTES
An original U.S. Holder's initial tax basis in a Note generally will be
equal to the portion of the issue price of a Unit that is properly allocable to
the Note, and thereafter such basis will be increased by the amount of OID that
is included in such U.S. Holder's income pursuant to the foregoing rules and
decreased by the amount of any cash payments received other than payments of
"qualified stated interest."
MARKET DISCOUNT, ACQUISITION PREMIUM
If a U.S. Holder purchases a Note for an amount that is less than the
adjusted issue price of the Note at the time of acquisition, the amount of such
difference will be treated as "market discount" for U.S. federal income tax
purposes, unless such difference is less than a specified DE MINIMIS amount.
Under the market discount rules, a U.S. Holder will be required to treat any
principal payment on a Note and any gain on the sale, exchange, retirement or
other disposition of a Note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such Note at the time of such payment or disposition. If a
U.S. Holder makes a gift of a Note, accrued market discount, if any, will be
recognized as if such U.S. Holder had sold such Note for a price equal to its
fair market value. In addition, a U.S. Holder may be required to defer, until
the maturity of the Note or an earlier disposition of the Note in a taxable
transaction, the deduction of a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such Note.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the Note,
unless the U.S. Holder elects to accrue market discount on a constant interest
method. A U.S. Holder of a Note may elect to include market discount in income
currently as it accrues (on either a straight-line basis or constant interest
method), in which case the rules described above regarding the deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
by such U.S. Holder on or after the first day of the first taxable year to which
the election applies and may not be revoked without the consent of the IRS.
A U.S. Holder who acquires a Note for an amount that is greater than the
adjusted issue price of such Note but equal to or less than the sum of all
amounts payable on such Note after the purchase date will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules of the Code and the OID Regulations, the daily portion of OID which such
holder must include in its gross income with respect to such Note for any
taxable year will be reduced by an amount equal to the OID multiplied by a
fraction, the numerator of which is the amount of such acquisition premium and
the denominator of which is the OID remaining from the date the Note was
purchased to their maturity date.
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SALE OR REDEMPTION OF NOTES
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by Econophone) or other disposition of a Note
will be a taxable event for U.S. federal income tax purposes. In such event, a
U.S. Holder will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange, redemption or other taxable disposition and (ii) the U.S.
Holder's adjusted tax basis in the Note. Except with respect to accrued market
discount with respect to a Note, such gain or loss should be capital gain or
loss and will be long-term capital gain or loss if the Note has been held by the
U.S. Holder for more than one year at the time of such sale, exchange,
redemption or other disposition. The excess of net long-term capital gains over
net short-term capital losses is taxed at a lower rate than ordinary income for
certain non-corporate taxpayers. The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitations on the deductibility of capital losses.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Under present U.S. federal income tax law, and subject to the discussion
below concerning backup withholding:
(a) payments of principal and interest (including OID) and premium on a
Note by the Company or any paying agent to any Non-U.S. Holder which does
not hold the Note in connection with a trade or business in the United
States, will not be subject to U.S. federal withholding tax, provided that,
in the case of amounts paid with respect to interest or accrued OID, (i)
such Non-U.S. Holder does not own, actually or constructively, 10 percent or
more of the total combined voting power of all classes of stock of the
Company entitled to vote, is not a controlled foreign corporation related,
directly or indirectly, to the Company through stock ownership, and is not a
bank receiving interest described in Section 881(c)(3)(A) of the Code and
(ii) the beneficial owner thereof fulfills the statement requirement set
forth in Section 871(h) or Section 881(c) of the Code (described below);
(b) such a non-U.S. Holder of a Note will not be subject to U.S. federal
income tax on gain realized on the sale, exchange or other disposition of
such Note unless such Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of disposition and
certain other requirements are met.
Sections 871(h) and 881(c) of the Code require that, in order to obtain the
portfolio interest exemption from withholding tax described in paragraph (a)
above, either the beneficial owner of a Note or a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution") and that is holding the Note on behalf of such beneficial owner,
files a statement with the withholding agent to the effect that the beneficial
owner of the Note is not a U.S. Holder. Under temporary United States Treasury
Regulations, such requirement will be fulfilled if the beneficial owner of a
Note certifies on IRS Form W-8, under penalties of perjury, that it is not a
U.S. Holder and provides its name and address, and files such statement with the
withholding agent, or if any Financial Institution holding the Note on behalf of
the beneficial owner files a statement with the withholding agent to the effect
it has received such a statement from the holder (and furnishes the withholding
agent with a copy thereof). A Non-U.S. Holder of a Note who does not meet the
requirements of the second preceding sentence would generally be subject to U.S.
federal withholding at a flat rate of 30% (or a lower applicable treaty rate) on
payments of interest (including OID) on the Notes. The IRS has proposed
regulations that if finalized would modify certain of the certification
requirements described above.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States, any interest (including any OID) on the Note and any gain
realized on the sale, exchange or other disposition of the Note which is
effectively connected with the conduct of such trade or business will generally
be subject to the regular United States income tax in the same manner as if the
Non-U.S. Holder were a U.S. Holder. In
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lieu of the certificate described in the preceding paragraph, such a Non-U.S.
Holder will be required to provide to the Company a properly executed IRS Form
4224 in order to claim an exemption from withholding tax on payments of interest
(or accrued OID) on a Note. In addition, if such Non-U.S. Holder is a
corporation, it may be subject to a branch profits tax equal to 30% (or such
lower rate as may be specified by an applicable income tax treaty) of its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments. For purposes of the branch profits tax, interest (including
OID) on such a Note and any gain recognized on the sale, exchange or other
disposition of a Note will be included in the earnings and profits of such
Non-U.S. Holder.
Notes held by an individual who is neither a citizen nor a resident of the
United States for U.S. federal income tax purposes at the time of such
individual's death will not be subject to U.S. federal estate tax, provided that
the income from the Notes was not or would not have been effectively connected
with a U.S. trade or business of such individual and that such individual
qualified for the exemption from U.S. federal withholding tax (without regard to
the certification requirements) that is described above.
Non-U.S. Holders should consult with their tax advisers regarding U.S. and
foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
"Backup" withholding and information reporting requirements may apply to
certain payments of principal and interest (including OID) on a Note and to
certain payments of proceeds of the sale or retirement of a Note. The Company,
its agent, a broker, the Trustee or any paying agent, as the case may be, will
be required to withhold tax from any payment that is subject to backup
withholding at a rate of 31% of such payment if the U.S. Holder fails to furnish
his taxpayer identification number (social security number or employer
identification number), to certify that such U.S. Holder is not subject to
backup withholding, or to otherwise comply with the applicable requirements of
the backup withholding rules. Certain U.S. Holders (including, among others, all
corporations) are not subject to the backup withholding and information
reporting requirements.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in clause (a)(ii) in the first paragraph under "--Tax Consequences to
Non-U.S. Holders" or has otherwise established an exemption (provided that
neither the Company nor such agent has actual knowledge that the Holder is a
U.S. Holder or that the conditions of such exemption are not in fact satisfied).
Payment of the proceeds from the sale by a Non-U.S. Holder of a Note made to
or through a foreign office of a broker will not be subject to U.S. information
reporting or backup withholding, except that if the broker is a U.S. person, a
controlled foreign corporation for U.S. federal income tax purposes or a foreign
person, 50% or more of whose gross income is effectively connected with a United
States trade or business for a specified three-year period, U.S. information
reporting, but not backup withholding, may apply to such payments. Payments of
the proceeds from the sale of a Note to or through the United States office of a
broker is subject to U.S. information reporting and backup withholding unless
the Holder certifies as to its non-U.S. status or otherwise establishes an
exemption from U.S. information reporting and backup withholding.
Any amounts withheld under the backup withholding rules from a payment to a
Holder may be claimed as a credit against such Holder's U.S. federal income tax
liability, provided that the required information is provided to the IRS.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of Notes, information with respect to
interest and OID accruing during the calendar year. The OID information will be
based upon the adjusted issue price of the debt instrument as if the Holder
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were the original Holder of the debt instrument. No assurance can be given that
the IRS will not challenge the accuracy of the reported information. Holders who
purchase Notes for an amount other than the adjusted issue price and/or on a
date other than the last day of an accrual period will be required to determine
for themselves the amount of OID, if any, they are required to include in gross
income for U.S. federal income tax purposes.
PLAN OF DISTRIBUTION
Reference is made to "The Exchange Offer" above for a description of the
Exchange Offer, including the purpose of the Exchange Offer, the basis upon
which the Exchange Notes are offered and expenses incurred in connection with
the Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus with
any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired as a result of market making activities or
other trading activities. The Company will, during the period ending 180 days
after the last Exchange Date, make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
Neither the Company nor any of its affiliates has entered into any
arrangement or understanding with any broker-dealer to distribute the Exchange
Notes and will not receive any proceeds from any sale of Exchange Notes by any
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of the resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker or dealer and/or the purchaser of any such
Exchange Notes. Any broker or dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such person may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
The Company has agreed in the Registration Rights Agreement to pay all
expenses incident to the Exchange Offer other than commissions or concessions of
any brokers or dealers and expenses of counsel for the underwriters or Holders
of the Exchange Notes.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes being offered
hereby will be passed upon for the Company by Schulte Roth & Zabel LLP, 900
Third Avenue, New York, New York 10022.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and is included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
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GLOSSARY
CARRIER: A party that resells either owned or leased transmission capacity
to other resellers or to end-users.
CARRIER GRADE SWITCH: A switch of the type and quality typically used by a
PTO or other large telecommunications service provider.
FACILITIES-BASED: Ownership of long distance interexchange and transmission
facilities.
INTEREXCHANGE: Between two local telephone exchanges. "Interexchange
facilities" are facilities used to transmit calls between local telephone
exchanges. "Interexchange carriers" are carriers providing long distance
telephone service.
IRU: Indefeasible Rights of Use. The rights to use a telecommunications
system, usually an overseas cable, with most of the rights and interests of
ownership, but without the right to control or manage the facility and,
depending upon the particular agreement, without any right to salvage or duty to
dispose of the cable at the end of its useful life.
LEASED LINES: Point-to-point permanent connections that can carry voice and
data. Leased lines are owned and maintained by PTOs or third party resellers.
LEC: Local Exchange Carrier. Companies from which Econophone and other long
distance providers must purchase "access services" to originate and terminate
calls in the United States.
LOCAL CONNECTIVITY: Physical circuits connecting the facilities of a
telecommunications service provider to the interexchange and transmission
facilities of a PTO, providing it with access into and egress from the PSTN.
MULTIPLEXING EQUIPMENT: Equipment that compresses a telephone call so that
more calls can simultaneously travel over the same line.
NODE: Equipment that collects and relays telephone calls to a switch. A node
is functionally equivalent to a point of presence; however, unlike a point of
presence, a node is connected to multiplexing equipment that compresses the call
traffic to be transmitted to a switch.
POINT OF PRESENCE: A location where a long distance carrier has installed
transmission equipment that collects calling traffic and relays calls to a
switch. A point of presence features equipment that is functionally equivalent
to a node; however, unlike a node, the equipment at a point of presence is not
connected to multiplexing equipment.
PSTN: Public switched telephone network. Refers to the telephone network
accessible by the public at large through private lines, wireless systems and
pay phones.
PTO: Principal Telecommunications Operators. The dominant carrier in each
country, often government-owned or protected. Commonly referred to as the
Postal, Telephone and Telegraph Company, or PTT.
RBOC: Regional Bell Operating Company. The regional long distance service
providers divested by AT&T in 1984.
SWITCH: A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of voice and/or data.
VALUE-ADDED FEATURE: A feature coupled with a transmission service that
enhances, but is not necessary for providing, the transmission service.
Value-added features that can be offered with voice telephony include, without
limitation, speed dial, redial and voice mail.
VIRTUAL PRIVATE NETWORK: A service provided to customers that only can be
used to call preprogrammed calling locations, typically within the customer's
company. Calls are completed using abbreviated dialing.
G-1
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ECONOPHONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................... F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996 AND UNAUDITED AS OF JUNE 30, 1997............. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE
UNAUDITED SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997................................................. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
FOR THE UNAUDITED SIX MONTH PERIOD ENDED JUNE 30, 1997................................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE
UNAUDITED SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997................................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-7
</TABLE>
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Econophone, Inc.:
We have audited the accompanying consolidated balance sheets of Econophone,
Inc. (a New York corporation) and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Econophone,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
March 4, 1997 (except with respect to matters discussed in Note 15 as to which
the date is July 1, 1997)
F-2
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ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
AND JUNE 30, 1997
<TABLE>
<CAPTION>
JUNE 30,
1997
1995 1996 -------------
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $ 106,122 $ 6,271,641 $ 631,833
Accounts receivable, net of allowance for doubtful accounts of
$470,610, $761,372 and $761,372, respectively................... 7,349,134 7,946,042 12,764,690
Prepaid expenses and other current assets......................... 160,826 511,326 1,666,420
------------- ------------- -------------
Total current assets.......................................... 7,616,082 14,729,009 15,062,943
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS net of accumulated
depreciation and amortization of $634,749, $1,643,151 and
$2,418,499, respectively (Note 4)................................. 2,581,317 6,242,472 11,224,774
TERRITORIAL RIGHTS (Note 5)......................................... -- 1,922,222 1,855,556
OTHER ASSETS (Note 6)............................................... 310,822 1,783,855 1,935,802
------------- ------------- -------------
Total assets.................................................. $ 10,508,221 $ 24,677,558 $ 30,079,075
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................................. $ 7,528,359 $ 5,190,086 $ 9,211,071
Accrued expenses and other current liabilities.................... 498,663 6,188,847 6,939,493
Short-term borrowings (Note 8).................................... 200,000 2,127,726 485,810
Current maturities of long-term debt (Note 8)..................... 323,119 753,881 649,628
Current maturities of obligations under capital lease (Note 14)... 24,855 130,867 153,882
Current maturities of notes payable--related party (Note 12)...... 9,981 7,884 10,234
Deferred revenue.................................................. 494,409 859,803 1,509,803
Bridge loan payable............................................... -- -- 7,000,000
------------- ------------- -------------
Total current liabilities..................................... 9,079,386 15,259,094 25,959,921
LONG-TERM DEBT (Note 8)............................................. 354,415 1,707,941 4,101,752
OBLIGATIONS UNDER CAPITAL LEASE (Note 14)........................... 36,332 235,074 385,758
NOTES PAYABLE--RELATED PARTY (Note 12).............................. 328,070 319,531 311,271
COMMITMENTS AND CONTINGENCIES (Note 14)
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 11)........... -- 13,357,940 14,281,985
STOCKHOLDERS' EQUITY (DEFICIT) (Note 10):
Common stock--voting, par value $.0001; authorized 29,250,000
shares; 20,000,000 shares issued and outstanding in 1995 and
1996............................................................ 2,000 2,000 2,000
Non-Voting Common stock, par value $.0001; authorized 500,000
shares; no shares issued and outstanding........................ -- -- --
Additional paid-in capital........................................ 391,883 481,870 481,870
Cumulative translation adjustment................................. -- -- (10,664)
Retained earnings (accumulated deficit)........................... 316,135 (6,685,892) (15,434,818)
------------- ------------- -------------
Total stockholders' equity (deficit).......................... 710,018 (6,202,022) (14,961,612)
------------- ------------- -------------
Total liabilities and stockholders' equity (deficit).......... $ 10,508,221 $ 24,677,558 $ 30,079,075
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES.............................. $ 8,522,611 $ 27,490,490 $ 45,102,882 $ 22,991,516 $ 30,445,881
COST OF SERVICES...................... 5,539,856 19,735,530 35,368,603 16,332,974 24,011,504
------------ ------------- ------------- ------------- -------------
Gross profit.................... 2,982,755 7,754,960 9,734,279 6,658,542 6,434,377
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 2,012,282 7,087,735 14,833,779 7,805,162 12,896,158
DEPRECIATION AND AMORTIZATION......... 168,022 388,508 1,127,429 393,494 1,135,856
------------ ------------- ------------- ------------- -------------
Income (loss) from operations... 802,451 278,717 (6,226,929) (1,540,114) (7,597,637)
OTHER INCOME.......................... -- 31,425 106,580 20,922 86,663
FOREIGN CURRENCY EXCHANGE GAIN (LOSS),
net................................. 100,000 (41,097) 26,649 (10,298) (28,321)
INTEREST EXPENSE, net................. (103,134) (147,826) (295,677) (77,929) (285,586)
------------ ------------- ------------- ------------- -------------
Income (loss) before provision
for taxes..................... 799,317 121,219 (6,389,377) $ (1,607,419) $ (7,824,881)
PROVISION (BENEFIT) FOR TAXES......... 72,994 -- -- -- --
------------ ------------- ------------- ------------- -------------
Net income (loss)............... $ 726,323 $ 121,219 $ (6,389,377) $ (1,607,419) $ (7,824,881)
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
EARNINGS (LOSS) PER SHARE............. $ .04 $ .01 $ (.32) $ (.08) $ (.39)
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
PRO FORMA INFORMATION (Note 2):
Income before pro forma provision
for income taxes.................. $ 799,317 $ 121,219
Pro forma provision for income
taxes............................. 344,762 41,214
------------ -------------
Pro forma net income............ $ 454,555 $ 80,005
------------ -------------
------------ -------------
PRO FORMA NET INCOME PER SHARE........ $ .02 $ .00
------------ -------------
------------ -------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN THE COMPUTATION...... 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE
----------------------- PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
------------ --------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 20,000,000 $ 2,000 $ 391,883 $ 694,217 -- $ 1,088,100
Net income............................ -- -- -- 121,219 -- 121,219
Dividends............................. -- -- -- (499,301) -- (499,301)
------------ --------- ---------- -------------- ----------- --------------
BALANCE, December 31, 1995.............. 20,000,000 2,000 391,883 316,135 -- 710,018
Distribution of S Corporation
Earnings............................ -- -- -- (316,135) -- (316,135)
Contribution of Capital to C
Corporation......................... -- -- 89,987 -- -- 89,987
Net loss.............................. -- -- -- (6,389,377) -- (6,389,377)
Accretion of preferred stock.......... -- -- -- (15,115) -- (15,115)
Dividends on preferred stock.......... -- -- -- (281,400) -- (281,400)
------------ --------- ---------- -------------- ----------- --------------
BALANCE, December 31, 1996.............. 20,000,000 $ 2,000 $ 481,870 $ (6,685,892) -- $ (6,202,022)
Net Loss.............................. -- -- -- (7,824,881) -- (7,824,881)
Accretion of Preferred Stock.......... -- -- -- (45,451) -- (45,451)
Dividends on Preferred Stock.......... -- -- -- (878,594) -- (878,594)
Cumulative Translation Adjustment..... -- -- -- -- (10,664) (10,664)
------------ --------- ---------- -------------- ----------- --------------
BALANCE, June 30, 1997 (unaudited)...... 20,000,000 $ 2,000 $ 481,870 $ (15,434,818) $ (10,664) $ (14,961,612)
------------ --------- ---------- -------------- ----------- --------------
------------ --------- ---------- -------------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 726,323 $ 121,219 $(6,389,377) $(1,607,419) $(7,824,881)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation and amortization........................ 168,022 388,508 1,127,429 393,646 1,135,856
Provision for doubtful accounts...................... 420,126 721,215 290,762 (62,620) --
Effect of prior period adjustment directly related to
sales.............................................. 60,889 -- -- -- --
Changes in assets and liabilities
Increase in accounts receivable...................... (2,138,140) (5,694,774) (2,887,670) (449,486) (4,840,819)
Decrease (increase) in prepaid expenses and other
current assets..................................... 39,786 (189,879) (350,500) (144,200) (780,514)
Increase in other assets............................. -- -- (1,514,284) (2,109) (798,198)
Increase in accounts payable, accrued expenses and
other current liabilities.......................... 1,197,291 6,196,439 3,351,953 1,886,558 4,760,967
Increase in deferred revenue......................... -- 494,409 365,394 45,280 650,000
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities....................................... 474,297 2,037,137 (6,006,293) 59,650 (7,697,589)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................... (735,555) (1,206,077) (4,246,997) (2,152,090) (3,285,305)
Issuance of note receivable............................ (65,000) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities.............. (800,555) (1,206,077) (4,246,997) (2,152,090) (3,285,305)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock.............. -- -- 13,061,425 -- --
Proceeds from bridge loan.............................. -- -- -- -- 7,000,000
Proceeds from line of credit........................... -- 1,760,000 800,000 -- --
Repayments of line of credit........................... (48,500) (1,860,000) (1,000,000) -- --
Proceeds from short-term borrowings.................... -- -- 5,436,582 50,000 --
Repayments of short-term borrowings.................... -- -- (3,308,855) (1,641,916)
Proceeds from long-term debt........................... 350,000 -- 2,232,195 4,201,847 118,618
Repayments of long-term debt........................... -- (116,400) (447,910) (548,009)
Repayments of notes payable--related party............. (8,080) (9,383) (10,636) (5,910)
Repayments of capital leases........................... -- (85,379) (117,844) (40,874) (127,706)
Dividend paid.......................................... -- (499,301) (226,148) (226,148) --
Net repayments of shareholder loans.................... (1,414) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities....................................... 292,006 (810,463) 16,418,809 3,436,814 5,343,086
---------- ---------- ---------- ---------- ----------
(Decrease) increase in cash........................ (34,252) 20,597 6,165,519 1,344,374 (5,639,808)
CASH, beginning of period.............................. 119,777 85,525 106,122 106,122 6,271,641
---------- ---------- ---------- ---------- ----------
CASH, end of period.................................... $ 85,525 $ 106,122 $6,271,641 $1,450,496 $ 631,833
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest............................................. $ 60,661 $ 193,455 $ 210,280 $ 74,054 $ 245,297
Income taxes......................................... 8,000 193,554 -- -- --
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of preferred stock........................... $ -- $ -- $ 15,115 -- $ 45,451
Accrued dividends on preferred stock................... -- -- 281,400 -- 878,594
Capital leases entered into to purchase fixed assets... 170,000 471,000 423,060 -- 2,472,345
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. NATURE OF BUSINESS
Econophone, Inc. ("Econophone") is a switch-based provider of long-distance
telecommunications services in certain major western European and U.S. markets.
Econophone's customer base consists primarily of small- and medium-sized
businesses, ethnic communities, expatriates and carriers, with a focus on
customers with significant international calling needs. In the United Kingdom
and the United States, Econophone provides principally international and
domestic long distance, calling card, prepaid and carrier services. In
continental Europe, Econophone provides principally international long distance,
calling card and prepaid services.
In March 1996, the Company changed its name to Econophone, Inc. from
Switchtel Communications Corp.
Econophone intends to significantly expand its operations in its current
markets and to enter into a number of markets where it currently does not have
operations. Econophone's prospects must, therefore, be considered in light of
the risks, expenses, problems and delays inherent in substantially expanding a
business and in establishing a new business in an evolving industry. The Company
is subject to a number of risks and uncertainties associated with its rapid
growth and current plans for expansion, including, among other things, its
limited operating history and its expectation to incur negative cash flow from
operations for at least the next couple of years and operating and net losses
for at least the next few years. In addition, the Company's dependence on
independent sales agents and resellers, its requirements for substantial capital
expenditures in the future and its current reliance on availability of
telecommunications transmission lines, which is limited, could influence the
Company's future results. (See further discussion included in "Risk Factors").
In April 1997, the Company received bridge financing to support capital
expenditures and general operations (Note 15).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Econophone and
its wholly owned subsidiaries: American Telemedia, Ltd. (England), Econophone,
Ltd. (Ireland), Econophone, Ltd. (Brussels), Econophone France SARL, Econophone
GmbH (Germany), Gemlink (Antwerp), Econophone (Hellas), S.A. (Greece), and its
70% owned subsidiary, Telco Global Communications Ltd. (England) (collectively,
the "Company"). The full amount of the net loss for the year ended December 31,
1996 for Telco Global Communications Ltd. has been recorded in the consolidated
financial statements of the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet at March 31, 1997 and the
consolidated statements of operations, shareholders' equity and cash flows for
the three months ended March 31, 1997 and 1996 include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position and the Company's
results of operations and cash flows.
F-7
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company records revenue based on minutes of service provided. Deferred
revenue consists of unused minutes on prepaid calling cards.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets, which range
from three to seven years. Beginning July 1996, the Company adjusted the useful
lives of equipment to be more reflective of their actual usefulness. The change
in estimate was accounted for on a going forward basis. The impact to the 1996
results of operations was not material. Amortization of leasehold improvements
is computed using the straight-line method over the lesser of the lease term or
estimated useful lives of the improvements.
INTERNAL-USE SOFTWARE
The Company capitalizes certain software development costs for internal use.
For the year ended December 31, 1996, the Company incurred approximately
$230,000 of such costs and have included them in Other Assets. The capitalized
software development costs are reported at the lower of unamortized cost or net
realizable value. These costs are amortized on a straight-line basis over the
estimated useful life, generally two years.
LONG-LIVED ASSETS
The Company's policy is to record long-lived assets at cost. In accordance
with Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," these assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amounts of the assets may
not be reasonable. Furthermore, the assets are evaluated for continuing value
and proper useful lives by comparison to expected future cash projections. At
December 31, 1996, the adoption of SFAS 121 did not have a material effect on
the Company. The Company amortizes these costs over the expected useful life of
the related asset.
INCOME TAXES
Prior to 1996, the Company was an S Corporation for federal and state income
tax purposes and, as a result, the earnings of the Company were taxable directly
to the shareholders. During 1996, the Company changed its tax status to a C
Corporation. In addition to the federal, state and local income taxes, the
F-8
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company is also liable for New York State taxes as a telephone and transmission
corporation and for New York City General Corporation Tax and Utilities Tax.
In the accompanying financial statements, pro forma income taxes have been
provided for at the expected effective rate as if the Company was a C
Corporation for the years ended December 31, 1994 and 1995.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the year in which those temporary
differences are expected to be recovered or settled.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation awards to employees and directors using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee or director
must pay to acquire the stock.
As required, the Company has adopted SFAS No. 123 to account for stock-based
compensation awards to outside consultants and affiliates. Accordingly,
compensation costs for stock option awards to outside consultants and affiliates
is measured at the date of grant based on the fair value of the award using The
Black-Scholes option pricing model. (See Note 13).
FOREIGN CURRENCY EXCHANGE
The financial statements of all foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of operations. Translation
adjustments generally are reflected as foreign currency translation adjustments
in the Statement of Stockholders' Equity and, accordingly, have no effect on net
income. Translation adjustments, which were immaterial for the years ended
December 31, 1996 and 1995, are reflected as foreign currency transaction
adjustments in the Statements of Operations. Transaction adjustments for all
foreign subsidiaries are included in income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
PER SHARE DATA
Per share data is based on the weighted average number of common shares
outstanding and dilutive common equivalent shares assumed to be outstanding
during the period (using the treasury stock method
F-9
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for dilutive common equivalent shares). Common equivalent shares consist of
options to purchase common stock.
Fully diluted loss per share has not been presented for the outstanding
options as they are anti-dilutive.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 ("SFAS No. 107") entitled "Disclosures About Fair
Value of Financial Instruments," which requires entities to disclose information
about the fair values of their financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
LONG AND SHORT-TERM DEBT
The carrying amount of the Company's short-term borrowings approximates fair
value. The fair value of the Company's long-term debt, including current
portions, is determined based on management's estimates of market prices for
similar debt instruments or on the current rates offered to the Company for debt
with similar maturities.
FOREIGN EXCHANGE CONTRACTS
The Company uses foreign exchange contracts from time to time to offset the
effects of exchange rate fluctuations of funds collectible in foreign currencies
in the United Kingdom. The funds are hedged approximately two to four weeks in
advance. This occurs when funds collected in British Pounds Sterling are
collected in the United Kingdom and transferred to the Company. As of December
31, 1996, the Company had no open foreign exchange contracts. As of December 31,
1995, the Company had open foreign exchange contracts totaling approximately
$1,634,000.
F-10
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
Equipment......................................................... $ 2,998,488 $ 7,189,102
Computer software................................................. 66,083 182,963
Furniture and fixture............................................. 35,124 136,399
Leasehold improvements............................................ 116,371 377,159
------------ ------------
3,216,066 7,885,623
Less-Accumulated depreciation and amortization.................... (634,749) (1,643,151)
------------ ------------
Property, equipment and leasehold improvements, net......... $ 2,581,317 $ 6,242,472
------------ ------------
------------ ------------
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996 was
$366,019 and $1,008,402, respectively.
5. TERRITORIAL RIGHTS
In September 1994, the Company entered into a joint venture with Europhone
International Ltd. ("EI") to jointly market Econophone's services in the United
Kingdom. EI engaged in sales and marketing, while Econophone provided network
support, billing and transmission services.
In connection with the modification of the joint marketing arrangement, EI
granted the Company the right to compete with them in exchange for forgiveness
of the net receivable due to the Company of $2,000,000. The Company has, as a
result, established an asset for these territorial rights which will be
amortized over 15 years. The current value will be subject to review for
impairment as outlined in Note 2.
Amortization expense for the year ended December 31, 1996 was $77,778.
6. OTHER ASSETS
Other assets consist primarily of security deposits and software development
costs.
F-11
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
7. CONCENTRATIONS
CREDIT RISK
The Company's trade accounts receivable are subject to credit risk. Although
diversified due to the large number of customers comprising the geographically
dispersed customer base, the Company does not require collateral or other
security to support its receivables. The Company's total sales and accounts
receivable for the years ended and as of December 31, 1994, 1995, and 1996 can
be detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996
----------------------- ----------------------- -----------------------
<CAPTION>
ACCOUNTS ACCOUNTS ACCOUNTS
REVENUES RECEIVABLE REVENUES RECEIVABLE REVENUES RECEIVABLE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
England......................................... $3,143,051 $ 886,593 $14,172,747 $4,621,737 $15,583,016 $2,501,698
United States................................... 2,728,130 136,248 8,292,415 958,572 18,044,513 4,074,424
Belgium......................................... 2,463,407 998,225 4,235,155 1,416,526 9,276,700 1,630,538
Other Europe.................................... 188,023 76,193 790,173 822,909 2,198,653 500,753
---------- ----------- ---------- ----------- ---------- -----------
8,522,611 2,097,289 27,490,490 7,819,744 45,102,882 8,707,414
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
</TABLE>
Management does not anticipate incurring losses on its trade receivables in
excess of established allowances based on factors surrounding the credit risk of
specific customers and historical trends.
The revenues of Europhone International, which accounted for greater than
10% of total revenues in each of the past three years, were $15.3 million, $14.2
million and $3.1 million for each of the years ended December 31, 1996, 1995 and
1994, respectively.
SUPPLIER
Sprint Communication, Inc. ("Sprint"), the Company's principal supplier of
telephone lines, has a recorded lien on all accounts receivable of the Company.
This lien is subordinated to the debt owed to Israel Discount Bank of New York
(Note 8). For the years ended December 31, 1995 and 1996, Sprint supplied
approximately $10.2 million and $9.4 million, respectively, of telephone line
usage to the Company. This amount has been included in cost of services.
8. BORROWINGS
At December 31, 1996, the Company was obligated under the following debt
agreements:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Short-term borrowings:
IDT note (a)...................................... $ 1,176,370 $ -- $ 1,176,370
Sprint note (b)................................... 951,356 -- 951,356
------------ ------------ ------------
$ 2,127,726 $ -- $ 2,127,726
------------ ------------ ------------
------------ ------------ ------------
Long-term debt:
NTFC note (c)..................................... $ 388,302 $ 1,424,945 $ 1,813,247
IDB note (d)...................................... 72,167 -- 72,167
Cable lines (e)................................... 293,412 282,996 576,408
------------ ------------ ------------
$ 753,881 $ 1,707,941 $ 2,461,822
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-12
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
8. BORROWINGS (CONTINUED)
- ------------------------
(a) On October 22, 1996, the Company borrowed $2,896,812 from IDT Corporation
("IDT"). The loan is evidenced by a secured promissory note due October 15,
1997. Interest accrues at a rate of 13% per annum. The collateral securing
repayment of the loan consists of the Company's fixed and intangible assets
as of June 30, 1996. The repayment of the loan commenced on October 31, 1996
with a payment of $1,500,000, and the balance will be comprised of twelve
successive monthly installments. As of December 31, 1996, the Company has
repaid a total of $1,720,442. IDT is also a customer of the Company.
(b) In October 1996, the Company converted a trade payable to Sprint
Communications Company L.P. ("Sprint") into a note payable. Such
indebtedness is evidenced by an unsecured promissory note due March 31,
1997. Interest accrues at a rate of 11% per annum. The repayment of the loan
commenced on October 30, 1996. As of December 31, 1996, the Company repaid a
total of $925,666.
(c) On May 28, 1996, the Company entered into an equipment loan and security
agreement with NTFC Capital Corporation ("NTFC") (as amended, the
"Agreement") permitting the Company to borrow up to $5.0 million to purchase
equipment and pay certain other related expenses. Through March 27, 1997,
$4.8 million has been drawn down under two tranches of the facility to
purchase equipment and to pay certain other related expenses. These tranches
are to be paid in 60 equal monthly installments and mature between July 1,
2001 and April 1, 2002 at an interest rate equal to the 90-day commercial
paper rate plus 395 basis points (9.41% at December 31, 1996), which will be
adjusted quarterly. As of March 31, 1997 $4.5 million of indebtedness was
outstanding under the NTFC Agreement. The NTFC Agreement as amended by the
Second Amendment, dated June 26, 1997, requires Econophone to maintain a
Debt Service Coverage Ratio (as defined therein) for each quarter through
December 31, 1999 of not less than 1.10 to 1.00 and for each fiscal quarter
thereafter of not less than 1.25 to 1.00. In addition, Econophone must
maintain a cash balance of not less than $1,500,000. Econophone also must
have EBITDA (as defined in the NTFC Agreement) of not less than:
($10,000,000) for the fiscal year ending December 31, 1997; ($5,000,000) for
the fiscal year ending December 31, 1998; $3,000,000 for the fiscal year
ending December 31, 1999; $10,000,000 for the fiscal year ending December
31, 2000; and $10,000,000 for the fiscal year ending December 31, 2000.
Prior to the execution and delivery of the Second Amendment, Econophone was
not in compliance with the then existing Debt Service Coverage Ratio,
minimum cash balance and EBITDA requirements of the NTFC Agreement, although
such noncompliance was waived by NTFC. The execution and delivery of the
Second Amendment was a condition to the closing of the Offering.
(d) The Company has an installment note with Israel Discount Bank of New York
("IDB") with a variable interest rate of 2.5% above prime rate (11% at
December 31, 1996). Monthly principal payments of $9,700 are required
through July 15, 1997, with a balloon payment on August 15, 1997. At
December 31, 1996, the Company was in compliance with the requirements to
maintain a compensating balance of 10% of the outstanding debt.
(e) The Company has six notes payable related to the purchase of cable lines.
Three of these notes bear interest at 12%, and mature through September
1998. The remaining three notes bear interest at LIBOR plus 5%, and mature
on June 30, 2001. These notes have quarterly principal and interest payments
ranging from $7,017 to $30,291.
F-13
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
8. BORROWINGS (CONTINUED)
Maturities of long-term debt over the next five years are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 753,881
1998............................................................ 530,939
1999............................................................ 444,447
2000............................................................ 444,447
2001............................................................ 288,108
---------
Total........................................................... $2,461,822
---------
---------
</TABLE>
The Company also has a credit agreement with IDB pursuant to which
Econophone may borrow up to $300,000. Interest accrues on all amounts
outstanding at a rate equal to the prime rate plus 2% per annum. As of December
31, 1996, the Company had no borrowings outstanding against this credit
agreement.
9. TAXES
As a telephone carrier and reseller doing business in New York State, the
Company is required to file annual telephone and transmission tax returns in
accordance with New York State tax laws. These returns include taxes on net
worth, gross sales and gross profit. In addition, each type of tax requires an
additional tax surcharge. The Company also remits federal and state excise taxes
and state and city sales tax. All of these taxes are included in general and
administrative expenses.
As of December 31, 1996, the Company had a net operating loss carryforward
of approximately $6,300,000 which is available to reduce its U.S. federal
taxable income and expires in 2011. A valuation allowance has been established
against this amount due to the uncertainties surrounding the utilization of the
carryforward.
A value added tax "VAT" is a tax charged on goods and services that is
designed to be borne by the ultimate end user of the goods and services.
Pursuant to the Sixth European Commission (the "EC") VAT Directive adopted in
1977 (the "VAT Directive"), providers of telecommunications services in the
European Union are liable for VAT in the EU member state where the provider of
the services is established. The provider, in turn, charges VAT to its customers
at the rate prevailing in the provider's state of establishment. To date, the
collection of VAT by Econophone does not appear to have a material adverse
effect on its ability to attract or retain customers and the collection of VAT
has not required Econophone to reduce its prices to remain competitive.
10. STOCKHOLDERS' EQUITY (DEFICIT)
On November 1, 1996, the Company's Articles of Incorporation were amended to
change all of the authorized shares of Common Stock and Non-Voting Common Stock
from no par value per share to $.0001 per value per share, to increase the
number of shares of authorized Common Stock from 400 shares to 29,250,000
shares, to increase the number of authorized shares of Non-Voting Common Stock
from 19,600 shares to 500,000 shares and to authorize the issuance of 250,000
shares of Preferred Stock (Note 11). Additionally, the Company effected a
recapitalization whereby the outstanding shares of Common Stock were converted
on a 73,125:1 basis.
F-14
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
All information contained in the accompanying financial statements and
footnotes has been retroactively restated to give effect to these transactions.
11. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 1, 1996, the Company entered into a Securities Purchase
Agreement (the "Agreement") with Princes Gate Investors II, L.P., an affiliate
of Morgan Stanley & Co., Incorporated, whereby it authorized and issued 140,000
shares of $.01 par value Redeemable Convertible Preferred Stock (the "Series A
Preferred") for a purchase price of approximately $13,061,000, net of issuance
costs. The stated redemption value on the preferred stock is $14,000,000 (or
$100 per share). The Series A Preferred is senior to all other capital stock of
the Company.
The Series A Preferred shall accrue monthly cumulative dividends on each
outstanding share at a rate of $1.00 per month. The accrued and unpaid dividends
shall compound monthly at a rate of 12% per year. The dividends begin to accrue
and compound interest from the issuance date of the preferred stock and cease to
accrue upon the closing of a "High-Yield Offering," as defined in the Agreement.
The mandatory redemption of the Series A Preferred is October 31, 2006. The
redemption shall be in cash.
Each holder of the Series A Preferred shall have the right, at the option of
the holder, to convert any of its shares of Series A Preferred, into a number of
fully paid and nonassessable whole shares of common stock. At any time, any
holder of Series A Preferred Stock may convert all or any portion thereof into
Common Stock of Econophone. As of September 1, 1997, the shares of Series A
Preferred Stock outstanding were convertible into 3,420,701 shares of Common
Stock. Notwithstanding the foregoing, until November 2, 1997, the holders of
Series A Preferred Stock may only convert an aggregate of 100,000 shares of
Series A Preferred Stock. The number of shares of Common Stock that each share
of Series A Preferred Stock is convertible into is equal to the number of shares
of Common Stock outstanding on November 1, 1996 (on a fully diluted basis),
which was 22,564,000, multiplied by a fraction (i) the numerator of which is
equal to the stated value with respect to the shares of Series A Preferred Stock
being so converted, plus any dividends accrued thereon, and (ii) the denominator
of which is equal to $100.0 million plus the number of dollars received by
Econophone since November 1, 1996 from the exercise of specified options or
warrants.
12. RELATED PARTY TRANSACTIONS
The Company has notes payable at December 31, 1995 and 1996 due to various
related parties. These notes are unsecured, and accrue interest at annual rates
ranging from 9% to 18%. The maturities on the notes range from December 8, 1997
to November 15, 1998.
The Company has a non-interest bearing note receivable at December 31, 1996
for approximately $143,000 from a related party.
13. STOCK-BASED COMPENSATION PLANS
On October 31, 1996, the Board of Directors adopted the Econophone, Inc.
1996 Flexible Incentive Plan (the "1996 Plan") and an Incentive Stock Option
Agreement with the Chief Operating and Financial
F-15
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Officer of the Company. The Company accounts for awards granted to employees and
directors under APB No. 25, under which no compensation cost has been recognized
for stock options granted. Had compensation cost for these stock options been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Net Income:
As Reported $ (6,389,377)
Pro Forma (6,602,979)
Primary EPS:
As Reported (.32)
Pro Forma (.33)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
During 1996, under the 1996 Plan, the Company granted 10,000 options to
outside consultants. All transactions with individuals other than those
considered employees, as set forth within the scope of APB No. 25, must be
accounted for under the provisions of SFAS No. 123. Under SFAS No. 123, the fair
value of the options granted to the consultants as of the date of grant using
the Black-Scholes pricing model is $8,936. The NQSOs (as hereinafter defined)
were granted to the consultants for terms of up to ten years, at an exercise
price of $2.50 and are exercisable in whole or in part at stated times from the
date of grant up to three years from the date of grant. As of December 31, 1996,
none of the options granted to the consultants were exercisable and the expense
recognized in fiscal 1996 relating to these options was $496.
The 1996 Plan authorizes the granting of awards, the exercise of which would
allow up to an aggregate of 3,000,000 shares of the Company's common stock to be
acquired by the holders of said awards. The awards can take the form of
Incentive Stock Options ("ISOs"), Non-qualified Stock Options (NQSOs), Stock
Appreciation Rights ("SARs"), Restricted Stock and Unrestricted Stock. The SARs
may be awarded either in tandem with options or on a stand-alone basis. Awards
may be granted to key employees, directors and consultants. ISOs and NQSOs are
granted in terms not to exceed ten years and become exercisable as set forth
when the award is granted. Options may be exercised in whole or in part. The
exercise price of the ISOs is the market price of the Company's common stock on
the date of grant. The exercise price of NQSOs shall never be less than the par
value of the Company's common stock. Any plan participant who is granted ISOs
and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option price with at least 110% of the fair
market value on the date of grant and the option must be exercised within five
years from the date of grant. Under the Company's 1996 Plan, ISOs and have been
granted to key employees and directors for terms of up to ten years, at an
exercise price of $2.50, and are exercisable in whole or in part at stated times
from the date of grant up to three years from the date of grant. At December 31,
1996, 226,527 options were exercisable under the Company's 1996 Plan.
F-16
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Option activity during 1996 is as follows:
<TABLE>
<CAPTION>
1996
---------------------------
<S> <C> <C>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
Outstanding at beginning of year.................................. -- --
Granted........................................................... 2,606,500 $ 2.50
Outstanding at end of year........................................ 2,606,500 2.50
----------
----------
Exercisable at end of year........................................ 226,527 2.50
Weighted average fair value of options granted.................... .89
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rate of 6.23 percent;
expected life of three years; expected volatility of 43 percent and expected
dividend yield of zero percent.
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICE 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ----------- -------------- ------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 2.50 2,606,500 9.65 $ 2.50 226,527 $ 2.50
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company has various lease agreements for offices, automobiles and other
property. Future minimum annual lease payments under the Company's operating and
capital leases with initial or remaining terms of one year or more at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
---------- ----------
<S> <C> <C>
1997.................................................................. $ 72,786 $ 130,867
1998.................................................................. 67,686 128,258
1999.................................................................. 51,353 63,450
2000.................................................................. 22,951 28,826
2001.................................................................. 13,728 14,540
---------- ----------
Total minimum lease payments.......................................... $ 228,504 $ 365,941
---------- ----------
---------- ----------
</TABLE>
The rent expense for the year ended December 31, 1996 is $393,904.
The Company has entered into employment agreements with certain officers
which expire by December 31, 1999. The aggregate commitment for future
compensation under these agreements is approximately $1,530,000. These officers
are also eligible for annual bonuses based on performance.
F-17
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
15. SUBSEQUENT EVENTS
On April 24, 1997, the Company authorized the issue and sale of $15.0
million of Senior Secured Increasing Rate Notes (the "Bridge Notes"), due April
24, 1998. The interest rate is 15% per annum for the first six months after the
Commitment Date, 16% per annum for the next three months and 17% per annum
thereafter. The Company will use the net proceeds of the Bridge Notes for
capital expenditures and general corporate purposes, including funding losses.
The Bridge Notes contain certain financial covenants that will restrict the sale
of assets, the incurrence of additional indebtedness and certain investments and
acquisitions by the Company.
On July 1, 1997, the Company authorized the issue and sale of 155,000 Units.
Each Unit consisted of one 13.5% Senior Note (the "Senior Notes"), due July 1,
2007 and one Warrant to purchase 8.167 shares of Common Stock. The Company will
use the net proceeds of the Senior Notes for capital expenditures and general
corporate purposes, including funding losses. The Senior Notes contain certain
financial covenants that will affect the sale of assets, the incurrence of
additional indebtedness and certain investments and acquisitions by the Company.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information........................... 3
Prospectus Summary.............................. 4
Risk Factors.................................... 14
The Exchange Offer.............................. 29
Use of Proceeds................................. 37
Capitalization.................................. 38
Selected Consolidated Financial Data............ 39
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 41
Business........................................ 51
Management...................................... 72
Certain Transactions............................ 78
Description of Certain Indebtedness............. 83
Principal Stockholders.......................... 85
Description of the Exchange Notes............... 86
Certain Federal Income Tax Considerations....... 114
Plan of Distribution............................ 119
Legal Matters................................... 119
Experts......................................... 119
Glossary........................................ G-1
Index to Financial Statements................... F-1
</TABLE>
--------------------------
UNTIL , 199 , ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS 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.
ECONOPHONE, INC.
OFFER TO EXCHANGE
$155,000,000
OF NEW
13 1/2% SENIOR NOTES DUE 2007
FOR
$155,000,000
OF ANY AND ALL OUTSTANDING
13 1/2% SENIOR NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
THE BANK OF NEW YORK
REORGANIZATION SECTION
101 BARCLAY STREET, FLOOR 7 EAST
NEW YORK, NEW YORK 10286
ATTN: SHILPA TRIVEDI
TELEPHONE:(212) 815-5789
FACSIMILE:(212) 815-6339
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth of the Certificate of Incorporation, as amended, provides for
indemnification of directors and officers to the fullest extent permitted by the
relevant provisions of the Business Corporation Law of the State of New York
(the "BCL"). The BCL permits a corporation to limit or eliminate a director's or
officer's personal liability to the corporation or the holders of its capital
stock for breach of duty. This limitation is generally unavailable for acts or
omissions by a director or officer which were (i) in bad faith, (ii) were the
result of active and deliberate dishonesty and were material to the cause of
action so adjudicated or (iii) involved a financial profit or other advantage to
which such director was not legally entitled. The Certificate of Incorporation
and the BCL also prohibit limitations on director or officer liability for acts
or omissions which resulted in a violation of a statute prohibiting certain
dividend declarations, certain payments to stockholders after dissolution and
particular types of loans. The effect of these provisions is to eliminate the
rights of Econophone and its stockholders (through stockholders' derivative
suits on behalf of Econophone) to recover monetary damages against a director or
officer for beach of fiduciary duty as a director (including breaches resulting
from grossly negligent behavior), except in the situations described above.
These provisions will not limit the liability of directors or officer under the
federal securities laws of the United States. Article Sixth of Econophone's
Certificate of Incorporation, as amended, is qualified in its entirety by
reference to the relevant provisions of the Certificate of Incorporation (filed
as Exhibit 3.1)
See Item 22 for a statement of the Company's undertaking as to the
Securities and Exchange Commission's position respecting indemnification arising
under the Securities Act of 1933.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Econophone, Inc., as amended.
3.2 Amended and Restated Bylaws of Econophone, Inc.
4.1 Securityholders Agreement, dated as of November 1, 1996, between Alfred West, Econophone, Inc. and
Princes Gate Investors II, L.P.
4.2 Note Purchase Agreement, dated as of April 24, 1997, between Econophone, Inc. and Morgan Stanley Group
Inc.
4.3* Form of Note under Note Purchase Agreement.
4.4* Specimen of Econophone, Inc.'s 13 1/2% Senior Note due 2007.
4.5 Indenture, dated as of July 1, 1997, between Econophone, Inc. and The Bank of New York, as Trustee.
4.6* Notes Registration Rights Agreement, dated July 1, 1997, between Econophone, Inc. and Morgan Stanley &
Co., Incorporated.
4.7* Warrant Agreement, dated as of July 1, 1997, between Econophone, Inc., and The Bank of New York, as
Warrant Agent, containing as an exhibit, specimen of Warrant Certificate.
4.8* Warrant Registration Rights Agreement, dated as of July 1, 1997, between Econophone, Inc. and Morgan
Stanley & Co. Incorporated.
4.9* Collateral Pledge and Security Agreement, dated July 1, 1997, between Econophone, Inc. and The Bank of
New York, as Trustee and Custodian.
5.1 Opinion of Schulte Roth & Zabel LLP regarding legality.
8.1 Opinion of Schulte Roth & Zabel LLP regarding tax matters (contained in Exhibit 5.1).
10.1 Securities Purchase Agreement, dated as of November 1, 1996, between Econophone, Inc. and Princes Gate
Investors II, L.P.
10.2 Placement Agreement, dated June 26 1997, between Econophone, Inc. and Morgan Stanley & Co.
Incorporated, as Placement Agent.
10.3 Amended and Restated Equipment Loan and Security Agreement, dated as of March 27, 1997, between
Econophone, Inc. and NTFC Capital Corporation ("NTFC").
10.4 First Amendment to Amended and Restated Equipment Loan and Security Agreement, dated as of April 24,
1997, among Econophone, Inc., American Telemedia, Ltd. and NTFC.
10.5* Second Amendment to Amended and Restated Equipment Loan and Security Agreement, dated as of June 26,
1997, among Econophone, Inc., American Telemedia, Ltd. and NTFC.
10.6 Third Amendment to Amended and Restated Equipment Loan and Security Agreement, dated as of August 7,
1997, among Econophone, Inc., American Telemedia, Ltd. and NTFC.
10.7* Promissory Note, dated May 28, 1996, from Econophone, Inc. to NTFC.
10.8* Promissory Note, dated March 27, 1997, from Econophone, Inc. to NTFC.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.9* Stock Pledge Agreement, dated March 27, 1997, between Alfred West and NTFC Capital Corporation.
10.10* Stock Pledge Agreement, dated March 27, 1997, between Steven West and NTFC Capital Corporation.
10.11* Stock Pledge Agreement, dated March 27, 1997, between Gary Bondi and NTFC Capital Corporation.
10.12* Employment Agreement, dated August 1, 1996, between Econophone, Inc. and Alan Levy, as amended October
31, 1996.
10.13* Employment Agreement, dated January 1, 1997, between Econophone, Inc. and Alfred West.
10.14* Amended and Restated Econophone, Inc. 1996 Flexible Incentive Plan.
10.15* Lease, dated January 31, 1997, between Paramount Group, Inc. (45 Broadway Limited Partnership) and
Econophone, Inc.
12.1* Statement of Computation of the Ratios of Earnings to Fixed Charges.
21.1* Subsidiaries of Econophone, Inc.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Schulte Roth & Zabel LLP (contained in Exhibit 5.1).
25.1* Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of The Bank
of New York.
27.1* Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules.
Schedule II - Schedule of Valuation and Qualifying Accounts (included at
page S-1)
ITEM 22. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in
II-3
<PAGE>
the aggregate, the changes in volume and price represent no more than a
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately proceeding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(8) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 the twenty-fifth day of September, 1997.
<TABLE>
<S> <C> <C>
ECONOPHONE, INC.
By: /s/ ALAN L. LEVY
-----------------------------------------
Alan L. Levy
President, Chief Financial Officer
and Chief Operating Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer
/s/ ALFRED WEST and Chairman of the
- ------------------------------ Board of Directors September 25, 1997
Alfred West (Principal Executive
Officer)
President, Chief Financial
/s/ ALAN L. LEVY Officer, Chief Operating
- ------------------------------ Officer and Director September 25, 1997
Alan L. Levy (Principal Financial and
Accounting Officer)
/s/ GARY S. BONDI
- ------------------------------ Director and Treasurer September 25, 1997
Gary S. Bondi
/s/ HARTLEY R. ROGERS
- ------------------------------ Director September 25, 1997
Hartley R. Rogers
/s/ STEVEN WEST
- ------------------------------ Director September 25, 1997
Steven West
II-5
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGES
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND DEDUCTIONS END OF
OF PERIOD EXPENSES (A) PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
December 31,
1996................................................. $ 470,610 $ 290,762 -- $ 761,372
1995................................................. 268,730 721,215 (519,335) 470,610
1994................................................. 118,604 420,126 (270,000) 268,730
June 30,
1997................................................. 761,372 -- -- 761,372
</TABLE>
- ------------------------
(a) Represents writeoffs, recoveries and other deductions.
S-1
<PAGE>
CERTIFICATE OF INCORPORATION
OF
SWITCHTEL COMMUNICATIONS CORP.
Filed by: Judah I. Septimus, Esq.
5417 Eighteenth Avenue
Brooklyn, New York 11204
<PAGE>
CERTIFICATE OF INCORPORATION
SWITCHTEL COMMUNICATIONS CORP.
Under Section 402 of the Business Corporation Law.
The undersigned, for the purpose of forming a corporation pursuant to
Section 402 of the Business Corporation Law of the State of New York, does
hereby certify and set forth:
FIRST: The name of the corporation is SWITCHTEL COMMUNICATIONS
CORP.
SECOND: The purposes for which the corporation is formed are:
To engage in any lawful act or activity for which corporations may be
organized under the business corporation law, provided that the corporation is
not formed to engage in any act or activity which requires the act or approval
of any state official, department, board, agency or other body without such
approval or consent first being obtained.
To establish, maintain and conduct a general service organization, to
make and conduct investigations and render reports of such investigations
relating to the telex and telecommunications industry, perform supervisory,
inspection and testing services and any and all other activities relating to the
analysis of telex and telecommunication equipment and systems. To act as a
consultant to individuals, corporations, associations, partnerships and others
and to obtain services in their behalf for the supervision and testing of telex
and telecommunication equipment and systems.
To maintain executive and operating personnel for the purpose of
advising and assisting others in all matters relating to telecommunications
network management; to furnish programs, systems, formulate policies and
generally to advise and assist others, under contract or otherwise, with
relation to any aspect of telex and telecommunication systems. Generally to
establish and operate a telex and telecommunication system in all its branches
and departments.
To carry on a general mercantile, industrial, investing and trading
business in all its branches; to devise, invent, manufacture, fabricate,
assemble, install, service, maintain, alter, buy, sell, import, export, license
as licensor or licensee, lease as lessor or lessee, distribute, job, enter into,
negotiate, execute, acquire, and assign contracts in respect of, acquire,
receive, grant, and assign licensing arrangements, options, franchises, and
other rights in respect of, and generally deal in and with, at wholesale and
retail, as principal, and as sales, business, special, or general agent,
representative, broker, factor, merchant, distributor, jobber, advisor, or in
any other lawful capacity, goods, wares, merchandise, commodities, and
unimproved, improved,
<PAGE>
finished, processed and other real, personal and mixed property of any and all
kinds, together with the components, resultants, and by-products thereof.
To acquire by purchase, subscription, underwriting or otherwise, and
to own, hold for investment, or otherwise, and to use, sell, assign, transfer,
mortgage, pledge, exchange or otherwise dispose of real and personal property of
every sort and description and wheresoever situated, including shares of stock,
bonds, debentures, notes, scrip, securities, evidences of indebtedness,
contracts or obligations of any corporation or association, whether domestic or
foreign, or of any firm or individual or of the United States or any state,
territory or dependency of the United States or any foreign country, or any
municipality or local authority within or without the United States, and also to
issue in exchange therefor, stocks, bonds or other securities or evidences of
indebtedness of this corporation and, while the owner or holder of any such
property, to receive, collect and dispose of the interest, dividends and income
on or from such property and to possess and exercise in respect thereto all of
the rights, powers and privileges of ownership, including all voting powers
thereon.
To construct, build, purchase, lease or otherwise acquire, equip,
hold, own, improve, develop, manage, maintain, control, operate, lease,
mortgage, create liens upon, sell, convey or otherwise dispose of and turn to
account, any and all plants, machinery, works, implements and things or
property, real and personal, of every kind and description, incidental to,
connected with, or suitable, necessary or convenient for any of the purposes
enumerated herein, including all or any part or parts of the properties, assets,
business and goodwill of any persons, firms, associations or corporations.
The powers, rights and privileges provided in this certificate are not
to be deemed to be in limitation of similar, other or additional powers, rights
and privileges granted or permitted to a corporation by the Business Corporation
Law, it being intended that this corporation shall have all rights, powers and
privileges granted or permitted to a corporation by such statute.
THIRD: The office of the corporation is to be located in the County
of Kings, State of New York.
FOURTH: The aggregate number of shares which the corporation shall
have the authority to issue is Two Hundred (200), all of which shall be without
par value.
FIFTH: The Secretary of State is designated as the agent of the
corporation upon whom process against it may be served. The post office address
to which the Secretary of State shall mail a copy of any process against the
corporation served on him is:
-2-
<PAGE>
Alfred West
5206 16th Avenue
Brooklyn, New York 11204
SIXTH: The personal liability of directors to the corporation or
its shareholders for damages for any breach of duty in such capacity is hereby
eliminated except that such personal liability shall not be eliminated if a
judgment or other final adjudication adverse to such director establishes that
his acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that he personally gained in fact a financial profit
or other advantage to which he was not legally entitled or that his acts
violated Section 719 of the Business Corporation Law.
IN WITNESS WHEREOF, this certificate has been subscribed to this 9th
day of July, 1992 by the undersigned who affirms that the statements made herein
are true under the penalties of perjury.
___________________________
GERALD WEINBERG
90 State Street
Albany, New York
-3-
<PAGE>
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF
SWITCHTEL COMMUNICATIONS CORP.
Under Section 805 of the Business Corporation Law
It is hereby certified that:
FIRST: The name of the corporation is Switchtel Communications
Corp.
SECOND: The certificate of incorporation of the corporation was
filed by the Department of State on July 10, 1992.
THIRD: The amendment of the certificate of incorporation of the
corporation effected by this certificate of amendment is as follows: To change
the name of the corporation.
FOURTH: To accomplish the foregoing amendment, Article FIRST of the
certificate of incorporation of the corporation, relating to the name of the
corporation, is hereby amended to read as follows:
"Article FIRST: The name of the corporation is Econophone, Inc."
FIFTH: The foregoing amendment of the certificate of incorporation
of the corporation was authorized by the consent in writing of all the members
of the Board of Directors of the corporation, followed by the unanimous written
consent of the holders of all of the outstanding shares of the corporation
entitled to vote on the said amendment of the certificate of incorporation.
<PAGE>
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained herein have been examined by us and are true and correct.
Dated as of the ____ day of February, 1996.
______________________________
Alfred West
President
______________________________
Gary Bondi
Secretary
-2-
<PAGE>
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained herein have been examined by us and are true and correct.
Dated as of the ____ day of February, 1996.
______________________________
Alfred West
President
______________________________
Gary Bondi
Secretary
-3-
<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF AMENDMENT
OF
SWITCHTEL COMMUNICATIONS CORP.
Under Section 805 of the Business Corporation Law
- --------------------------------------------------------------------------------
<PAGE>
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF
ECONOPHONE, INC.
Under Section 805 of the Business Corporation Law
It is hereby certified that:
FIRST: The name of the corporation is Econophone, Inc. (the
"Corporation"). The name under which the Corporation was formed was Switchtel
Communications Corp.
SECOND: The certificate of incorporation of the Corporation (the
"Certificate") was filed by the Department of State on July 10, 1992.
THIRD: The amendment of the Certificate effected by this
certificate of amendment is as follows: To amend Article FOURTH of the
Certificate to: (a) increase the aggregate number of presently authorized and
outstanding shares from two hundred (200) to four hundred (400) shares entitled
the "Voting Common Stock," and (b) authorize new common shares in the amount of
nineteen thousand, six hundred (19,600) shares entitled the "'Nonvoting Common
Stock," which amounts to an aggregate total of twenty thousand (20,000) shares;
and to state the relative rights, preferences and limitations of such shares.
To effect such amendments, Article FOURTH is deleted in its entirety
and the following is hereby substituted therefor:
"Article FOURTH: The aggregate number of shares which the Corporation
shall have the authority to issue is twenty thousand (20,000) shares, all of
which shall be without par value, of which four hundred (400) shares shall be
designated as Voting Common Stock, and nineteen thousand, six hundred (19,600)
shares shall be designated as Nonvoting Common Stock. The relative rights,
preferences and limitations of such shares shall be in all respects identical,
share for share alike, except that the holders of the Nonvoting Common Stock
shall have no rights to vote for the election of directors or on any other
matter, except as otherwise required by law."
FOURTH: The foregoing amendments of the Certificate were authorized
by the consent in writing of all the members of the board of directors of the
Corporation, followed by the unanimous written consent of the holders of all of
the outstanding shares of the Corporation entitled to vote on such amendments of
the Certificate, and by the unanimous written consent of the holders of all of
the outstanding shares of each class of common shares entitled to vote thereon.
<PAGE>
FIFTH: The next amendment of the Certificate effected by this
certificate of amendment is as follows: To amend Article FIFTH of the
Certificate to change the post office address to which the Secretary of State
shall mail a copy of any process against the Corporation.
SIXTH: To accomplish the foregoing amendment, Article FIFTH of the
Certificate, relating to the post office address to which the Secretary of State
shall mail a copy of any process against the Corporation, is deleted in its
entirety and the following is hereby substituted therefor:
"Article FIFTH: The Secretary of State is designated as the agent of
the Corporation upon whom process against it may be served. The post office
address to which the Secretary of State shall mail a copy of any process against
the Corporation served on him is:
Mr. Alfred West
Econophone, Inc.
1450 37th Street
Brooklyn, New York 11218"
SEVENTH: The foregoing amendment of the Certificate was authorized by
the consent in writing of all the members of the board of directors of the
Corporation, followed by the unanimous written consent of the holders of all of
the outstanding shares of the Corporation entitled to vote on such amendment of
the Certificate.
EIGHTH: The next amendment of the Certificate effected by this
certificate of amendment is as follows: To amend Article SIXTH of the
Certificate relating to the elimination of personal liability of the directors
or shareholders of the Corporation.
NINTH: To accomplish the foregoing amendment, Article SIXTH of the
Certificate, relating to the elimination of personal liability of the directors
or shareholders of the Corporation, is deleted in its entirety and the following
is hereby substituted therefor:
"Article SIXTH: The personal liability of directors to the
Corporation or its shareholders for damages for any breach of duty in such
capacity is hereby eliminated except that such personal liability shall not be
eliminated if a judgment or other final adjudication adverse to such director
establishes that his acts or omissions were in bad faith or involved intentional
misconduct or a knowing violation of law or that he personally gained in fact a
financial profit or other advantage to which he was not legally entitled or that
his acts violated Section 719 of the New York Business Corporation Law, as
amended (the "New York Business Corporation Law"). In the event that the New
York Business Corporation Law, or any successor statute thereto is amended with
respect to the permissible limits of directors' liability, this Article SIXTH
shall be deemed to provide the fullest limitation on liability permitted under
such amended statute. Any repeal or modification of this Article SIXTH by the
stockholders of the Corporation only shall be applied prospectively, to the
extent that such repeal or modification would, if applied retrospectively,
adversely affect any limitation on the personal liability of a director of the
Corporation existing immediately prior to such repeal or modification."
2
<PAGE>
TENTH: The foregoing amendment of the Certificate was authorized by
the consent in writing of all the members of the board of directors of the
Corporation, followed by the unanimous written consent of the holders of all of
the outstanding shares of the Corporation entitled to vote on such amendment of
the Certificate.
(signature page follows)
3
<PAGE>
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained herein have been examined by us and are true and correct.
Dated on this ____ day of June, 1996.
______________________________
Alfred West
President
______________________________
Gary Bondi
Secretary
4
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF
ECONOPHONE, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
* * * * *
WE, THE UNDERSIGNED, Alfred West and Gary Bondi, being respectively
the President and the Secretary of Econophone, Inc., a corporation organized
under the laws of the State of New York, hereby certify as follows:
FIRST: The name of the Corporation is Econophone, Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed
in the Office of the Secretary of State of the State of New York on the 10th day
of July, 1992. The Corporation was formed under the name Switchtel
Communications Corp.
THIRD: This amendment of the Certificate of Incorporation was
authorized by unanimous written consent of the directors dated November 1, 1996,
followed by unanimous written consent of all of the shareholders dated
November 1, 1996.
FOURTH: (a) The said Certificate of Incorporation, as heretofore
amended, is hereby amended pursuant to Section 801(b) of the Business
Corporation Law to change all of the authorized shares of Voting Common Stock
and Non-Voting Common Stock from no par value per share to $.0001 par value per
share, to increase the number of authorized shares of Voting Common Stock from
four hundred (400) shares to twenty nine million two hundred and fifty thousand
(29,250,000) shares, to increase the number of authorized shares of Non-Voting
Common Stock from nineteen thousand six-hundred (19,600) shares to five hundred
thousand shares (500,000), to authorize 250,000 shares of preferred stock and to
state the number, designation, relative rights, preferences, and limitations of
the shares of a series of preferred stock, par value $.01 per share, as fixed by
the Board of Directors of the Corporation before the issuance of such shares.
The Non-Voting Common Stock and Voting Common Stock are collectively referred to
as the Common Stock. Immediately prior to the effectiveness of this Certificate
of Amendment, all 400 authorized shares of Voting Common Stock are issued and
outstanding.
The number of issued shares of Voting Common Stock of the Corporation
after giving effect to this Certificate of Amendment is 20,000,000. The number
of unissued shares of Voting Common Stock of the Corporation after giving effect
to this Certificate of Amendment is 9,250,000. The ratio of the number of
shares of Voting Common Stock authorized after giving effect to this Certificate
of Amendment to the number of shares of Voting Stock authorized immediately
prior thereto is 73,125:1. The number of issued shares of Non-Voting Common
Stock of the Corporation after giving effect to this Certificate of Amendment is
zero. The number of unissued shares of Non-Voting Common Stock of the
Corporation after giving effect to this Certificate of Amendment is 500,000.
The ratio of the number of shares of Non-Voting
<PAGE>
Common Stock authorized after giving effect to this Certificate of Amendment to
the number of shares of Non-Voting Common Stock authorized immediately prior
thereto is 25.5:1.
(b) To effect the foregoing, Article FOURTH of the Certificate of
Incorporation of the Corporation, relating to the number of authorized shares of
Common Stock, is deleted in its entirety and the following is hereby substituted
therefor:
Article FOURTH: The aggregate number of shares which the Corporation
shall have the authority to issue is 30,000,000 shares, of which 29,250,000
shall be designated as Voting Common Stock, par value $.0001 per share,
500,000 shares of which shall be designated as Non-Voting Common Stock, par
value $.0001 per share, and 250,000 shares of which shall be designated as
preferred stock, par value $.01 per share. The par value of all of the
issued and outstanding shares of Common Stock is hereby changed from no par
value to $.0001 par value per share. The relative rights, preferences and
limitations of such shares of Common Stock shall be in all respects
identical, share for share alike, except that the holders of the Non-Voting
Common Stock shall have no right to vote for the election of directors or
on any other matter, except as otherwise required by law.
DIVIDENDS. The holders of Common Stock shall be entitled to receive
dividends out of funds legally available therefor at such times and in such
amounts as the Board of Directors may determine in its sole discretion,
with each share of Voting Common Stock, and each share of Non-Voting Common
Stock sharing equally, share for share, in such dividends, except that if
dividends are declared which are payable in shares of Voting Common Stock
or Non-Voting Common Stock, dividends shall be declared which are payable
at the same rate in both classes of stock and the dividends payable in
shares of Voting Common Stock shall be payable to the holders of that class
of stock and the dividends payable in shares of Non-Voting Common Stock
shall be payable to the holders of that class of stock. The rights of
holders of Common Stock to receive dividends are subject to the provisions
of any outstanding preferred stock.
LIQUIDATION. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after the payment or
provision for payment of all debts and liabilities of the Corporation and
all preferential amounts to which the holders of the preferred stock are
entitled with respect to the distribution of assets in liquidation, the
holders of Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation available for distribution.
PREFERRED STOCK. Shares of preferred stock may be issued by the
Corporation from time to time in one or more series, with such voting
powers, full or limited, or no voting powers, and such designations,
powers, privileges, preferences, and relative, participating, optional, or
other rights, if any, and such qualifications, limitations, or restrictions
thereon, as are permitted by law and as the Board of Directors shall from
time to time provide for by resolution or resolutions duly adopted,
including, without limitation, voting powers, if any (including multiple or
fractional votes per share), dividend rights, if
2
<PAGE>
any, and the Board of Directors is hereby authorized to fix and determine
the voting rights, full or limited, if any, and such other powers,
privileges, preferences, and rights of any series of preferred stock
(including, but not limited to, applicable conversion or redemption rates
or prices or dividend rates), and to fix the number of shares constituting
any such series and to increase or decrease the number of shares of any
such series (but not below the number of shares thereof then outstanding).
In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of
shares of such series.
PREEMPTIVE RIGHTS. No shareholder shall have any preemptive rights to
purchase any other shares or securities of any class or type (including
convertible securities) pursuant to Section 622 of the Business Corporation
Law which may at any time be sold or offered for sale by the Corporation.
12% REDEEMABLE CONVERTIBLE PREFERRED STOCK ($100 STATED VALUE PER SHARE),
SERIES A.
SECTION 1. DESIGNATION; RANK. This series of Preferred Stock
shall be designated Redeemable Convertible Preferred Stock, Series A, par value
$.01 per share (the "Series A Preferred"). The Series A Preferred shall be
senior to all other capital stock of the Corporation, whether now outstanding or
hereafter issued, including the Common Stock (the "Common Stock") of the
Corporation, as to dividend payments and as to distributions upon liquidation,
dissolution or winding up of the Corporation.
SECTION 2. AUTHORIZED NUMBER. The number of shares constituting
the Series A Preferred shall be 140,000 shares.
SECTION 3. DIVIDENDS. The Series A Preferred shall accrue monthly
cumulative dividends on each outstanding share of Series A Preferred at the rate
of $1 per share per month. Such cumulative dividends shall accrue, whether or
not declared by the Board, in equal amounts (other than with respect to the
initial dividend period) monthly on the first day of each month (each a
"Dividend Accrual Date"), to holders of record as they appear on the register
for the Series A Preferred at the close of business on the day immediately
preceding such Dividend Accrual Date. Such accrued and unpaid dividends shall
compound monthly at a rate of 12% per annum. As used herein, "accrued
dividends" and "accrued and unpaid dividends" shall mean accrued dividends,
including, without limitation, the amount compounded thereon. A monthly
dividend period shall begin on the day following each Dividend Accrual Date and
end on the next succeeding Dividend Accrual Date. Notwithstanding the
foregoing, (A) the first dividend period shall commence on the Series A
Preferred Issue Date, and the dividend payable in respect thereof shall accrue
for the actual number of days in such period and (B) dividends shall cease to
accrue and compound on the Series A Preferred on the closing date with respect
to the High Yield Offering. For purposes hereof, "High Yield Offering" shall
mean the issuance and sale by the Corporation to bona fide third parties of debt
securities having a maturity of no less than seven years from the date of
issuance thereof and yielding gross proceeds (which shall include, without
limitation, discounts and/or placement agent fees) to the Corporation of at
least
3
<PAGE>
$75 million; PROVIDED that any amount of proceeds of such debt securities that
is placed in escrow or any similar arrangement to fund the payment of interest,
premium (if any) or principal on such debt securities shall be deemed not to be
gross proceeds for purposes of this definition.
Dividends on any share of Series A Preferred shall not be paid in cash
prior to the redemption, if any, of such share.
Except as provided in Section 6(a)(i), no dividends or other
distributions, and no redemption, purchase or other acquisition for value, shall
be made with respect to any share of or right to acquire the Common Stock (other
than the Series A Preferred) or any other class or series of the Corporation's
Capital Stock at any time when any share of the Series A Preferred is
outstanding. The foregoing provision shall not be violated by reason of (i) the
repurchase of Capital Stock followed immediately by the reissuance thereof for
consideration in an amount at least equal to the consideration paid to acquire
such stock, (ii) the redemption, repurchase or other acquisition for value of
Capital Stock in exchange for, or with the proceeds of a substantially
concurrent offering (occurring not more than 90 days prior to such redemption,
repurchase or other acquisition for value) of, other Capital Stock of the
Corporation (other than Disqualified Stock), (iii) the repurchase of Capital
Stock of the Corporation from employees (other than Mr. Alfred West, Steven
West, Gary Bondi and David Mer) of the Corporation or any of its Subsidiaries
for consideration not to exceed, in the aggregate, $1,000,000, (iv) the
repurchase of Capital Stock of the Corporation, or any right to acquire such
Capital Stock, from David Mer for consideration not to exceed, in the aggregate,
$1,000,000 or (v) repurchases or redemptions pursuant to the last paragraph of
Section 10.1(c). For purposes hereof, payments with respect to any stock
appreciation right shall be deemed to be a repurchase of Capital Stock.
SECTION 4. LIQUIDATION PREFERENCE. (a) In the event of any
liquidation, dissolution, or winding up of the Corporation, either voluntary or
involuntary, distributions to the shareholders of the Corporation shall be made
in the following manner:
The holders of the Series A Preferred shall be entitled to
receive prior and in preference to any distribution of any of the assets or
funds of the Corporation to the holders of the Common Stock or any other
class or series of the Corporation's capital stock the stated value (in
cash) of $100 (the "stated value") per share for each share of Series A
Preferred then held by them plus an amount equal to all accrued dividends
(whether or not declared) on the Series A Preferred to the date of
liquidation, dissolution or winding up (the "Redemption Amount"). If the
assets and funds thus distributed among the holders of Series A Preferred
are insufficient to permit the payment to such holders of the full
preferential amount described above, then the entire assets and funds of
the Corporation legally available for distribution shall be distributed
among the holders of Series A Preferred in the proportion that the number
of shares of Series A Preferred held by each such holder bears to the
number of all shares of the Series A Preferred then outstanding. After
payment has been made to the holders of the Series A Preferred of the full
amounts to which they are entitled, no further amounts are required to be
paid with respect to the Series A Preferred, and the remaining assets of
the Corporation shall be distributed among the holders of all capital stock
of the Corporation junior to the Series A
4
<PAGE>
Preferred in accordance with the Certificate of Incorporation of the
Corporation and applicable law.
(b) Unless waived in advance in writing by the lender (or its
assignee) under the Equipment Loan and Security Agreement, dated May 28, 1996,
between NTFC Capital Corporation and the Corporation (the "NTFC Lender" and the
"NTFC Loan"), during such time as any amounts shall be due under the NTFC Loan,
the Corporation shall not effect any redemption of the Series A Preferred for
cash; provided that, this sentence shall not prohibit any redemption by the
Corporation pursuant to Section 7(a). Any cash payment by the Corporation in
violation of the preceding sentence shall forthwith be paid by the recipient
thereof to the Lender. The Corporation shall pay all amounts due under the NTFC
Loan whenever it shall have any then current redemption obligation with respect
to the Series A Preferred so that the first sentence of this paragraph shall not
prohibit any such payment to holders of Series A Preferred.
SECTION 5. PROVISIONS GENERALLY APPLICABLE TO DIVIDENDS AND
LIQUIDATION. Except as provided in Section 6, the Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of Sections 3 and 4 and in the taking of all such action as
may be necessary or appropriate in order to protect the dividend and liquidation
rights of the holders of the Series A Preferred against impairment.
SECTION 6. VOTING RIGHTS. (a) In addition to such other vote, if
any, as may be required by New York law or provided by the resolution creating
any other series of Preferred Stock, the affirmative vote of the holders of at
least a majority of the outstanding shares of Series A Preferred, voting
together as a single class, shall be necessary to: (i) declare or pay any
dividends on, or redeem or otherwise acquire any other class or series of
Capital Stock of the Corporation, except to the extent provided for pursuant to
the terms of any class or series of Capital Stock approved by the affirmative
vote of the holders of at least a majority of the then outstanding shares of
Series A Preferred; (ii) authorize an amendment to the Corporation's Certificate
of Incorporation decreasing the liquidation preference of the Series A Preferred
or otherwise adversely affecting the preferences, rights or powers of the Series
A Preferred or the Warrants; (iii) effect a voluntary liquidation, dissolution
or winding up of the Corporation, or the sale of all or substantially all the
assets of the Corporation, or the merger, consolidation or recapitalization of
the Corporation; or (iv) amend the Certificate of Incorporation or Bylaws of the
Corporation in a manner or take any other action that would in any way impair,
limit or delay the ability of the holders of the Series A Preferred to exercise
the voting rights set forth in this Section 6, by written consent or at any
meeting of shareholders of the Corporation.
(b) In addition to the voting rights provided for in Section 6(a),
the holders of the Series A Preferred shall, until the earlier of (x) the IPO
Closing Date (as defined in Section 10.1(b)) and (y) such time as Permitted
Holders shall cease to own at least a majority of the shares of Series A
Preferred issued on the Series A Preferred Issue Date, be entitled to elect, by
5
<PAGE>
the affirmative vote of at least a majority of the outstanding shares of
Series A Preferred, voting together as a single class, one director of the
Corporation (the "PG Director"), who shall at all times be a member of the
Executive Committee and Compensation Committees of the Board and any committee
performing similar functions, if such committees exist. The PG Director shall
serve at the pleasure of the holders of the Series A Preferred until such time
as the holders of the Series A Preferred, by affirmative vote of at least a
majority of the outstanding shares of Series A Preferred, shall elect a
different individual to be the PG Director. The election of the PG Director
shall occur upon the delivery to the Secretary of the Corporation of a
certificate, executed by holders of a majority of the shares of Series A
Preferred, indicating the nomination of the individual so named in such
certificate, and the directors of the Corporation shall thereafter promptly take
all action necessary to elect the PG Director as a director of the Corporation.
Notwithstanding any provision of the Certificate of Incorporation or By-laws of
the Corporation to the contrary, (i) the PG Director shall be entitled to five
Business Day's notice of all meetings of the Board and, if applicable, the
Executive and Compensation Committees thereof and any committee performing
similar functions, (ii) meetings of the Board and such committees shall be held
in reasonable places at reasonable times and (iii) the Board shall meet at least
quarterly. The PG Director shall resign on the earlier of the two dates
referred to in the first sentence of this Section 6(b) and the right of holders
of the Series A Preferred to elect a director shall be terminated.
(c) Except as specifically provided in this Section 6 and as provided
under New York corporate law, the holders of the Series A Preferred shall not be
entitled to any voting rights.
SECTION 7. REDEMPTION. (a) SPECIAL OPTIONAL REDEMPTION. The
Corporation may, at its option, on the New Financing Closing Date (as defined
below) redeem up to 40,000 shares of Series A Preferred, out of funds legally
available therefor, upon giving a Redemption Notice as set forth in Section 7(c)
hereof. The redemption payment for each share of Series A Preferred shall be
the Redemption Amount, in cash, determined as of the Redemption Date (as defined
below). If the Corporation effects such redemption, it shall do so ratably
according to the number of shares held by each holder of Series A Preferred.
For purposes hereof, the "New Financing Closing Date" shall be any date, on or
prior to October 31, 1997, on which the Corporation shall receive gross proceeds
(which shall include, without limitation, underwriters' commissions and
discounts and/or placement agent fees) of at least $50 million from the issuance
of debt or equity securities.
(b) MANDATORY REDEMPTION. On October 31, 2006, the Corporation shall
redeem all of the then outstanding shares of Series A Preferred, out of funds
legally available therefor. The Corporation shall use its best efforts to cause
funds to be legally available therefor. The redemption payment for each share
of Series A Preferred shall be the Redemption Amount, in cash, as of October 31,
2006.
(c) MECHANICS OF REDEMPTION. (i) At least 20 days, but not more
than 60 days, prior to the date fixed for any redemption pursuant to Section
7(a) or (b) (the "Redemption Date"), the Corporation shall send a written notice
(the "Redemption Notice") to
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each holder of shares of Series A Preferred to be redeemed on such date (the
"Redemption Shares") stating: (A) the total number of anticipated Redemption
Shares at such date; (B) the number of anticipated Redemption Shares held by
such holder at such date; (C) the anticipated Redemption Date: (D) the
anticipated Redemption Amount per share (calculated based on the anticipated
Redemption Date); and (E) the manner in which and the place at which such holder
is to surrender to the Corporation the certificate or certificates representing
its Redemption Shares.
(ii) Upon surrender to the Corporation, in the manner and at
the place designated, of a certificate or certificates representing Redemption
Shares, the Redemption Amount for such shares shall be payable to the order of
the person whose name appears on such certificate or certificates as the owner
thereof. All such surrendered certificates shall be cancelled.
(iii) On or prior to the Redemption Date, the Corporation shall
have the option to deposit the aggregate of all Redemption Amounts for all
Redemption Shares in a bank or trust company (designated in the Redemption
Notice) doing business in the Borough of Manhattan, the City and State of New
York, having aggregate capital and surplus in excess of $500,000,000, as a trust
fund for the benefit of the respective holders of Redemption Shares, with
irrevocable instructions and authority to the bank or trust company to pay the
appropriate Redemption Amount to a given holder of Redemption Shares upon
receipt of notification from the Corporation that such holder has surrendered
the certificate representing such shares to the Corporation, which notification
shall be given by the Corporation upon its receipt of such shares. Such
instructions shall also provide that any such moneys remaining unclaimed at the
expiration of one year following the Redemption Date shall thereafter be
returned to the Corporation upon its request as expressed in a resolution of the
Board. The holder of any Redemption Shares in respect of which such deposit has
been returned to the Corporation pursuant to the preceding sentence shall have a
claim as an unsecured creditor against the Corporation for the Redemption Amount
in respect thereof, without interest.
(iv) Provided that the Corporation has given the Redemption
Notice described in Section 7(c)(i) and has on or prior to the Redemption Date
either paid or made available (as described in Section 7(c)(iii)) Redemption
Amounts to the holders of Redemption Shares, all Redemption Shares shall be
deemed to have been redeemed as of the close of business of the Corporation on
the applicable Redemption Date. Thereafter, the holder of such shares shall no
longer be treated for any purposes as the record holder of such shares of Series
A Preferred, regardless of whether the certificates representing such shares are
surrendered to the Corporation or its transfer agent, excepting only the right
of the holder to receive the appropriate Redemption Amount, without interest,
upon such surrender. Such shares so redeemed shall not be transferred on the
books of the Corporation or be deemed to be outstanding for any purpose
whatsoever.
(v) The Corporation shall not be obligated to pay the
Redemption Amount to any holder of Redemption Shares unless the certificates
evidencing such shares are either delivered to the Corporation or its transfer
agent, or the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an
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agreement reasonably satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
(vi) A Redemption Notice may provide that it is subject to the
occurrence of any event before the Redemption Date specified in such notice and
such Redemption Notice shall be of no effect unless all such conditions to the
redemption have occurred before the Redemption Date or have been waived by the
Corporation.
(d) CHANGE OF CONTROL; BREACH OF COVENANT. (i) If (A) there shall
occur a Change of Control (as defined in Section 12(b)), (B) the Corporation
shall take any of the actions described in Section 6(a) without obtaining the
affirmative vote of the holders of at least a majority of the outstanding shares
of Series A Preferred, (C) the Corporation shall breach and fail to cure within
10 days of such breach any of its obligations pursuant to Section 12(a)(iii),
12(a)(vi) or 12(a)(vii) or (D) Mr. Alfred West shall die or become substantially
disabled on a long term basis at any time prior to the effectiveness of the Key
Man Insurance (as defined in Section 12(a)(vi)), any holder of shares of the
Series A Preferred shall have the right, at such holder's option, to require the
Corporation to redeem, and upon the exercise of such right the Corporation shall
purchase, for cash, all of the shares of the Series A Preferred held by such
holder at a price per share equal to the Redemption Amount determined as of the
date the Corporation redeems such shares as specified by the Corporation
pursuant to Section 7(d)(ii). In the case of clause (B) above, such right to
require such purchase shall be in addition to any legal or equitable remedy
available to holders of Series A Preferred. In addition, if there shall occur a
Change of Control, the Corporation shall cause the holders of Series A Preferred
to be entitled to sell any or all of their shares of Series A Preferred to the
acquiror or acquirors on terms and conditions at least as favorable as the terms
and conditions with respect to the sale to the acquiror or acquirors by the
Corporation or any beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of 5% or more of any class of Capital Stock of the Corporation.
(ii) PROCEDURE. On or before the fifth day after the
occurrence of an event giving rise to a right of redemption pursuant to Section
7(d)(i), the Corporation shall send each holder of Series A Preferred a notice
advising such holder of its rights hereunder and specifying the date, not less
than 20 nor more than 60 days after the date such notice is delivered to such
holder, on which the Corporation proposes to redeem the shares of those holders
requesting redemption pursuant hereto (and, in the case of a sale referred to in
the last sentence of Section 7(d)(i), the date on which the Change of Control is
expected to occur); PROVIDED that no failure of the Corporation to give such
notice shall limit the rights of holders hereunder. Any holder of shares of the
Series A Preferred wishing to exercise its rights hereunder shall deliver to the
Corporation on or before the fifteenth day after receipt of the notice referred
to in the first sentence of this clause (ii), written notice of such holder's
exercise of such right, which notice shall set forth the name of the holder, the
number of shares of Series A Preferred which such holder wishes to have redeemed
or sold and a statement that an election to exercise its rights hereunder is
being made thereby. Upon delivery of such shares, the redemption procedures of
Sections 7(c)(ii) through (v) shall be applicable (with the notice referred to
in the first sentence of this clause (ii) constituting the Redemption Notice).
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(e) REDEMPTION SUBJECT TO APPLICABLE LAW. Any redemption pursuant to
this Section 7 shall be subject to Section 513 of the Business Corporation Law
of the State of New York.
SECTION 8. (a) TRANSFER AND LEGENDING OF SHARES. No transfer of
shares of the Series A Preferred shall be effective until such transfer is
registered on the books of the Corporation. Any shares so transferred must
(unless otherwise permitted by Section 8(b)) bear a legend substantially in the
following form:
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT, THE RULES
AND REGULATIONS PROMULGATED THEREUNDER AND ANY APPLICABLE STATE
SECURITIES LAWS.
THE SECURITY REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A
SECURITYHOLDERS AGREEMENT DATED AS OF NOVEMBER 1, 1996 THAT FIXES
CERTAIN RIGHTS AND OBLIGATIONS OF THE ISSUER HEREOF AND THE HOLDER OF
THIS SECURITY. A COPY OF THE AGREEMENT IS ON FILE AT THE ISSUER'S
PRINCIPAL OFFICE.
(b) Any holder of shares of Series A Preferred may, upon providing
evidence reasonably satisfactory to the Corporation (including, if so requested
by the Corporation, an opinion of counsel of such holder) that such shares of
Series A Preferred may be sold pursuant to Rule 144(k) under the Securities Act,
exchange the certificate representing such shares of Series A Preferred for a
new certificate that does not bear the legend set forth in Section 8(a).
The Corporation shall refuse to register any attempted transfer of
shares of Series A Preferred not in compliance with this Section 8.
SECTION 9. STATUS OF REDEEMED SHARES. If shares of the Series A
Preferred are redeemed pursuant to Section 7 hereof, the shares so redeemed
shall be retired and shall assume the status of authorized but unissued shares
of preferred stock of the Corporation.
SECTION 10.1. RIGHT TO CONVERT; MANDATORY CONVERSION. (a) Each
holder of the Series A Preferred shall have the right, at the option of such
holder, at any time or from time to time, to convert any of its shares of Series
A Preferred, into a number of fully paid and nonassessable whole shares of
Common Stock of the Corporation equal to the Conversion Number (as defined
below).
Notwithstanding the foregoing, until the day following the first
anniversary of the Series A Preferred Issue Date, the holders of the Series A
Preferred shall only be entitled to convert an aggregate of 100,000 shares of
Series A Preferred. If the holders of Series A Preferred shall desire to
convert an aggregate of more than such 100,000 shares before such date,
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they shall allocate the right to convert such 100,000 shares amongst themselves
in such manner as they may agree.
(b) The Corporation may, at its option, convert any of the shares of
Series A Preferred into a number of fully paid and nonassessable whole shares of
Common Stock of the Corporation equal to the Conversion Number; PROVIDED that
such conversion may only occur on the IPO Closing Date. For purposes hereof,
the "IPO Closing Date" means the closing date with respect to the initial public
offering of Common Stock of the Corporation generating gross proceeds of at
least $25 million and registered with the U.S. Securities and Exchange
Commission on Form S-1 (or such other form as is then available); the shares of
Common Stock sold in such initial public offering and generating such $25
million of gross proceeds may be sold by the Corporation, any securityholder of
the Corporation or any combination of the Corporation and its securityholders.
(c) For purposes hereof, the Conversion Number shall be equal to:
(i) the total number of shares of Common Stock outstanding as of the
Series A Preferred Issue Date (calculated on a fully diluted basis,
including all warrants, options or rights held by employees or any other
Person, assuming that the employee options referenced on the Schedules to
the Security Purchase Agreement were issued prior to the Series A Preferred
Issue Date, but excluding the Series A Preferred and Warrants, multiplied
by
(ii) a fraction, (A) the numerator of which is equal to the stated
value with respect to the shares of Series A Preferred being so converted,
plus any dividends accrued thereon, and (B) the denominator of which is
equal to 100 million plus the number of U.S. dollars received by the
Corporation, since the Series A Preferred Issue Date, from the exercise of
options or warrants to purchase Common Stock that are specified on Schedule
3.04(a) to the Securities Purchase Agreement.
The number referred to in subparagraph (i) above shall be deemed to be
22,561,000, absent evidence to the contrary.
If the Conversion Number is not a whole number, it shall be increased
to the next largest whole number, or at the option of the Corporation, any
fractional share of Common Stock otherwise receivable upon a conversion of
Series A Preferred may instead be paid in cash at the Redemption Amount.
(d) In the event that there shall be more than one class of Common
Stock of the Corporation outstanding as of the date of any conversion of
Series A Preferred, each holder of Series A Preferred being converted shall be
entitled to designate which class of Common Stock it shall receive upon
conversion of its Series A Preferred. The shares of Common Stock of the
Corporation into which the shares of Series A Preferred are converted shall be
referred to herein as "Conversion Shares."
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SECTION 10.2. MECHANICS OF CONVERSION. In order to effect the
conversion of any shares of Series A Preferred into Conversion Shares, the
holder of such shares of Series A Preferred shall surrender to the Corporation
the shares of Series A Preferred to be converted accompanied by a duly executed
notice of conversion form set forth in the certificate representing such shares
of Series A Preferred stating that such holder elects to convert all or a
specified portion of shares of Series A Preferred represented by such
certificate in accordance with the provisions hereof, specifying the name or
names in which such holder wishes the Conversion Shares to be issued and the
amount of each class of Common Stock of the Corporation into which the shares of
Series A Preferred should be converted.
The Corporation will pay any and all issue and other taxes (but not
any taxes based on income) that may be payable in respect of any issue or
delivery of Conversion Shares upon conversion of shares of Series A Preferred.
As promptly as practicable and in any event within seven Business Days
after the receipt of such notice of conversion, the Corporation shall deliver
to, or upon the written order of, the holder of the Series A Preferred to be
converted (i) certificates representing the number of validly issued, fully paid
and nonassessable whole Conversion Shares to which the holder of the securities
being converted shall be entitled and (ii) if fewer than all the Series A
Preferred surrendered are being converted, a new share certificate or
certificates, evidencing the number of shares of Series A Preferred equal to the
number of shares of Series A Preferred surrendered for conversion less the
number of shares of Series A Preferred being converted. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the shares of Series A Preferred to be converted.
Upon such conversion, the rights of the holder thereof as to the Series A
Preferred being converted shall cease except for the right to receive Conversion
Shares (or such other consideration as provided herein) in accordance herewith,
and the person entitled to receive the Conversion Shares shall be treated for
all purposes as having become the record holder of such Conversion Shares at
such time.
SECTION 11.1. ADJUSTMENTS. The number of Conversion Shares issuable
upon the conversion of each share of Series A Preferred shall be subject to
adjustment from time to time as set forth in this Section 11.1.
(a) ISSUANCE OF COMMON STOCK OF THE CORPORATION AT LESS THAN CURRENT
MARKET VALUE. In the event the Corporation shall issue or sell shares of Common
Stock, or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for, purchase or otherwise acquire shares of
Common Stock (each an "Issuance", but such term shall not include the issuance
or sale of any of the foregoing types of securities (w) in connection with a
transaction in which holders of Series A Preferred exercise their rights to
transfer securities under Article 4 of the Securityholders Agreement, (x) upon
the exercise, conversion or exchange of any securities received in an Issuance,
(y) as part of the High Yield Offering or (z) of up to 3,561,000 shares of
Common Stock or rights, options or warrants therefor granted or sold to key
employees of the Corporation or its Subsidiaries in order to retain or to create
an incentive for such key employees; PROVIDED that such 3,561,000 shares,
options, rights or warrants shall include any shares, options, rights or
warrants referenced in any of the Schedules to the
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Securities Purchase Agreement or outstanding on the Series A Preferred Issue
Date) at a consideration (the "Consideration") per share of Common Stock
(determined, in the case of such rights, options, warrants or convertible or
exchangeable securities, by dividing (i) the aggregate amount received or
receivable by the Corporation in consideration of the issuance or sale of such
rights, options, warrants or convertible or exchangeable securities, plus the
total consideration payable to the Corporation upon exercise, conversion or
exchange thereof, by (ii) the total number of shares of Common Stock covered by
such rights, options, warrants or convertible or exchangeable securities) that
is lower than the Current Market Value per share of Common Stock immediately
prior to such Issuance, then the number of shares of Common Stock of the
Corporation into which each share of Series A Preferred is convertible shall be
adjusted so that it shall equal an amount determined by: (I) multiplying the
percentage of the fully-diluted shares of Common Stock of the Corporation into
which such share of Series A Preferred is convertible immediately prior to such
Issuance by the number of fully-diluted shares of Common Stock of the
Corporation immediately prior to such Issuance and then by a fraction, the
numerator of which shall be the product of (A) the number of fully-diluted
shares of Common Stock of the Corporation immediately after such Issuance
multiplied by (B) the Current Market Value per share of such Common Stock on the
date of such Issuance, and the denominator of which shall be the sum of (1) the
number of fully-diluted shares of Common Stock of the Corporation immediately
prior to such Issuance multiplied by such Current Market Value plus (2) the
aggregate Consideration received by the Corporation for such Issuance,
(II) dividing the amount determined in clause (I) above by the number of
fully-diluted shares of Common Stock of the Corporation immediately after such
Issuance.
Such adjustments shall be made successively whenever such an Issuance
is made. For the purposes of such adjustments, the shares of Common Stock which
the holder of any rights, options, warrants or convertible or exchangeable
securities received in an Issuance shall be entitled to subscribe for, purchase
or otherwise acquire shall be deemed to be issued and outstanding as of the date
of such Issuance and the consideration received by the Corporation therefor
shall be deemed to be the Consideration received by the Corporation for such
rights, options, warrants or convertible or exchangeable securities, plus the
consideration or premiums stated in such rights, options, warrants or
convertible or exchangeable securities to be paid for the shares of Common Stock
covered thereby. In the event the Corporation shall issue or sell shares of
Common Stock or options, warrants or convertible or exchangeable securities
containing the right to subscribe for, purchase or otherwise acquire shares of
Common Stock in an Issuance, for a consideration consisting, in whole or in
part, of property other than cash or its equivalent, then, in determining the
"price per share of Common Stock" and the "Consideration received by the
Corporation" for purposes of the first sentence of this Section 11.1(a), the
Board shall determine, in good faith, the fair value of the property, which
determination shall be applied in connection with any determination of Current
Market Value pursuant to this Section 11.1(a). If any Issuance results in an
adjustment pursuant to this Section 11.1(a) and the rights, options, warrants or
convertible or exchangeable securities to which such Issuance related expire or
mature without being exercised, converted or exchanged, then the adjustment made
as a result of such Issuance shall be reversed and be of no effect.
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(b) CURRENT MARKET VALUE. For the purposes of any computation under
this Section 11.1, the Current Market Value per share of Common Stock of the
Corporation or of any other security (herein collectively referred to as a
"security") at any date herein specified shall be:
(i) if the security is not registered under the Exchange Act, the
fair value of the security (1) most recently determined as of a date within
the six months preceding such date by an Independent Financial Expert
selected by the Corporation in accordance with the criteria for such
valuation set out in Section 11.1(e), or (2) if no such determination shall
have been made within such six-month period or if the Corporation so
chooses, determined as of such date by an Independent Financial Expert
selected by the Corporation in accordance with the criteria for such
valuation set out in Section 11.1(e), or
(ii) if the security is registered under the Exchange Act, the average
of the daily market prices of the security for the 20 consecutive trading
days immediately preceding such date or, if the security has been
registered under the Exchange Act for less than 20 consecutive trading days
before such date, then the average of the daily market prices for all of
the trading days before such date for which daily market prices are
available. The market price for each such trading day shall be: (A) in
the case of a security listed or admitted to trading on any national
securities exchange, the closing sales price, regular way, on such day, or
if no sale takes place on such day, the average of the closing bid and
asked prices on such day on the principal national securities exchange on
which such security is listed or admitted, such exchange to be determined
by the Board, in good faith; PROVIDED that, for purposes of such
determination, the PG Director shall have a number of votes equal to
one-half of the votes of all members of the Board voting thereon, (B) in
the case of a security not then listed or admitted to trading on any
national securities exchange, the last reported sale price on such day, or
if no sale takes place on such day, the average of the closing bid and
asked prices on such day, as reported by a reputable quotation source
designated by the Corporation, (C) in the case of a security not then
listed or admitted to trading on any national securities exchange and as to
which no such reported sale price or bid and asked prices are available,
the average of the reported high bid and low asked prices on such day, as
reported by a reputable quotation service, or a newspaper of general
circulation in the Borough of Manhattan, City and State of New York
customarily published on each Business Day, designated by the Corporation,
or, if there shall be no bid and asked prices on such day, the average of
the high bid and low asked prices, as so reported, on the most recent day
(not more than 30 days prior to the date in question) for which prices have
been so reported and (D) if there are no bid and asked prices reported
during the 30 days prior to the date in question, the Current Market Value
of the security shall be determined in accordance with Section 11.1(e).
(c) DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of
Common Stock of the Corporation issuable upon conversion of the Series A
Preferred shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of shares of Common Stock of
the Corporation issuable upon the conversion
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of each share of Series A Preferred; PROVIDED, HOWEVER, that any adjustments
which by reason of this Section 11.1(c) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations shall be made to the nearest one-thousandth of a share.
(d) ADDITIONAL ADJUSTMENTS. In addition to the foregoing
adjustments, the Board may make any other adjustment to increase the number of
shares of Common Stock of the Corporation issuable upon conversion of shares of
Series A Preferred as it may, in good faith, deem desirable to protect the
rights and benefits of holders of Series A Preferred.
(e) CURRENT MARKET VALUE. The Current Market Value shall be deemed
to be equal to the fair value set forth in the Value Report (as defined below)
as determined by an Independent Financial Expert, which shall be selected by the
Board, and retained on customary terms and conditions, using one or more
valuation methods that the Independent Financial Expert, in its best
professional judgment, determines to be most appropriate; PROVIDED that, for
purposes of such selection, the PG Director shall have a number of votes equal
to one-half of the votes of all members of the Board voting thereon. The
Corporation shall engage the Independent Financial Expert to deliver to the
Corporation, within 45 days of the appointment of the Independent Financial
Expert, a value report (the "Value Report") stating the value of the Common
Stock of the Corporation and other securities or property of the Corporation, if
any, being valued as of the Valuation Date and containing a brief statement as
to the nature and scope of the examination or investigation upon which the
determination of value was made. The determination as to Current Market Value
in accordance with the provisions of this Section 11.1(e) shall be conclusive on
all Persons. The Independent Financial Expert shall consult with management of
the Corporation and the PG Director in order to allow management and the PG
Director to comment on the proposed value prior to delivery to the Corporation
of any Value Report of the Independent Financial Expert.
For purposes hereof, "Financial Expert" means one of Alex, Brown &
Sons; Bear, Stearns & Co., Inc.; Dillon, Read & Co. Inc.; Donaldson, Lufkin &
Jenrette Securities Corporation; Goldman, Sachs & Co.; Lazard Freres & Co.;
Merrill Lynch, Pierce, Fenner & Smith Incorporated; PaineWebber Incorporated;
Prudential Securities Inc.; Smith Barney Inc.; Salomon Brothers Inc; Oppenheimer
& Co.; Furman Selz; SBC Warburg; or Lehman Brothers; and "Independent Financial
Expert" means a Financial Expert that does not (or whose directors, executive
officers or 5% stockholders do not) have a direct or indirect financial interest
in the Corporation or any of its Subsidiaries, which has not been for at least
five years, and, at the time it is called upon to give independent financial
advice to the Corporation is not (and none of its directors, executive officers
or 5% stockholders is) a promoter, director, or officer of the Corporation or
any of its Subsidiaries. The Independent Financial Expert may be compensated
and indemnified by the Corporation for opinions or services it provides as an
Independent Financial Expert.
As used herein "fair value" means the price a willing buyer, under no
compulsion to buy, would pay a willing seller, under no compulsion to sell, in
an arms' length transaction.
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SECTION 11.2. NOTICE OF ADJUSTMENT. Whenever the number of shares of
Common Stock of the Corporation or other stock or property issuable upon the
conversion of any share of Series A Preferred is adjusted, as herein provided,
by more than 1%, the Corporation shall mail to each holder notice of such
adjustment or adjustments and shall deliver to each Holder an officers'
certificate (and if requested by holders of a majority of the shares of Series A
Preferred, a certificate of a firm of independent public accountants selected by
the Board (who may be the regular accountants employed by the Corporation))
setting forth the number of shares of Common Stock of the Corporation or other
stock or property issuable upon the conversion of any share of Series A
Preferred after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
SECTION 12. (a) CERTAIN ADDITIONAL PROVISIONS. (i) LIMITATION ON
INDEBTEDNESS. (A) The Corporation shall not, and shall not permit any
Restricted Subsidiary to, Incur any Indebtedness except: (1) Indebtedness in an
aggregate principal amount not to exceed $20 million outstanding at any time;
(2) Indebtedness to the Corporation or any Restricted Subsidiary;
(3) Indebtedness or Disqualified Stock issued in exchange for, or the net
proceeds of which are used to exchange, refinance, refund or defease outstanding
Indebtedness or Disqualified Stock, other than Indebtedness Incurred under
clauses (1) and (6) of this subparagraph (a)(i)(A) and any refinancings thereof,
in an amount (or, if such new Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, with an original issue price) not to exceed the amount
exchanged, refinanced, refunded or defeased (plus premiums, accrued interest,
fees and expenses); PROVIDED that Indebtedness or Disqualified Stock the
proceeds of which are used to exchange, refinance, refund or defease
Disqualified Stock, determined as of the date of Incurrence of such new
Indebtedness or issuance of such Disqualified Stock, does not mature prior to
the Stated Maturity of the Indebtedness to be exchanged, refinanced, refunded,
redeemed or defeased or have a mandatory redemption date prior to the
Disqualified Stock to be exchanged, refinanced, refunded or defeased, and the
Average Life of such Indebtedness or Disqualified Stock is at least equal to the
remaining Average Life of the Indebtedness or Disqualified Stock to be
exchanged, refinanced, refunded or defeased; (4) Indebtedness issued in the High
Yield Offering; (5) Indebtedness Incurred solely to fund the acquisition of
assets used or useful in the telecommunications business; and (6) Indebtedness
(I) in respect of performance bonds, bankers' acceptances and surety or appeal
bonds provided in the ordinary course of business, (II) under (or in respect of)
Currency Agreements and Interest Rate Agreements; PROVIDED that, (i) such
Currency Agreements do not increase the Indebtedness of the Corporation and its
Restricted Subsidiaries outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder and that such Currency
Agreements are entered into for the purpose of hedging, not speculating on,
foreign currency fluctuations and (ii) such Interest Rate Agreements are entered
into for the purpose of protecting the Corporation and its Subsidiaries from
fluctuations in interest rates, not speculating on fluctuations in interest
rates, and (III) arising from agreements providing for indemnification,
adjustment of purchase price or similar options, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations of the
Corporation or any of its Subsidiaries pursuant to such agreements, in any case
Incurred in
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connection with the disposition of any business, assets or Subsidiary of the
Corporation, other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Subsidiary of the
Corporation for the purpose of financing such acquisition.
(B) Notwithstanding any other provision of this paragraph (a)(i), the
maximum amount of Indebtedness that the Corporation or any of its Subsidiaries
may Incur pursuant to this paragraph (a)(i) shall not be deemed to be exceeded
due solely to the result of fluctuations in the exchange rates of currencies.
(C) For purposes of determining any particular amount of Indebtedness
under this paragraph (a)(i), Guarantees of, or obligations with respect to
letters of credit supporting, Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this paragraph (a)(i), in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Corporation, in its sole discretion, shall
designate the clause or clauses under which such item of Indebtedness shall be
Incurred.
(ii) LIMITATION ON RESTRICTED PAYMENTS. The Corporation shall not and
shall not permit any Restricted Subsidiary to make any Investment in any Person,
other than a Permitted Investment, (a "Restricted Payment") if at the time of
and after giving effect to the proposed Restricted Payment: (I) a Default shall
have occurred and be continuing or (II) the aggregate amount expended for all
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board, whose determination shall be conclusive
and evidenced by a Board Resolution) after the Series A Preferred Issue Date
shall exceed the sum of (w) 50% of the aggregate amount of consolidated net
income (or, if a loss, minus 100% of such amount) of the Corporation accrued on
a cumulative basis during the period (taken as one accounting period) beginning
on October 1, 1996 and ending on the last day of the last fiscal quarter
preceding the Transaction Date plus (x) the aggregate net cash proceeds (other
than cash proceeds applied as provided in clause (ix) of the definition of
Permitted Investment) received by the Corporation from the issuance and sale of
Junior Securities of the Corporation (other than Disqualified Stock) to any
Person other than a Restricted Subsidiary of the Corporation or Indebtedness
that is convertible into Junior Securities of the Corporation (other than
Disqualified Stock) to the extent such Indebtedness is converted into Junior
Securities of the Corporation (other than Disqualified Stock), subsequent to the
Series A Preferred Issue Date, plus (y) an amount equal to the net reduction in
Investments (other than Permitted Investments).
(iii) LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. (A)
The Corporation shall not, and shall not permit any Subsidiary of the
Corporation to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any holder
(or any Affiliate of such holder) of 5% or more of any class of Capital Stock of
the Corporation or with any Affiliate of the Corporation, except for
transactions on terms at least as favorable to the Corporation or such
Subsidiary as could be obtained on an arms- length basis from a Person that is
not such an Affiliate or 5% holder. In addition, the Corporation shall notify
the initial holder of Series A Preferred of any such transaction, whether or not
such transaction is
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on an arms-length basis, if such transaction occurs at any time when Permitted
Holders own at least 35% of the shares of Series A Preferred issued on the
Series A Preferred Issue Date. The limitation contained in the first sentence
of this subparagraph (iii) does not apply to transactions (A) pursuant to
documents existing on the Series A Preferred Issue Date and listed on Schedule
3.06 to the Securities Purchase Agreement, (B) between the Corporation and its
Restricted Subsidiaries and, in the case of tax sharing agreements, its
Unrestricted Subsidiaries or (C) between Restricted Subsidiaries.
(iv) [Intentionally left blank.]
(v) LIMITATION ON LIENS. The Corporation will not, and will not
permit any Restricted Subsidiary to, create, incur, assume or suffer to exist
any Lien on any of its assets or properties of any character, or any shares of
Capital Stock or Indebtedness of any Restricted Subsidiary.
The foregoing limitation does not apply to (i) Liens existing on the
Series A Preferred Issue Date; (ii) Liens granted after the Series A Preferred
Issue Date on any assets or Capital Stock of the Corporation or its Restricted
Subsidiaries created in favor of the holders of the Series A Preferred;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Corporation or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Corporation or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness permitted to be Incurred
hereunder; or (v) Permitted Liens.
(vi) KEY MAN INSURANCE. The Corporation shall, within 30 days of the
Series A Preferred Issue Date, obtain "Key Man" insurance with respect to the
death and long term incapacity of Mr. West, naming the Corporation as sole
beneficiary, from an insurance company satisfactory to the PG Director and
containing terms and conditions reasonably satisfactory to the PG Director with
a benefit of at least $20 million (the "Key Man Insurance"), shall maintain such
Key Man Insurance in full force and effect, shall not permit the naming of any
other beneficiary thereof and shall not transfer any of its rights thereunder,
in each case until the third anniversary of the Series A Preferred Issue Date.
Notwithstanding the foregoing, in the event that the Corporation or Mr. West
shall receive any termination notice with respect to the Key Man Insurance from
the insurer with respect thereto, it shall use its best efforts to cause a new
insurer to provide Key Man Insurance prior to the effective date of such
termination and shall, in any event, cause Key Man Insurance to have been
obtained within 30 days after such effective date.
(vii) MAINTENANCE OF BUSINESS. The business of the Corporation and its
Restricted Subsidiaries shall be limited to the telecommunications business and
businesses reasonably related or ancillary thereto.
(viii) TELCO MOU. The Issuer shall use its best efforts to, within 15
days of the Series A Preferred Issue Date, execute a memorandum of understanding
with Telco Investments Limited, a United Kingdom corporation, containing terms
and conditions reasonably satisfactory to the initial Holder. The Issuer shall
provide all drafts of such memorandum of understanding to the PG Director prior
to such execution.
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(b) DEFINITIONS. As used in this Certificate of Designation, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and VICE VERSA),
unless the context otherwise requires:
"Affiliate" is defined to mean, as applied to any Person, any other
Person directly or indirectly controlling, controlled by or under direct or
indirect common control with such Person. For the purposes of this definition,
"control" (including, without limitation, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as applied to
any Person, is defined to mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the product of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments; and
with respect to any Disqualified Stock shall have an analogous meaning.
"Board Resolution" means, with respect to the Board or the Executive
Committee thereof, a copy of a resolution, certified by the Secretary or
Assistant Secretary thereof to have been duly adopted by the Board to be in full
force and effect on the date of such certification.
"Business Day" means any day except a Saturday or Sunday or other day
on which commercial banks in The City of New York are required or authorized by
law or other governmental action to be closed.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or nonvoting) of capital stock of such Person, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligation" means the rental obligations, as aforesaid, under such lease.
"Change of Control" means such time as (i) Mr. Alfred West ceases to
be the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Securities representing at least 25% of the total voting power of the
outstanding Voting Securities of the Corporation, (ii) a "person" or "group"
within the meaning of Section 13d-3 or 14(d)(2) of the Exchange Act becomes the
beneficial owner of Voting Securities representing more voting power than the
Voting Securities then beneficially owned by Mr. Alfred West, or (iii) the
Corporation shall sell or agree in writing to sell all or substantially all of
its assets.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations and other equivalents (however designated, whether
voting or nonvoting) of
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common stock of such Person, including, without limitation, with respect to the
Corporation, its common stock, no par value.
"Compensation Committee" means a committee of the Board of the
Corporation which shall have exclusive authority (i) to make decisions regarding
the compensation of each officer of the Corporation and its Subsidiaries and
(ii) to adopt and administer any arrangement under which options, warrants or
other rights to purchase securities of the Corporation or its Subsidiaries are
granted to any employee of the Corporation or any Subsidiary thereof.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement that relates to
fluctuations in currency values to or under which the Corporation or any of its
Restricted Subsidiaries is a party or a beneficiary on the Series A Preferred
Issue Date or becomes a party or a beneficiary thereafter.
"Default" means a breach of any of the obligations of the Corporation
under this Certificate of Designation.
"Disqualified Stock" means any class or series of Capital Stock of the
Corporation that by its terms or otherwise is (i) required to be redeemed prior
to the mandatory redemption date of the Series A Preferred, (ii) redeemable at
the option of the holder of such class or series of Capital Stock at any time
prior to the mandatory redemption date of the Series A Preferred, or
(iii) convertible into or exchangeable for Capital Stock referred to in clause
(i) or (ii) above prior to the redemption of the Series A Preferred or
Indebtedness having a scheduled maturity prior to the mandatory redemption date
of the Series A Preferred; PROVIDED that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require the Corporation to repurchase or redeem such Capital Stock
upon the occurrence of a "change of control" occurring prior to the mandatory
redemption date of the Series A Preferred, shall not constitute Disqualified
Stock if the "change of control" provision applicable to such Capital Stock is
no more favorable to the holders of such Capital Stock than the provisions
contained in Section 7 and such Capital Stock specifically provides that the
Corporation will not repurchase or redeem any such Capital Stock pursuant to
such provisions prior to the Corporation's repurchase of Series A Preferred
required to be repurchased by the Corporation under Section 7.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Series A Preferred Issue Date applied
on a basis consistent with the principles, methods, procedures and practices
employed in the preparation of the Corporation's audited financial statements,
including, without limitation, those 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. All
computations based on GAAP contained in this Certificate of Designation shall be
computed in conformity with GAAP, except that calculations made for
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purposes of determining compliance with the provisions hereof shall be made
without giving effect to (i) the amortization of any expenses incurred in
connection with the issuance of the Series A Preferred, and (ii) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay or advance or supply funds for the purchase or payment of such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness; PROVIDED that neither the accrual of interest (whether such
interest is payable in cash or kind) nor the accretion of original issue
discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including,
without limitation, reimbursement obligations with respect thereto), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person, PROVIDED that the amount of such
Indebtedness shall be the lesser of (a) the fair market value of such asset at
such date of determination and (b) the amount of such Indebtedness of such other
Person, (vii) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person, and (viii) to the extent
not otherwise included in this definition, all obligations of such Person under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date; PROVIDED that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the
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remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar agreement or
arrangement that relates to fluctuations in interest rates.
"Investment" means any direct or indirect advance, loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of the Corporation or its Subsidiaries
and other than advances to sales representatives in the ordinary course of
business in an amount not to exceed $250,000 at any one time outstanding) or
other extension of credit or capital contribution to (by means of any transfer
of cash or other property to others or any payment for property or services for
the account or use of others) or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, any other
Person. For purposes of the definition of "Unrestricted Subsidiary" and
paragraph (a)(ii) hereof, (i) "Investment" shall include the fair market value
of the net assets of any Subsidiary of the Corporation at the time that such
Subsidiary of the Corporation is designated an Unrestricted Subsidiary and shall
exclude the fair market value of the net assets of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Subsidiary of the
Corporation and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined by the Board in good faith.
"Junior Securities" means any securities of the Corporation other than
securities evidencing Indebtedness.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, or any agreement to
give any security interest).
"Permitted Holders" means Princes Gate Investors II, L.P., Investor
Investments AB, PGI Investments Limited, Gregor von Opel and Acorn Partnership
II, L.P. and any affiliate of any of the foregoing.
"Permitted Investment" means (i) an Investment in the Corporation or a
Restricted Subsidiary or a Person which will, upon or in connection with the
making of such Investment, become a Restricted Subsidiary or be merged or
consolidated with or into or transfer or convey all or substantially all its
assets to, the Corporation or a Restricted Subsidiary; PROVIDED that such
person's primary business is related, ancillary or complementary to the
businesses of the Corporation and its Subsidiaries on the date of such
Investment; (ii) Temporary Cash Investments; (iii) payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) notes and
other evidences of Indebtedness, not to exceed $2 million at any one time
outstanding; (v) stock, obligations or securities received in satisfaction of
judgments; (vi) relocation and
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similar loans to employees of the Corporation or its Subsidiaries not to exceed
$150,000 at any one time outstanding; (vii) loans to employees of the
Corporation or its Subsidiaries, evidenced by an unsubordinated promissory note,
for the purpose of enabling such employees to purchase Capital Stock of the
Corporation, in an amount not to exceed $1.5 million at any one time
outstanding; (viii) Investments, not to exceed $5 million at any one time
outstanding, if the Board has determined that such Investments constitute
strategic investments; and (ix) Investments in Darcom Limited in an amount not
to exceed the amount of net cash proceeds to the Corporation from the Incurrence
of Indebtedness by, or the issuance of Capital Stock of, the Corporation since
the Series A Preferred Issue Date, PROVIDED that such incurrences and issuances
are permitted by the terms of this Certificate of Designation.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Corporation or any of its Restricted Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or personal
property or any other asset acquired after the Series A Preferred Issue Date;
PROVIDED that (a) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with Section 12(a)(i), (1) to finance the
cost (including the cost of improvement or construction) of the item of property
or assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness so secured, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any
such Lien does not extend to or cover any property or assets other than such
item of property or assets and any improvements on such item; (vii) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of the Corporation and its Restricted Subsidiaries, taken as
a whole; (viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Corporation or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; (xi) Liens on property of, or on shares of Capital
Stock or
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Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to
or cover any property or assets of the Corporation or any Restricted Subsidiary
other than the property or assets acquired; (xii) Liens in favor of the
Corporation or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Corporation or any Restricted
Subsidiary of the Corporation that does not give rise to an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to letters of credit
that encumber documents and other property relating to such letters of credit
and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Interest
Rate Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed solely
to protect the Corporation or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Corporation or
any of its Restricted Subsidiaries in the ordinary course of business in
accordance with the past practices of the Corporation and its Restricted
Subsidiaries prior to the Series A Preferred Issue Date; and (xviii) Liens on or
sales of receivables.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including, without
limitation, a government or political subdivision or an agency or
instrumentality thereof.
"preferred stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of preferred or preference stock of such Person,
including, without limitation, with respect to the Corporation, the Series A
Preferred.
"Restricted Subsidiary" means any Subsidiary of the Corporation other
than an Unrestricted Subsidiary.
"Securityholders Agreement" means the Securityholders Agreement, dated
November 1, 1996, among the Corporation, Princes Gate Investors II, L.P. and
Mr. Alfred West.
"Securities Purchase Agreement" means the Securities Purchase
Agreement, dated November 1, 1996 between the Corporation and Princes Gate
Investors II, L.P.
"Stated Maturity" means, with respect to any debt security, the date
specified in such debt security as the fixed date on which any principal of such
debt security is due and payable.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which Voting Securities representing more than 50% of the voting
power of all of such
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corporation's or entity's Voting Securities are at the time directly or
indirectly owned by such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 270 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) commercial paper, maturing not more than 180 days after the date of
acquisition, issued by a corporation (other than an Affiliate of the
Corporation) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc.
("Moody's") or "A-1" (or higher) according to Standard & Poor's Ratings Group
("S&P"), (v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's and (vi) time deposits, certificates of deposit, money market deposits,
bank promissory notes and bankers' acceptances maturing not more than 270 days
after the acquisition thereof and guaranteed or issued by any of the ten largest
banks (based on assets as of the immediately preceding December 31) organized
under the laws of any jurisdiction in which one of the Restricted Subsidiaries
does business and which are not under intervention, bankruptcy or similar
proceeding, not to exceed $2 million outstanding (or, subsequent to the High
Yield Offering, $10 million) at any one time.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Restricted
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness or the issuance of Disqualified Stock by the Corporation or any of
its Subsidiaries, the date such Indebtedness is to be Incurred or such
Disqualified Stock is to be issued and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Corporation
that at the time of determination shall be designated an Unrestricted Subsidiary
by the Board in the manner
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provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board
may designate any Subsidiary of the Corporation (including any newly acquired or
newly formed Subsidiary of the Corporation) to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, the Corporation or any other Subsidiary of the Corporation
(other than an Unrestricted Subsidiary or one of its Subsidiaries) that is not a
Subsidiary of the Subsidiary to be so designated; PROVIDED that either (a) the
Subsidiary to be so designated has total assets of $1,000 or less or (b) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under paragraph (a)(ii) hereof. The Board may designate any Unrestricted
Subsidiary to be a Subsidiary of the Corporation; PROVIDED that immediately
after giving effect to such designation (1) the Corporation could Incur $1.00 of
additional Indebtedness under subparagraph (a)(i)(A) hereof and (2) such
designation would not result in any Default.
"Voting Securities" of any Person means stock or other ownership
interests of such Person entitled to vote for the board of directors of such
Person or other entity performing similar functions.
"Warrants" means the Warrants which may be granted to holders of the
Series A Preferred pursuant to the Securityholders Agreement.
"Wholly Owned Restricted Subsidiary" means with respect to any Person,
any Subsidiary of such Person if all of the Common Stock or other similar equity
ownership interests in such Subsidiary (other than any director's qualifying
shares or Investments by foreign nationals mandated by applicable law) is owned
directly or indirectly by such Person.
(c) HIGH YIELD CONFORMING AMENDMENT. Notwithstanding anything herein
contained to the contrary, the Corporation may, on or at any time subsequent to
the closing date of the High Yield Offering, amend this Certificate of
Designation so that the obligations of the Corporation pursuant to the last
paragraph of Section 3, Section 12(a)(i), 12(a)(ii), 12(a)(iii) and 12(a)(v)
shall be no more restrictive than the analogous covenants contained in the
indenture with respect to the securities issued in the High Yield Offering.
SECTION 13. NOTICES. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or when sent by telecopier (with receipt
confirmed), provided a copy is also sent by express (overnight, if possible)
courier, addressed (i) in the case of a holder of the Series A Preferred, to
such holder's address of record, and (ii) in the case of the Corporation, to the
Corporation's principal executive offices to the attention of the Corporation's
President.
SECTION 14. AMENDMENTS AND WAIVERS. Any right, preference, privilege
or power of, or restriction provided for the benefit of, the Series A Preferred
set forth herein may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or prospectively)
with the written consent of the Corporation and the affirmative vote or written
consent of the holders of at least a majority of the shares of Series A
Preferred then outstanding, and any amendment or waiver so effected shall be
binding upon the Corporation and all holders of the Series A Preferred.
25
<PAGE>
FIFTH: (a) The Certificate of Incorporation is further amended to
change each currently outstanding share of Voting Common Stock, par value $.0001
per share, into 1,000 shares of Voting Common Stock, par value $.0001 per share,
and to change each outstanding share of Non-Voting Common Stock, par value
$.0001 per share, into 1,000 shares of Voting Common Stock, par value $.0001
per share.
(b) To effect the foregoing, Article SEVENTH relating to the change
of outstanding shares of the Corporation's Voting Common Stock and Non-Voting
Common Stock is hereby added to the Certificate of Incorporation to read as
follows:
Upon the effective date of this amendment, (1) each outstanding share
of Voting Common Stock, par value $.0001 per share, of the Corporation
shall be converted into 1,000 shares of Voting Common Stock, par value
$.0001 per share, and certificates for such shares shall be issued to each
holder of Voting Common Stock upon surrender of such stockholder's
certificates formerly representing such shares of Voting Common Stock of
the Corporation; (2) each outstanding share of Non-Voting Common Stock, par
value $.0001 per share, of the Corporation shall be converted into 1,000
shares of Voting Common Stock, par value $.0001 per share, and certificates
for such shares shall be issued to each former holder of Non-Voting Common
Stock of the Corporation upon surrender to the Corporation of such
stockholder's certificates formerly representing such shares of Non-Voting
Common Stock of the Corporation.
26
<PAGE>
IN WITNESS WHEREOF, we have signed this certificate on the 1st day of
November, 1996, and we affirm the statements contained therein as true under the
penalties of perjury.
______________________________
Alfred West
President
______________________________
Gary Bondi
Secretary
27
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF
ECONOPHONE, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
* * * * *
WE, THE UNDERSIGNED, Alfred West and David Lacher, being respectively
the President and the Secretary of Econophone, Inc., a corporation organized
under the laws of the State of New York, hereby certify as follows:
FIRST: The name of the Corporation is Econophone, Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed
in the Office of the Secretary of State of the State of New York on the 10th day
of July, 1992. The Corporation was formed under the name Switchtel
Communications Corp.
THIRD: A Certificate of Amendment of the Certificate of
Incorporation was filed in the Office of the Secretary of State of the State of
New York on November 1, 1996. The amendment was authorized by unanimous written
consent of the directors dated November 1, 1996, followed by unanimous written
consent of all the shareholders dated November 1, 1996.
FOURTH: This amendment of the Certificate of Incorporation was
authorized by the unanimous written consent of the directors dated June 23,
1997, followed by the unanimous written consent of all the shareholders dated
June 23, 1997.
FIFTH: (a) The said Certificate of Incorporation, as heretofore
amended, is hereby amended pursuant to Section 801(b)(14) of the Business
Corporation Law to permit the Corporation to provide indemnification for its
directors and officers and certain other persons.
(b) To effect the foregoing, Article SIXTH of the Certificate of
Incorporation is hereby amended by (i) adding an "(a)" before the first
paragraph of current Article SIXTH and (ii) adding the following paragraph after
paragraph (a) of Article SIXTH:
"(b) The Corporation shall indemnify its directors and officers to
the fullest extent permitted by the Business Corporation Law, as the same may be
amended and supplemented from time to time. The Corporation also may indemnify
such persons and any other person permitted to be indemnified under the Business
Corporation Law, pursuant to agreement or resolution of shareholders or
directors, from and against any and all of the expenses, liabilities or other
matters referred to in or covered by the Business Corporation Law. The
indemnification provided for herein shall not be deemed exclusive of any other
rights to
<PAGE>
which any person may be entitled under any By-law, resolution of shareholders,
resolution of directors, agreement or otherwise, as permitted by the Business
Corporation Law, as to action, or as to the failure to act, in any capacity in
which such person served at the request of the Corporation."
SIXTH: (a) The said Certificate of Incorporation, as heretofore
amended, is hereby amended pursuant to Section 801(b)14 of the Business
Corporation Law to require the Company to maintain "key man" insurance with
respect to Mr. West with a benefit of at least $10 million.
(b) To effect the foregoing, Section 12(a)(vi) of the Certificate of
Incorporation is deleted in its entirety and the following is hereby substituted
therefor:
(vi) KEY MAN INSURANCE. The Corporation shall maintain "Key Man"
insurance with respect to the death and long term incapacity of Mr. West, naming
the Corporation as sole beneficiary, from an insurance company satisfactory to
the PG Director and containing terms and conditions reasonably satisfactory to
the PG Director with a benefit of at least $10 million (the "Key Man
Insurance"), shall maintain such Key Man Insurance in full force and effect,
shall not permit the naming of any other beneficiary thereof and shall not
transfer any of its rights thereunder, in each case until the third anniversary
of the Series A Preferred Issue Date. Notwithstanding the foregoing, in the
event that the Corporation or Mr. West shall receive any termination notice with
respect to the Key Man Insurance from the insurer with respect thereto, it shall
use its best efforts to cause a new insurer to provide Key Man Insurance prior
to the effective date of such termination.
SEVENTH: (a) The said Certificate of Incorporation, as heretofore
amended, is hereby amended pursuant to Section 801(b)14 of the Business
Corporation Law to remove the obligation to use best efforts to execute a
memorandum of understanding with Telco Investments Limited.
(b) To effect the foregoing, Section 12(a)(viii) of the Certificate
of Incorporation is deleted in its entirety.
-2-
<PAGE>
IN WITNESS WHEREOF, we have signed this certificate on the 25th day of
June, 1997, and we affirm the statements contained therein as true under the
penalties of perjury.
______________________________
Alfred West
President
______________________________
David Lacher
Secretary
-3-
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
ALFRED WEST and DAVID LACHER, being severally duly sworn, say, and
each for himself says, that the said Alfred West is the President and the said
David Lacher is the Secretary of Econophone, Inc., which is a corporation
organized under the laws of the State of New York and is the corporation
described in the foregoing Certificate; that they have read the said Certificate
and know the contents thereof and that the same is true and to their knowledge.
______________________________
Alfred West
President
______________________________
David Lacher
Secretary
Subscribed and sworn to before
me this ____ day of June, 1997
Notary Public
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
ECONOPHONE, INC.
(formerly Switchtel Communications Corp.)
A New York Corporation
<PAGE>
ARTICLE I
THE CORPORATION
Section 1. NAME. The legal name of this corporation (hereinafter the
"Corporation") is Econophone, Inc.
Section 2. OFFICES. The Corporation shall have its principal office
in the State of New York. The Corporation may also have offices at such other
places within and without the United States as the Board of Directors may from
time to time appoint or the business of the Corporation may require.
Section 3. SEAL. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, New York. One or more duplicate dies for impressing such seal may be kept
and used.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the shareholders shall
be held at the principal office of the Corporation in the State of New York or
at such other place, within or without the State of New York, as is fixed in the
notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders of
the Corporation for the election of directors and the transaction of such other
business as may properly come before the meeting shall be held at such date and
time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting as herein provided, or the business thereof
may be transacted at any special meeting called for such purpose.
Section 3. SPECIAL MEETINGS. Special meetings of shareholders may be
called by the President whenever he deems it necessary or advisable. A special
meeting of the shareholders shall be called by the President whenever so
directed in writing by a majority of the entire Board of Directors or whenever
the holders of one-third (1/3) of the number of shares of the capital stock of
the Corporation entitled to vote at such meeting shall, in writing, request the
same.
Section 4. NOTICE OF MEETINGS. Notice of the time and place of the
annual and of each special meeting of the shareholders shall be given to each of
the shareholders entitled to vote at such meeting by mailing the same in a
postage, prepaid wrapper addressed to each such shareholder at his address as it
appears on the books of the Corporation, or by delivering the same personally to
any such shareholder, in lieu of such mailing, at least ten (10) and not more
than fifty (50) days prior to each meeting. Meetings may be held without notice
if all of the shareholders entitled to vote thereat are present in person or by
proxy, or if notice thereof is waived by all such shareholders not present in
person or by proxy, before or after the meeting.
<PAGE>
Notice by mail shall be deemed to be given when deposited, with postage thereon
prepaid, in the United States mail. If a meeting is adjourned to another time,
not more than thirty (30) days hence, or to another place, and if an
announcement of the adjourned time or place is made at the meeting, it shall not
be necessary to give notice of the adjourned meeting unless the Board of
Directors, after adjournment, fixes a new record date for the adjourned meeting.
Notice of the annual and each special meeting of the shareholders shall indicate
that it is being issued by or at the direction of the person or persons calling
the meeting and shall state the name and capacity of each such person. Notice
of each special meeting shall also state the purpose or purposes for which it
has been called. Neither the business to be transacted at, nor the purpose of,
the annual or any special meeting of the shareholders need be specified in any
written waiver of notice.
Section 5. RECORD DATE FOR SHAREHOLDERS. For the purpose of
determining the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or for the purpose of determining
shareholders entitled to receive payment of any dividend or other distribution
or the 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 fifty (5) days nor less than ten (10) days before the
date of such meeting, nor more than fifty (50) days prior to any other action.
If no record date is fixed, the record date for determining shareholders
entitled to, notice of, or, vote at a meeting of shareholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if no notice is given, the day on which the meeting is held; the record date
for determining shareholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed; and
the record date for determining shareholders for any other purposes shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of shareholders of record entitled
to notice of, or to vote at, any meeting of shareholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 6. PROXY REPRESENTATION. Every shareholder may authorize
another person or persons to act for him by proxy in all matters to which a
shareholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the shareholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after eleven (11)
months from its date unless such proxy provides for a longer period. Every
proxy shall be revocable at the pleasure of the shareholder executing it, except
as otherwise provided in Section 609 of the New York Business Corporation Law,
as amended (the "New York Business Corporation Law").
Section 7. VOTING AT SHAREHOLDERS' MEETINGS. Each share of stock
shall entitle the holder thereof to one vote. In the election of directors, a
plurality of the votes cast shall elect. Any other action shall be authorized
by a majority of the votes cast except where the New York Business Corporation
Law prescribes a different percentage of votes or a different exercise of voting
power. In the election of directors, and for any other action, voting need not
be by ballot.
2
<PAGE>
Section 8. QUORUM AND ADJOURNMENT. Except for a special election of
directors pursuant to Section 603 of the New York Business Corporation Law, the
presence in person or by proxy, of the holders of a majority of the shares of
the stock of the Corporation outstanding and entitled to vote thereat shall be
requisite and shall constitute a quorum at any meeting of the shareholders.
When a quorum is once present to organize a meeting, it shall not be broken by
the subsequent withdrawal of any shareholders. If at any meeting of
shareholders there shall be less than a quorum so present, the shareholders
present in person or by proxy and entitled to vote thereat, may adjourn the
meeting from time to time until a quorum shall be present, but no business shall
be transacted at any such adjourned meeting except such as might have been
lawfully transacted had the meeting not been adjourned.
Section 9. LIST OF SHAREHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare, make and certify, at least ten
(10) days before every meeting of the shareholders, a complete list of the
shareholders, as of the record date fixed for such meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open
to the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city or other municipality or
community where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and may
be inspected by any shareholder who is present. If the right to vote at any
meeting is challenged, the inspectors of election, if any, or the person
presiding thereat, shall require such list of shareholders to be produced as
evidence of the right of the persons challenged to vote at such meeting, and all
persons who appear from such list to be shareholders entitled to vote thereat
may vote at such meeting.
Section 10. INSPECTORS OF ELECTION. The Board of Directors, in
advance of any meeting, may, but need not, appoint one or more inspectors of
election to act at the meeting or any adjournment thereof. If an inspector or
inspectors are not appointed, the person presiding at the meeting may, and at
the request of any shareholder entitled to vote thereat shall, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the meeting or at the meeting by the person presiding
thereat. Each inspector, if any, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability. The inspectors, if any, shall determine the number of shares of
stock outstanding and the voting power of each, the shares of stock represented
at the meeting, the existence of a quorum, the validity and effect of proxies,
and shall receive votes, ballots or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots or consents, determine the result, and do such acts as are
proper to conduct the election or vote with fairness to all shareholders. On
request of the person presiding at the meeting or any shareholder entitled to
vote thereat, the inspector or inspectors, if any, shall make a report in
writing of any challenge, question or matter determined by him or them and
execute a certificate of any fact found by him or them. Any report or
certificate made by the inspector or inspectors shall be prima facie evidence of
the facts stated and of the vote certified by them.
3
<PAGE>
Section 11. ACTION OF THE SHAREHOLDERS WITHOUT MEETINGS. Any action
which may be taken at any annual or special meeting of the shareholders may be
taken without a meeting on written consent, setting forth the action so taken,
signed by the holders of all outstanding shares entitled to vote thereon as
provided in Section 615 of the New York Business Corporation Law. Written
consent thus given by the holders of all outstanding shares entitled to vote
shall have the same effect as a unanimous vote of the shareholders.
ARTICLE III
DIRECTORS
Section 1. NUMBER OF DIRECTORS. The number of directors which shall
constitute the entire Board of Directors shall be at least three (3), except
that where all outstanding shares of the stock of the Corporation are owned
beneficially and of record by less than three (3) shareholders, the number of
directors may be less than three (3) but not less than the number of
shareholders. Subject to the foregoing limitation, such number may be fixed
from time to time by action of a majority of the entire Board of Directors or of
the shareholders at an annual or special meeting, or, Of the number of directors
is not so fixed, the number shall be three (3) or shall be equal to the number
of shareholders (determined as aforesaid), whichever is less. Until such time
as the Corporation shall issue shares of its stock, the Board of Directors shall
consist of two (2) persons. No decrease in the number of directors shall
shorten the term of any incumbent director.
Section 2. ELECTION AND TERM. The initial Board of Directors shall
be elected by the incorporation and each initial director so elected shall hold
office until the first annual meeting of shareholders and until his successor
has been elected and qualified. Thereafter, each director who is elected at an
annual meeting of shareholders, and each director who is elected in the interim
to fill a vacancy or a newly created directorship, shall hold office until the
next annual meeting of shareholders and until his successor has been elected and
qualified.
Section 3. FILLING VACANCIES, RESIGNATION AND REMOVAL. Any director
may tender his resignation at any time. Any director or the entire Board of
Directors may be removed, with or without cause, by vote of the shareholders.
In the interim between annual meetings of shareholders or special meetings of
shareholders called for the election of directors or for the removal of one or
more directors and for the filling of any vacancy in that connection, newly
created directorships and any vacancies in the Board of Directors, including
unfilled vacancies resulting from the resignation or removal of directors for
cause or without cause, may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum, or by the sole remaining
director pursuant to Section 705(b) of the New York Business Corporation Law.
Section 4. QUALIFICATIONS AND POWERS. Each director shall be at
least eighteen (18) years of age. A director need not be a shareholder, a
citizen of the United States or a resident of the State of New York. The
business of the Corporation shall be managed by the Board of Directors, subject
to the provisions of the Certificate of Incorporation. In addition to the
powers and authorities by these By-laws expressly conferred upon it, the Board
of Directors
4
<PAGE>
may exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-laws directed or required to be exercised or done exclusively by the
shareholders.
Section 5. REGULAR AND SPECIAL MEETINGS OF THE BOARD OF DIRECTORS.
The Board of Directors may hold its meetings, whether regular or special, either
within or without the State of New York. The newly elected Board of Directors
may meet at such place and time as shall be fixed by the vote of the
shareholders at the annual meeting, for the purpose or organization or
otherwise, without notice of such meeting to the newly elected directors in
order legally to constitute the meeting, provided a majority of the entire Board
of Directors shall be present; or they may meet at such place and time as shall
be fixed by the consent in writing of all directors. Regular meetings of the
Board of Directors may be held with or without notice at such time and place as
shall from time to time be determined by resolution of the Board of Directors.
Whenever the time or place of regular meetings of the Board of Directors shall
have been determined by resolution of the Board of Directors, no regular
meetings shall be held pursuant to any resolution of the Board of Directors
altering or modifying its previous resolution relating to the time or place of
the holding of regular meetings, without first giving at least three (3) days
written notice to each director, either personally or by telegram, or at least
five (5) days written notice to each director by mail, of the substance and
effect of such new resolution relating to the time and place at which regular
meetings of the Board of Directors may thereafter be held without notice.
Special meetings of the Board of Directors shall be held whenever called by the
President, Vice-President (Chief Executive Officer), the Secretary or any
director in writing. Notice of each special meeting of the Board of Directors
shall be delivered personally to each director or sent by telegraph to his
residence or usual place of business at least three (3) days before the meeting,
or mailed to him to his residence or usual place of business at least five (5)
days before the meeting. Meetings of the Board of Directors, whether regular or
special, may be held at any time and place, and for any purpose, without notice,
to any director who attends the meeting and does not protest, prior thereto or
at its commencement, the lack of notice to him or when all directors not present
shall, in writing, waive notice of and consent to the holding of such meeting,
which waiver and consent may be given after the holding of such meeting. All or
any of the directors may waive notice of any meeting and the presence of a
director at any meeting of the Board of Directors shall be deemed a waiver of
notice thereof by him. A notice, or waiver of notice, need not specify the
purpose or purposes of any regular or special meeting of the Board of Directors.
Section 6. QUORUM AND ACTION. A majority of the entire Board of
Directors shall constitute a quorum except that when the entire Board of
Directors consists of one director, then one director shall constitute a quorum,
and except that when a vacancy or vacancies prevents such majority, a majority
of the directors in office shall constitute a quorum, provided that such
majority shall constitute at least one-third (1/3) of the entire Board of
Directors. A majority of the directors present, whether or not they constitute
a quorum, may adjourn a meeting to another time and place. Except as herein
otherwise provided, and except as otherwise provided by the New York Business
Corporation Law, the vote of the majority of the directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors.
5
<PAGE>
Section 7. TELEPHONIC MEETINGS. Any member or members of the Board
of Directors of Directors, or of any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any such
committee, as the case may be, by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time, and participation in a meeting by such means
shall constitute presence in person at such meeting.
Section 8. ACTION WITHOUT A 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 if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee as provided in Section 708(b) of the New York Business
Corporation Law.
Section 9. COMPENSATION OF DIRECTORS. By resolution of the Board of
Directors, the directors may be paid their expenses, if any, for attendance at
each regular or special meeting of the Board of Directors or of any committee
designated by the Board of Directors and may be paid a fixed sum for attendance
at such meeting, or a stated salary as director, or both. Nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor; provided,
however, that directors who are also salaried officers shall not receive fees or
salaries as directors.
ARTICLE IV
COMMITTEES
Section 1. IN GENERAL. The Board of Directors may, by resolution or
resolutions passed by the affirmative vote therefor of a majority of the entire
Board of Directors, designate an Executive Committee and such other committees
as the Board of Directors may from time to time determine, each to consist of
three (3) or more directors, and each of which, to the extent provided in the
resolution or in the Certificate of Incorporation or in the By-laws, shall have
all the powers of the Board of Directors, except that no such Committee shall
have power to fill vacancies in the Board of Directors, or to change the
membership of or to fill vacancies in any committee, or to make, amend, repeal
or adopt By-laws of the Corporation, or to submit to the shareholders any action
that needs shareholder approval under these By-laws or the New York Business
Corporation Law, or to fix the compensation of the directors for serving on the
Board of Directors or any committee thereof, or to amend or repeal any
resolution of the Board of Directors which by its terms shall not be so amenable
or repealable. Each committee shall serve at the pleasure of the Board of
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 the 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, whether or not he or they constitute a quorum, may
unanimously
6
<PAGE>
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member.
Section 2. EXECUTIVE COMMITTEE. Except as otherwise limited by the
Board of Directors or by these By-laws, the Executive Committee, if so
designated by the Board of Directors, shall have and may exercise, when the
Board of Directors is not in session, all the powers of the Board of Directors
in the management of the business and affairs of the Corporation, and shall have
power to authorize the seal of the Corporation to be affixed to all papers which
may require it. The Board of Directors shall have the power at any time to
change the membership of the Executive Committee, to fill vacancies in it, or to
dissolve it. The Executive Committee may make rules for the conduct of its
business and may appoint such assistants as it shall from time to time deem
necessary. A majority of the members of the Executive Committee, if more than a
single member, shall constitute a quorum.
ARTICLE V
OFFICERS
Section 1. DESIGNATION, TERM AND VACANCIES. The officers of the
Corporation shall be a President, one or more Vice-Presidents, a Secretary, a
Treasurer, and such other officers as the Board of Directors may from time to
time deem necessary. Such officers may have and perform the powers and duties
usually pertaining to their respective offices, the powers and duties
respectively prescribed by law and by these By-laws, and such additional powers
and duties as may from time to time be prescribed by the Board of Directors.
The same person may hold any two (2) or more offices, except that the offices of
President and Secretary may not be held by the same person unless all the issued
and outstanding stock of the Corporation is owned by one person, in which
instance such person may hold all or any combination of offices.
The initial officers of the Corporation shall be appointed by the
initial Board of Directors, each to hold office until the meeting of the Board
of Directors following the first annual meeting of shareholders and until his
successor has been appointed and qualified. Thereafter, the officers of the
Corporation shall be appointed by the Board of Directors as soon as practicable
after the election of the Board of Directors at the annual meeting of
shareholders, and each officer so appointed shall hold office under the first
meeting of the Board of Directors following the next annual meeting of the
shareholders and until his successor has been appointed and qualified. Any
officer elected or appointed by the Board of Directors may be removed at any
time, with or without cause, by the affirmative vote therefor of a majority of
the entire Board of Directors. All other agents and employee of the Corporation
shall hold office at the pleasure of the Board of Directors. Vacancies
occurring among the officers of the Corporation shall be filled by the Board of
Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 2. PRESIDENT. The President shall preside at all meetings of
the shareholders and at all meetings of the Board of Directors at which he may
be present. Subject to the direction of the Board of Directors, he shall have
general charge of the entire business of the Corporation. He may sign
certificates of stock and sign and seal bonds, debentures, contracts
7
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or other obligations authorized by the Board of Directors, and may, without
previous authority of the Board of Directors, make such contracts as the
ordinary conduct of the Corporation's business requires. He shall have the
usual powers to select and appoint all necessary officers and employees of the
Corporation, except those selected by the Board of Directors, and to remove all
such officers and employees except those selected by the Board of Directors, and
make new appointments to fill vacancies. He may delegate any of his powers to a
Vice-President of the Corporation.
Section 3. VICE-PRESIDENT. The Vice-President shall be the Chief
Executive Officer of the Corporation and have such of the President's powers and
duties as the President may from time to time delegate to him, and shall have
such other powers and perform such other duties as may be assigned to him by the
Board of Directors. During the absence or incapacity of the President, the
Chief Executive Officer, or, if there be more than one, the Chief Executive
Officer having the greatest seniority in office, shall perform the duties of the
President, and when so acting shall have all the powers and be subject to all
the responsibilities of the office of President.
Section 4. TREASURER. The Treasurer shall be the Chief Financial
Office of the Corporation and have custody of such funds and securities of the
Corporation as may come to his hands or be committed to his care by the Board of
Directors. Whenever necessary or proper, he shall endorse on behalf of the
Corporation, for collection, checks, notes, or other obligations, and shall
deposit the same to the credit of the Corporation in such bank or banks or
depositaries, approved by the Board of Directors as the Board of Directors or
President may designate. He may sign receipts or vouchers for payments made to
the Corporation, and the Board of Directors may require that such receipts or
vouchers shall also be signed by some other officer to be designated by them.
Whenever required by the Board of Directors, he shall render a statement of his
cash amounts and such other statements respecting the affairs of the Corporation
as may be required. He shall keep proper and accurate books of account. He
shall perform all acts incident to the office of the Chief Financial Officer,
subject to the control of the Board of Directors.
Section 5. SECRETARY. The Secretary shall have custody of the seal
of the Corporation and when required by the Board of Directors, or when any
instrument shall have been signed by the President duly authorized to sign the
same, or when necessary to attest any proceedings of the shareholders or
directors, shall affix it to any instrument requiring the same and shall attest
the same with his signature, provided that the seal may be affixed by the
President or Chief Executive Officer or other officer of the Corporation to any
document executed by either of them respectively on behalf of the Corporation
which does not require the attestation of the Secretary. He shall attend to the
giving and serving of notices of meetings. He shall have charge of such books
and papers as properly belong to his office or as may be committed to his care
by the Board of Directors. He shall perform such other duties as appertain to
his office or as may be required by the Board of Directors.
Section 6. DELEGATION. In the case of the absence of any officer of
the Corporation, or for any reason that the Board of
8
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Directors may deem sufficient, the Board of Directors may temporarily delegate
the powers or duties, or any of them, of such officer to any other officer or to
any director.
ARTICLE VI
STOCK
Section 1. CERTIFICATE REPRESENTING SHARES. All certificates
representing shares of the capital stock of the Corporation shall be in such
form not inconsistent with the Certificate of Incorporation, these By-laws or
the laws of the State of New York, and shall set forth thereon the statements
prescribed by Section 508, and where applicable, by Sections 505, 616(c),
620(g), 709(c) and 1002 of the New York Business Corporation Law. Such shares
shall be approved by the Board of Directors, and shall be signed by the
President or the Chief Executive Officer and by the Secretary or the Chief
Financial Officer and shall bear the seal of the Corporation and shall not be
valid unless so signed and sealed. Certificates countersigned by a duly
appointed transfer agent and/or registered by a duly appointed registrar shall
be deemed to be so signed and sealed whether the signatures be manual or
facsimile signatures and whether the seal be a facsimile seal or any other form
of seal. All certificates shall be consecutively numbered and the name of the
person owning the shares represented thereby, his residence, with the number of
such shares and the date of issue, shall be entered on the Corporation's books.
All certificates surrendered shall be canceled and no new certificates issued
until the former certificates for the same number of shares shall have been
surrendered and canceled, except as provided for herein.
In case any officer or officers who shall have signed or whose
facsimile signature or signatures shall have been affixed to any such
certificate or certificates, shall cease to be such officer or officers of the
Corporation before such certificate or certificates shall have been delivered by
the Corporation, such certificate or certificates may nevertheless be adopted by
the Corporation, and may be issued and delivered as though the person or persons
who signed such certificates, or whose facsimile signature or signatures shall
have been affixed thereto, had not ceased to be such officer or officers of the
Corporation.
Any restriction on the transfer or registration of transfer of any
shares of stock of any class or series shall be noted conspicuously on the
certificate representing such shares.
Section 2. FRACTIONAL SHARE INTERESTS. The Corporation, may, but
shall not be required to, issue certificates for fractions of a share. If the
Corporation does not issue fractions of a share, it shall (1) arrange for the
disposition of fractional interests by those entitled thereto, (2) pay in cash
the fair value of fractions of a share as of the time when those entitled to
receive such fractions are determined, or (3) issue scrip or warrants in
registered or bearer form which shall entitle the holder to receive a
certificate for a full share upon the surrender of such scrip or warrants
aggregating a full share. A certificate for a fractional share shall, but scrip
or warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
distribution of the assets of the Corporation in the event of liquidation. The
Board of Directors may cause scrip or warrants to be issued subject to the
conditions that they shall become void if not exchanged for certificates
representing full
9
<PAGE>
shares before a specified date, or subject to the condition that the shares for
which scrip or warrants are exchangeable may be sold by the Corporation and the
proceeds thereof distributed to the holders of scrip or warrants or subject to
any other conditions which the Board of Directors may impose.
Section 3. ADDRESSES OF SHAREHOLDERS. Every shareholder shall
furnish the Corporation with an address to which notices of meetings and all
other notices may be served upon or mailed to him, and in default thereof
notices may be addressed to him at his last known post office address.
Section 4. STOLEN, LOST OR DESTROYED CERTIFICATES. The Board of
Directors, may in its sole discretion, direct that a new certificate or
certificates of stock be issued in place of any certificate or certificates of
stock theretofore issued by the Corporation, alleged to have been stolen, lost
or destroyed, and the Board of Directors when authorizing the issuance of such
new certificate or certificates, may, in its discretion, and as a condition
precedent thereto, require the owner of such stolen, lost or destroyed
certificate or certificates or his legal representatives to give to the
Corporation and to such registrar or registrars and/or transfer agent or
transfer agents as may be authorized or required to countersign such new
certificate or certificates, a bond in such sum as the Corporation may direct
not exceeding double the value of the stock represented by the certificate
alleged to have been stolen, lost or destroyed, as indemnity against any claim
that may be made against them or any of them for or in respect of the shares of
stock represented by the certificate alleged to have been stolen, lost or
destroyed.
Section 5. TRANSFERS OF SHARES. Upon compliance with all provisions
restricting the transferability of shares, if any, transfers of stock shall be
made only upon the books of the Corporation by the holder in person or by his
attorney thereunto authorized by power of attorney duly filed with the Secretary
of the Corporation or with a transfer agent or registrar, if any, upon the
surrender and cancellation of the certificate or certificates for such shares
properly endorsed and the payment of all taxes due thereon. The Board of
Directors may appoint one or more suitable banks and/or trust companies as
transfer agents and/or registrars of transfers, for facilitating transfers of
any class or series of stock of the Corporation by the holders thereof under
such regulations as the Board of Directors may from time to time prescribe.
Upon such appointment being made all certificates of stock of such class or
series thereafter issued shall be countersigned by one of such transfer agents
and/or one of such registrars of transfers, and shall not be valid unless so
countersigned.
ARTICLE VII
DIVIDENDS AND FINANCE
Section 1. DIVIDENDS. The Board of Directors shall have power to fix
and determine and to vary, from time to time, the amount of the working capital
of the Corporation before declaring any dividends among its shareholders, and to
direct and determine the use and disposition of any net profits or surplus, and
to determine the date or dates for the declaration and payment of dividends and
to determine the amount of any dividend, and the amount of any reserves
necessary in their judgment before declaring any dividends among its
shareholders, and
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to determine the amount of the net profits of the Corporation from time to time
available for dividends.
Section 2. FISCAL YEAR. The fiscal year of the Corporation shall end
on the last day of December in each year and shall begin on the next succeeding
day, or shall be for which other period as the Board of Directors may from time
to time designate with the consent of the Department of Taxation and Finance,
where applicable.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 1. STOCK OF OTHER CORPORATIONS. The Board of Directors shall
have the rights to authorize any director, officer or other person on behalf of
the Corporation to attend, act and vote at meetings of the Shareholders of any
corporation in which the Corporation shall hold stock and to exercise thereat
any and all rights and powers incident to the ownership of such stock and to
execute waivers of notice of such meetings and calls therefor; and authority may
be given to exercise the same either on one or more designated occasions, or
generally on all occasions until revoked by the Board of Directors. In the
event that the Board of Directors shall fail to give such authority, such
authority may be exercised by the President in person or by proxy appointed by
him on behalf of the Corporation.
Any stocks or securities owned by this Corporation may, if so
determined by the Board of Directors, be registered either in the name of this
Corporation or in the name of any nominee or nominees appointed for that purpose
by the Board of Directors.
Section 2. BOOKS AND RECORDS. Subject to the New York Business
Corporation Law, the Corporation may keep its books and accounts outside the
State of New York.
Section 3. NOTICES. Whenever any notice is required by these By-laws
to be given, personal notice is not meant unless expressly so stated, and any
notice so required shall be deemed to be sufficient if given by depositing the
same in a post office box in a sealed postpaid wrapper, addressed to the person
entitled thereto at his last known post office address, and such notice shall be
deemed to have been given on the day of such mailing.
Whenever any notice whatsoever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation or these By-laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
Section 4. AMENDMENTS. Except as otherwise provided has in, these
By-laws may be altered, amended or repealed and By-laws may be made at any
annual meeting of the shareholders or at any special meeting thereof it notice
of the proposed alteration, amendment or repeal, or By-law or By-laws to be made
be contained in the notice of such special meeting, by the holders of a majority
of the shares of stock of the Corporation outstanding and entitled to
11
<PAGE>
vote thereat; or by a majority of the Board of Directors at any regular meeting
of the Board of Directors, or at any special meeting of the Board of Directors,
if notice of the proposed alteration, amendment or repeal, or By-law or By-laws
to be made, be contained in the notice of such special meeting.
I, Gary Bondi, Secretary of the Corporation, hereby certify that the
foregoing are the By-laws adopted by the Board of Directors of the Corporation
this _____th day of February, 1996.
___________________________________
Gary Bondi, Secretary
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Exhibit 4.1
SECURITYHOLDERS AGREEMENT
dated as of November 1, 1996
among
MR. ALFRED WEST,
ECONOPHONE, INC.
and
PRINCES GATE INVESTORS II, L.P.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
............................................................................ 1
SECTION 1.1. Definitions............................................... 1
ARTICLE II
RIGHTS AND OBLIGATIONS WITH
RESPECT TO TRANSFER
............................................................................ 5
SECTION 2.1. Restrictive Legend........................................ 5
ARTICLE III
REGISTRATION RIGHTS
............................................................................ 6
SECTION 3.1. Demand Registration Rights................................ 6
SECTION 3.2. Piggy-Back Registration................................... 7
SECTION 3.3. Reduction of Offering..................................... 7
SECTION 3.4. Registration Procedures................................... 8
SECTION 3.5. Registration Expenses..................................... 11
SECTION 3.6. Indemnification by the Issuer............................. 11
SECTION 3.7. Indemnification by Selling Holders........................ 12
SECTION 3.8. Conduct of Indemnification Proceedings.................... 12
SECTION 3.9. Contribution.............................................. 13
SECTION 3.10. Participation in Underwritten Registrations.............. 14
SECTION 3.11. Rule 144 and Rule 144A................................... 15
SECTION 3.12. Holdback Agreements...................................... 15
ARTICLE IV
COVENANTS
............................................................................ 16
SECTION 4.1. Information............................................... 16
SECTION 4.2. Right to Participate in Certain Dispositions.............. 17
SECTION 4.3. Drag-Along................................................ 19
SECTION 4.4. Employment Agreements..................................... 19
SECTION 4.5. E-Gram.................................................... 20
SECTION 4.6. Carrier Contracts......................................... 20
i
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ARTICLE V
WARRANTS
............................................................................ 20
SECTION 5.1. Issuance of Warrants...................................... 20
ARTICLE VI
MISCELLANEOUS
............................................................................ 22
SECTION 6.1. Holders not Signatories Hereto............................ 22
SECTION 6.2. Headings.................................................. 22
SECTION 6.3. No Inconsistent Agreements................................ 22
SECTION 6.4. Parent Entities........................................... 22
SECTION 6.5. Entire Agreement.......................................... 22
SECTION 6.6. Notices................................................... 22
SECTION 6.7. Applicable Law............................................ 23
SECTION 6.8. Severability.............................................. 23
SECTION 6.9. Termination............................................... 23
SECTION 6.10. Successors, Assigns, Transferees......................... 23
SECTION 6.11. Amendments; Waivers...................................... 23
SECTION 6.12. Counterparts; Effectiveness.............................. 24
SECTION 6.13. Recapitalization, etc.................................... 24
SECTION 6.14. Remedies................................................. 24
SECTION 6.16. Subsidiary Offerings..................................... 24
EXHIBIT A - Form of Management Reporting Package
ii
<PAGE>
SECURITYHOLDERS AGREEMENT
SECURITYHOLDERS AGREEMENT dated as of November 1, 1996 (the "Series A
Preferred Issue Date") among Mr. Alfred West ("Mr. West"), Econophone, Inc., a
New York corporation ("Issuer"), and Princes Gate Investors II, L.P.
("Purchaser").
WHEREAS, the Issuer and the Purchaser have entered into the Securities
Purchase Agreement (as defined below) pursuant to which the Purchaser has agreed
to purchase shares of Series A Preferred (as defined below) in accordance with
the terms thereof.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. (a) The following terms, as used herein,
have the following meanings:
"Board of Directors" means the Board of Directors of the Issuer.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized or required
by law to close.
"Certificate of Amendment" means the certificate of amendment to the
Company's certificate of incorporation relating to, among other things, the
Series A Preferred, and filed with the Secretary of State of the State of
New York on the date hereof.
"Charter" means the Certificate of Incorporation of the Issuer, as in
effect as of the Closing Date, in the form attached as Exhibit D to the
Securities Purchase Agreement.
"Closing Date" means the date of the closing of the purchase of
Series A Preferred pursuant to the Securities Purchase Agreement.
"Commission" means the Securities and Exchange Commission and any
successor agency having similar powers.
"Common Stock" means the Common Stock of the Issuer.
"Conversion Shares" means the shares of common stock of the Issuer
issuable or issued upon the conversion of the Series A Preferred.
"Equity Securities" means the Series A Preferred, the Conversion
Shares, the Warrants and the Warrant Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Holder" means any registered holder of shares of Series A Preferred
or Registrable Securities, or any registered holder of Warrants.
"Initial Public Offering" means the initial public offering of Common
Stock of the Issuer generating gross proceeds of at least $25 million and
registered with the Commission on Form S-1 or such other form as may then
be available; the shares of Common Stock sold in such initial public
offering and generating such $25 million of gross proceeds may be sold by
the Issuer, any securityholder of the Issuer (including, without
limitation, the Holders) or any combination of the Issuer and its
securityholders.
"Issuer" has the meaning set forth in the first paragraph of this
Agreement.
"Person" means an individual, partnership, corporation, trust, joint
stock company, association, joint venture, or any other entity or
organization, including, without limitation, a government or political
subdivision or an agency or instrumentality thereof.
"Piggy-Back Registration" means any registration of any shares of
Common Stock with respect to which any Holder elects to include Registrable
Securities pursuant to Section 3.2 hereof.
<PAGE>
"Purchaser" has the meaning set forth in the first paragraph of this
Agreement.
"Registrable Securities" means the Conversion Shares and the Warrant
Shares; PROVIDED, in any event, that such securities shall cease to be
Registrable Securities when (x) a registration statement relating to such
securities shall have been declared effective by the Commission and such
securities shall have been disposed of pursuant to such effective
registration statement, (y) such securities may be disposed of pursuant to
Rule 144(k) or (z) such securities are no longer outstanding. Solely for
purposes of determining the Holders entitled to exercise registration
rights hereunder, "Registrable Securities" shall be deemed to include
Conversion Shares and Warrant Shares that would be issued upon conversion
or exercise of the Series A Preferred and the Warrants, as applicable.
"Registration Expenses" means, to the extent applicable, all
(i) registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including, without limitation, reasonable fees
and disbursements of a qualified independent underwriter, if any, counsel
in connection therewith and the reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) printing expenses, (iv) internal expenses of the Issuer
(including, without limitation, all salaries and expenses of officers and
employees performing legal or accounting duties), (v) reasonable fees and
disbursements of counsel for the Issuer, (vi) customary fees and expenses
for independent certified public accountants retained by the Issuer
(including, without limitation, the expenses of any comfort letters or
costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters), (vii) reasonable fees
and expenses of any special experts retained by the Issuer in connection
with such registration, (viii) reasonable fees and expenses of one counsel
for the Holders, (ix) fees and expenses of listing the Registrable
Securities on a securities exchange or on the NASDAQ National Market
System, (x) rating agency fees, (xi) the costs and expenses of the Issuer
relating to investor presentations on the "road show" undertaken in
connection with the marketing of Registrable Securities, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with
the road show presentations with the prior approval of the Issuer, travel
and lodging expense of the representatives and officers of the Issuer and
any such consultants, and the cost of any transportation utilized in
connection with the road show, and (xii) all other costs or expenses
incident to the performance of the obligations of the Issuer with respect
to Article III. Nothing in this definition shall oblige the Issuer to pay
any underwriting or placement agent fees or discounts or any securities
transfer taxes.
"Rule 144" means Rule 144 under the Securities Act, as such rule may
be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act, as such rule may
be amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Securities Purchase Agreement" means the Securities Purchase
Agreement dated as of the date hereof by and between the Issuer and the
Purchaser.
"Selling Holder" means a Holder who proposes to Transfer Registrable
Securities pursuant to Article III.
"Series A Preferred" means the Redeemable Convertible Preferred Stock,
Series A, of the Issuer, having the rights and privileges set forth in the
Charter.
"Series A Preferred Issue Date" has the meaning set forth in the first
paragraph of this Agreement.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which Voting Securities representing more than 50% of the
voting power of such corporation's or entity's Voting Securities are at the
time directly or indirectly owned by such Person.
"Transfer" means any transfer, in whole or in part, by sale, pledge,
assignment, grant or other means.
<PAGE>
"Underwriter" means a securities dealer who purchases any Registrable
Securities as a principal in connection with a distribution of such
Registrable Securities and not as part of such dealer's market-making
activities.
"Voting Securities" of any Person means stock or other ownership
interests of such Person entitled to vote for the board of directors of
such Person or other entity performing similar functions.
"Warrant Shares" means the shares of common stock of the Issuer
issuable or issued upon exercise of the Warrants.
(b) Each of the following terms is defined in the Section opposite
such term:
TERM SECTION
Demand Registration 3.1
Effective Date 6.12
Indemnified Party 3.8
Indemnifying Party 3.8
IPO Demand 3.1
Notice of Interest 4.2
Notice Period 4.2
Offer 4.2
Offer Notice 4.2
Offered Shares 4.2
Pro Rata Portion 4.2
Registration Demand 3.1
Related Party 4.2
Requesting Holders 3.1
Shares 4.2
Warrants 5.1
ARTICLE II
RIGHTS AND OBLIGATIONS WITH
RESPECT TO TRANSFER
SECTION 2.1. RESTRICTIVE LEGEND. (a) For so long as this Agreement
remains in effect, each certificate representing an Equity Security owned by any
holder or a subsequent transferee shall (unless otherwise permitted by the
provisions of Section 2.1(b)) include a legend in substantially the following
form:
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT, THE RULES
AND REGULATIONS PROMULGATED THEREUNDER AND ANY APPLICABLE STATE
SECURITIES LAWS.
THE SECURITY REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A
SECURITYHOLDERS AGREEMENT DATED AS OF NOVEMBER 1, 1996 THAT FIXES
CERTAIN RIGHTS AND OBLIGATIONS OF THE ISSUER AND THE HOLDER OF THIS
SECURITY. A COPY OF THE AGREEMENT IS ON FILE AT THE ISSUER'S
PRINCIPAL OFFICE.
(b) Any holder of an Equity Security may, upon providing evidence
reasonably satisfactory to the Issuer (including, if so requested by the Issuer,
an opinion of counsel to such Holder) that such Equity Security may be sold
pursuant to Rule 144(k), exchange the certificate representing such Equity
Security for a new certificate that does not bear the legend set forth in
Section 2.1(a).
ARTICLE III
REGISTRATION RIGHTS
SECTION 3.1. DEMAND REGISTRATION RIGHTS. (a) IPO DEMAND. From and
after the date of the third anniversary of the Series A Preferred Issue Date
until the consummation of the Initial Public Offering, holders of at least 50%
of the outstanding Registrable Securities (determined on a fully diluted basis
assuming the conversion of all Series A Preferred and Warrants then outstanding)
may make a written request (the "IPO Demand") that the Issuer consummate the
Initial Public Offering and, upon receipt of such IPO Demand, the Issuer shall
be obligated to promptly use its best efforts to proceed to consummate the
Initial Public Offering as provided for in Section 3.4 hereof.
<PAGE>
(b) SUBSEQUENT DEMAND. At any time after the consummation of the
Initial Public Offering, the Holders of at least 25% of the outstanding
Registrable Securities (determined on a fully diluted basis assuming the
conversion of all Series A Preferred and Warrants then outstanding) may make a
written request (the "Registration Demand") for registration (a "Demand
Registration") under the Securities Act of Registrable Securities; PROVIDED that
upon the request of the lead Underwriter in the Initial Public Offering, the
Holders shall not make a Registration Demand during such period as the lead
Underwriter may reasonably request (but in no event longer than 180 days)
beginning on the date of the final prospectus with respect to the Initial Public
Offering. The Registration Demand will specify the number of Registrable
Securities proposed to be sold and will also specify the intended method of
disposition thereof. The Holders shall not be entitled to make more than two
Registration Demands and the Issuer shall not be obligated to effect more than
one Demand Registration in any twelve-month period. Any Registration Demand
shall be for the sale of Registerable Securities with an anticipated sale price
of at least $10,000,000; PROVIDED, that the holders of Registerable Securities
may, in their discretion, make a Registration Demand for securities involving
the sale of Registerable Securities with an anticipated sale price of less than
$10,000,000, in which case the holders of the Registerable Securities shall not
be entitled to request any additional Registration Demands hereunder. The
Holder or Holders (as applicable) making such request are referred to herein
collectively as the "Requesting Holders."
(c) EFFECTIVE REGISTRATION. A registration requested pursuant to
this Section 3.1 shall be deemed not to have been effected (i) if a registration
statement with respect thereto shall not have become effective, (ii) if after it
has become effective, such registration is interfered with for any reason by any
stop order, injunction or other order or requirement of the Commission or any
other governmental agency or any court, and the result of such interference is
to prevent the Selling Holders from disposing of the Registrable Securities to
be sold thereunder in accordance with the intended methods of disposition or
(iii) f the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with any underwritten
registration shall not be satisfied or waived with the consent of the Issuer,
the Selling Holders or the Underwriter, as applicable.
(d) UNDERWRITING. If the Requesting Holders so elect, the offering
of Registrable Securities pursuant to a Demand Registration shall be in the form
of an underwritten offering. The Issuer shall select the book-running lead
Underwriter and any additional investment bankers and managers in connection
with the offering, each of which shall be reasonably satisfactory to the
Requesting Holders of a majority of the Registrable Securities to be registered.
SECTION 3.2. PIGGY-BACK REGISTRATION. If the Issuer proposes to file
a registration statement under the Securities Act with respect to an offering of
common stock (i) for its own account (other than a registration statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the Commission))
or (ii) for the account of any Holders (other than the holders of Registrable
Securities) then the Issuer shall give written notice of such proposed filing to
the holders of Registrable Securities as soon as practicable (but in any event
not less than 15 days before the filing date), and such notice shall offer each
of the holders of Registrable Securities the opportunity to register any of its
Registrable Securities. Notwithstanding anything herein to the contrary, the
Issuer shall be entitled to terminate any Piggy-Back Registration at any time.
SECTION 3.3. REDUCTION OF OFFERING. Notwithstanding anything
contained in any other Section herein, if the lead Underwriter of an offering
described in Section 3.1 or 3.2 delivers a written statement to the Issuer that
the success of such offering would, in its opinion, be materially and adversely
affected by inclusion of all the securities requested to be included, then the
Issuer may, upon written notice to the Holders, reduce (if and to the extent
stated by such Underwriter to be necessary to eliminate such effect) the number
of the securities required to be registered so that the resultant aggregate
number of the securities requested to be registered that will be included in
such registration shall be equal to the numbers of the securities referred to in
the preceding parenthetical; PROVIDED, HOWEVER, that priority in such
registration shall be (A) in the case of an Initial Public Offering resulting
from the giving of an IPO Demand, (i) first, securities offered for the account
of the Issuer, (ii) second, securities offered for the account of the holders of
Registrable Securities and (iii) third, among any other securityholders entitled
to registration rights pursuant to any contractual right of registration, in
accordance therewith, and (B) in the case of any other initial public offering,
(i) first, securities for the account of the Issuer and (ii) second, among any
other securityholders of the Issuer entitled to registration rights pursuant to
any contractual right of registration, in accordance therewith, (C) in the case
of any Registration Demand by holders of Registrable Securities, first,
securities offered for the account of such holders, (ii) second, pro rata among
<PAGE>
any other securityholders of the Issuer entitled to register securities pursuant
to a contractual right of registration in accordance therewith and (iii) third,
securities offered for the account of the Issuer and (D) in any case where any
securityholder other than a holder of Registrable Securities has requested
registration pursuant to a contractual right of registration (i) first to
securities offered for the account of any such holders, in accordance therewith,
(ii) second, pro rata among any securities of the holders or Registrable
Securities to the extent requested to be registered pursuant to Section 3.2 and
(iii) third, securities offered for the account of the Issuer.
SECTION 3.4. REGISTRATION PROCEDURES. Whenever the Issuer receives
an IPO Demand or a Registration Demand or any holder of Registrable Securities
elects to participate in a Piggy-Back Registration pursuant to Section 3.2
hereof, the Issuer will use its best efforts, (i) in the case of the IPO Demand,
to consummate the Initial Public Offering, and (ii) in the case of a
Registration Demand or election to participate in a Piggy-Back Registration, to
effect the registration and the sale of the relevant Registrable Securities in
accordance with the intended method of disposition thereof, in each case as
promptly as practicable, and in connection therewith:
(a) The Issuer will promptly (or in the case of a registration
pursuant to Section 3.2, on such time frame as shall be properly specified
by the securityholders requesting such registration) prepare and file with
the Commission a registration statement on any form for which the Issuer
then qualifies or which counsel for the Issuer shall deem appropriate and
which form shall be available for the sale of the Registrable Securities to
be registered thereunder in accordance with the intended method of
distribution thereof (which form shall be a Form S-1 in the case of the
Initial Public Offering, or a successor form thereto), and use its best
efforts to cause such filed registration statement to become effective as
soon as practicable (or, in the case of a registration pursuant to
Section 3.2, on such time frame as shall be properly specified by the
securityholders requesting such registration) and remain effective for a
period of not less than 180 days or such shorter period which will
terminate when all of the Registrable Securities covered by such
registration statement have been sold (but not before the expiration of the
40 or 90 day period referred to in Section 4(3) of the Securities Act and
Rule 174 thereunder, to the extent applicable); PROVIDED that if the Issuer
shall furnish to the Requesting Holders a certificate signed by either its
Chairman, President, or Vice-President stating that in his good faith
judgment it would materially adversely affect the Issuer or its
shareholders for such a registration statement to be filed promptly, the
Issuer may delay by 90 days any IPO Demand or Registration Demand made in
accordance with Section 3.1.
(b) The Issuer will, concurrently with filing a registration
statement or prospectus or any amendment or supplement thereto, furnish to
the Requesting Holders, if any, and each Underwriter, if any, such number
of copies of such registration statement, each amendment and supplement
thereto (and, in each case one copy of all exhibits thereto and documents
incorporated by reference therein if so requested), the prospectus included
in such registration statement (including each preliminary prospectus) and
such other documents as the Requesting Holders or such Underwriter may
reasonably request in order to facilitate the sale of the Registrable
Securities.
(c) After the filing of the registration statement, the Issuer will
promptly notify the Selling Holders of any stop order issued or threatened
by the Commission and use its best efforts to prevent the entry of such
stop order or to remove it if entered.
(d) The Issuer will use its best efforts to (i) register or qualify
the Registrable Securities under such other securities or blue sky laws of
such U.S. jurisdictions as the Selling Holders request, keep such
registration or qualification in effect for so long as such registration
statement under the Securities Act remains in effect, and take any other
action which may be reasonably necessary to enable the Selling Holders to
consummate the disposition in such jurisdictions of the securities owned by
the Selling Holders and (ii) use its best efforts to cause such Registrable
Securities to be registered with or approved by such other governmental
agencies or authorities as may be necessary or advisable, by virtue of the
business and operations of the Issuer and/or its Subsidiaries, to enable
the Selling Holders to consummate the disposition of such Registrable
Securities; PROVIDED, that the Issuer will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise
be required to qualify but for this paragraph (d), (ii) subject itself to
taxation in any such jurisdiction other than taxation arising with respect
to the registration of securities or (iii) consent to general service of
process in any such jurisdiction.
<PAGE>
(e) At any time when a prospectus relating to the sale of Registrable
Securities is required to be delivered under the Securities Act, the Issuer
will immediately notify the Selling Holders of the occurrence of an event
requiring the preparation of a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading and promptly make
available to the Selling Holders and the Underwriters any such supplement
or amendment. The Selling Holders agree that, upon receipt of any notice
from the Issuer of the happening of any event of the kind described in the
preceding sentence, the Selling Holders will forthwith discontinue the
offer and sale of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until receipt of the copies
of such supplemented or amended prospectus and, if so directed by the
Issuer, the Selling Holders will deliver to the Issuer all copies, other
than permanent file copies then in the possession of the Selling Holders,
of the most recent prospectus covering such Registrable Securities at the
time of receipt of such notice. In the event the Issuer shall give such
notice, the Issuer shall extend the period during which such registration
statement shall be maintained effective as provided in Section 3.4(a)
hereof by the number of days during the period from and including the date
of the giving of such notice to the date when the Issuer shall make
available to the Selling Holders such supplemented or amended prospectus.
(f) The Issuer will enter into customary agreements (including,
without limitation, an underwriting agreement in customary form) and take
such other actions, including, without limitation, engaging in a road show
and preparing and rehearsing therefor, as are customary in order to
expedite or facilitate the disposition of such Registrable Securities in
the manner in which they are intended to be disposed of.
(g) The Issuer will furnish to the Selling Holders and to each
Underwriter, if any, a signed counterpart, addressed to the Selling Holders
or such Underwriter, of (i) an opinion or opinions of counsel to the Issuer
and (ii) a comfort letter or comfort letters from the Issuer's independent
public accountants, each in customary form and covering such matters as are
customarily covered by opinions and comfort letters with respect to
companies such as the Issuer (including, without limitation, regulatory
compliance opinions), as the Selling Holders or the lead Underwriter
therefor reasonably requests.
(h) The Issuer will otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its securityholders, as soon as reasonably practicable, an earnings
statement covering a period of 12 months, beginning within three months
after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities
Act.
(i) The Issuer will provide and cause to be maintained a transfer
agent and registrar of national standing for all Registrable Securities
covered by such registration statement from and after a date not later than
the effective date of such registration statement.
(j) The Issuer will use its best efforts (i) to cause all such
Registrable Securities covered by such registration statement to be listed
on any national securities exchange (if such Registrable Securities are not
already listed), and on each other securities exchange on which similar
securities issued by the Issuer are then listed, if the listing of such
Registrable Securities is then permitted under the rules of such exchange;
or (ii) prior to the sale of the Registrable Securities, to secure the
designation of all such Registrable Securities covered by such registration
statement as a NASDAQ "national market system security" within the meaning
of Rule 11Aa2-1 of the Commission or, failing that, to secure NASDAQ
authorization for such Registrable Securities, in each case if the
Registrable Securities so qualify, and, without limiting the generality of
the foregoing, to arrange for at least two market makers to register as
such with respect to such Registrable Securities with the National
Association of Securities Dealers, in the case of each action referred to
in this clause (ii) if requested by the Holder or by the lead Underwriter.
Notwithstanding anything to the contrary in this Section 3.4, nothing
contained herein shall be deemed to limit the last sentence of Section 3.02 or
to impose on the Issuer in connection with any registration pursuant to
Section 3.2 hereof any obligation in excess of that required to be performed by
the Issuer for the benefit of or at the request of the securityholders
<PAGE>
requesting such registration and the Underwriters, if any, retained in
connection therewith.
SECTION 3.5. REGISTRATION EXPENSES. Registration Expenses incurred
in connection with any registration made or requested to be made pursuant to
this Article III will be borne by the Issuer, whether or not any such
registration statement becomes effective, to the extent permitted by applicable
law; provided that the Issuer shall not be responsible for Registration Expenses
that relate to a registration triggered by an IPO Demand or Registration Demand
if such registration is cancelled solely (i) as a result of a request from the
Selling Holders or (ii) as a result of acts or omissions on the part of any
Selling Holder.
SECTION 3.6. INDEMNIFICATION BY THE ISSUER. To the extent permitted
by applicable law, the Issuer agrees to indemnify and hold harmless each Selling
Holder, its officers, directors and agents, and each person, if any, who
controls each such Selling Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and expenses caused by any untrue statement
or alleged untrue statement of a material fact contained in any registration
statement or prospectus relating to the Registrable Securities (as amended or
supplemented if the Issuer shall have furnished any amendments or supplements
thereto) or any preliminary prospectus, or 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 (in the case of any prospectus or
preliminary prospectus, in the light of the circumstances under which they were
made) not misleading, except insofar as such losses, claims, damages,
liabilities or expenses are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information furnished in writing
to the Issuer by or on behalf of any such Selling Holder expressly for use
therein. The Issuer also agrees, to the extent permitted by applicable law, to
indemnify any Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Selling Holders provided in
this Section 3.6. Notwithstanding the foregoing, the Issuer shall not be
required to indemnify and hold harmless any Selling Holder with respect to any
losses, claims, damages, liabilities and expenses caused solely by such Holder's
failure to comply with the penultimate sentence of Section 3.4(e).
SECTION 3.7. INDEMNIFICATION BY SELLING HOLDERS. To the extent
permitted by applicable law, each Selling Holder agrees, severally but not
jointly, to indemnify and hold harmless the Issuer, its officers, directors and
agents and each person, if any, who controls the Issuer within the meaning of
either Section 15 of the Securities Act of Section 20 of the Exchange Act, to
the same extent as the foregoing indemnity from the Issuer to such Selling
Holder, but only with reference to (i) information related to such Selling
Holder furnished in writing by or on behalf of such Selling Holder expressly for
use in any registration statement or prospectus relating to the Registrable
Securities, or any amendment or supplement thereto, or any preliminary
prospectus, (ii) such Selling Holder's failure to comply with the penultimate
sentence of Section 3.4(e) and (iii) if the Issuer shall have provided such
Selling Holder with an appropriate prospectus, such Selling Holder's failure to
deliver such prospectus to the purchaser from such Selling Holder. Each Selling
Holder also agrees, to the extent permitted by applicable law, to indemnify and
hold harmless Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Issuer provided for in this
Section 3.7.
SECTION 3.8. CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any
proceeding (including, without limitation, any governmental investigation) shall
be instituted involving any Person in respect of which indemnity may be sought
pursuant to Section 3.6 or 3.7, such Person (the "Indemnified Party") shall
promptly notify the Person against whom such indemnity may be sought (the
"Indemnifying Party") in writing and the Indemnifying Party upon request of the
Indemnified Party shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and shall pay the
reasonable fees and disbursements of such counsel related to the proceeding. In
any such proceeding, any Indemnified Party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party,unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnified Party and the Indemnifying Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) at any time for
<PAGE>
all such Indemnified Parties, and that all such fees and expenses shall be
reimbursed as they are incurred (subject to the receipt of reasonably
satisfactory documentation of such fees and expenses). In the case of any such
separate firm for the Indemnified Parties, such firm shall be designated in
writing by the Indemnified Parties; provided, that such firm shall be reasonably
satisfactory to the Indemnifying Party. The Indemnifying Party shall not be
liable for any settlement of any proceeding effected without its consent, but if
settled with such consent, or if there be a final nonappealable judgment for the
plaintiff, the Indemnifying Party shall indemnify and hold harmless such
Indemnified Parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an Indemnified Party shall have requested an
Indemnifying Party to reimburse the Indemnified Party for reasonable fees and
expenses of counsel as contemplated by the third sentence of this paragraph, the
Indemnifying Party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 Business Days after receipt by such Indemnifying Party
of the aforesaid request and (ii) such Indemnifying Party shall not have
reimbursed the Indemnified Party in accordance with such request prior to the
date of such settlement, unless the Indemnifying Party has contested such
reimbursement obligation and provides reasonable assurances that payment of such
reimbursement obligation can be made upon resolution of such dispute (which
shall not necessarily require the posting of a bond or a deposit into escrow).
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 (x) includes an unconditional release of such Indemnified Party
from all liability arising out of such proceeding and (y) provides that such
Indemnified Party does not admit any fault or guilt with respect to the subject
matter of such proceeding.
SECTION 3.9. CONTRIBUTION. (a) If the indemnification provided for
herein is for any reason unavailable to the Indemnified Parties in respect of
any losses, claims, damages or liabilities referred to herein, then each such
Indemnifying Party, to the extent permitted by applicable law, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Issuer and any Selling Holder on the one hand and
the Underwriters on the other, in such proportion as is appropriate to reflect
the relative benefits received by the Issuer and such Selling Holder on the one
hand and the Underwriters on the other from the offering of the securities, or
if such allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits but also the relative
fault of the Issuer and such Selling Holder on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations, and (ii) as between the Issuer on the one
hand and any Selling Holder on the other, in such proportion as is appropriate
to reflect the relative fault of the Issuer and of such Selling Holder in
connection with such statements or omissions, as well as any other relevant
equitable considerations. The relative benefits received by the Issuer and any
Selling Holder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Issuer and such Selling Holder bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the prospectus. The relative fault of the Issuer and
any Selling Holder on the one hand and of the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Issuer and such Selling
Holder or by the Underwriters. The relative fault of the Issuer on the one hand
and any Selling Holder on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(b) The Issuer and each Selling Holder agree that it would not be
just and equitable if contribution pursuant to this Section 3.9 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 or liabilities 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
<PAGE>
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 3.9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable 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, and no Selling Holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities of such Selling Holder were
offered to the public (less Underwriters' discounts and commissions) exceeds the
amount of any damages which such Selling Holder 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 Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
SECTION 3.10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person
(including any Selling Holder) may participate in any underwritten registration
hereunder unless such Person (a) agrees to sell such Person's securities on the
basis provided in any underwriting arrangements approved by the Persons entitled
hereunder or otherwise to approve such arrangements and (b) completes, executes
and provides all questionnaires, powers of attorney, indemnities, underwriting
agreements, legal opinions and other documents reasonably required under the
terms of such underwriting arrangements and these registration rights.
SECTION 3.11. RULE 144 AND RULE 144A. The Issuer covenants that it
will file any reports required to be filed by it under the Securities Act and
the Exchange Act and will take such further action as any Selling Holder shall
reasonably request, all to the extent required from time to time to enable
Selling Holders to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
and Rule 144A under the Securities Act, as such Rules may be amended from time
to time, or (b) any similar rule or regulation hereafter adopted by the
Commission; PROVIDED, that, notwithstanding the foregoing, the Issuer shall not
be required by virtue of this Section 3.11 to file an application with PORTAL
with respect to any of the Registrable Securities or the Series A Preferred.
Upon the request of any holder of Registrable Securities, the Issuer will
deliver to such holder a written statement as to whether it has complied with
such requirements.
SECTION 3.12. HOLDBACK AGREEMENTS. (a) RESTRICTIONS ON PUBLIC SALE
BY HOLDER OF REGISTRABLE SECURITIES. If and to the extent requested by the
Issuer, in the case of a non-underwritten public offering, and if and to the
extent requested by the lead Underwriter or Underwriters, in the case of an
underwritten public offering, the Holders agree not to effect, except as part of
such registration, any public sale or distribution of the securities being
registered or a similar security of the Issuer, or any securities convertible
into or exchangeable or exercisable for such securities, including, without
limitation, a sale pursuant to Rule 144 or Rule 144A, during the 10 days prior
to, and during such period that the Issuer (in the case of a non-underwritten
public offering) or the lead Underwriter (in the case of an underwritten public
offering) may reasonably request, but in no event longer than 180 days,
beginning on the effective date of such registration statement.
(b) RESTRICTIONS ON PUBLIC SALE BY THE ISSUER. The Issuer agrees
(i) not to effect any public sale or distribution of any securities similar to
those being registered in accordance with Section 3.1, or any securities
convertible into or exchangeable or exercisable for such securities, during the
7 days prior to, and during such period as the lead Underwriter may reasonably
request, but in no event longer than 180 days, beginning on, the effective date
of any registration statement or the commencement of a public distribution of
Registrable Securities (except as part of such registration statement and except
pursuant to registrations on Form S-4 or S-8 or any successor or similar form
thereto or pursuant to an unregistered offering to employees of the Issuer or
its Subsidiaries pursuant to an employee benefit plan as defined in Rule 405 of
Regulation C of the Securities Act); and (ii) that, during such time as
Registerable Securities are outstanding, any agreement entered into after the
date of this Agreement pursuant to which the Issuer issues or agrees to issue
any privately placed Equity Securities (other than a stock option agreement
under an incentive plan of the Issuer) shall contain a provision under which
holders of such securities agree not to effect any public sale or distribution
of any such securities during the periods described in Section 3.12(a) above, in
each case including, without limitation, a sale pursuant to Rule 144 or Rule
144A (except as part of any such registration, if permitted); PROVIDED, however,
that the provisions of this paragraph (b) shall not prevent the exercise,
conversion or exchange of any securities pursuant to their terms into or for
other securities.
<PAGE>
ARTICLE IV
COVENANTS
SECTION 4.1. INFORMATION. So long as at least 35% of the shares of
the Series A Preferred issued on the Series A Preferred Issue Date (as adjusted
for stock splits, reverse stock splits and share reclassifications) remain
outstanding, the Issuer shall deliver to each of the holders of Series A
Preferred:
(a) within forty five (45) days after the end of the first three
fiscal quarters (or, in the case of the quarter ended September 30, 1996, by
January 1, 1997), consolidated balance sheets of the Issuer and its Subsidiaries
as at the end of such period and the related consolidated statements of income,
stockholders' equity and cash flow of the Issuer and its Subsidiaries for such
fiscal quarter, setting forth in each case in comparative form the consolidated
figures for the corresponding period of the previous fiscal year (to the extent
that the statements for the prior period already have been compiled in a
comparative form), all in reasonable detail and certified by the Issuer's Chief
Financial Officer that they fairly present the financial condition of the Issuer
and its Subsidiaries as at the dates indicated and the results of their
operations and changes in their financial position for the periods indicated,
subject to changes resulting from normal year-end adjustments;
(b) within one hundred twenty (120) days after the end of each fiscal
year of the Issuer commencing with the fiscal year ending December 31, 1996,
audited consolidated balance sheets of the Issuer and its Subsidiaries as at the
end of such year and the related audited consolidated statements of income,
stockholders' equity and cash flow of the Issuer and its Subsidiaries for such
fiscal year, setting forth in each case, in a form comparable to the
consolidated figures for the previous year, all in reasonable detail and
accompanied by a report thereon of independent certified public accountants of
recognized national standing selected by the Issuer, which report shall be
unqualified as to scope of audit and shall state that such consolidated
financial statements present fairly the financial position of the Issuer and its
Subsidiaries as at the dates indicated and the results of their operations and
changes in their financial position for the periods indicated in conformity with
generally accepted accounting principles applied on a basis consistent with
prior years (except as otherwise stated therein) and that the examination by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards;
(c) as soon as practicable and in any event no later than thirty (30)
days after the end of each fiscal month of the Issuer beginning with the month
ended January 31, 1997, the Econophone, Inc. Management Reporting Package,
substantially in the form of and covering such items set forth in Exhibit A
hereto, for such month;
(d) promptly upon receipt thereof, copies of all reports submitted to
the Issuer by independent public accountants in connection with each annual,
interim or special audit of the Issuer's financial statements made by such
accountant, including, without limitation, the comment letter submitted by such
accountants to management in connection with their annual audit;
(e) promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent or made available
generally by the Issuer to its securityholders or by any Subsidiary of the
Issuer to its securityholders other than the Issuer or another Subsidiary, of
all regular and periodic reports and all registration statements and
prospectuses, if any, filed by the Issuer or any of its Subsidiaries with any
securities exchange or quotation system or with the Commission or any
governmental authority succeeding to any of its functions, and of all press
releases and other written statements made available generally by the Issuer or
any Subsidiary to the public concerning material developments in the business of
the Issuer and its Subsidiaries;
(f) from time to time such additional information regarding the
financial position or business of the Issuer and its Subsidiaries as any Holder
may reasonably request.
(g) The Issuer shall not be required to provide the information
required pursuant to Section 4.1(c), (d) or (f) to any Holder other than the
initial Holder.
SECTION 4.2. RIGHT TO PARTICIPATE IN CERTAIN DISPOSITIONS.
(a) Mr. West agrees that he shall not Transfer shares of stock of the Issuer
(except a Transfer to a trust or other entity or person for estate planning
purposes or otherwise to any relative or affiliate (any of the foregoing being a
"Related Party") that does not constitute a Change of Control (as defined in the
<PAGE>
Certificate of Amendment)), unless the terms and conditions of such Transfer
shall include an offer to include in such Transfer (in accordance with the
provisions of paragraphs (a)-(d) of this Section 4.2), at the option of each of
the Holders, the Pro Rata Portion (as hereinafter defined) of the shares of
Common Stock then owned by each Holder, the Conversion Shares issuable upon
conversion of the shares of Series A Preferred then owned by such Holder and the
Warrant Shares issuable upon the exercise of any Warrants then owned by such
Holder (such shares of Common Stock, Conversion Shares and Warrant Shares being
referred to herein as such Holder's "Shares"), on the same terms and conditions
as the Transfer by Mr. West.
(b) If Mr. West or any Related Party receives from a third party or
parties (which shall exclude any Related Party) an offer or offers to purchase
or otherwise acquire (an "Offer") shares of Common Stock held by Mr. West or
such Related Party (the "Offered Shares"), and Mr. West or any Related Party
intends to pursue a Transfer of such Offered Shares to such third party or
parties, Mr. West shall provide written notice (the "Offer Notice") of such
Offer to each Holder not later than 30 days prior to the consummation of such
Transfer; provided, that the obligations of any Related Party contained in the
foregoing sentence shall not apply to shares owned by such Related Party on the
Series A Preferred Issue Date. The Offer Notice shall identify the Offered
Shares, the price offered for such Offered Shares, all other material terms and
conditions of the Offer and, in the case of an Offer in which the consideration
payable for the Offered Shares consists in whole or in part of consideration
other than cash, reasonably detailed information regarding such other
consideration. Each Holder shall have the right and option, for a period of not
less than 20 days after the date the Offer Notice is given to the Holder (the
"Notice Period"), to notify Mr. West or such Related Party (whichever is
specified in the Offer Notice) of its interest in Transferring up to the Pro
Rata Portion of such Holder's Shares pursuant to the Offer. Each Holder
desiring to exercise such option shall, prior to the expiration of the Notice
Period, provide Mr. West or such Related Party (whichever is specified in the
Offer Notice) with a written notice specifying the number of Shares which such
Holder has an interest in Transferring pursuant to the Offer (a "Notice of
Interest"). In addition, Mr. West shall make himself available to the Holders
and representatives thereof, at reasonable times and places, and shall respond
to reasonable inquiries with respect to the Offer, the terms and conditions
thereof and all other matters with respect thereto.
(c) If, at the end of the Notice Period, any Holder shall not have
given a Notice of Interest with respect to some or all of the Pro Rata Portion
of such Holder's Shares contemplated by the Offer, such Holder will be deemed to
have waived all its rights under this Section 4.2 with respect to the Transfer
pursuant to the Offer of the portion of the Pro Rata Portion of the Shares owned
by such Holder with respect to which a Notice of Interest shall not have been
given.
(d) "Pro Rata Portion" means, with respect to each Holder, (A) in the
case of a Transfer in connection with a Change of Control, the total number of
Shares owned by such Holder, and (B) in all other cases, a number equal to the
product of (i) the total number of Shares then owned by such Holder (calculated
on an as converted basis), times (ii) a fraction, the numerator of which shall
be the total number of shares of Common Stock proposed to be Transferred by Mr.
West or such Related Party (together with the number of shares of Common Stock
issuable upon the exercise of any derivative security proposed to be Transferred
by Mr. West or such Related Party), and the denominator of which shall be the
total number of shares of Common Stock (together with the number of shares of
Common Stock issuable upon the exercise of any derivative security) owned by
Mr. West and such Related Parties (including such shares and derivative
securities so proposed to be Transferred, but excluding any Shares owned by any
Related Parties on the Series A Preferred Issue Date). If Mr. West shall
Transfer any other shares of stock of the Issuer, each Holder shall have the
right to include with such Transfer its pro rata portion of the equity value of
the Issuer.
(e) Mr. West and any Related Party shall not Transfer any shares of
Common Stock to any Related Party unless such transferee Related Party shall
agree in writing, in a form reasonably satisfactory to the holders of a majority
of the shares of the Series A Preferred, to be subject to and abide by the
provisions of this Section 4.2. This Section 4.2 shall not be binding on any
third party transferee (except any Related Party and Mr. West) of Mr. West or
any Related Party.
SECTION 4.3. DRAG-ALONG. If Mr. West proposes to Transfer
substantially all of the shares of capital stock of the Issuer beneficially
owned (as defined in Rule 13d-3 under the Exchange Act) by him to Persons other
than Related Parties, and if Mr. West so requests, the Holders shall Transfer
the securities held by them acquired pursuant to this Agreement (or any
securities into which such securities are convertible or exchangeable or for
<PAGE>
which they are exercisable) on the same terms as the Transfer by Mr. West.
Notwithstanding the first two sentences of this paragraph, any such Holder may
instead, contemporaneously with the Transfer contemplated above, require the
Issuer to redeem the securities of the Issuer otherwise subject to the first two
sentences of this Section 4.3 in accordance with Section 7(d) of the Certificate
of Amendment, as if a Change of Control (as defined in the Certificate of
Amendment) had occurred.
SECTION 4.4. EMPLOYMENT AGREEMENTS. (a) Within 30 days after the
Series A Preferred Issue Date, Mr. West shall enter into an employment agreement
with the Issuer in form and substance reasonably satisfactory to the initial
Holder, Mr. West and the Issuer, containing, among other things, a duration of
at least 3 years, a covenant by Mr. West not to compete with the Issuer or its
Subsidiaries (which shall automatically terminate if he is involuntarily
terminated other than for cause) for 1 year after the termination of his
employment, customary confidentiality obligations on the part of Mr. West and a
covenant by Mr. West to devote substantially all of his working time to the
business of the Issuer.
(b) The Issuer or one of its Restricted Subsidiaries shall use its
best efforts to, within 60 days after the Series A Preferred Issue Date, enter
into a sales agency agreement with Chaim Freifeld containing terms reasonably
acceptable to the PG Director, including a duration of one year (with a one year
renewal) and a provision under which Mr. Freifeld agrees to be an exclusive
sales agent for the Issuer or such Restricted Subsidiary during such period.
SECTION 4.5. E-GRAM. At such time as the services presently being
developed by E-Gram Inc. ("E-Gram") are commercially provided to third parties,
Mr. West shall cause E-Gram to issue to the Holders on a pro rata basis the
number of shares of the capital stock of E-Gram equal to 10% of the then
outstanding capital stock thereof; PROVIDED, that prior to the issuance of such
shares of capital stock to the Holders, E-Gram and the Holders shall agree to
terms substantially similar to Section 4.2, 4.3 and 6.10 hereof and reasonable
anti-dilution provisions. Mr. West represents that E-Gram is the legal entity
that owns the rights to the E-Gram product.
SECTION 4.6. CARRIER CONTRACTS. The Issuer shall use its best
efforts to, within 30 days after the Preferred Stock Issue Date, provide to
counsel for the initial Holder copies of contracts between it, each of its
Subsidiaries and each of their carriers, including signature pages executed by
such carriers and addendums or annexes specifying any minimum commitment to such
carriers.
ARTICLE V
WARRANTS
SECTION 5.1. ISSUANCE OF WARRANTS. (a) INITIAL GRANT. If, on the
date of the fourth anniversary of the Series A Preferred Issue Date, the Issuer
shall not have consummated the Initial Public Offering, the Issuer shall on such
date issue and deliver to the holders of Series A Preferred warrants, with an
exercise price of $.01 per share and a 10 year duration ("Warrants"), to
purchase shares of Common Stock representing, in the aggregate, 5% of the Common
Stock (calculated on a fully diluted basis, as of such fourth anniversary,
assuming that each then outstanding security exercisable for or convertible into
Common Stock, including the Series A Preferred, had been so exercised or
converted).
(b) SUBSEQUENT GRANTS. On the last day of each six month period
(commencing with the six month period beginning on the fourth anniversary of the
Series A Preferred Issue Date), if the Issuer shall not have consummated the
Initial Public Offering, the Issuer shall on such date issue and deliver to the
holders of the Series A Preferred Warrants to purchase shares of Common Stock
representing, in the aggregate, 5% of the Common Stock (calculated on a fully
diluted basis, as of the end of such six month period, assuming that each then
outstanding security exercisable for or convertible into Common Stock, including
the Series A Preferred, had been so exercised or converted). Notwithstanding
the foregoing, the Issuer shall not be required to issue or deliver any Warrants
pursuant to this Section 5.1 once the holders of the Series A Preferred own
Series A Preferred, Conversion Shares, Warrants and Warrant Shares representing,
in the aggregate, 25% of the Common Stock (i) including for purposes of this
calculation any such securities previously Transferred by the holders of Series
A Preferred to Persons other than Permitted Holders (as adjusted for stock
splits, reverse stock splits and reclassifications) and (ii) calculated on a
fully diluted basis assuming that each then outstanding security exercisable for
or convertible into Common Stock, including the Series A Preferred, had been so
exercised or converted.
<PAGE>
(c) Warrants issued and delivered pursuant to this Section 5.1 shall
be issued and delivered to each holder of Series A Preferred pro rata, based on
the proportion that the Series A Preferred and Conversion Shares owned by such
holder bears to the total amount of Series A Preferred and Conversion Shares
owned by all such holders.
(d) At the time of the first issuance and delivery of Warrants
pursuant to this Section 5.1, the holders of the Series A Preferred and the
Issuer shall enter into a warrant agreement containing customary provisions,
reasonably acceptable to the holders of Warrants, relating to the Warrants,
including, without limitation, anti-dilution provisions. The percentages of
Common Stock that the holders of the Series A Preferred shall be entitled to
receive Warrants in respect of pursuant to Section 5.1(a) or (b) shall be
multiplied by a number equal to (i) one minus (ii) a fraction, the numerator of
which shall be equal to the number of the shares of the Series A Preferred
(determined on an as-converted basis) previously disposed of by the holders
Series A Preferred pursuant to Section 4.2 or 4.3 and the denominator of which
shall be the number of shares of the Series A Preferred (in each case,
determined on an as converted basis) issued to holders of Series A Preferred
pursuant hereto and pursuant to the Securities Purchase Agreement of even date
herewith.
(e) CHANGE OF CONTROL. If there shall occur a Change of Control (as
defined in the Certificate of Amendment) and the Issuer shall have complied with
its obligations under Section 7(d) of the Certificate of Amendment, then,
anything to the contrary herein notwithstanding, as of the date of such Change
of Control the right of the Holders to receive any Warrants pursuant to this
Section 5 shall cease.
(f) WARRANTS NOT ISSUABLE. Notwithstanding Section 5.1(a) or (b)
hereof, no Warrants shall be issuable hereunder to the extent that prior to any
scheduled issuance of Warrants the Issuer shall have merged into any other
Person and the Holders shall have received in connection therewith securities
registered under the Securities Act that are part of a class of publicly traded
securities.
<PAGE>
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. HOLDERS NOT SIGNATORIES HERETO. Each Holder, whether or
not a signatory hereto, agrees that by accepting a share of the Series A
Preferred, a Conversion Share, a Warrant Share or a Warrant that it shall be
subject to and bound by the provisions hereof.
SECTION 6.2. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of any provisions hereof.
SECTION 6.3. NO INCONSISTENT AGREEMENTS. (a) The Issuer represents
that it is not a party to, and agrees that it will not hereafter enter into any
agreement with respect to, its securities which is inconsistent with, or
otherwise conflicts with or adversely affects, the rights granted to the Holders
under this Agreement.
SECTION 6.4. PARENT ENTITIES. Mr. West and the Issuer agree that no
parent entity for the Issuer shall be created without the consent of the Holders
of a majority of the Series A Preferred.
SECTION 6.5. ENTIRE AGREEMENT. This Agreement, the Securities
Purchase Agreement and the Certificate of Amendment, taken together, constitute
the entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein and therein, and there are no restrictions,
promises, representations, warranties, covenants, or undertakings with respect
to the subject matter hereof, other than those expressly set forth or referred
to herein or therein. This Agreement and such other agreements and instruments
supersede all prior agreements and understandings between the parties hereto
with respect to the subject matter hereof.
SECTION 6.6. NOTICES. Any notice, request, instruction or other
document to be given hereunder by any party hereto to another party hereto shall
be in writing (including, without limitation, telecopier or similar writing) and
shall be given to such party at its address or telecopier number set forth on
its signature page or to such other address as the party to whom notice is to be
given may provide in a written notice to the party giving such notice, a copy of
which written notice shall be on file with the Secretary of the Issuer. Each
such notice, request or other communication shall be effective (i) if given by
telecopy, which such telecopy is transmitted to the telecopy number specified in
its signature page and the appropriate answerback or confirmation, as the case
may be, is received, (ii) if given by mail, 72 hours after such communication is
deposited in the U.S. mail with first class
<PAGE>
postage prepaid addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section 6.6.
SECTION 6.7. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6.8. SEVERABILITY. The invalidity or unenforceability of any
provisions of this Agreement in any jurisdiction shall not affect the validity,
legality or enforceability of the remainder of this Agreement in such
jurisdiction or the validity, legality or enforceability of this Agreement,
including any such provision, in any other jurisdiction, it being intended that
all rights and obligations of the parties hereunder shall be enforceable to the
fullest extent permitted by law.
SECTION 6.9. TERMINATION. This Agreement shall terminate and be of
no further force or effect with respect to a given Holder when such Holder no
longer owns any Equity Securities (except as to matters preceding the Holder's
disposition of Equity Securities); PROVIDED that the provisions of Sections 2.1,
3.5, 3.6, 3.7, 3.8, 3.9, 6.1, 6.2, 6.5, 6.6, 6.7, 6.8, 6.9, 6.11, 6.12, 6.14 and
6.15 shall survive any such termination. Notwithstanding anything to the
contrary herein, Section 4.2, 4.3 and 5.1 shall terminate upon the consummation
of the Initial Public Offering.
SECTION 6.10. SUCCESSORS, ASSIGNS, TRANSFEREES. Each Holder shall be
permitted to Transfer any Equity Securities to any person at any time, subject
only to the provisions of applicable securities laws and except that Equity
Securities may not be transferred to any direct or indirect competitor of the
Issuer or any of its Subsidiaries except pursuant to any distribution effected
in connection with a bona fide at the market public offering of such Equity
Securities. The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns, including any transferee of any Equity Security. Neither this
Agreement nor any provision hereof shall be construed so as to confer any right
or benefit upon any Person other than the parties to this Agreement and their
respective heirs, successors and assigns, including any transferee of any Equity
Security.
SECTION 6.11. AMENDMENTS; WAIVERS. (a) No failure or delay on the
part of any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law or
equity.
(b) Neither this Agreement nor any term or provision hereof may be
amended or waived except by an instrument in writing signed, in the case of an
amendment,
<PAGE>
by the parties thereto or, in the case of a waiver, by the party against whom
the enforcement of such waiver is sought.
SECTION 6.12. COUNTERPARTS; EFFECTIVENESS. This Agreement may be
executed in any number of counterparts, each of which shall be an original with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other party hereto, and the
closings under the Securities Purchase Agreement shall have occurred (the
"Effective Date").
SECTION 6.13. RECAPITALIZATION, ETC. If any capital stock or other
securities are issued in respect of, or in exchange or substitution for, any
Equity Securities by reason of any reorganization, recapitalization,
reclassification, merger, consolidation, spin-off, partial or complete
liquidation, stock dividend, split-up, sale of assets, distribution to
stockholders or combination of the shares of Common Stock or any other change in
capital structure of the Issuer, appropriate adjustments shall be made with
respect to the relevant provisions of this Agreement so as to fairly and
equitably preserve, as far as practicable, the original rights and obligations
of the parties hereto under this Agreement.
SECTION 6.14. REMEDIES. The parties hereby acknowledge that money
damages would not be adequate compensation for the damages that a party would
suffer by reason of a failure of any other party to perform any of the
obligations under this Agreement and therefore waive any defense to specific
performance that may relate to the adequacy of remedies at law.
SECTION 6.15. CONFIDENTIALITY. The Purchaser shall not disclose any
Confidential Information (as defined below) to (i) any third party other than
its legal counsel, (ii) affiliates to whom it may Transfer any Series A
Preferred, (iii) other Persons to whom it may contemplate the transfer of
Series A Preferred to the extent that any such Person agrees in advance to be
bound by confidentiality arrangements reasonably acceptable to the Issuer or
(iv) as required by law. Confidential Information means any of the Issuer's
information not known to the public, which the Issuer provides or makes
available to the Purchaser in the course of and/or for the purpose of the
Issuer's sale of Series A Preferred to the Purchaser or thereafter which is
reasonably designated as Confidential Information by the Issuer or which the
Purchaser otherwise believes to be Confidential Information.
SECTION 6.16. SUBSIDIARY OFFERINGS. The Issuer shall cause its
Subsidiaries not to Transfer any of their securities in connection with any
offering without the consent of the holders of a majority of the Series A
Preferred.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be duly executed and delivered as of the date first above written.
MR. ALFRED WEST(1)
(as an individual)
________________________________________
ECONOPHONE, INC.(2)
By: ____________________________________
Name:
Title:
PRINCES GATE INVESTORS II, L.P.(3)
By: ____________________________________
Name:
Title:
(1) Address: 1712 57th Street
Brooklyn, NY 11204
Telecopier number: (718) 437-4941
(2) Address: 60 Hudson Street, Room 319
New York, NY 10013
Telecopier number: (212) 964-4771
(3) Address: 1585 Broadway, 36th Floor
New York, NY 10036
Attention: David R. Powers
Telecopier number: (212) 761-0517
<PAGE>
EXHIBIT A
ECONOPHONE, INC. MANAGEMENT REPORTING PACKAGE
The Econophone, Inc. Management Reporting Package will provide divisional
revenues, divisional cost of services, divisional gross margins, and divisional
minutes; selling, general & administrative expenses, depreciation and
amortization, interest expenses, and other miscellaneous expenses.
<PAGE>
EXHIBIT 4.2
EXECUTION COPY
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ECONOPHONE, INC.
$15,000,000
SENIOR SECURED INCREASING RATE NOTES DUE APRIL 24, 1998
______________________________
NOTE PURCHASE AGREEMENT
______________________________
Dated as of April 24, 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
1. AUTHORIZATION OF NOTES................................................... 1
2. SALE AND PURCHASE OF NOTES............................................... 1
2.1. Obligation to Purchase........................................... 1
2.2. Notice of Purchase............................................... 2
2.3. Initial Purchase Date............................................ 2
3. CONDITIONS TO THE INITIAL PURCHASE DATE.................................. 2
3.1. Documents Required............................................... 3
3.2. Opinions of Counsel.............................................. 6
3.3. Payment of Accrued Fees and Expenses............................. 7
4. CONDITIONS TO EACH PURCHASE DATE......................................... 7
4.1. Representations and Warranties................................... 7
4.2. No Default....................................................... 7
4.3. Documents Required............................................... 7
4.4. Purchase Permitted by Applicable Requirements of Law, Etc........ 8
4.5. Consents and Approvals........................................... 8
4.6. No Litigation or Other Proceedings............................... 8
4.7. No Material Adverse Change....................................... 9
4.8. No Other Offerings............................................... 9
4.9. No Adverse Change to Financial Markets........................... 9
4.10. Employment of Mr. Alfred West.................................... 9
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ 9
5.1. Organization; Power and Authority................................ 9
5.2. Authorization, Enforceability, Etc...............................10
5.3. Disclosure.......................................................10
5.4. Capitalization; Organization and Ownership of Shares of
Subsidiaries, Etc................................................10
5.5. Financial Statements.............................................11
5.6. Compliance with Laws, Other Instruments, Etc.....................12
5.7. Governmental Authorizations, Etc.................................12
5.8. Litigation.......................................................13
5.9. Taxes............................................................13
5.10. Title to Property; Leases........................................14
5.11. Security Interests, Etc..........................................14
5.12. Licenses, Permits, Etc...........................................15
5.13. Compliance with ERISA............................................15
5.14. Private Offering by the Company..................................16
5.15. Use of Proceeds; Margin Regulations..............................17
5.16. Status Under Certain Statutes....................................17
5.17. Foreign Assets Control Regulations, Etc..........................18
5.18. Employee and Labor Matters.......................................18
5.19. Environmental Matters............................................19
<PAGE>
ii
5.20. No Burdensome Agreements.........................................20
5.21. Existing Indebtedness; Future Liens..............................20
5.22. Solvency.........................................................20
5.23. Related Party Transactions.......................................20
5.24. Material Contracts...............................................21
5.25. Pari Passu Obligations...........................................21
5.26. No Significant Subsidiaries......................................21
5.27. Carrier Contracts................................................22
6. REPRESENTATIONS OF THE PURCHASER.........................................22
6.1. Purchase for Investment..........................................22
6.2. Accredited Investor..............................................22
6.3. Source of Funds..................................................22
7. PREPAYMENTS AND REDEMPTIONS OF THE NOTES.................................23
7.1. Optional Prepayments of the Notes................................23
7.2. Offer to Repurchase Notes and Reduce Commitments in Respect of a
Change of Control................................................24
7.3. Mandatory Redemptions of the Notes...............................25
7.4. Allocation of Partial Prepayments................................26
7.5. Maturity; Surrender, Etc.........................................26
7.6. Purchase of Notes................................................27
7.7. Reduction of Commitments with Excess Proceeds....................27
8. AFFIRMATIVE COVENANTS....................................................27
8.1. Information Covenants............................................27
8.2. Compliance with Law..............................................32
8.3. Maintenance of Insurance.........................................32
8.4. Maintenance of Properties........................................33
8.5. Payment of Taxes and Claims; Performance of Material
Obligations......................................................33
8.6. Preservation of Corporate Existence, Etc.........................34
8.7. Maintenance of Books and Records; Inspection.....................34
8.8. Use of Proceeds..................................................35
8.9. Search Reports...................................................35
8.10. Covenant to Give Further Security................................35
8.11. Furnishing of Rule 144A Information..............................39
9. NEGATIVE COVENANTS.......................................................39
9.1. Limitations on Transactions with Affiliates......................39
9.2. Limitations on Liens.............................................40
9.3. Limitations on Indebtedness......................................42
9.4. Limitations on Sale-Leaseback Transactions.......................43
9.5. Limitations on Restricted Payments...............................43
9.6. Limitations on Fundamental Changes, Asset Sales,
Acquisitions, Etc................................................44
9.7. Limitations on Investments, Etc..................................46
9.8. Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries...........................................47
9.9. Limitation on Issuance of Capital Stock..........................47
<PAGE>
iii
9.10. Limitation on Modifications of Indebtedness; Modifications of
Certificate of Incorporation, Bylaws and Certain Other
Agreements; Etc..................................................48
9.11. Limitations on Conduct of Business...............................49
9.12. Limitations on Accounting Changes and Changes in Fiscal Year.....49
9.13. Limitations on Partnerships......................................49
9.14. Limitations on Speculative Transactions..........................49
9.15. Employment of, or Competition by, Key Employees..................49
9.16. Limitations on Capital Expenditures..............................49
10. FINANCIAL COVENANTS......................................................50
10.1. Minimum Consolidated EBITDA......................................50
10.2. Consolidated Debt Service Coverage Ratio.........................50
10.3. Consolidated Funded Indebtedness to Net Worth Ratio..............50
10.4. Minimum Cash Balance.............................................50
11. EVENTS OF DEFAULT........................................................50
11.1. Events of Default................................................50
11.2. Acceleration.....................................................54
11.3. Other Remedies...................................................54
11.4. Rescission.......................................................54
11.5. Restoration of Rights and Remedies...............................55
11.6. No Waivers or Election of Remedies, Etc..........................55
12. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES............................55
12.1. Registration of Notes............................................55
12.2. Transfer and Exchange of Notes...................................55
12.3. Replacement of Notes.............................................57
13. PAYMENTS ON NOTES........................................................57
13.1. Place of Payment.................................................57
13.2. Home Office Payment..............................................58
14. EXPENSES, INCREASED COSTS AND INDEMNIFICATION, ETC.......................58
14.1. Transaction Expenses.............................................58
14.2. Indemnity........................................................59
14.3. Taxes............................................................60
14.4. Survival.........................................................62
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.............62
16. AMENDMENT AND WAIVER.....................................................62
16.1. Requirements.....................................................62
16.2. Solicitation of Holders of Notes.................................63
16.3. Binding Effect, Etc..............................................64
16.4. Notes Held by Company, Etc.......................................64
17. NOTICES..................................................................64
<PAGE>
iv
18. REPRODUCTION OF DOCUMENTS................................................65
19. CONFIDENTIAL INFORMATION.................................................65
20. SUBSTITUTION OF PURCHASER................................................66
21. MISCELLANEOUS............................................................66
21.1. Successors and Assigns...........................................66
21.2. Payments Due on Non-Business Days................................66
21.3. Satisfaction Requirement.........................................67
21.4. Severability.....................................................67
21.5. Construction; Accounting Terms, Etc..............................67
21.6. Survival of Fee Letter...........................................67
21.7. Computation of Time Periods......................................67
21.8. Execution in Counterparts........................................68
21.9. Governing Law; Submission to Jurisdiction, Etc...................68
21.10. Waiver of Jury Trial.............................................68
<PAGE>
v
SCHEDULES
Schedule I - Information Relating to Purchasers
Schedule II - Defined Terms
Schedule 5.4(a) - Capitalization of the Company
Schedule 5.4(b) - Subsidiaries
Schedule 5.5(c) - Liabilities and Other Obligations
Schedule 5.7 - Governmental Authorizations and Other Approvals
Schedule 5.8 - Disclosed Litigation
Schedule 5.12 - License and Intellectual Property Infringements, Etc.
Schedule 5.19 - Environmental Matters
Schedule 5.21 - Existing Indebtedness
Schedule 5.24 - Material Contracts
Schedule 9.1 - Transactions with Affiliates
Schedule 9.2 - Existing Liens
Schedule 9.7 - Existing Investments
Schedule 9.8 - Existing Dividend and Payment Restrictions
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Notice of Sale and Purchase
Exhibit C - Form of Shareholder Pledge Agreement
Exhibit D - Form of Solvency Certificate
Exhibit E-1 - Form of Opinion of Special Counsel for the Company and the
Shareholders
Exhibit E-2 - Form of Opinion of General Counsel of the Company
Exhibit F - Form of Compliance Certificate
<PAGE>
ECONOPHONE, INC.
60 Hudson Street
New York, New York 10013
Senior Secured Increasing Rate Notes due April 24, 1998
As of April 24, 1997
TO EACH OF THE PURCHASERS LISTED IN
SCHEDULE I ATTACHED HERETO:
Ladies and Gentlemen:
Econophone, Inc., a New York corporation (the "COMPANY"), hereby
agrees with you as follows:
1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $15,000,000
aggregate principal amount of its Senior Secured Increasing Rate Notes due April
24, 1998 (the Notes delivered pursuant to Section 2 of this Agreement and the
Other Agreements and any such Notes issued in substitution therefor pursuant to
Section 12 of this Agreement or the Other Agreements being, collectively, the
"NOTES"). Each of the Notes shall be in substantially the form of Exhibit A
attached hereto, with such amendments, supplements and other modifications
thereto, if any, as shall be approved from time to time by you and the Company.
Capitalized terms used in this Agreement shall have the meanings specified in
Schedule II attached hereto; and references in this Agreement to a "SCHEDULE" or
an "EXHIBIT" are, unless otherwise specified herein, references to a Schedule or
an Exhibit attached to this Agreement.
2. SALE AND PURCHASE OF NOTES.
2.1. OBLIGATION TO PURCHASE.
Subject to the terms and conditions of this Agreement, the Company
will issue and sell to you, and you will purchase from the Company, from time to
time on any Business Day during the period from the date of this Agreement to
(but not including) December 31, 1997, Notes in an aggregate principal amount
for each such sale and purchase not to exceed the lesser of (a) your Available
Commitment at such date and (b) at any time prior to the Additional Availability
Date, $6,500,000, at the purchase price of 100% of the aggregate principal
amount thereof. Contemporaneously with entering into this Agreement, the
Company is entering into separate Note Purchase Agreements (collectively, the
"OTHER AGREEMENTS") identical with this Agreement (except as to the identity of
the Other Purchasers and the aggregate principal amount of the Notes to be
purchased thereby) with each of the other purchasers named in Schedule I
attached hereto (collectively, the "OTHER PURCHASERS"), if any, providing for
the sale on each Purchase Date to each of the Other Purchasers of Notes in an
aggregate principal amount for
<PAGE>
2
each such sale and purchase not to exceed the lesser of (a) the Available
Commitment of the applicable Other Purchaser at such date and (b) at any time
prior to the Additional Availability Date, $6,500,000, at the purchase price of
100% of the aggregate principal amount thereof. Your obligation hereunder and
the obligations of the Other Purchasers under the Other Agreements are several
and not joint obligations, and you shall have no obligation under any Other
Agreement and no liability to any Person for the performance or nonperformance
by any Other Purchaser thereunder. Each sale and purchase of Notes pursuant to
this Section 2.1 shall be in an aggregate principal amount of $1,000,000 or an
integral multiple of $100,000 in excess thereof. Notes purchased and sold under
this Section 2.1 and repaid or prepaid may not be repurchased and resold.
2.2. NOTICE OF PURCHASE.
Each sale and purchase of Notes shall be made upon notice, given
not later than 11:00 A.M. (New York City time) on the third Business Day prior
to the date of the proposed sale and purchase (each, a "PURCHASE DATE"), by the
Company to you; PROVIDED, HOWEVER, that no more than one Purchase Date shall be
requested by the Company under this Agreement and the Other Agreements during
any period of five consecutive Business Days. Each notice of a proposed sale
and purchase of Notes (a "NOTICE OF SALE AND PURCHASE") shall be by telephone,
confirmed immediately in writing, or by telex or telecopier, in substantially
the form of Exhibit B attached hereto, specifying therein the requested
(a) Purchase Date (which shall be a Business Day), (b) aggregate principal
amount of Notes to be purchased by you on such Purchase Date and (c) aggregate
principal amount of Notes to be purchased by all of the Other Purchasers on such
Purchase Date. On each Purchase Date, subject to the fulfillment of the
applicable conditions set forth in Section 3, the Company will deliver to you
the Notes to be purchased by you on such Purchase Date in the form of a single
Note (or such greater number of Notes in denominations of at least $100,000 or
integral multiples of $100,000 in excess thereof as you may request at least one
Business Day prior to such Purchase Date), dated such Purchase Date and
registered in your name (or in the name of your nominee), against delivery by
you to the Company or its order of same day funds in the amount of the aggregate
purchase price therefor by wire transfer for the account of the Company to The
Chase Manhattan Bank (ABA No. 021000128), New York, New York, Account No.
134-631250.
2.3. INITIAL PURCHASE DATE.
The initial sale and purchase of the Notes to be purchased by you
and the Other Purchasers, if any, shall occur at the offices of Shearman &
Sterling, 599 Lexington Avenue, New York, New York 10022, at or before
10:00 A.M. (New York City time), at a closing on April 24, 1997 or on such other
Business Day thereafter on or prior to June 1, 1997 as may be agreed upon among
the Company, you and the Other Purchasers, if any (the "INITIAL PURCHASE DATE").
3. CONDITIONS TO THE INITIAL PURCHASE DATE.
Your obligation to purchase and pay for the Notes to be sold to you
on the Initial Purchase Date is subject to the fulfillment to your satisfaction,
on or prior to the Initial Purchase Date, of the following conditions:
<PAGE>
3
3.1. DOCUMENTS REQUIRED.
You shall have received the following documents, each dated as of
the Initial Purchase Date (except as otherwise specified below) and in the form
of the respective Exhibit attached hereto, if any, or otherwise in form and
substance satisfactory to you:
(a) NOTE PURCHASE AGREEMENTS. This Agreement and each of the
Other Agreements, if any, duly executed by the Company.
(b) SHAREHOLDER PLEDGE AGREEMENTS. One or more shareholder
pledge agreements, in each case in substantially the form of Exhibit C
attached hereto (as amended, supplemented or otherwise modified hereafter
from time to time in accordance with the terms thereof and Section 16, the
"SHAREHOLDER PLEDGE AGREEMENTS"), duly executed by each of the
Shareholders, together with:
(i) certificates representing the Initial Pledged Interests
referred to therein, together with undated stock powers executed in
blank;
(ii) instruments evidencing the Initial Pledged Indebtedness
referred to therein, duly endorsed in blank;
(iii) proper financing statements (Form UCC-1 or a comparable
form) or the equivalent thereof under the Uniform Commercial Code (or
similar law or statute) of all jurisdictions that may be necessary or
that you or any of the Other Purchasers may deem desirable in order to
perfect and protect the liens and security interests created under the
Shareholder Pledge Agreements, covering the Collateral described
therein, in each case completed in a manner satisfactory to you and
duly executed by the applicable Shareholder; and
(iv) evidence that all other actions that may be necessary or
that you or any of the Other Purchasers may deem desirable in order to
perfect and protect the liens and security interests created under the
Shareholder Pledge Agreements have been taken or will be taken in
accordance with the terms of the Note Documents.
(c) CORPORATE APPROVALS AND OTHER SIMILAR DOCUMENTATION. Certified
copies of the resolutions of the board of directors (or persons performing
similar functions) of the Company approving each of the Note Documents to
which it is or is to be a party, the issuance and sale of the Notes and the
other transactions contemplated hereby and thereby and all documents
evidencing other necessary corporate action with respect to each such Note
Document, the issuance and sale of the Notes and the other transactions
contemplated hereby and thereby.
(d) CERTIFICATE OF INCORPORATION. A copy of the certificate of
incorporation of the Company and each amendment thereto, certified (as of a
date reasonably near the Initial Purchase Date) by the Secretary of State
of the State of New York as being a true and complete copy thereof.
<PAGE>
4
(e) GOOD STANDING CERTIFICATES. A copy of a certificate of the
Secretary of State of the State of New York, dated reasonably near the
Initial Purchase Date, listing the certificate of incorporation of the
Company and each amendment thereto on file in the office of such Secretary
of State and certifying that (i) such amendments are the only amendments to
the certificate of incorporation of the Company on file in his office,
(ii) the Company has paid all franchise taxes (or the equivalent thereof)
to the date of such certificate and (iii) the Company is duly incorporated
and in good standing under the laws of the State of New York.
(f) FOREIGN QUALIFICATION CERTIFICATES. Copies of certificates of
the Secretary of State (or the equivalent Governmental Authority) of each
jurisdiction in which the Company is qualified as a foreign corporation,
dated reasonably near the Initial Purchase Date, in each case stating that
the Company is duly qualified and in good standing as a foreign corporation
in such jurisdiction and has filed all annual reports required to be filed,
and paid all franchise taxes (or the equivalent thereof) required to be
paid, in such jurisdiction to the date of such certificate.
(g) SECRETARY'S CERTIFICATE. A certificate from the secretary or an
assistant secretary (or a person performing similar functions) of the
Company certifying:
(i) the absence of any amendments to the certificate of
incorporation of the Company since the date of the Secretary of
State's certificate referred to in subsection (d) of this Section 3.1;
(ii) the completeness and accuracy of the resolutions of the
board of directors of the Company and all documents evidencing other
necessary corporate action thereof referred to in subsection (c) of
this Section 3.1;
(iii) the completeness and accuracy of the bylaws of the
Company as in effect on the date the resolutions of the board of
directors of the Company referred to in subsection (c) of this Section
3.1 were adopted and on the Initial Purchase Date (a copy of which
shall be attached to such certificate);
(iv) the names and true signatures of the officers of the
Company authorized to sign each of the Note Documents to which it is
or is to be a party and the other agreements, instruments and other
documents to be delivered hereunder or thereunder; and
(v) such other matters as you or any of the Other Purchasers
shall specify relating to the existence and good standing of the
Company and the corporate and other necessary authority for, and the
validity of, each of the Note Documents to which it is or is to be a
party and any other matters relevant to any of the foregoing.
(h) OFFICER'S CERTIFICATE. A certificate of the Company, signed on
behalf of the Company by Mr. Alan Levy, the Chief Financial Officer thereof
(the statements made in which certificate shall be true on and as of the
Initial Purchase Date), certifying as to:
<PAGE>
5
(i) the due organization and good standing of the Company and
each of its Subsidiaries in their respective jurisdictions of
organization and the absence of any proceeding for the dissolution or
liquidation of the Company or any of its Subsidiaries;
(ii) the completeness and accuracy of all of the
representations and warranties made by the Company in this Agreement
and the other Note Documents to which it is or is to be a party,
before and after giving effect to the issue and sale of the Notes and
to the application of the proceeds therefrom as contemplated by
Section 5.15(a), as though made on and as of the Initial Purchase
Date;
(iii) the absence of any event occurring and continuing, or
resulting from the issue and sale of the Notes or the consummation of
any of the other transactions contemplated hereby, that constitutes a
Default or an Event of Default;
(iv) neither the Company nor any of its Subsidiaries having
changed its jurisdiction of organization, having been a party to any
merger, consolidation or other similar transaction or having issued or
sold any shares of its capital stock (or other ownership or profit
interests therein), or any warrants, options or other rights therefor,
at any time following the date of the most recent unaudited
consolidated financial statements of the Company and its Subsidiaries
referred to in Section 5.5(a) other than the issuance and sale of
140,000 shares of Series A Preferred Stock to Princes Gate Investors
II, L.P. and the issuance of 2,646,500 options for shares of common
stock of the Company to key employees thereof under the 1996 Flexible
Incentive Plan;
(v) to the best of his knowledge, the absence of any existing
or threatened event or circumstance applicable to the Company or any
of its Subsidiaries that could reasonably be expected to impair the
ability of the Company to consummate the Refinancing; and
(vi) the satisfaction of all conditions precedent by the
Company to the issuance and sale of the Notes on and as of the
Initial Purchase Date.
(i) SOLVENCY CERTIFICATES. A certificate from Mr. Alan Levy, the
Chief Financial Officer of the Company, in substantially the form of
Exhibit D attached hereto, attesting to the Solvency of the Company and its
Subsidiaries, taken as a whole, immediately before and immediately after
giving effect to the Note Documents and all of the transactions
contemplated hereby or thereby to occur on or about the Initial Purchase
Date and assuming the sale and purchase of Notes on such date in an
aggregate principal amount of $15,000,000.
(j) FINANCIAL INFORMATION. Copies of (i) the audited consolidated
financial statements of the Company and its Subsidiaries referred to in
Section 5.5(a), in each case accompanied by an unqualified opinion of
Arthur Andersen LLP, independent accountants of the Company, and (ii) the
unaudited financial statements of the Company and its Subsidiaries referred
to in Section 5.5(a), together with a certificate of a Senior Financial
Officer of the Company with respect thereto.
<PAGE>
6
(k) CONSENTS. Certified copies of all Governmental Authorizations,
and all consents, approvals and authorizations of, and notices to and other
actions by, all Persons with whom any of the Obligors or any of their
respective Subsidiaries has any contractual obligations, as shall be
required for the execution, delivery or performance of this Agreement and
the other Note Documents or the consummation of the issuance and sale of
the Notes or any of the other transactions contemplated hereby or thereby,
including, without limitation:
(i) a waiver of certain provisions set forth in the
certificate of incorporation of the Company, in form and substance
satisfactory to you and the Other Purchasers, if any, and duly
executed by the Company and at least a majority in interest of the
holders of the shares of Series A Preferred Stock, (A) permitting the
Company to enter into this Agreement and the other Note Documents to
which it is or is to be a party, to issue and sell the Notes and to
grant the liens and security interests to be granted thereby from time
to time hereafter pursuant to the terms of Section 8.10, (B) reducing
the amount of "key man" life insurance the Company is required to
maintain with respect to the death and long term incapacity of Mr.
Alfred West to $10,000,000 and (C) addressing such other matters as
you or any of the Other Purchasers shall reasonably request; and
(ii) an amendment and waiver to the NTFC Loan Agreement and
the other NTFC Loan Documents, in form and substance satisfactory to
you and the Other Purchasers, if any, and duly executed by the Company
and NTFC, (A) permitting each of the Obligors to grant to the
Collateral Agent, for the benefit of itself and the other Secured
Parties, a valid and perfected lien on and security interests in the
NTFC Collateral owned thereby, (B) permitting the amendment to the
certificate of incorporation of the Company referred to in clause (i)
of this Section 3.1(k), (C) waiving the event of default that has
occurred and is continuing under the NTFC Loan Agreement as a result
of the failure of the Company to deliver to NTFC on or prior to
March 31, 1997 the audited financial statements of the Company and its
Subsidiaries for the Fiscal Year ended December 31, 1996, (D) amending
the definition of "Cash Flow" set forth therein to include, for any
fiscal period of the Company, the remaining Available Commitments of
you and the Other Purchasers as of the last day of such fiscal period
and (E) addressing such other matters as you or any of the Other
Purchasers shall reasonably request.
(l) EXISTING INDEBTEDNESS. Certified copies of all of the
agreements, instruments and other documents evidencing or setting forth the
terms and conditions of the Indebtedness of the Company and its
Subsidiaries existing on the Initial Purchase Date and in an aggregate
amount of at least $100,000 (all of which Indebtedness is described, and
marked with an asterisk, on Schedule 5.21 attached hereto), except for
Indebtedness of the Company described in items 30 and 31 of Schedule 5.21
attached hereto (which Indebtedness is not evidenced by any agreement,
instrument or other document).
3.2. OPINIONS OF COUNSEL.
You shall have received the following favorable opinions, each dated
the Initial Purchase Date and in the form of the respective Exhibit attached
hereto, if any, or otherwise in form and substance satisfactory to you:
<PAGE>
7
(a) Schulte Roth & Zabel LLP, special counsel for the Company and
each of the Shareholders, in substantially the form of Exhibit E-1 attached
hereto, and addressing such other matters as you (or your counsel) may
reasonably request (and the Company hereby instructs its special counsel to
deliver such opinion to you);
(b) Lacher & Fox, General Counsel of the Company, in substantially
the form of Exhibit E-2 attached hereto, and addressing such other matters
as you (or your counsel) may reasonably request (and the Company hereby
instructs its General Counsel to deliver such opinion to you); and
(c) Shearman & Sterling, your special counsel.
3.3. PAYMENT OF ACCRUED FEES AND EXPENSES.
Without limiting the provisions of Section 14.1, all of the accrued
fees and expenses incurred by you in connection with the transactions
contemplated by this Agreement and the other Note Documents (including, without
limitation, the accrued fees and expenses of Shearman & Sterling, special
counsel to you) to be paid by or on behalf of the Company, and all compensation
payable to you pursuant to the terms of the Fee Letter, on or prior to the
Initial Purchase Date shall have been paid.
4. CONDITIONS TO EACH PURCHASE DATE.
Your obligation to purchase and pay for the Notes to be sold to you on
each Purchase Date (including, without limitation, the Initial Purchase Date) is
subject to the fulfillment to your satisfaction, on or prior to such Purchase
Date, of the following conditions:
4.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of each of the Obligors contained
in this Agreement and each of the other Note Documents shall be complete and
correct on the date of the related Notice of Sale and Purchase and on such
Purchase Date, before and after giving effect to the issue and sale of the Notes
and to the application of the proceeds therefrom as contemplated by Section
5.15(a).
4.2. NO DEFAULT.
After giving effect to the issue and sale of the Notes and to the
application of the proceeds therefrom as contemplated by Section 5.15(a), no
Default or Event of Default shall have occurred and be continuing.
4.3. DOCUMENTS REQUIRED.
You shall have received on or prior to such Purchase Date the
following documents, each dated as of such Purchase Date and in the form of the
respective Exhibit attached hereto, if any, or otherwise in form and substance
satisfactory to you:
<PAGE>
8
(a) NOTICE OF SALE AND PURCHASE. A Notice of Sale and Purchase,
properly completed and duly executed by the Company.
(b) NOTES. Notes, registered in your name, in such aggregate
principal amount as is specified to be purchased by you in the related
Notice of Sale and Purchase and in such number of Notes and in such
denominations (of at least $100,000 per Note) as are specified to the
Company by you at least one Business Day prior to such Purchase Date (and
in the absence of such specification, in a single Note), in each case duly
executed by the Company.
(c) ADDITIONAL DOCUMENTATION. Such other information as you or any
of the Other Purchasers may reasonably request.
4.4. PURCHASE PERMITTED BY APPLICABLE REQUIREMENTS OF LAW, ETC.
The purchase of and any payment for the Notes to be purchased by you
on such Purchase Date (a) shall be permitted by the applicable Requirements of
Law of each jurisdiction to which you are subject, without recourse to
provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting
limited investments by insurance companies without restriction as to the
character of the particular investment, (b) shall not violate any applicable
Requirements of Law (including, without limitation, Regulation G, T, U or X of
the Board of Governors of the Federal Reserve System) and (c) shall not subject
you to any tax, penalty or other liability under or pursuant to any applicable
Requirements of Law, except for any Taxes or Other Taxes for which the Company
is obligated to compensate you under Section 14.3; PROVIDED that if the purchase
of and any payment for the Notes to be purchased by you on such Purchase Date
would subject you to any such tax, penalty or other liability, you agree to use
reasonable efforts (consistent with your internal policy and legal and
regulatory restrictions) to substitute one of your Affiliates as the purchaser
of the Notes hereunder in accordance with Section 20 if such substitution would
avoid the need for or reduce the amount of any such tax, penalty or liability
and would not, in your sole determination, be otherwise disadvantageous to you.
If requested by you, you shall have received an Officer's Certificate on or
prior to such Purchase Date, dated such Purchase Date, certifying such matters
of fact as you may reasonably specify to enable you to determine whether such
purchase and payment are so permitted.
4.5. CONSENTS AND APPROVALS.
All Governmental Authorizations, and all consents, approvals and
authorizations of, and notices to, and other actions by, any other Person,
necessary in connection with the issuance and sale of the Notes and the other
transactions contemplated hereby and thereby shall have been obtained (without
the imposition of any conditions that are not acceptable to you) and shall
remain in full force and effect; and all applicable waiting periods shall have
expired without any action being taken by any Governmental Authority that could
reasonably be expected to restrain, prevent or impose any material adverse
conditions on the Company or on the sale and purchase of the Notes or any of the
other transactions contemplated by this Agreement.
4.6. NO LITIGATION OR OTHER PROCEEDINGS.
Except as described on Schedule 5.8 attached hereto, there shall exist
no action, suit, investigation, litigation or proceeding pending or, to the best
knowledge of the Company, threatened
<PAGE>
9
against or affecting any of the Obligors or any of their respective Subsidiaries
or any of the property or assets thereof in any court or before any arbitrator
or by or before any other Governmental Authority of any kind that (a) either
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or (b) challenges the legality, validity, binding effect
or enforceability of this Agreement or any of the other Note Documents or the
consummation of the sale and purchase of the Notes or any of the other
transactions contemplated hereby or thereby.
4.7. NO MATERIAL ADVERSE CHANGE.
Since December 31, 1996, there shall not have occurred (in your
judgment) a material adverse change in the business, condition (financial or
otherwise), operations, results of operations, assets, property, liabilities or
prospects of the Company and its Subsidiaries, taken as a whole.
4.8. NO OTHER OFFERINGS.
None of the Obligors or any of their respective Subsidiaries shall
have offered, placed or sold, or have caused to be offered, placed or sold,
directly or indirectly by private or public offering or offerings, any debt or
preferred equity securities or other obligations that, in your sole judgment,
could reasonably be expected to impair your ability to resell the Notes being
issued hereunder on terms reasonably acceptable to you.
4.9. NO ADVERSE CHANGE TO FINANCIAL MARKETS.
There shall not have occurred any disruption or change in the
financial or capital markets conditions generally from those in effect on or
prior to April 1, 1997, which disruption or change could reasonably be expected
to have a Material Adverse Effect.
4.10. EMPLOYMENT OF MR. ALFRED WEST.
Mr. Alfred West shall be in good health, shall be employed as a senior
executive officer of the Company and, in such capacity, shall be actively
involved in managing the businesses and financial matters of the Company and
shall not have expressed any intention to terminate his employment by the
Company.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to you that as of the date hereof,
the date of each Notice of Sale and Purchase and each Purchase Date:
5.1. ORGANIZATION; POWER AND AUTHORITY.
The Company and each of its Subsidiaries are Persons duly organized,
validly existing and in good standing under the laws of their respective
jurisdictions of organization and are duly qualified as foreign corporations or
other entities and are in good standing in each other jurisdiction in which the
ownership, lease or operation of their property and assets or the conduct of
their businesses requires such qualification, other than any such jurisdiction
in which the failure to be so qualified or in good standing,
<PAGE>
10
either individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect. The Company and each of its Subsidiaries have
all corporate and other necessary power and authority, and the legal right, to
own or to hold under lease all of the property and assets they purport to own or
hold under lease and to conduct the business they conduct and propose to
conduct. Each of the Obligors has all corporate and other necessary power and
authority, and the legal right, to execute and deliver this Agreement, the Notes
and the other Note Documents to which it is or is to be a party, to perform its
Obligations hereunder and thereunder and to consummate all of the transactions
contemplated hereby and thereby.
5.2. AUTHORIZATION, ENFORCEABILITY, ETC.
This Agreement and each of the other Note Documents have been duly
authorized by all necessary corporate action (including, without limitation, all
necessary shareholder action) on the part of each of the Obligors intended to be
a party thereto. This Agreement has been, and the Notes and each of the other
Note Documents, when delivered hereunder, will have been, duly executed and
delivered by each of the Obligors intended to be a party thereto. This
Agreement constitutes, and the Notes and each of the other Note Documents, when
delivered hereunder, will constitute, the legal, valid and binding obligations
of each of the Obligors intended to be a party thereto, enforceable against such
Obligor in accordance with their respective terms, except as such enforceability
may be limited by the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally.
5.3. DISCLOSURE.
All of the information furnished by or on behalf of any of the
Obligors or any of their respective Subsidiaries in writing to you or any of the
Other Purchasers pursuant to or in connection with this Agreement or any of the
other Note Documents or any other document, certificate or other writing
furnished to you or any of the Other Purchasers in connection with the sale and
purchase of the Notes or any of the other transactions contemplated hereby,
taken as a whole, is complete and correct in all material respects as of the
date on which such information was so provided; and all such information, taken
as a whole, does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made therein, in light of
the circumstances under which any such statements were made, not misleading.
All financial projections and forecasts that have been prepared by the Company
or any of its Subsidiaries and made available to you have been prepared in good
faith based upon reasonable assumptions and represented, at the time each such
financial projection or forecast was delivered to you, the Company's best
estimate of its future financial performance (it being recognized by you that
such financial projections or forecasts are not to be viewed as facts and that
the actual results during the period or periods covered by any such financial
projections or forecasts may differ from the projected or forecasted results).
5.4. CAPITALIZATION; ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES,
ETC.
(a) As of the Initial Purchase Date, each of the authorized shares of
capital stock of the Company and the issued and outstanding shares of capital
stock of the Company are as described in Part A of Schedule 5.4(a) attached
hereto. All of the issued and outstanding shares of capital stock of the
Company have been validly issued and are fully paid and nonassessable, and the
holders thereof are not entitled to any preemptive or other similar rights. As
of the Initial Purchase Date, 4,012,000 shares
<PAGE>
11
of common stock of the Company have been reserved for issuance in connection
with the conversion of the Series A Preferred Stock and 3,000,000 shares of
common stock of the Company are issuable under the terms of the 1996 Flexible
Incentive Plan, copies of which plan have been delivered to you in the form and
on the terms in effect on the Initial Purchase Date. Except as described in
Part B of Schedule 5.4(a) attached hereto, as of the Initial Purchase Date, the
1996 Flexible Incentive Plan is the only plan or arrangement in existence
relating to the issuance of shares of capital stock of the Company. Except as
described in this Section 5.4 or in Part C of Schedule 5.4(a) attached hereto,
as of the Initial Purchase Date, there are no outstanding debt or equity
securities of the Company and no outstanding obligations of the Company
convertible into or exchangeable for, or warrants, options or other rights for
the purchase or acquisition from the Company, or other obligations of the
Company to issue, directly or indirectly, any shares of capital stock of the
Company.
(b) Schedule 5.4(b) attached hereto sets forth all of the
Subsidiaries of the Company as of the Initial Purchase Date, showing, as to each
such Subsidiary, the correct name thereof, the jurisdiction of its organization
and the percentage of shares of each class of its capital stock or similar
equity interests outstanding that are owned by the Company and/or one or more of
its Subsidiaries. All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary of the Company shown on Schedule 5.4(b)
attached hereto as being owned by the Company and/or one or more of its
Subsidiaries have been validly issued, are fully paid and nonassessable and are
owned by the Company and/or one or more of its Subsidiaries, free and clear of
all Liens.
(c) The outstanding shares of capital stock of the Company and each
of its Subsidiaries have been issued, and all outstanding warrants, options or
other rights for the purchase or acquisition from the Company or any of its
Subsidiaries of any shares of its capital stock have been granted, in accordance
with the registration or qualification provisions of the Securities Act and any
applicable state securities laws or pursuant to valid exemptions therefrom.
(d) None of the Subsidiaries of the Company is a party to or
otherwise is subject to any legal restriction or any agreement or arrangement
restricting the ability of such Subsidiary to pay dividends out of profits or to
make any other similar distributions of profits to the Company or any of its
Subsidiaries that owns shares of capital stock of or similar equity interests in
such Subsidiary, except under this Agreement and as otherwise expressly
permitted to remain in effect under Section 9.8.
5.5. FINANCIAL STATEMENTS.
(a) The audited consolidated balance sheets of the Company and its
Subsidiaries as of December 31, 1994 and December 31, 1995 and the related
audited consolidated statements of operations, stockholders' equity and cash
flows of the Company and its Subsidiaries for the Fiscal Years ended December
31, 1994 and December 31, 1995, in each case including the schedules and notes
thereto and accompanied by an opinion of Arthur Andersen LLP, the independent
accountants of the Company, and the consolidated balance sheet of the Company
and its Subsidiaries as of September 30, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows of the Company and
its Subsidiaries for the three-month period then ended, duly certified by a
Senior Financial Officer of the Company, copies of all of which have been
furnished to you, fairly present (subject, in the case of such balance sheet as
of September 30, 1996 and such statements of operations, stockholders' equity
and cash flows for the three-month period then ended, to normal year-end audit
adjustments) the consolidated financial condition of the Company and its
Subsidiaries as at such dates and the consolidated results of
<PAGE>
12
operations and cash flows of the Company and its Subsidiaries for the respective
periods ended on such dates. All of the financial statements referred to above
in this subsection (a), including the schedules and notes thereto, have been
prepared in accordance with generally accepted accounting principles applied
consistently throughout the respective periods covered thereby.
(b) Since December 31, 1996, there has been (i) no material adverse
change in the business, condition (financial or otherwise), operations, results
of operations, assets, property, liabilities or prospects of the Company and its
Subsidiaries, taken as a whole, and (ii) no development, event or circumstance
relating to or affecting the Company or any of its Subsidiaries that, either
individually or in the aggregate, has had or could reasonably be expected to
have a Material Adverse Effect.
(c) There are no liabilities or obligations of the Company or any of
its Subsidiaries of any nature whatsoever (whether absolute, contingent, accrued
or otherwise and whether or not due) that, either individually or in the
aggregate, could reasonably be expected to be material to the Company, either
individually or together with its Subsidiaries, taken as a whole, in each case
except for those liabilities and obligations that are fully disclosed in the
unaudited consolidated financial statements of the Company and its Subsidiaries
referred to in subsection (a) of this Section 5.5 or on Schedule 5.5(c) attached
hereto or that have been incurred since the Initial Purchase Date and are not
prohibited under the terms of this Agreement or any of the other Note Documents.
5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
The execution, delivery and performance by each of the Obligors of
each of the Note Documents to which it is or is to be a party and the
consummation of the sale and purchase of the Notes and the other transactions
contemplated hereby and thereby do not (a) contravene such Obligor's certificate
of incorporation or bylaws (or similar organizational documents), (b) violate
any Requirement of Law, (c) conflict with or result in the breach of, or
constitute a default under, any loan or purchase agreement, indenture, mortgage,
deed of trust, lease, instrument, contract or other agreement binding on or
affecting such Obligor, any of its Subsidiaries or any of their respective
property or assets or (d) except for the Liens created under the Collateral
Documents, result in or require the creation or imposition of any Lien upon or
with respect to any of the property or assets of such Obligor or any of its
Subsidiaries. Neither any of the Obligors nor any of their respective
Subsidiaries is in violation of any of the terms of its certificate of
incorporation or bylaws (or similar organizational documents) or any Requirement
of Law or in breach of any loan or purchase agreement, indenture, mortgage, deed
of trust, lease, instrument, contract or other agreement referred to in the
immediately preceding sentence, the violation or breach of which, either
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
5.7. GOVERNMENTAL AUTHORIZATIONS, ETC.
(a) The Company and each of its Subsidiaries (i) own or possess all
of the Governmental Authorizations that are necessary to own or lease and
operate their respective property and assets and to conduct their respective
businesses as presently conducted, except where and to the extent that the
failure to obtain or maintain in effect any such Governmental Authorization,
either individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect, and (ii) have not received any notice relating
to or threatening the revocation, termination, cancellation, denial,
<PAGE>
13
impairment or modification of any such Governmental Authorization, nor is the
Company or any of its Subsidiaries in violation or contravention of, or in
default under, any such Governmental Authorization.
(b) No Governmental Authorization, and no consent, approval or
authorization of, or notice to, or other action by, any other Person, is
required for the due execution, delivery, recordation, filing or performance by
any of the Obligors of this Agreement or any of the other Note Documents to
which it is or is to be a party, or for the consummation of the sale and
purchase of the Notes or any of the other transactions contemplated hereby and
thereby, except for such Governmental Authorizations, and such consents,
approvals, authorizations, notices and other actions, as are described on
Schedule 5.7 attached hereto, all of which have been obtained or made on or
prior to the Initial Purchase Date and are in full force and effect or will be
obtained or made in accordance with the terms of the Note Documents and,
thereafter, will be in full force and effect.
5.8. LITIGATION.
Except as described on Schedule 5.8 attached hereto, there is no
action, suit, investigation, litigation or proceeding pending or, to the best
knowledge of the Company, threatened against or affecting any of the Obligors or
any of their respective Subsidiaries or any of the property or assets thereof in
any court or before any arbitrator or by or before any other Governmental
Authority of any kind that (a) either individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect or (b) challenges the
legality, validity, binding effect or enforceability of this Agreement or any of
the other Note Documents or the consummation of the sale and purchase of the
Notes or any of the other transactions contemplated hereby or thereby.
5.9. TAXES.
(a) Each of the Obligors and each of their respective Subsidiaries
have filed or caused to be filed all tax returns and reports that are required
to have been filed in any jurisdiction, and have paid all taxes shown to be due
and payable on such returns and all taxes shown to be due and payable on any
assessments of which such Obligor or such Subsidiary, as the case may be, has
received notice and all other taxes, assessments, levies, fees and other
governmental charges imposed upon any of the Obligors or any of their respective
Subsidiaries, or their property, assets, income or franchises, to the extent
such taxes, assessments, levies, fees and other charges have become due and
payable and before they have become delinquent, (i) except for taxes,
assessments, levies, fees or other governmental charges the amount,
applicability or validity of which is being contested in good faith and by
appropriate proceedings diligently conducted and with respect to which such
Obligor or such Subsidiary, as the case may be, has established reserves in
accordance with generally accepted accounting principles in effect from time to
time and (ii) solely in the case of tax returns and reports that are required to
be filed in any jurisdiction outside of the United States of America, and taxes,
assessments, levies, fees and other governmental charges that are due and
payable with respect thereto, except where the filing of any such tax return or
report or the failure to pay any such tax, assessment, levy, fee or other
governmental charge, either individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
(b) The United States federal income tax liabilities of the Company
and its Subsidiaries have been determined by the Internal Revenue Service and
paid, or the time for audit has expired, for all Fiscal Years through the Fiscal
Year ended December 31, 1992. The Company has
<PAGE>
14
established reserves in accordance with generally accepted accounting principles
in effect from time to time for all taxable years and all other taxable periods
for which the expiration of the applicable statute of limitations for assessment
or collection of the federal income tax liabilities of the Company or any of its
Subsidiaries has not occurred (whether as a result of extension or otherwise)
and for its current fiscal period.
(c) As of the Initial Purchase Date, neither any of the Obligors nor
any of their respective Subsidiaries or Affiliates has entered into an agreement
or waiver or been requested to enter into an agreement or waiver extending any
statute of limitations relating to the payment or collection of taxes of any
such Obligor or any such Subsidiary or Affiliate, or is aware of any
circumstances that would cause the taxable years or other taxable periods of any
of the Obligors or any of their respective Subsidiaries or Affiliates not to be
subject to the normally applicable statute of limitations.
(d) Neither the Company nor any of its Subsidiaries is or at any time
has been a member of an affiliated, consolidated, combined or unitary group
other than such group of which the Company is the common parent (within the
meaning of Section 1504(a)(1) of the Internal Revenue Code).
(e) The Company is not an S corporation with the meaning of Section
1361 of the Internal Revenue Code.
5.10. TITLE TO PROPERTY; LEASES.
The Company and each of its Subsidiaries have good and sufficient
title to, or a valid and enforceable leasehold interest in, all of their
respective property and assets that, either individually or in the aggregate,
are material, in each case free and clear of all Liens other than the Liens
expressly permitted under Section 9.2. All leases under which any of the
Company or any of its Subsidiaries are a lessor or a lessee are valid and
subsisting and are in full force and effect in all material respects.
5.11. SECURITY INTERESTS, ETC.
The Collateral Documents create valid and perfected first priority
liens on and security interests in the Collateral (subject to Permitted Liens
and, in the case of the property and assets of the Obligors which become part of
the Collateral on or about the Additional Availability Date, the liens and
security interests of NTFC, on behalf of itself and the other NTFC Lenders,
pursuant to the terms of the NTFC Loan Documents and the Intercreditor
Agreement) in favor of the Collateral Agent, for its benefit and the benefit of
the other Secured Parties, securing the payment of the Notes and all of the
other Obligations of the Obligors under or in respect of the Note Documents.
All of the shares of capital stock of (or other ownership or profit interests
in) the Company and each of the Subsidiaries that are purported to comprise part
of the Collateral have been delivered to the Collateral Agent or NTFC, as
required by the applicable Collateral Documents (on behalf of the Secured
Parties), together with undated stock or other appropriate powers executed in
blank; and all filings and other actions necessary to perfect and protect such
liens and security interests have been duly made or taken and are in full force
and effect or will be duly made or taken in accordance with the terms of the
Note Documents; and all filing and recording fees and taxes have been duly paid.
<PAGE>
15
5.12. LICENSES, PERMITS, ETC.
(a) The Company and each of its Subsidiaries own or possess all of
the licenses, permits, franchises, authorizations, consents and approvals, and
own or have the legal right to use all of the patents, copyrights, service
marks, trademarks and trade names (or other rights thereto), that are necessary
to own or lease and operate their respective property and assets and to conduct
their respective businesses as presently conducted, without known conflict with
the rights of any other Person. Except as described on Part A of Schedule 5.12
attached hereto, no action, suit, investigation, litigation or proceeding of any
Person is pending or, to the best knowledge of the Company, is threatened
challenging the use of any such license, permit, franchise, authorization,
consent, approval, patent, copyright, service mark, trademark, trade name or
other right, or the validity or effectiveness thereof, except for any such
action, suit, investigation, litigation or proceeding that, either individually
or in the aggregate, could not reasonably be expected to have a Material Adverse
Effect.
(b) Except as described on Part B of Schedule 5.12 attached hereto:
(i) no product of the Company or any of its Subsidiaries infringes on
any license, permit, franchise, authorization, consent, approval, patent,
copyright, service mark, trademark, trade name or other right owned by any
other Person; and
(ii) there is no violation by any Person of any right of the Company
or any of its Subsidiaries with respect to any license, permit, franchise,
authorization, consent, approval, patent, copyright, service mark,
trademark, trade name or other right owned or used by the Company or any
such Subsidiary.
(c) The Company has and maintains in full force and effect all
Governmental Authorizations required by the FCC or any PUC or any Communications
Law for the construction and operation of its telecommunications network in
accordance with its intended design and at its full capacity, and all such
Governmental Authorizations are not subject to any further judicial or
administrative review and are in all respects final. Neither you nor any other
holder of the Notes will, solely as a result of your or their execution,
delivery or performance of this Agreement, any Other Agreement or any of the
other Note Documents, or your or their investment in (or your or their
commitment to invest in) the Notes, be subject to the regulation or control of
the FCC or any PUC.
5.13. COMPLIANCE WITH ERISA.
(a) The Company and each of the ERISA Affiliates have operated and
administered each ERISA Plan in compliance with its terms and with the
provisions of ERISA and all other applicable Requirements of Law.
(b) During the immediately preceding five-year period, (i) no
Termination Event has occurred or, to the best knowledge of the Company, could
reasonably be expected to occur with respect to any Plan, (ii) no "ACCUMULATED
FUNDING DEFICIENCY" (as such term is defined in Section 302 of ERISA and Section
412 of the Internal Revenue Code), whether or not waived, has occurred with
respect to any Plan and (iii) no Lien in favor of the PBGC or a Plan has arisen
or could reasonably be expected to arise on account of any Plan.
<PAGE>
16
(c) Neither the Company nor any of the ERISA Affiliates has incurred
any liability pursuant to Title I or IV or ERISA or the penalty or excise tax
provisions of the Internal Revenue Code relating to ERISA Plans, and no event,
transaction or condition has occurred or exists that could reasonably be
expected to result in the incurrence of any such liability by the Company or any
such ERISA Affiliate, or in the imposition of any Lien on any of the rights,
properties or assets of the Company or any such ERISA Affiliate, in either case
pursuant to Title I or IV of ERISA, such penalty or excise tax provisions or
Section 401(a)(29) or 412 of the Internal Revenue Code.
(d) Neither the Company nor any of the ERISA Affiliates (i) has
incurred or, to the best knowledge of the Company, could reasonably be expected
to incur any Withdrawal Liability in respect of any Multiemployer Plan or any
Multiple Employer Plan or (ii) would become subject to any Withdrawal Liability
if the Company or any such ERISA Affiliate were to withdraw completely from all
Multiemployer Plans and all Multiple Employer Plans as of the most recent
valuation date of each such Plan.
(e) No prohibited transaction (within the meaning of Section 406 of
the Internal Revenue Code) or breach of fiduciary responsibility has occurred
with respect to any ERISA Plan which has subjected or may subject the Company or
any of the ERISA Affiliates to any liability under Section 406, 409, 502(i) or
502(l) of ERISA or Section 4975 of the Internal Revenue Code, or under any
agreement or other instrument pursuant to which the Company or any of the ERISA
Affiliates has agreed or is required to indemnify any Person against any such
liability.
(f) The actuarial present value of all "BENEFIT LIABILITIES" (as
defined in Section 4001 of ERISA) under all of the Plans, determined as of the
end of each such Plan's most recently completed plan year on the basis of the
actuarial assumptions specified for funding purposes in such Plan's most recent
actuarial valuation report, whether or not vested, did not exceed the aggregate
current value of the assets of all such Plans allocable to such benefit
liabilities by more than $100,000 in the aggregate.
(g) Neither the Company nor any of the ERISA Affiliates has been
notified that any Multiemployer Plan is in reorganization (within the meaning of
Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of
ERISA) or is being terminated (within the meaning of Title IV of ERISA), and, to
the best knowledge of the Company, no Multiemployer Plan could reasonably be
expected to be in reorganization, insolvent or terminated.
(h) None of the execution and delivery of this Agreement, the
issuance and sale of the Notes hereunder or the consummation of any of the
transactions contemplated hereby will involve any transaction that is subject to
the prohibitions of Section 406 of ERISA or in connection with which a tax could
be imposed pursuant to Section 4975 of the Internal Revenue Code. The
representation by the Company in the first sentence of this Section 5.13(h) is
made in reliance upon, and is subject to the accuracy of, your representation in
Section 6.3 as to the sources of the funds used to pay the purchase price of the
Notes to be purchased by you.
5.14. PRIVATE OFFERING BY THE COMPANY.
(a) Neither the Company nor any Person acting on its behalf has
directly or indirectly offered the Notes or any similar securities for sale to,
or solicited any offer to buy any of the same from, or otherwise approached or
negotiated in respect thereof with, any Person other than you, the Other
<PAGE>
17
Purchasers, if any, and not more than ten other Institutional Investors, each of
which has been offered the Notes at a private sale for investment. Neither the
Company nor any Person acting on its behalf has taken, or will take, any action
that would subject the issuance and sale of the Notes to the registration
requirements of Section 5 of the Securities Act.
(b) Neither the Company nor any Person acting on its behalf has
directly or indirectly offered or sold the Notes by any form of general
solicitation or general advertising, including, without limitation, any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or any broadcast over television or radio
or any seminar or meeting whose attendees have been invited by any form of
general solicitation or general advertising (within the meaning of Rule 502(c)
of Regulation D under the Securities Act).
5.15. USE OF PROCEEDS; MARGIN REGULATIONS.
(a) The proceeds received from the sale of the Notes from time to
time to you and the Other Purchasers, if any, will be used solely to finance
Capital Expenditures of the Company and its Subsidiaries, to pay fees and
expenses incurred in connection with the sale and purchase of the Notes to you
and the Other Purchasers and for other general corporate purposes of the Company
and its Subsidiaries not otherwise prohibited under the terms of the Note
Documents (including, without limitation, to fund financial losses suffered from
time to time by the Company and its Subsidiaries).
(b) Neither the Company nor any of its Subsidiaries is engaged in the
business of extending credit for the purpose of purchasing or carrying any
"MARGIN STOCK" (within the meaning of Regulation G or U of the Board of
Governors of the Federal Reserve System (12 CFR 207)). No part of the proceeds
from the sale of the Notes will be used, directly or indirectly, for the purpose
of purchasing or carrying any margin stock or for the purpose of purchasing,
carrying or trading in any securities under such circumstances as to involve the
Company in a violation of Regulation X of the Board of Governors of the Federal
Reserve System (12 CFR 224) or to involve any broker or dealer in a violation of
Regulation T of the Board of Governors of the Federal Reserve System (12 CFR
220). Margin stock does not constitute more than 25% of the value of the
consolidated property and assets of the Company and its Subsidiaries and the
Company does not have any present intention that margin stock will constitute
more than 25% of the value of such consolidated property and assets. None of
the transactions contemplated by this Agreement and the Other Agreements
(including, without limitation, the direct and indirect use of proceeds of the
Notes) will violate or result in a violation of the Securities Act or the
Exchange Act or any of the rules and regulations promulgated thereunder or in
such Regulation G, T, U or X, as applicable.
5.16. STATUS UNDER CERTAIN STATUTES.
(a) Neither any of the Obligors nor any of their respective
Subsidiaries is subject to regulation under the Investment Company Act of 1940,
as amended, the Public Utility Act of 1935, as amended, or the Federal Power
Act, as amended.
(b) Neither any of the Obligors nor any of their respective
Subsidiaries is an "INVESTMENT COMPANY", or an "AFFILIATED PERSON" of, or
"PROMOTER" or "PRINCIPAL UNDERWRITER" for, an "INVESTMENT COMPANY" (each as
defined in the Investment Company Act of 1940, as amended). Neither the sale
and purchase of the Notes nor the application of the proceeds therefrom or the
repayment thereof
<PAGE>
18
by the Company, nor the consummation of any of the other transactions
contemplated hereby, will violate any provision of such Act or any rule,
regulation or order of the Securities and Exchange Commission thereunder.
(c) Neither any of the Obligors nor any of their respective
Subsidiaries is a "HOLDING COMPANY", or a "SUBSIDIARY COMPANY" of a "HOLDING
COMPANY", or an "AFFILIATE" of a "HOLDING COMPANY" or of a "SUBSIDIARY COMPANY"
of a "HOLDING COMPANY" (each within the meaning of the Public Utility Holding
Company Act of 1935, as amended).
(d) Neither any of the Obligors nor any of their respective
Subsidiaries is a "PERSONAL HOLDING COMPANY" (as defined in Section 542 of the
Internal Revenue Code).
(e) Each of the Obligors and each of their respective Subsidiaries
are current with all reports and documents, if any, required to be filed with
any securities commission or similar agency of any applicable jurisdiction and
are in compliance with all applicable rules and regulations of such commissions
and agencies.
5.17. FOREIGN ASSETS CONTROL REGULATIONS, ETC.
Neither the issue and sale of the Notes by the Company nor the use of
the proceeds therefrom will violate the Trading with the Enemy Act, as amended,
or any of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
5.18. EMPLOYEE AND LABOR MATTERS.
(a) There is (i) no unfair labor practice complaint pending or, to
the best knowledge of the Company, threatened against the Company or any of its
Subsidiaries before any Governmental Authority and no grievance or arbitration
proceeding pending or threatened against the Company or any of its Subsidiaries
which arises out of or under any collective bargaining agreement, (ii) no
strike, labor dispute, slowdown, stoppage or similar action or grievance pending
or threatened against the Company or any of its Subsidiaries and (iii) to the
best knowledge of the Company, no union representation question existing with
respect to the employees of the Company or any of its Subsidiaries and no union
organizing activity taking place with respect to any of the employees of any of
them.
(b) There exists no actual or threatened termination, cancellation or
limitation of, or modification to or change in, the business relationship
between (i) the Company or any of its Subsidiaries, on the one hand, and any
carrier, any customer or any group thereof, on the other hand, whose agreements
with the Company or any such Subsidiary are, or whose use of the
telecommunications equipment thereof is, either individually or in the
aggregate, material to the business or operations of the Company and its
Subsidiaries, taken as a whole, or (ii) the Company or any of its Subsidiaries,
on the one hand, and any material supplier thereof, on the other hand; and there
exists no present state of facts or circumstances that could reasonably be
expected to give rise to or result in any such termination, cancellation,
limitation, modification or change.
(c) To the best knowledge of the Company, none of the key employees
of the Company are obligated under any contract, agreement or other arrangement
(including, without
<PAGE>
19
limitation, licenses, covenants or commitments of any nature) with any Person
other than the Company and/or one or more of its Subsidiaries, or subject to any
judgment, decree, injunction or order of any court, arbitrator or other
Governmental Authority, that could reasonably be expected to interfere with the
use of such employee's best efforts to promote the interests of the Company and
its Subsidiaries or would conflict with such employee's involvement in the
businesses or operations of the Company and its Subsidiaries as conducted and as
proposed to be conducted.
5.19. ENVIRONMENTAL MATTERS.
Except as described on Schedule 5.19 attached hereto:
(a) The operations and properties (whether owned or leased) of the
Company and each of its Subsidiaries comply in all material respects with
all Environmental Laws and Environmental Permits, and all necessary
Environmental Permits have been obtained and are in full force and effect
for all of the operations and properties of the Company and each such
Subsidiary. All past noncompliance with any such Environmental Laws or
Environmental Permits has been resolved without ongoing material
obligations or costs to the Company or any of its Subsidiaries. To the
best knowledge of the Company, no circumstances exist that, either
individually or in the aggregate, could reasonably be expected (i) to form
the basis of an Environmental Action against the Company or any of its
Subsidiaries or any of its properties or (ii) to cause any such property to
be subject to any restrictions on ownership, occupancy, use or
transferability under any Environmental Law.
(b) There are no and never have been any underground or aboveground
storage tanks or any surface impoundments, septic tanks, pits, sumps or
lagoons in which Hazardous Materials are being or have been treated, stored
or disposed of on any property owned or operated by the Company or any of
its Subsidiaries or, to the best knowledge of the Company, on any property
formerly owned or operated by the Company or any of its Subsidiaries; and
there is no asbestos or asbestos-containing material on any property owned
or operated by the Company or any of its Subsidiaries.
(c) Neither the Company nor any of its Subsidiaries is undertaking,
nor has any of them completed, either individually or together with other
potentially responsible parties, any investigation or assessment or
remedial or response action relating to any actual or threatened release,
discharge or disposal of Hazardous Materials at any site, location or
operation, either voluntarily or pursuant to the order of any Governmental
Authority or the requirements of any Environmental Law; and all Hazardous
Materials generated, used, treated, handled or stored at, or released,
discharged or disposed of on, or transported to or from, any property owned
or operated by the Company or any of its Subsidiaries have been disposed of
in a manner that does not violate, and could not reasonably be expected to
give rise to liability under, any applicable Environmental Law.
(d) Neither the Company nor any of its Subsidiaries has received any
notice from any Governmental Authority regarding any violation or alleged
violation of, noncompliance or alleged noncompliance with, or liability or
potential liability under or in respect of, any Environmental Law or
Environmental Permit by the Company or any such Subsidiary, nor does the
Company
<PAGE>
20
or any such Subsidiary have knowledge or have any reason to believe that
any such notice will be received or is being threatened.
5.20. NO BURDENSOME AGREEMENTS.
Neither any of the Obligors nor any of their respective Subsidiaries
is a party to any loan or purchase agreement, indenture, mortgage, deed of
trust, lease, instrument, contract or other agreement or subject to any
Requirement of Law or any charter or corporate or other similar restriction
that, either individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect.
5.21. EXISTING INDEBTEDNESS; FUTURE LIENS.
(a) Schedule 5.21 attached hereto sets forth a complete and correct
list of all outstanding Indebtedness of the Company and each of its Subsidiaries
as of the Initial Purchase Date. Neither the Company nor any of its
Subsidiaries is in default, and no waiver of default is currently in effect, in
the payment of any principal of or interest on any Indebtedness of the Company
or any such Subsidiary, and no event or condition exists with respect to any
Indebtedness of the Company or any such Subsidiary that would permit (or that
with notice or the lapse of time, or both, would permit) one or more Persons to
cause such Indebtedness to become due and payable, or would require an offer to
prepay, redeem, repurchase, purchase or defease such Indebtedness to be made, in
each case prior to its stated maturity or its regularly scheduled dates of
payment.
(b) Neither any of the Obligors nor any of their respective
Subsidiaries has agreed or consented to cause or permit in the future (upon the
happening of a contingency or otherwise) any of its property or assets, whether
now owned or hereafter acquired, to be subject to a Lien not expressly permitted
under Section 9.2.
5.22. SOLVENCY.
The Company is and the Company and its Subsidiaries, taken as a whole,
are, and upon giving effect to the issuance and sale of all of the Notes and the
other transactions contemplated hereby will be, Solvent.
5.23. RELATED PARTY TRANSACTIONS.
Except as set forth on Schedule 9.1 attached hereto:
(a) no officer or director of the Company and no member of the
immediate family of any officer or director thereof is indebted to the
Company in any amount, nor is the Company indebted to (or committed to make
loans or extend or guarantee credit to or otherwise to make Investments in)
any of them;
(b) to the best knowledge of the Company, neither any officer or
director of the Company nor any member of the immediate family of any
officer or director thereof has any direct or indirect ownership or profit
interest in any corporation or other entity with which the Company is
affiliated or with which the Company has an ongoing business relationship,
or in any
<PAGE>
21
corporation or other entity that competes with the Company, that exceeds 1%
of the aggregate ownership and profit interests therein; and
(c) no officer or director of the Company and no member of the
immediate family of any officer or director thereof has any direct or
indirect financial interest in any material contract of the Company, except
for the financial interest of Mr. Alan Levy reflected in his employment
agreement with the Company, as amended, a copy which has been delivered to
you prior to the Initial Purchase Date.
5.24. MATERIAL CONTRACTS.
(a) Except for the agreements, contracts, plans, leases, arrangements
and commitments set forth in Schedule 5.24 attached hereto, neither the Company
nor any of its Subsidiaries is a party or subject to any agreement, contract,
plan, lease, arrangement or commitment that (i) is material to the business,
condition (financial or otherwise), operations, results of operations, assets,
property or liabilities of the Company and its Subsidiaries, taken as a whole,
(ii) provides for the purchase in excess of $250,000 of materials, supplies,
goods, services, equipment or other property or assets, except in the ordinary
course of business, (iii) involves any partnership, joint venture or other
similar arrangement or (iv) restricts the Company or any of its Subsidiaries
from engaging in or competing in any line of business, with any Person or in any
geographic area.
(b) Each agreement, contract, plan, lease, arrangement and commitment
disclosed or required to be disclosed pursuant to clause (a) of this Section
5.24 is the legal, valid and binding obligation of the Company or its applicable
Subsidiary, enforceable against the Company or such Subsidiary in accordance
with its terms, and is in full force and effect; and none of the Company or any
of its Subsidiaries or, to the best knowledge of the Company, any other party
thereto is in default in any material respect under the terms of any such
agreement, contract, plan, lease, arrangement or commitment.
5.25. PARI PASSU OBLIGATIONS.
The Obligations of the Company under this Agreement and the other Note
Documents rank senior in right of payment to all Obligations of the Company
other than the outstanding Indebtedness of the Company described on Schedule
5.21 attached hereto and any purchase money Indebtedness of the Company incurred
pursuant to Section 9.3(d). The Obligations of the Company under this Agreement
and the other Note Documents rank at least PARI PASSU in right of payment with
all outstanding Indebtedness of the Company described on Schedule 5.21 attached
hereto and all purchase money Indebtedness of the Company incurred pursuant to
Section 9.3(d).
5.26. NO SIGNIFICANT SUBSIDIARIES.
None of the Subsidiaries of the Company is a "SIGNIFICANT SUBSIDIARY"
within the meaning of Regulation S-X promulgated by the Securities and Exchange
Commission under the Securities Act.
<PAGE>
22
5.27. CARRIER CONTRACTS.
The aggregate commitments of the Company and its Subsidiaries under
all of the carrier contracts to which one or more of such Persons are parties do
not exceed $1,200,000 per calendar month.
6. REPRESENTATIONS OF THE PURCHASER.
6.1. PURCHASE FOR INVESTMENT.
You represent that you are purchasing the Notes for your own account
or for one or more separate accounts maintained by you or for the account of one
or more pension or trust funds and not with a view to the distribution thereof;
PROVIDED that the disposition of your or their property shall at all times be
within your or their control. You understand that the Notes have not been
registered under the Securities Act and may be resold only if registered
pursuant to the provisions of the Securities Act or if an exemption from
registration is available, except under circumstances where neither such
registration nor such an exemption is required by applicable law, and you agree
that the Company is not required to register the Notes.
6.2. ACCREDITED INVESTOR.
You are an "ACCREDITED INVESTOR" (as defined in Rule 501 of
Regulation D under the Securities Act) and, by reason of your business and
financial experience, and the business and financial experience of those Persons
retained by you to advise you with respect to your investment in the Notes, you,
together with such advisors, have such knowledge, sophistication and experience
in business and financial matters as to be capable of evaluating the merits and
risks of the prospective investment, are able to bear the economic risk of such
investment and, at the present time, are able to afford a complete loss of such
investment. You are not purchasing the Notes in reliance upon any investigation
made by any of the Other Purchasers.
6.3. SOURCE OF FUNDS.
You represent that at least one of the following statements is an
accurate representation as to each source of funds (a "FUNDS SOURCE") to be used
by you to pay the purchase price of the Notes to be purchased by you hereunder:
(a) the Funds Source does not constitute the assets of an Employee
Benefit Plan;
(b) the Funds Source will constitute assets of an insurance company
general account (as such term is used in PTCE 95-60 issued by the United
States Department of Labor) and the purchase and holding of the Notes by
you is entitled to the exemption granted by PTCE 95-60; PROVIDED that
neither any of the Obligors nor any of their respective Subsidiaries is
your "AFFILIATE" (within the meaning of Section V(a) of PTCE 95-60);
(c) if any part of any Funds Source will be from the assets of any
separate account maintained by you in which any Employee Benefit Plan (or
its related trust) has an interest, at least one of the following
statements with respect to such Funds Source is accurate:
<PAGE>
23
(i) such separate account is maintained solely in connection
with your fixed contractual obligations under which amounts payable or
credited to such Employee Benefit Plan and to any participant or
beneficiary thereof (including any annuitant) are not affected in any
manner by the investment performance of the separate account; or
(ii) the Funds Source will constitute assets of a "POOLED
SEPARATE ACCOUNT" (as such term is used in PTCE 90-1 issued by the
United States Department of Labor) and either (A) prior to the
applicable Purchase Date, you shall have disclosed to the Company the
name of each Employee Benefit Plan whose assets in such separate
account exceed or are expected to exceed 10% of the total assets of
such account as of such Purchase Date or (B) the purchase and holding
of the Notes by you is entitled to the exemption granted under PTCE
90-1; PROVIDED that neither any of the Obligors nor any of their
respective Subsidiaries is your "AFFILIATE" (within the meaning of
PTCE 90-1);
(d) the Funds Source will constitute assets of a "BANK COLLECTIVE
FUND" (as such term is used in PTCE 91-38 issued by the United States
Department of Labor) and either (A) prior to the applicable Purchase Date,
you shall have disclosed to the Company the name of each Employee Benefit
Plan whose assets in such bank collective fund exceed or are expected to
exceed 10% of the total assets of such fund as of such Purchase Date or (B)
the purchase and holding of Notes by you is entitled to the exemption
granted under PTCE 91-38; PROVIDED that neither any of the Obligors nor any
of their respective Subsidiaries is your "AFFILIATE" (within the meaning of
PTCE 91-38); or
(e) the Funds Source will constitute assets of an "INVESTMENT FUND"
managed by a "QUALIFIED PLAN ASSET MANAGER" (as both such terms are defined
in Part V of PTCE 84-14 issued by the United States Department of Labor) (a
"QPAM"); the QPAM and the Employee Benefit Plans on whose behalf the QPAM
is acting have been disclosed to the Company and the purchase and holding
of Notes by you is entitled to the exemption granted under PTCE 84-14;
PROVIDED that neither any of the Obligors nor any of their respective
Subsidiaries, nor any "AFFILIATE" (within the meaning of PTCE 84-14)
thereof, has, as of the applicable Purchase Date, or has exercised during
the calendar year immediately preceding the applicable Purchase Date, the
authority to (A) appoint or terminate the QPAM on behalf of any such
Employee Benefit Plan or (B) negotiate on behalf of any such Employee
Benefit Plan the terms of its management agreement with the QPAM
(including, without limitation, any renewals or modifications thereof).
For purposes of subsections (c) and (d) of this Section 6.3, all Employee
Benefit Plans maintained by the same employer or employee organization are
deemed to be a single plan.
7. PREPAYMENTS AND REDEMPTIONS OF THE NOTES.
7.1. OPTIONAL PREPAYMENTS OF THE NOTES.
The Company may, at its option, upon not less than ten days' prior
notice to the holders of the Notes, prepay all or any part of the Notes, in an
aggregate principal amount of $1,000,000 or integral multiples of $100,000 in
excess thereof (or, if less, the remaining aggregate principal amount of all
Notes outstanding at such time), at a purchase price in cash equal to 100% of
the aggregate
<PAGE>
24
principal amount of the Notes so prepaid, PLUS all accrued and unpaid interest
thereon, if any, to the date of such prepayment. Each notice of an optional
prepayment of the Notes pursuant to this Section 7.1 shall specify the date
fixed for such prepayment, the aggregate principal amount of the Notes to be
prepaid on such date, the principal amount of each Note held by such holder to
be prepaid (determined in accordance with Section 7.4) and the interest to be
paid on the prepayment date with respect to such principal amount being prepaid,
and shall state that such prepayment is to be made pursuant to this Section 7.1.
7.2. OFFER TO REPURCHASE NOTES AND REDUCE COMMITMENTS IN RESPECT OF A
CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each holder of the
Notes will have the right to require the Company to repurchase all or any
portion (equal to $1,000,000 or an integral multiple of $100,000 in excess
thereof) of the Notes of such holder pursuant to an offer made in the manner
described below (each, a "CHANGE OF CONTROL OFFER"), at a purchase price in cash
equal to 100% of the aggregate principal amount thereof, PLUS accrued and unpaid
interest thereon, if any, to the date of such repurchase (the "CHANGE OF CONTROL
PAYMENT"). In addition, you and each of the Other Purchasers will have the
right to terminate in whole or reduce a portion (equal to $1,000,000 or an
integral multiple of $100,000 in excess thereof) of your or their Available
Commitment, if any, as of the Change of Control Repurchase Date arising in
connection with each Change of Control Offer. Within four Business Days
following any Change of Control, the Company shall deliver a notice, by
facsimile confirmed the same day by overnight courier service, to each holder of
the Notes stating:
(i) that the Change of Control Offer is being made pursuant to
this Section 7.2 and that all Notes tendered shall be accepted for
repurchase;
(ii) the parties, and the events or circumstances giving rise, to
the Change of Control for which such Change of Control Offer is being made,
in reasonable detail;
(iii) the repurchase price for the Note or Notes of such holder and
the Change of Control Repurchase Date therefor;
(iv) that any Note not tendered for repurchase shall continue to
accrue interest in accordance with the terms thereof;
(v) that, unless the Company defaults in the payment of the Change
of Control Payment, all Notes accepted for repurchase pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Repurchase Date; and
(vi) that holders whose Notes are being tendered for repurchase
only in part shall be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered.
The Company shall comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control. Any holder of the Notes that elects
to have all or a portion of its Notes repurchased as part of the Change of
Control Offer shall deliver notice to the Company of its election at least five
Business Days prior to the scheduled Change of Control Repurchase Date. Any
holder of a Note that does not deliver to the Company notice accepting
<PAGE>
25
the Change of Control Offer at least five Business Days prior to the Change of
Control Repurchase Date shall be deemed to have rejected such Change of Control
Offer. Similarly, if you elect to terminate in whole or reduce a portion of
your Available Commitment in connection with any Change of Control Offer, you
shall deliver notice to the Company of your election at least five Business Days
prior to the related Change of Control Repurchase Date (it being understood and
agreed that if you do not deliver such notice to the Company at least five
Business Days prior to the related Change of Control Repurchase Date, you shall
be deemed to have elected to retain your Available Commitment hereunder).
Notwithstanding the foregoing provisions of this subsection (a), the failure of
the Company to deliver the notice referred to in the third sentence of this
subsection (a) to (A) any holder of the Notes shall not affect or impair the
obligation of the Company to purchase any Note from such holder on the
applicable Change of Control Repurchase Date and (B) you or any of the Other
Purchasers shall not affect or impair your or their right to terminate or reduce
your or their Available Commitment on the applicable Change of Control
Repurchase Date.
(b) On a date that is no earlier than 30 days nor later than 60 days
from the date that the Company delivers or causes to be delivered notice of the
Change of Control to the holders or, if the Company fails to deliver such notice
or cause such notice to be delivered, on the date that is 30 days after the
occurrence of such Change of Control (the "CHANGE OF CONTROL REPURCHASE DATE"),
the Company (i) shall, to the extent lawful, accept for repurchase all Notes or
portions thereof properly tendered in response to the Change of Control Offer,
(ii) shall pay to each of the holders of the Notes so accepted the Change of
Control Payment for its Notes and (iii) shall deliver to each holder of Notes
that only tendered a portion of its Notes new Notes equal in aggregate principal
amount to the unpurchased portion of the Notes surrendered, if any, by such
holder. On each Change of Control Repurchase Date, if you or any of the Other
Purchasers shall have notified the Company of your or their election to have
your or their Available Commitment terminated or reduced in accordance with the
terms of subsection (a) of this Section 7.2 as of such date, such termination or
reduction of your or their Available Commitment shall be automatically and
permanently effected as of such date.
(c) Prior to complying with the provisions of this Section 7.2, but
in any event within 20 days following the occurrence of a Change of Control, the
Company either (i) shall repay all outstanding amounts under the NTFC Loan
Documents and terminate all of the commitments of the lenders thereunder and
shall redeem in full all outstanding shares of Series A Preferred Stock or (ii)
shall obtain the requisite waiver of any defaults under the NTFC Loan Documents
and rights of redemption of the holders of shares of the Series A Preferred
Stock, respectively, resulting from the occurrence of the Change of Control or
otherwise and the requisite consents, if any, under the NTFC Loan Documents and
from the holders of the shares of Series A Preferred Stock, respectively, to
permit the repurchase of the Notes required by this Section 7.2.
7.3. MANDATORY REDEMPTIONS OF THE NOTES.
(a) Upon receipt by the Company or any of its Subsidiaries of the Net
Cash Proceeds from (i) the issuance or incurrence by the Company or any of its
Subsidiaries of any Indebtedness (other than (A) Indebtedness issued or incurred
pursuant to any of Sections 9.3(c) through 9.3(i) and (B) Net Cash Proceeds from
all such issuances and incurrences since the date of this Agreement that, when
aggregated with all of the Net Cash Proceeds received by the Company and its
Subsidiaries from the issuances and sales of equity securities since the date of
this Agreement, do not exceed $1,000,000) and (ii) the sale or issuance by the
Company or any of its Subsidiaries of any shares of its capital stock (or
<PAGE>
26
other ownership or profit interests therein), any securities convertible into or
exchangeable for shares of its capital stock (or other ownership or profit
interests therein) or any warrants, options or other rights for the purchase or
acquisition of any shares of its capital stock (or other ownership or profit
interests therein) (other than Net Cash Proceeds from all such issuances and
sales since the date of this Agreement that, when aggregated with all of the Net
Cash Proceeds received by the Company and its Subsidiaries from the issuances
and incurrences of Indebtedness since the date of this Agreement (other than
Indebtedness issued or incurred pursuant to any of Sections 9.3(c) through
9.3(i)), do not exceed $1,000,000), the Company shall redeem outstanding Notes
in an amount equal to the lesser of (1) 100% of the aggregate principal amount
of all Notes outstanding on the date of such redemption and (2) the amount of
such Net Cash Proceeds, in either case PLUS all accrued and unpaid interest on
the principal amount of the Notes so redeemed to the date of such redemption and
all fees, expenses and other payments due and payable to the holders of the
Notes under the Note Documents on such date.
(b) Upon receipt by the Company or any of its Subsidiaries of Net
Cash Proceeds from any Asset Sale (other than Asset Sales effected in the
ordinary course of the Company's or the applicable Subsidiary's business), the
Company shall redeem outstanding Notes in an amount equal to the lesser of (i)
100% of the aggregate principal amount of all Notes outstanding on the date of
such redemption and (ii) so long as the NTFC Loan Agreement remains in effect,
an amount equal to the holders of the Notes' ratable portion of such Net Cash
Proceeds (such ratable portion being that portion of such Net Cash Proceeds
which bears the same ratio to the total amount of such Net Cash Proceeds as the
aggregate principal amount of the Notes outstanding on the date of such
redemption bears to the total of such aggregate principal amount PLUS the
aggregate principal amount of all loans made by the NTFC Lenders under the NTFC
Loan Agreement and outstanding on the date of such redemption) and, at any time
thereafter, the amount of such Net Cash Proceeds; PROVIDED, HOWEVER, that,
notwithstanding the foregoing provisions of this Section 7.3(b), the Company
shall not be required to redeem outstanding Notes with the Net Cash Proceeds of
one or more Asset Sales effected since the date of this Agreement for which the
aggregate fair value of the property and assets of the Company and its
Subsidiaries subject to such Asset Sales does not exceed $250,000 so long as
such Net Cash Proceeds are reinvested within 90 days of the date of receipt
thereof in the ordinary course businesses and operations of the Company and its
Subsidiaries.
7.4. ALLOCATION OF PARTIAL PREPAYMENTS.
In the case of each partial prepayment, repurchase or redemption of
the Notes pursuant to Section 7.1, 7.2 or 7.3, the principal amount of the Notes
to be prepaid, repurchased or redeemed shall be allocated (in integral multiples
of $1,000) among all of the Notes at the time outstanding in proportion, as
nearly as practicable, to the respective unpaid principal amounts thereof not
theretofore called for prepayment, repurchase or redemption, with adjustments to
the extent practicable to compensate for any prior prepayments, repurchases or
redemptions not made exactly in such proportion.
7.5. MATURITY; SURRENDER, ETC.
In the case of each prepayment, repurchase or redemption of the Notes
pursuant to Section 7.1, 7.2 or 7.3, the principal amount of each Note to be
prepaid, repurchased or redeemed shall mature and become due and payable on the
date fixed for such prepayment, repurchase or redemption, together with accrued
and unpaid interest on such principal amount to such date. From and after such
date, unless the Company shall fail to pay such principal amount when so due and
payable, together with
<PAGE>
27
the accrued and unpaid interest thereon as aforesaid, interest on such principal
amount shall cease to accrue. Any Note prepaid, redeemed or repurchased in full
shall be surrendered to the Company and cancelled and shall not be reissued, and
no Note shall be issued in lieu of any prepaid, repurchased or redeemed
principal amount of any Note.
7.6. PURCHASE OF NOTES.
The Company will not and will not permit any of its Subsidiaries or
Affiliates to purchase, redeem, prepay or otherwise acquire, directly or
indirectly, any of the outstanding Notes except upon the payment, prepayment or
repurchase of the Notes in accordance with the terms of this Agreement and the
Notes. The Company will promptly cancel all Notes acquired by it pursuant to
any payment, prepayment or purchase of Notes in accordance with the terms of
this Agreement and the Notes, and no Notes may be issued in substitution or
exchange for any such Notes.
7.7. REDUCTION OF COMMITMENTS WITH EXCESS PROCEEDS.
In the case of repurchase or redemption of Notes pursuant to Section
7.3, if the Net Cash Proceeds received in connection with the incurrence,
issuance or sale of any debt or equity securities of the Company or any of its
Subsidiaries or any Asset Sale giving rise to such mandatory redemption under
Section 7.3 exceeds the aggregate amount required for the Company to redeem all
of the outstanding Notes on the date such Net Cash Proceeds are received, then
the aggregate Available Commitments of you and the Other Purchasers shall be
automatically and permanently reduced, on a PRO RATA basis, by an amount equal
to such excess Net Cash Proceeds.
8. AFFIRMATIVE COVENANTS.
From the date of this Agreement and, thereafter, so long as any of the
Notes shall be outstanding or you shall have any Commitment hereunder, the
Company will at all times perform and comply, and will cause each of its
Subsidiaries to perform and comply, with each of the following covenants:
8.1. INFORMATION COVENANTS.
The Company will furnish to each holder of the Notes:
(a) MONTHLY REPORTS. As soon as available and in any event within 45
days after the end of each fiscal month of the Company, commencing with the
fiscal month of the Company ending March 31, 1997, the consolidated
statement of operations of the Company and its Subsidiaries for such fiscal
month, in form and detail reasonably acceptable to you.
(b) QUARTERLY FINANCIAL STATEMENTS. As soon as available and in any
event within 45 days after the end of each of the first three fiscal
quarters of the Company in each Fiscal Year, (i) the consolidated balance
sheet of the Company and its Subsidiaries as at the end of such fiscal
quarter and the related consolidated statements of operations,
stockholders' equity and cash flows of the Company and its Subsidiaries for
such fiscal quarter and for the period commencing at the end of the
previous Fiscal Year and ending with the end of such fiscal quarter, in
each case
<PAGE>
28
setting forth in comparative form the consolidated figures for the
corresponding period in the immediately preceding Fiscal Year, all of the
above-described financial statements to be in substantially the form of the
unaudited consolidated financial statements, as applicable, of the Company
and its Subsidiaries for the fiscal quarter of the Company ended September
30, 1996 that are referred to in Section 5.5(a) or otherwise in form and
detail reasonably acceptable to you, and duly certified by a Senior
Financial Officer of the Company as (A) fairly presenting, subject to
normal year-end audit adjustments, the consolidated financial condition,
results of operations and cash flows of the Company and its Subsidiaries
for such fiscal quarter and (B) having been prepared in accordance with
generally accepted accounting principles in effect for such fiscal quarter
covered thereby and consistently applied and (ii) management's discussion
and analysis of the important operational and financial developments of the
Company and its Subsidiaries during such fiscal quarter and year-to-date
periods.
(c) ANNUAL FINANCIAL STATEMENTS. As soon as available and in any
event within 120 days after the close of each Fiscal Year, the consolidated
balance sheet of the Company and its Subsidiaries as at the end of such
Fiscal Year and the related consolidated statements of operations,
stockholders' equity and cash flows of the Company and its Subsidiaries for
such Fiscal Year, in each case setting forth in comparative form the
consolidated figures for the immediately preceding Fiscal Year, all of the
above-described financial statements to be in substantially the form of the
audited consolidated financial statements of the Company and its
Subsidiaries for the Fiscal Year ended December 31, 1995 that are referred
to in Section 5.5(a) or otherwise in form and detail reasonably acceptable
to you, and audited by Arthur Andersen LLP or other independent accountants
of recognized national standing reasonably acceptable to you, together
with:
(i) an opinion of Arthur Andersen LLP or such other accountants,
as the case may be, (A) to the effect that such financial statements
have been prepared in accordance with generally accepted accounting
principles in effect for the Fiscal Year covered thereby and
consistently applied and (B) that is not limited as to the scope of
the audit or qualified as to the status of the Company and its
Subsidiaries as a going concern or otherwise qualified in any manner
not reasonably acceptable to you; and
(ii) management's discussion and analysis of the important
operational and financial developments of the Company and its
Subsidiaries during such Fiscal Year.
(d) COMPLIANCE CERTIFICATE. At the time of delivery of the
consolidated financial statements of the Company and its Subsidiaries
provided for in Sections 8.1(b) and 8.1(c), a compliance certificate of the
Company, in substantially the form of Exhibit F hereto, duly certified by a
Senior Financial Officer thereof, (i) stating that, to the best of such
Senior Financial Officer's knowledge after due inquiry, no Default or Event
of Default has occurred and is continuing or, if a Default or an Event of
Default has occurred and is continuing, a statement as to the nature
thereof and the action that the Company has taken and proposes to take with
respect thereto, (ii) setting forth the computations used by the Company in
determining compliance with the covenants contained in Section 10 for the
fiscal period covered by such financial statements (including with respect
to each subsection in such Section, where applicable, the calculations of
the maximum or minimum amount, ratio or percentage, as the case may be,
permissible under the terms of each such subsection, and the calculation of
the amount, ratio or percentage then in
<PAGE>
29
existence) and (iii) setting forth (A) a description in reasonable detail
of all of the changes, if any, from GAAP in the generally accepted
accounting principles applied in the preparation of such financial
statements and (B) a statement of reconciliation if and to the extent
necessary for determining whether any of the changes in the generally
accepted accounting principles applied in the preparation of such financial
statements would affect the calculation of, or compliance with, any of the
covenants set forth in Section 10, conforming the financial statements that
accompany such compliance certificate to GAAP.
(e) ANNUAL BUDGETS. As soon as practicable and in any event within
30 days after the end of each Fiscal Year, commencing with the Fiscal Year
ending December 31, 1997, an annual budget of the Company and the
Subsidiaries, in form satisfactory to you, consisting of (i) PRO FORMA
financial statements for the next succeeding Fiscal Year of the Company,
accompanied by the statement of a Senior Financial Officer of the Company
to the effect that, to the best of his knowledge, the budget is a
reasonable estimate for the period covered thereby and (ii) such other
projections and forecasted information as you or any of the Other
Purchasers may from time to time reasonably request.
(f) AUDITOR'S REPORTS. Promptly upon receipt thereof, copies of all
"management letters" or other written reports submitted to the Company or
any of its Subsidiaries by Arthur Andersen LLP or any other independent
accountants of the Company or any such Subsidiary in connection with each
annual, interim or special audit of its financial statements made by such
accountants (including, without limitation, any comment letter submitted by
such accountants to management of the Company or any such Subsidiary in
connection with their annual audit and any reports addressing internal
accounting controls of the Company or any such Subsidiary submitted by such
accountants), and all responses of the management of the Company or such
Subsidiary thereto.
(g) SEC AND OTHER REPORTS. Promptly upon transmission or receipt
thereof, (i) copies of any filings and registrations with, and any reports
or notices to or from, the Securities and Exchange Commission or any
successor agency thereto, and copies of all financial statements, proxy
statements, notices and reports that the Company or any of its Subsidiaries
shall send to any holder of Indebtedness owed by the Company or any of its
Subsidiaries pursuant to the terms of the documentation governing such
Indebtedness or to any trustee, agent or other representative therefor
(other than any notices requesting borrowings or the issuance of letters of
credit, notices of interest rate selection and other similar notices that
are sent to any such holder) and (ii) copies of all press releases and
other statements made available by the Company or any of its Subsidiaries
to the public (other than bulletins and statements made solely in
telecommunications publications or to other Persons engaged principally in
the telecommunications business).
(h) NOTICE OF DEFAULT, ETC. Promptly and in any event within three
Business Days after a Responsible Officer obtains knowledge thereof, notice
of the occurrence of (i) each Default or Event of Default, or any event,
development or occurrence that, either individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect continuing
on the date of such statement, setting forth in reasonable detail the
nature of such Default or Event of Default or event, development or
occurrence and the action that the Company has taken and proposes to take
with respect thereto, (ii) any actual or threatened revocation,
termination,
<PAGE>
30
cancellation, denial or impairment of, or refusal to renew or extend, or
modification or other change to, any Governmental Authorization necessary
or desirable for the Company or any of its Subsidiaries to own or lease and
operate their respective property and assets or to conduct their respective
businesses as conducted or as proposed to be conducted and (iii) a Change
of Control or any change in the members of the board of directors of, or
any material change in the management of, the Company or any of its
Subsidiaries.
(i) LITIGATION. Promptly after the commencement thereof, notice of
all actions, suits, investigations, litigations and proceedings of the
types described in Section 5.8 in any court or before any arbitrator or by
or before any Governmental Authority of any kind binding upon or affecting
any of the Obligors or any of their respective Subsidiaries or any of their
respective property or assets.
(j) ERISA MATTERS. Promptly and in any event within three Business
Days after a Responsible Officer obtains knowledge of any of the following,
a notice setting forth the nature thereof and the action, if any, that the
Company or any ERISA Affiliate proposes to take with respect thereto:
(i) any event or condition that constitutes, or could
reasonably be expected to result in, a Termination Event;
(ii) with respect to any Multiemployer Plan, the receipt of
any notice of any Withdrawal Liability assessed against the Company or
any ERISA Affiliate, or of a determination that any Multiemployer Plan
is in reorganization or insolvent (both within the meaning of Title IV
of ERISA);
(iii) the taking by the PBGC of steps to institute, or the
threatening by the PBGC of the institution of, proceedings under
Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by the Company or any
ERISA Affiliate of a notice from a Multiemployer Plan that such action
has been taken by the PBGC with respect to such Multiemployer Plan;
(iv) the failure to make payment in full on or before the due
date (including extensions thereof) of all amounts that the Company or
any ERISA Affiliate is required to contribute to each Plan pursuant to
its terms and as required to meet the minimum funding standard set
forth in ERISA and the Internal Revenue Code with respect thereto;
(v) any funding deficiency with respect to one or more Plans
in excess of $50,000 or any other change in the funding status of any
Plan that, either individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect; or
(vi) any event, transaction or condition not otherwise
described in this subsection (j) that could result in the incurrence
of any liability by the Company or any ERISA Affiliate pursuant to
Title I or IV of ERISA or the penalty or excise tax provisions of the
Internal Revenue Code relating to ERISA Plans, or in the imposition of
any Lien on any of the rights, properties or assets of the Company or
any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty
or excise tax provisions, if
<PAGE>
31
such liability or Lien, taken together with any other such liabilities
or Liens then existing, could reasonably be expected to have a
Material Adverse Effect.
Promptly upon your reasonable request, such additional information
concerning any ERISA Plan as you may have reasonably requested, including,
but not limited to, copies of each annual report/return (Form 5500 series)
and all schedules and attachments thereto required to be filed with the
Department of Labor and/or the Internal Revenue Service pursuant to ERISA
and the Internal Revenue Code, respectively, for each "PLAN YEAR" (within
the meaning of Section 3(39) of ERISA).
(k) ENVIRONMENTAL MATTERS. Promptly and in any event within five
Business Days after a Responsible Officer of the Company obtains knowledge
thereof, notice of the occurrence of one or more of the following:
(i) any pending or threatened Environmental Action against
the Company or any of its Subsidiaries or any of the property owned or
operated by the Company or any such Subsidiary;
(ii) any condition or occurrence on or arising from any
property owned or operated by the Company or any of its Subsidiaries
that (A) results or is alleged to have resulted in noncompliance by
the Company or any such Subsidiary with any applicable Environmental
Law or (B) could reasonably be expected to form the basis of an
Environmental Action against the Company or any such Subsidiary or any
of their respective property;
(iii) any condition or occurrence on any property owned or
operated by the Company or any of its Subsidiaries that could
reasonably be expected to cause such property to be subject to any
restrictions on the ownership, occupancy, use or transferability by
the Company or any such Subsidiary of such property under any
Environmental Law; and
(iv) the taking of any removal or remedial action in response
to the actual or alleged presence of any Hazardous Material on any
property owned or operated by the Company or any of its Subsidiaries
as required by any Environmental Law, any Environmental Permit or any
Governmental Authority.
All such notices shall describe in reasonable detail the nature of the
claim, investigation, condition, occurrence, removal or remedial action and
the Company's or such Subsidiary's response thereto. In addition, the
Company will provide you with copies of all reports, notices and written
information to and from the United States Environmental Protection Agency
or any state or local agency responsible for environmental matters, all
communications with any Person (other than its attorneys) relating to any
Environmental Action of which notice is required to be given pursuant to
this subsection (k), and such detailed reports of any such Environmental
Action as you or any of the Other Purchasers may from time to time
reasonably request.
(l) INSURANCE. As soon as available and in any event within 30 days
after the end of each Fiscal Year, a report summarizing all insurance
coverage maintained by the Company
<PAGE>
32
and its Subsidiaries, specifying therein the type, carrier, amount,
deductibles and co-insurance requirements and expiration date thereof and
containing such additional information as you or any of the Other
Purchasers may from time to time reasonably request.
(m) INDEBTEDNESS DOCUMENTS. Promptly after the occurrence thereof or
the request therefor, copies of any amendment, waiver or other modification
of the terms of any of the Indebtedness of the Company and its Subsidiaries
described on Schedule 5.21 attached hereto and outstanding in an aggregate
amount of at least $100,000, or any notice of default delivered thereunder.
(n) REQUESTED INFORMATION. With reasonable promptness, such other
information and documents relating to the condition (financial or
otherwise), business, operations, results of operations, performance,
property, assets or liabilities of the Company or any of its Subsidiaries
as may from time to time be reasonably requested by the Collateral Agent or
any holder of the Notes.
8.2. COMPLIANCE WITH LAW.
(a) The Company will and will cause each of its Subsidiaries to (i)
comply with all Requirements of Law to which each of them and their respective
property and assets are subject and all applicable restrictions imposed on each
of them and their property and assets by any Governmental Authority (including,
without limitation, ERISA and all Environmental Laws and Communications Laws),
and (ii) except as provided in Section 8.6, obtain and maintain in effect all
Governmental Authorizations that are necessary (A) to own or lease and operate
their respective property and assets and to conduct their respective businesses
as presently conducted, except where and to the extent that the failure to
obtain or maintain in effect any such Governmental Authorization, either
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect, or (B) for the due execution, delivery, recordation,
filing or performance by any of the Obligors of this Agreement or any of the
other Note Documents to which it is or is to be a party, or for the consummation
of the sale and purchase of the Notes or any of the other transactions
contemplated hereby and thereby, except for such Governmental Authorizations as
are described on Schedule 5.7 attached hereto, all of which will be obtained or
made in accordance with the terms of the Note Documents and, thereafter, will be
in full force and effect.
(b) Neither the Company nor any of its Subsidiaries will generate,
use, treat, store, release or dispose of, or permit the generation, use,
treatment, storage, release or disposal of Hazardous Materials on any property
now or hereafter owned or operated by the Company or any such Subsidiary, or
transport or permit the transportation of Hazardous Materials to or from any
such property, except for Hazardous Materials used or stored at any such
property in compliance with all applicable Environmental Laws and Environmental
Permits and reasonably required in connection with the operation, use and
maintenance of any such property in the ordinary course of the Company's or the
applicable Subsidiary's business.
8.3. MAINTENANCE OF INSURANCE.
(a) The Company will and will cause each of its Subsidiaries to
maintain insurance with respect to their respective properties, assets and
businesses with insurers that have, or that have directly reinsured such
insurance with insurers that have, an A.M. Best Company claims paying ability
<PAGE>
33
rating of "A-" (or the then equivalent rating) and against such casualties and
contingencies, of such types, on such terms and in such amounts (including
deductibles, co-insurance and self-insurance, if adequate reserves are
maintained with respect thereto) as is customary in the case of companies of
established reputations engaged in the same or a similar business and similarly
situated, as may otherwise be required by applicable Requirements of Law or by
the Collateral Documents or as may otherwise be reasonably required by you,
including, without limitation, workers' compensation insurance, liability
insurance, casualty insurance and business interruption insurance.
(b) The Company will maintain "key man" insurance with respect to the
death and long term incapacity of Mr. Alfred West with an insurer reasonably
satisfactory to you, naming the Company as sole beneficiary, with a benefit of
at least $10,000,000 and otherwise on terms and conditions reasonably
satisfactory to you; PROVIDED that if the Company or Mr. Alfred West shall
receive any notice of expiration or termination of such key man insurance from
the insurer thereof, the Company shall use its best efforts to cause a new
insurer to provide such key man insurance on the terms described in this
subsection (b) prior to or concurrently with the date of such expiration or
termination and shall, in any event, cause such key man insurance to have been
replaced within 30 days after such expiration or termination date.
8.4. MAINTENANCE OF PROPERTIES.
The Company will and will cause each of its Subsidiaries to maintain
and keep their respective properties and assets in good repair, working order
and condition (other than as a result of ordinary wear and tear or casualty and
condemnation).
8.5. PAYMENT OF TAXES AND CLAIMS; PERFORMANCE OF MATERIAL OBLIGATIONS.
(a) The Company will and will cause each of its Subsidiaries to pay
and discharge all taxes, assessments, levies, fees and other governmental
charges imposed upon them or any of their properties, assets, income or
franchises, to the extent such taxes, assessments, levies, fees and other
governmental charges have become due and payable and before they have become
delinquent, and all claims for which sums have become due and payable that have
resulted or could result in a Lien upon any of the property or assets of the
Company or any of its Subsidiaries; PROVIDED, HOWEVER, that neither the Company
nor any of its Subsidiaries shall be required to pay or to discharge any such
tax, assessment, levy, fee, other charge or claim the amount, applicability or
validity of which is being contested in good faith and by appropriate
proceedings diligently conducted and with respect to which the Company or such
Subsidiary, as the case may be, has established reserves in accordance with
generally accepted accounting principles in effect from time to time, unless and
until any Lien resulting therefrom attaches to its property and assets and
becomes enforceable by its other creditors, and only for so long as the failure
to pay or to discharge any such tax, assessment, levy, fee, other charge or
claim, either individually or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect.
(b) The Company will and will cause each of its Subsidiaries to
perform all of its obligations under the terms of each loan or purchase
agreement, indenture, mortgage, deed of trust, lease, instrument, contract and
other agreement binding on or affecting it, except where the failure to so
perform, either individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
<PAGE>
34
8.6. PRESERVATION OF CORPORATE EXISTENCE, ETC.
(a) The Company will preserve and keep in full force and effect its
corporate existence, good standing and rights in the State of New York. The
Company will preserve and keep in full force and effect the corporate existence
and good standing of each of its Subsidiaries and all permits, licenses,
approvals, rights, privileges and franchises of the Company and its
Subsidiaries; PROVIDED, HOWEVER, that the Company and its Subsidiaries may
consummate any merger, consolidation, liquidation, dissolution or winding up
otherwise permitted under Section 9.6; and PROVIDED FURTHER, HOWEVER, that
nothing in Section 8.2 or in this sentence of Section 8.6(a) shall prevent the
Company or any of its Subsidiaries from terminating or failing to preserve and
keep in full force and effect any such permit, license, approval, right,
privilege or franchise if the Company has determined in its good faith judgment
that such termination or failure to preserve, either individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
(b) The Company will and will cause each of its Subsidiaries to duly
qualify and to remain duly qualified as a foreign corporation or other entity,
and to be and remain in good standing, in each jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of its
businesses requires such qualification, except in any such jurisdiction in which
the failure to be so qualified or in good standing, either individually or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect.
8.7. MAINTENANCE OF BOOKS AND RECORDS; INSPECTION.
(a) The Company will and will cause each of its Subsidiaries to keep
proper records and books of account in which complete, correct and reasonably
detailed entries shall be made of all financial transactions and of all of the
property, assets and businesses of the Company and each such Subsidiary
(including, without limitation, the establishment and maintenance of adequate
and appropriate reserves) in conformity with generally accepted accounting
principles in effect from time to time and all Requirements of Law. The Company
will mark all of its books and records relating to the Collateral (including,
without limitation, its share register) in such a manner as to properly evidence
the Collateral Documents and the liens and security interests created
thereunder.
(b) The Company shall and shall cause each of its Subsidiaries to
permit each holder of the Notes and any of the agents or representatives thereof
(so long as such agent or representative has agreed in writing to be bound by
the provisions of Section 19), upon reasonable notice, during normal business
hours and at the expense of the Company, at any time and from time to time to
visit and inspect any of the offices or properties of, and to examine and make
copies of and abstracts from the records and books of account of, the Company
and/or any of its Subsidiaries, and to discuss the affairs, finances and
accounts of the Company and/or any such Subsidiary, as the case may be, with,
and be advised as to the same by, their officers, directors and independent
accountants (and, by this Subsection (b), the Company authorizes each such
officer, director and independent accountant to discuss the affairs, finances
and accounts of the Company and its Subsidiaries with such Persons).
<PAGE>
35
8.8. USE OF PROCEEDS.
The Company will use the proceeds of the sale and purchase of the
Notes solely for the purposes set forth in Section 5.15(a).
8.9. SEARCH REPORTS.
The Company will, as promptly as practicable after the Initial
Purchase Date, deliver to you completed requests for information listing the
financing statements referred to in Section 3.1(b)(iii) and all other effective
financing statements filed in the jurisdictions referred to in
Section 3.1(b)(iii) that name any of the Shareholders as debtor, together with
copies of such other financing statements.
8.10. COVENANT TO GIVE FURTHER SECURITY.
(a) The Company hereby agrees that, as soon as practicable and in any
event not later than May 24, 1997:
(i) The Company will execute and deliver to the Collateral Agent a
security agreement, in form and substance reasonably satisfactory to the
Collateral Agent and you, pursuant to which it will grant to the Collateral
Agent, on behalf of itself and the other Secured Parties, valid and
perfected liens on and security interests in all of the property and assets
of the Company (whether now owned or hereafter acquired and whether or not
existing on such date) that are located in the United States of America and
either (A) are not subject to the lien or security interest of any other
Person at such time, in which case the liens and security interests granted
therein to the Collateral Agent shall be first priority liens and security
interests, subject only to Permitted Liens, or (B) comprise part of the
NTFC Collateral, in which case the liens and security interests granted
therein to the Collateral Agent shall be second priority liens and security
interests, subject only to Permitted Liens and the liens and security
interest in such property and assets granted to NTFC, on behalf of itself
and the other NTFC Lenders, pursuant to, and on the terms and conditions
set forth in, the NTFC Loan Documents, and, in furtherance of the
foregoing, the Company shall:
(A) deliver to the Collateral Agent all of the certificates
representing the shares of capital stock of each of the Domestic
Subsidiaries referred to in such security agreement, accompanied by
undated stock powers executed in blank, and instruments evidencing the
Indebtedness of one or more of the Domestic Subsidiaries to the
Company, duly endorsed in blank;
(B) duly execute and deliver to the Collateral Agent proper
financing statements (Form UCC-1 or a comparable form) under the
Uniform Commercial Code of all jurisdictions that may be necessary or
that the Collateral Agent or you may deem reasonably desirable and may
request in order to perfect and protect the liens and security
interests created under such security agreement, covering the
Collateral described therein, in each case completed in a manner
satisfactory to the Collateral Agent and you; and
(C) provide the Collateral Agent and you with evidence that all
other actions that may be necessary or that the Collateral Agent or
you may deem reasonably desirable
<PAGE>
36
and may request in order to perfect and protect the liens and security
interests created under such security agreement (or the intended
priority of such liens and security interests) have been taken or will
be taken in accordance with the terms of such security agreement.
(ii) Each of the Shareholders will execute and deliver to the
Collateral Agent a pledge agreement or an amendment to the Shareholders
Pledge Agreement to which he is a party, in either case in form and
substance reasonably satisfactory to the Collateral Agent and you, pursuant
to which such Shareholder will grant to the Collateral Agent, on behalf of
itself and the other Secured Parties, a valid and perfected lien on and
security interest in all of the shares of capital stock of the Company, or
warrants, options or other rights for the purchase or acquisition from the
Company of any such shares, that are owned or thereafter are acquired by
such Shareholder (whether or not existing on such date), and all proceeds
of such shares, warrants, options or other rights, which comprise part of
the NTFC Collateral, which lien and security interest shall be at least a
second priority lien and security interest, subject only to the lien and
security interest in such property and assets granted to NTFC, on behalf of
itself and the other NTFC Lenders, pursuant to, and on the terms and
conditions set forth in, the NTFC Loan Documents, and, in furtherance of
the foregoing, each such Shareholder shall:
(A) duly execute and deliver to the Collateral Agent proper
amendments to the financing statements (Form UCC-3 or a comparable
form) referred to in Section 3.1(b)(iii) and/or proper financing
statements (Form UCC-1 or a comparable form) under the Uniform
Commercial Code of all jurisdictions that, in either case, may be
necessary or that the Collateral Agent or you may deem reasonably
desirable and may request in order to perfect and protect the lien and
security interest created under such pledge agreement or amendment,
covering the Collateral described therein, in each case completed in a
manner satisfactory to the Collateral Agent and you; and
(B) provide the Collateral Agent and you with evidence that all
other actions that may be necessary or that the Collateral Agent or
you may deem reasonably desirable and may request in order to perfect
and protect the lien and security interest created under such pledge
agreement or amendment (or the intended priority of such lien and
security interest) have been taken or will be taken in accordance with
the terms of the such pledge agreement or amendment.
(iii) Each of the Company and NTFC shall have entered into an
intercreditor agreement with the Collateral Agent, in form and substance
reasonably satisfactory to each of the Collateral Agent and you (as
amended, supplemented, or otherwise modified in accordance with the terms
thereof and Section 16, the "INTERCREDITOR AGREEMENT"), (A) setting forth
the respective rights and responsibilities of each of NTFC and the
Collateral Agent so that (1) the Collateral Agent, on behalf of itself and
the other Secured Parties, will have a valid and perfected first priority
lien on and security interest in all of the Initial Note Documents
Collateral and a valid and perfected second priority lien on and security
interest in all of the NTFC Collateral (subject only to Permitted Liens and
the lien and security interest in such property and assets granted to NTFC,
on behalf of itself and the other NTFC Lenders, pursuant to, and on the
terms and conditions set forth in, the NTFC Loan Documents) and (2) NTFC,
on behalf of itself and the other NTFC Lenders, will have a valid and
perfected first priority lien on and security interest
<PAGE>
37
in all of the NTFC Collateral (subject to Permitted Liens) and a valid and
perfected second priority lien on and security interest in all of the
Collateral (subject only to the liens and security interests of the
Collateral Agent, on behalf of itself and the other Secured Parties,
pursuant to, and on the terms and conditions set forth in, the Note
Documents), which arrangements shall be acknowledged by the Company, and
(B) addressing such other matters as the Collateral Agent or you shall
reasonably request (including, without limitation, the agreement of the
Company to take all such actions to assist in effectuating such
intercreditor arrangements as are reasonably requested by the Collateral
Agent and NTFC therein).
(iv) The Company will cause to be delivered to the Collateral Agent,
you and the other Secured Parties signed copies of one or more favorable
opinions of special and appropriate local counsel for the Company and the
Shareholders and as the Collateral Agent or you shall reasonably request,
addressed to the Collateral Agent, you and the other Secured Parties and
reasonably acceptable to each such Person, as to the security agreement,
the pledge agreements or amendments to the Shareholder Pledge Agreements
and the intercreditor agreement referred to in clauses (i), (ii) and (iii)
of this subsection (a), respectively, being the legal, valid and binding
obligations of the Company or the applicable Shareholder, enforceable
against the Company or such Shareholder in accordance with their respective
terms, as to the creation and perfection (and, in the case of shares of
capital stock of the Company or any of its Subsidiaries and intercompany
Indebtedness, the priority) of the liens and security interests created or
purported to be created therein and to such other matters as the Collateral
Agent, you or any of the other Secured Parties may reasonably request.
(b) The Company hereby agrees that if any of the Notes are
outstanding at any time after October 31, 1997 then, upon your request or the
request of any of the Other Purchasers or any of the other holders of the Notes,
the Company will cause, within 60 days of such request, 661/2% of the shares of
capital stock of (or other ownership or profit interests in) each of the Foreign
Subsidiaries entitled to vote (within the meaning of Treasury Regulation Section
1-956-2(c)(2) promulgated under the Internal Revenue Code) (the "VOTING EQUITY
INTERESTS") (on a fully diluted basis) or, if less, all of the Voting Equity
Interests in such Foreign Subsidiary owned by the Company and/or the Domestic
Subsidiaries, and all of the shares of capital stock of (or other ownership or
profit interests in) each of the Foreign Subsidiaries not entitled to vote
(within the meaning of Treasury Regulation Section 1-956-2(c)(2) promulgated
under the Internal Revenue Code) (the "NON-VOTING EQUITY INTERESTS") now or
hereafter owned by the Company or any of the Domestic Subsidiaries, to be
pledged to the Collateral Agent, on behalf of itself and the other Secured
Parties, pursuant to the terms of the Security Agreement and/or one or more
pledge agreements in form and substance reasonably acceptable to the Collateral
Agent and you; PROVIDED, HOWEVER, that, if, as a result of any changes in the
tax laws of the United States of America after the date of this Agreement, the
pledge by the Company or any of its Subsidiaries of any additional shares of
capital stock of (or other ownership or profit interest in) any of the Foreign
Subsidiaries to the Collateral Agent, on behalf of itself and the other Secured
Parties, would not result in an increase in the aggregate net consolidated tax
liabilities of the Company and its Subsidiaries, then, promptly after the
changes in such laws, all such additional shares (or other ownership or profit
interests) shall be pledged to the Collateral Agent, on behalf of itself and the
other Secured Parties, pursuant to the terms and conditions of the Security
Agreement and/or one or more pledge agreements in form and substance reasonably
acceptable to the Collateral Agent and you. In furtherance of the foregoing
provisions of this Section 8.10(b), the Company agrees that, within 60 days
after the applicable request of you, any of the Other Purchasers or any of the
other holders of the Notes:
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38
(i) If the shares of capital stock of (or other ownership or profit
interests in) such Foreign Subsidiary (A) are evidenced by certificates, it
will cause certificates representing 661/2% of the Voting Equity Interests
in such Foreign Subsidiary (on a fully diluted basis) or, if less, all of
the Voting Equity Interests in such Foreign Subsidiary owned by the Company
and/or the Domestic Subsidiaries, and all of the Non-Voting Equity
Interests in such Foreign Subsidiary, now or hereafter owned by the Company
or any of the Domestic Subsidiaries to be delivered to the Collateral Agent
(together with undated stock or other appropriate powers duly endorsed in
blank), and pledged to the Collateral Agent, on behalf of itself and the
other Secured Parties, pursuant to the Security Agreement and/or one or
more pledge agreements in form and substance reasonably acceptable to the
Collateral Agent and you or (B) are not evidenced by certificates, to take
all actions (including, without limitation, the filing of financing
statements (or the equivalent thereof) under the Uniform Commercial Code
(or any similar law or statute) of all applicable jurisdictions) that may
be necessary or that the Collateral Agent or you may deem reasonably
desirable and may request to create, perfect and protect first priority
liens and security interests under the laws of all applicable jurisdictions
in 661/2% of the Voting Equity Interests in such Foreign Subsidiary (on a
fully diluted basis) or, if less, all of the Voting Equity Interests in
such Foreign Subsidiary owned by the Company and/or the Domestic
Subsidiaries, and all of the Non-Voting Equity Interests in such Foreign
Subsidiary, now or hereafter owned by the Company or any of the Domestic
Consolidated Subsidiaries pursuant to the Security Agreement and/or one or
more pledge agreements in form and substance reasonably acceptable to the
Collateral Agent and you;
(ii) It will deliver to the Collateral Agent, you and each of the
other Secured Parties (A) such other documentation as the Collateral Agent
or you may reasonably request in connection with the existence, power,
authority and authorization of, and other similar matters relating to, the
Company, each of the Domestic Subsidiaries, if applicable, and each of the
Foreign Subsidiaries and (B) evidence that all other actions that may be
necessary or that the Collateral Agent or you may deem reasonably desirable
and may request in order to perfect and protect the pledge, assignment and
security interest created under the Security Agreement and/or any such
pledge agreement (or the intended priority of such pledge, assignment and
security interest) have been taken or will be taken in accordance with the
terms of the Security Agreement or such pledge agreement; and
(iii) It will cause to be delivered to the Collateral Agent, you
and each of the other Secured Parties signed copies of one or more
favorable opinions of special and appropriate foreign counsel for the
Company and each of the applicable Foreign Subsidiaries as the Collateral
Agent, you or any of the other Secured Parties shall reasonably request,
addressed to the Collateral Agent, you and the other Secured Parties and
reasonably acceptable to each such Person, as to the pledge agreements
referred to in clause (i) of this subsection (b) being the legal, valid and
binding obligations of the Company or the applicable Domestic Subsidiary,
enforceable against the Company or such Domestic Subsidiary in accordance
with their respective terms, as to the creation, perfection and priority of
the liens and security interests created or purported to be created
therein, as to the choice of New York law being recognized in the courts of
the jurisdiction in which each of the applicable Foreign Subsidiaries is
organized and as such other matters as the Collateral Agent, you or any
other Secured Parties may reasonably request.
<PAGE>
39
8.11. FURNISHING OF RULE 144A INFORMATION.
The Company agrees that, for so long as it is not subject to Section
13 or 15(d) of the Exchange Act, it will furnish to any holder of the Notes or
to any prospective purchaser of any Note designated by such holder that is a
"QUALIFIED INSTITUTIONAL BUYER" (as defined in Rule 144A under the Securities
Act), upon the request of such holder, on or prior to the date such Note is to
be sold to such prospective purchaser, the following information (which shall be
reasonably current in relation to the date of such sale): (a) a very brief
statement of the nature of the business of the Company and its Subsidiaries and
the products and services they offer; (b) the Company's audited consolidated
balance sheets and related consolidated statements of operations, stockholders'
equity and cash flows for the two most recently completed Fiscal Years prior to
such date; and (c) such other information as may from time to time be reasonably
necessary to maintain the eligibility of the Notes for trading under Rule 144A
under the Securities Act and as shall not be materially more onerous for the
Company to provide than the information required to maintain such eligibility on
the date of this Agreement.
9. NEGATIVE COVENANTS.
From the date of this Agreement and, thereafter, so long as any of the
Notes shall be outstanding or you shall have any Commitment hereunder, the
Company will perform and comply, and will cause each of its Subsidiaries to
perform and comply, at all times with each of the following covenants:
9.1. LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.
The Company will not and will not permit any of its Subsidiaries to
directly or indirectly enter into, renew, extend or engage in any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease, transfer or exchange of property or assets of any kind or the
rendering of services of any kind) with any of its Affiliates, except upon fair
and reasonable terms no less favorable to the Company or such Subsidiary than
would be obtainable in a comparable arm's-length transaction with a Person not
an Affiliate thereof; PROVIDED that the foregoing restrictions of this
Section 9.1 shall not apply to:
(a) the transactions described on Schedule 9.1 attached hereto;
(b) any transaction or series of related transactions solely between
or among the Company and one or more of its Subsidiaries or between or
among Subsidiaries of the Company, to the extent such transactions or
series of related transactions are otherwise permitted under the terms of
the Note Documents;
(c) transactions otherwise permitted under Section 9.5;
(d) the payment of reasonable and customary regular fees to directors
of the Company that are not employees thereof; and
(e) any transaction or series of related transactions either (i) that
is approved by a majority of the disinterested members of the board of
directors of the Company or (ii) for which
<PAGE>
40
the Company or any of its Subsidiaries delivers to you a written opinion
from a nationally recognized investment banking firm, and in form and
substance, satisfactory to you, stating that the transaction is fair to the
Company or such Subsidiary from a financial point of view.
9.2. LIMITATIONS ON LIENS.
(a) The Company will not and will not permit any of its
Subsidiaries to create, incur, assume or suffer to exist any Lien on or with
respect to any of its property or assets of any character (including, without
limitation, accounts), whether now owned or hereafter acquired, to file or
suffer to exist under the Uniform Commercial Code or any similar law or statute
of any jurisdiction, a financing statement (or the equivalent thereof) that
names the Company or any of its Subsidiaries as debtor, to sign or suffer to
exist any security agreement authorizing any secured party thereunder to file
such financing statement (or the equivalent thereof), to sell any of its
property or assets subject to an understanding or agreement, contingent or
otherwise, to repurchase such property or assets (including sales of accounts
receivable with recourse to the Company or any of its Subsidiaries), or to
assign any accounts or other right to receive income; EXCLUDING, HOWEVER, from
the operation of the foregoing restrictions of this Section 9.2 the following:
(i) Permitted Liens;
(ii) Liens in favor of you and the Other Purchasers, if any,
created under the Collateral Documents;
(iii) Liens existing on the date of this Agreement and described in
Schedule 9.2 attached hereto;
(iv) Liens existing on and after the Additional Availability Date
in favor of NTFC, on behalf of itself and the other NTFC Lenders, securing
the Obligations of the Company under the NTFC Loan Documents, but subject
to the terms of the Intercreditor Agreement;
(v) purchase money Liens upon or in property or assets acquired or
held by the Company or any of its Subsidiaries in the ordinary course of
business to secure the purchase price of any such property or asset or to
secure Indebtedness incurred solely for the purpose of financing the
acquisition, construction or improvement of such property or asset to be
subject to such Liens, or Liens existing on any such property or asset at
the time of or within 90 days after the date of its acquisition (other than
any such Liens created in contemplation of such acquisition that do not
secure the purchase price of such property or asset); PROVIDED, HOWEVER,
that no such Lien shall extend to or cover any property or assets other
than the property or asset being so acquired, constructed or improved; and
PROVIDED FURTHER that the aggregate principal amount of Indebtedness
secured by Liens permitted under this clause (v) shall not exceed the
lesser of (A) the cost to the Company or the applicable Subsidiary of the
property or asset to be subject to any such Lien and (B) the amount
otherwise permitted to be incurred therefor under the terms of this
Agreement;
(vi) Liens arising in connection with Capitalized Leases otherwise
permitted under Section 9.3(e); PROVIDED that no such Lien shall extend to
or cover any property or assets other than the property and assets subject
to such Capitalized Leases;
<PAGE>
41
(vii) Liens upon any property and assets (other than any shares of
capital stock of, or other ownership or profit interests in, any Person)
existing at the time such property or asset is purchased or otherwise
acquired by the Company or any of its Subsidiaries; PROVIDED that, in each
case, any such Lien was not created in contemplation of such purchase or
other acquisition and does not extend to or cover any property or assets
other than the property or asset being so purchased or otherwise acquired;
and PROVIDED FURTHER that any Indebtedness or other Obligations secured by
such Liens shall otherwise be permitted under the terms of the Note
Documents;
(viii) Liens upon any property and assets (other than shares of
capital stock or other ownership or profit interests) of a Person and its
Subsidiaries existing at the time such Person is merged into or
consolidated with any of the Subsidiaries of the Company in accordance with
the terms of Section 9.6 or becomes a Subsidiary of the Company in
accordance with the terms of Section 9.7; PROVIDED that, in each case, such
Lien was not created in contemplation of such merger, consolidation or
acquisition and does not extend to or cover any property or assets other
than property and assets of the Person and its Subsidiaries being so merged
into or consolidated with such Subsidiary or acquired by the Company or
such Subsidiary, as the case may be;
(ix) deposits to secure the performance of leases of property
(whether real, personal or mixed) of the Company and its Subsidiaries
(excluding Capitalized Leases) in the ordinary course of business; and
(x) the replacement, extension or renewal of any Lien permitted
under clause (v) or (vi) of this Section 9.2(a) solely upon or in the same
property and assets theretofore subject thereto; PROVIDED that any
Indebtedness secured by such Liens shall otherwise be permitted under the
terms of the Note Documents.
(b) The Company will not and will not permit any of its
Subsidiaries to enter into, assume or suffer to exist any agreement prohibiting,
conditioning or otherwise restricting the creation or assumption of any Lien
upon any of its property or assets, whether now owned or hereafter acquired, or
requiring the grant of any assignment or security for any Obligation if an
assignment or security is given for any other Obligation, other than:
(i) any such agreement with you, the Other Purchasers, if any, and
the other holders of the Notes;
(ii) any such agreement evidencing or setting forth the terms of
any Indebtedness described in Schedule 5.21 attached hereto, to the extent
such agreement is in effect on the date hereof;
(iii) any such agreement prohibiting other encumbrances on specific
property and assets of the Company or any such Subsidiaries, which
agreement secures the payment of Indebtedness incurred solely to acquire,
construct or improve such property or assets or to finance the purchase
price therefor and which Indebtedness is otherwise permitted to be incurred
under the terms of this Agreement;
<PAGE>
42
(iv) any agreement setting forth customary restrictions on the
subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract of similar property or assets;
(v) any restriction or encumbrance imposed pursuant to an
agreement that has been entered into by the Company or any such Subsidiary
for any Asset Sale so long as such Asset Sale is otherwise permitted under
the terms of the Note Documents; and
(vi) any agreement evidencing Indebtedness outstanding on the date
a Person first becomes a Subsidiary of the Company; PROVIDED that such
agreement was not created in contemplation of the acquisition of such
Person and does not extend to or cover any property or assets other than
property and assets of the Person so acquired by the Company.
9.3. LIMITATIONS ON INDEBTEDNESS.
The Company will not and will not permit any of its Subsidiaries to
directly or indirectly create, incur, assume, guarantee or suffer to exist, or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness other than:
(a) Indebtedness arising under the Note Documents;
(b) Indebtedness existing on the date of this Agreement and
described in Schedule 5.21 attached hereto;
(c) Indebtedness of any of the Subsidiaries of the Company owing
to the Company or any of the other Subsidiaries of the Company; PROVIDED,
HOWEVER, that the aggregate principal amount of all Indebtedness of the
Company and its Subsidiaries owing to one or more Subsidiaries of the
Company that are not wholly owned Subsidiaries thereof shall not exceed
$250,000 at any time outstanding;
(d) Indebtedness secured by Liens expressly permitted under
Section 9.2(a)(v) in an aggregate principal amount that, when aggregated
with the principal amount of all Indebtedness incurred under this clause
(d) and clause (e) of this Section 9.3, does not exceed $7,500,000 at any
time outstanding;
(e) Indebtedness evidenced by Capitalized Lease Obligations
entered into in order to finance Capital Expenditures made by the Company
and its Subsidiaries in accordance with the provisions of Section 9.16,
which Indebtedness, when aggregated with the principal amount of all
Indebtedness incurred under this clause (e) and clause (d) of this Section
9.3, does not exceed $7,500,000 at any time outstanding;
(f) Indebtedness existing at the time that any property or asset
is purchased or otherwise acquired by the Company or any of its
Subsidiaries and secured solely by such property or asset; PROVIDED that
such Indebtedness was not incurred in contemplation of such purchase or
other acquisition; and PROVIDED FURTHER that the aggregate principal amount
of all Indebtedness incurred under this subsection (f), together with the
aggregate principal amount of all Indebtedness incurred under subsection
(g) of this Section 9.3, the aggregate cash and noncash
<PAGE>
43
purchase price and all purchases and other acquisitions of property and
assets made pursuant to Section 9.6(j) and the aggregate amount of all
Investments made pursuant to Section 9.7(f), does not exceed $1,000,000 at
any time;
(g) Indebtedness existing at the time any Person is merged into or
consolidated with any of the Subsidiaries of the Company in accordance with
the terms of Section 9.6 or becomes a Subsidiary of the Company in
accordance with the terms of Section 9.7; PROVIDED that such Indebtedness
was not incurred in contemplation of such merger, consolidation or
acquisition; and PROVIDED FURTHER that the aggregate principal amount of
all Indebtedness incurred under this subsection (g), together with the
aggregate principal amount of all Indebtedness incurred under subsection
(f) of this Section 9.3 the aggregate cash and noncash purchase price of
all purchases and other acquisitions of property and assets made pursuant
to Section 9.6 (j) and the aggregate amount of all Investments made
pursuant to Section 9.7(f), does not exceed $1,000,000 at any time;
(h) unsecured Indebtedness of the Company and its Subsidiaries not
otherwise permitted under this Section 9.3 in an aggregate principal amount
not to exceed $250,000 at any time outstanding; and
(i) endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business.
9.4. LIMITATIONS ON SALE-LEASEBACK TRANSACTIONS.
The Company will not and will not permit any of its Subsidiaries to
directly or indirectly become or remain liable as lessee or as a guarantor or
surety with respect to any lease (including, without limitation, any Capitalized
Lease) of any property (whether real, personal or mixed), whether now owned or
hereafter acquired, that the Company or such Subsidiary, as the case may be, (a)
has sold or transferred or is to sell or transfer in a transaction with such
assumption of liability to any other Person other than the Company or any of its
wholly owned Subsidiaries or (b) intends to use for substantially the same
purpose as any other property that has been sold or transferred or is to be sold
or transferred by such Person to any other Person in connection with such lease,
that would cause the liabilities of the Company and its Subsidiaries in respect
of all such transactions to exceed $500,000 in the aggregate at any time.
9.5. LIMITATIONS ON RESTRICTED PAYMENTS.
The Company will not and will not permit any of its Subsidiaries to
directly or indirectly declare, order, make or set apart any sum for or to pay
any Restricted Payment, except for:
(a) Restricted Payments to the Company or to or in any of its
wholly owned Subsidiaries;
(b) the payment of dividends or the making of other distributions
by any Subsidiary of the Company to the Company or any of its wholly owned
Subsidiaries;
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44
(c) the payment of dividends or the making of other distributions
by any Subsidiary of the Company that is not a wholly owned Subsidiary
thereof to its shareholders generally so long as the Company and/or each of
its Subsidiaries that own any of the equity interests (or other ownership
or profit interests) in such non-wholly owned Subsidiary receive at least
their respective proportionate shares of any such dividend or other
distribution (based upon their relative holdings of the equity interests
(or other ownership or profit interests) therein and taking into account
the relative preferences, if any, of the various classes of the equity
interests (or other ownership or profit interests) therein); PROVIDED,
HOWEVER, that the aggregate amount of all such dividends and other
distributions paid or made by all of the Subsidiaries of the Company that
are not wholly owned Subsidiaries thereof to Persons other than the Company
and its Subsidiaries shall not exceed $100,000 at any time; and
(d) the repurchase or retirement of stock options held by one or
more key employees of the Company and its Subsidiaries upon the retirement
or death of any such key employee, in each case pursuant to the terms of
the 1996 Flexible Incentive Plan, as in effect on the date of this
Agreement; PROVIDED, HOWEVER, that the aggregate amount expended by the
Company from time to time to repurchase or retire any or all of such stock
options shall not exceed $250,000 at any time.
9.6. LIMITATIONS ON FUNDAMENTAL CHANGES, ASSET SALES, ACQUISITIONS, ETC.
The Company will not and will not permit any of its Subsidiaries to
alter the corporate, capital or legal structure of the Company or any such
Subsidiary, to wind up, liquidate or dissolve itself (or suffer any liquidation
or dissolution), to enter into any transaction of merger or consolidation, or to
convey, sell, lease or sublease (as lessor or sublessor), transfer or otherwise
dispose of, whether in one transaction or a series of related transactions, all
or any part of its business, property or assets, whether now owned or hereafter
acquired (or agree to do any of the foregoing at any future time), or to
purchase or otherwise acquire, whether in one transaction or a series of related
transactions, any part of the property, assets or business of any Person (or
agree to do any of the foregoing at any future time), except that:
(a) the Company may merge or consolidate with or into any of its
Subsidiaries so long as the Company is the surviving corporation;
(b) any wholly owned Subsidiary of the Company may merge or
consolidate with or into any other Subsidiary of the Company so long as
such wholly owned Subsidiary is the surviving corporation;
(c) any Subsidiary of the Company that is no longer actively engaged
in any business or activities and does not have property and assets with an
aggregate fair value or book value in excess of $250,000 may be wound up,
liquidated or dissolved by the Company so long as such winding up,
liquidation or dissolution is determined in good faith to be in the best
interests of the Company and its Subsidiaries by the board of directors of
the Company (as evidenced in a resolution set forth in an Officer's
Certificate delivered to you);
(d) the Company and its Subsidiaries may sell their respective
inventory in the ordinary course of business;
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45
(e) the Company and its Subsidiaries may enter into sale and
leaseback transactions otherwise permitted to be entered into under Section
9.4, may make Restricted Payments otherwise permitted to be made under
Section 9.5, may make Investments otherwise permitted to be made under
Section 9.7, may sell shares of its capital stock otherwise permitted to be
sold under Section 9.9 and may make Capital Expenditures otherwise
permitted to be made under Section 9.16;
(f) the Company and its Subsidiaries may sell, lease, sublease,
transfer or otherwise dispose of any obsolete, worn out or surplus property
and assets thereof or any other property and assets thereof that are no
longer useful in the conduct of the Company's or the applicable
Subsidiary's business so long as the aggregate book value of all of the
property and assets of the Company and its Subsidiaries that are sold,
leased, subleased, transferred or otherwise disposed of pursuant to this
subsection (f) does not exceed $500,000 at any time;
(g) any Subsidiary of the Company may sell, lease, sublease, transfer
or otherwise dispose of all or any portion of its property and assets to
the Company or any of its wholly owned Subsidiaries;
(h) the Company and its Subsidiaries may sell, lease, sublease,
transfer or otherwise dispose of any of its property and assets, to the
extent not otherwise permitted under this Section 9.6, at the fair market
value thereof (as determined in good faith by the Company) and for cash;
PROVIDED that the gross proceeds thereof do not exceed $1,000,000 in the
aggregate in any Fiscal Year; and PROVIDED FURTHER that the Net Cash
Proceeds from each such sale, lease, sublease, transfer or other
disposition are applied to the redemption of the outstanding Notes and/or
the reduction of the Available Commitments of you and the Other Purchasers
pursuant to this Agreement and the Other Agreements to the extent required
under, and in accordance with the terms of, Sections 7.3 and 7.7;
(i) the Company and its Subsidiaries may purchase or otherwise
acquire inventory, materials, equipment and intangible assets in the
ordinary course of business; and
(j) the Company and its Subsidiaries may acquire all (but not less
than all) of the capital stock of (or other ownership or profit interests
in) any Person and may purchase or otherwise acquire any other property and
assets from any Person so long as the aggregate cash and noncash purchase
price of all such purchases and acquisitions (including, without
limitation, all indemnities to the sellers thereof, all write-downs of
property and assets and reserves for liabilities with respect thereto and
all assumptions of debt, liabilities and other obligations in connection
therewith) do not exceed $1,000,000 at any time; PROVIDED that in the case
of any purchase or acquisition made pursuant to this subsection (j):
(i) any Subsidiary of the Company or any of its Subsidiaries
acquired or created as a result thereof or in connection therewith
shall be a wholly owned Subsidiary thereof;
(ii) any Subsidiary of the Company or any of its Subsidiaries
acquired or created as a result thereof or in connection therewith
shall not have any material contingent liabilities (as determined in
good faith by the board of directors of the Company);
<PAGE>
46
(iii) any business acquired or invested in shall be
substantially the same line of business as that of the Company and its
Subsidiaries conducted at the time of such purchase or acquisition in
the ordinary course, or a line of business directly related thereto,
thereof or in connection therewith; and
(iv) immediately before and after giving PRO FORMA effect to
such purchase or acquisition, no Default or Event of Default shall
have occurred and be continuing.
9.7. LIMITATIONS ON INVESTMENTS, ETC.
The Company will not and will not permit any of its Subsidiaries to
directly or indirectly make or commit or agree to make any advance, loan,
guarantee of Obligations, other extension of credit or capital contributions to,
or hold or invest in or commit or agree to hold or invest in, or purchase or
otherwise acquire or commit or agree to purchase or otherwise acquire any shares
of capital stock (or other ownership or profit interests), bonds, notes,
debentures or other securities of, or make or commit or agree to make any other
investment in, any other Person, or purchase or own any futures contract or
otherwise become liable for the purchase or sale of currency or other
commodities at a future date in the nature of a futures contract (collectively,
"INVESTMENTS"), except that the following shall be permitted:
(a) the Company and its Subsidiaries may acquire and hold accounts
receivable owing to any of them;
(b) the Company and its Subsidiaries may acquire and hold cash and
Cash Equivalents;
(c) the Company and its Subsidiaries may maintain and continue to own
the Investments thereof existing on the date of this Agreement and
described on Schedule 9.7 attached hereto;
(d) the Company and its Subsidiaries may make intercompany
Investments to the extent otherwise permitted to be made under Section 9.3
and may make Restricted Payments otherwise permitted to be made under
Section 9.5;
(e) the Company and its Subsidiaries may make Investments in account
debtors received in connection with the bankruptcy or reorganization, or in
settlement of delinquent obligations, of customers in the ordinary course
of business and in accordance with applicable collection and credit
policies established by the Company or its applicable Subsidiary;
(f) the Company and its Subsidiaries may acquire all (but not less
than all) of the capital stock of (or other ownership or profit interests
in) any Person and, thereafter, may make capital contributions therein;
PROVIDED that, in each case, such acquisition or capital contribution is
otherwise permitted under the terms of the Note Documents; and PROVIDED
FURTHER that the aggregate amount of all of the acquisitions and capital
contributions made pursuant to this subsection (f), together with the
aggregate principal amount of all Indebtedness incurred under Sections
9.3(f) and 9.3(g) and the aggregate cash and noncash purchase price of all
purchases and other acquisitions of property and assets made pursuant to
Section 9.6(j), does not exceed $1,000,000 at any time; and
<PAGE>
47
(g) Investments not otherwise permitted under this Section 9.7 in an
aggregate amount not to exceed $250,000 at any time.
9.8. LIMITATIONS ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES.
The Company will not and will not permit any of its Subsidiaries to
directly or indirectly create or otherwise cause, incur, assume, suffer or
permit to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any such Subsidiary (a) to pay dividends or to make
any other distribution on any shares of capital stock of (or other ownership or
profit interest in) such Subsidiary owned by the Company or any of its
Subsidiaries, (b) to pay or prepay or to subordinate any Indebtedness owed to
the Company or any of its Subsidiaries, (c) to make loans or advances to the
Company or any of its Subsidiaries or (d) to transfer any of its property or
assets to the Company or any of its Subsidiaries; PROVIDED, HOWEVER, that
nothing in any of clauses (a) through (d) of this Section 9.8 shall prohibit or
restrict:
(i) this Agreement and the other Note Documents;
(ii) any agreements in effect on the date of this Agreement and
described on Schedule 9.8 attached hereto;
(iii) any applicable law, rule or regulation (including, without
limitation, applicable currency control laws and applicable state corporate
statutes restricting the payment of dividends in certain circumstances);
(iv) in the case of clause (d) of this Section 9.8, any agreement
setting forth customary restrictions on the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance or
contract of similar property or assets;
(v) in the case of clause (d) of this Section 9.8, any holder of a
Lien otherwise permitted to exist under clause (v) or (vi) of Section
9.2(a) from restricting on customary terms the transfer of any property or
assets subject thereto; and
(vi) any agreement evidencing Indebtedness outstanding on the date
a Person first becomes a Subsidiary of the Company; PROVIDED that such
agreement was not created in contemplation of the acquisition of such
Person by the Company.
9.9. LIMITATION ON ISSUANCE OF CAPITAL STOCK.
(a) The Company will not issue or sell or enter into any agreement or
arrangement for the issuance and sale of any shares of its capital stock (or
other ownership or profit interests therein), any securities convertible into or
exchangeable for shares of its capital stock (or other ownership or profit
interests therein) or any warrants, options or other rights for the purchase or
acquisition of any shares of its capital stock (or other ownership or profit
interests therein), except for:
(i) transfers and replacements of outstanding shares of capital stock
of the Company; and
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48
(ii) the issuance and sale of shares of common stock of the Company so
long as (A) the Company certifies to you and each of the other holders of
the Notes that the Net Cash Proceeds thereof are at least equal to, and
will be applied to repay or redeem in full, the aggregate outstanding
principal amount of the Notes, all accrued and unpaid interest thereon, if
any, and all fees, expenses and other amounts owing under or in respect of
the Note Documents at such time and (B) such issuance and sale is not in
contravention of the Intercreditor Agreement.
(b) The Company will not permit any of its Subsidiaries to issue or
sell or enter into any agreement or arrangement for the issuance and sale of any
shares of its capital stock (or other ownership or profit interests therein),
any securities convertible into or exchangeable for shares of its capital stock
(or other ownership or profit interests therein) or any warrants, rights or
options to acquire any shares of its capital stock (or other ownership or profit
interests therein), except for:
(i) transfers and replacements of outstanding shares of capital stock
of any such Subsidiary; and
(ii) stock splits, stock dividends and additional issuances of shares
of capital stock of any such Subsidiary which do not decrease the
percentage equity interests (or other ownership or profit interests of, or
adversely modify or affect any of the rights of, the Company or any of its
Subsidiaries in any class of the capital stock of such Subsidiary.
9.10. LIMITATION ON MODIFICATIONS OF INDEBTEDNESS; MODIFICATIONS OF
CERTIFICATE OF INCORPORATION, BYLAWS AND CERTAIN OTHER AGREEMENTS;
ETC.
The Company will not and will not permit any of its Subsidiaries (a)
to amend, modify or otherwise change (or permit the amendment, modification or
other change in any manner of) any of the provisions of any Indebtedness of the
Company or any of its Subsidiaries or of any instrument or agreement (including,
without limitation, any purchase agreement, indenture, loan agreement or
security agreement) relating to any such Indebtedness if such amendment,
modification or change would shorten the final maturity or average life to
maturity of, or require any payment to be made earlier than the date originally
scheduled on, such Indebtedness, would increase the interest rate applicable to
such Indebtedness, or would change the subordination provision, if any, of such
Indebtedness, or would otherwise be adverse to the issuer of such Indebtedness
in any respect, (b) except for the Notes and the other Obligations of the
Company and its Subsidiaries under or in respect of the Note Documents, to make
any voluntary or optional payment, prepayment, redemption or other acquisition
for value of any Indebtedness of the Company or any of its Subsidiaries
(including, without limitation, by way of depositing money or securities with
the trustee therefor before the date required for the purpose of paying any
portion of such Indebtedness when due), or to refund, refinance, replace or
exchange any other Indebtedness for any such Indebtedness, or to make any
prepayment, redemption or repurchase of any outstanding Indebtedness as a result
of any asset sale, change of control, issuance and sale of debt or equity
securities or similar event, or give any notice with respect to any of the
foregoing, or (c) to amend, modify or otherwise change its certificate of
incorporation or bylaws (or other similar organizational documents), including,
without limitation, by the filing or modification of any certificate of
designation, or any agreement or arrangement entered into by it, with respect to
any shares of its capital stock (or other ownership or profit interest therein)
(including any shareholders' agreement), or enter into any new
<PAGE>
49
agreement with respect to any of its shares of capital stock (or other ownership
or profit interest therein), other than (i) the amendment to the certificate of
incorporation of the Company is to be effected promptly following the Initial
Purchase Date in order to incorporate therein the matters waived by the holders
of the Series A Preferred Stock pursuant to waiver thereto referred to in
Section 3.1(k)(i) and (ii) any such amendments, modifications or changes or any
such new agreements or arrangements pursuant to this clause (c) that, either
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
9.11. LIMITATIONS ON CONDUCT OF BUSINESS.
The Company will not and will not permit any of its Subsidiaries to
engage in any business or activities other than providing domestic and
international long distance telecommunications service and telecommunications
equipment to its domestic and international customers (including, but not
limited to, telephone calling card services), and businesses and activities
directly related thereto.
9.12. LIMITATIONS ON ACCOUNTING CHANGES AND CHANGES IN FISCAL YEAR.
The Company will not and will not permit any of its Subsidiaries to
make or permit any change in (a) its accounting policies and reporting
practices, except as required by generally accepted accounting principles in
effect from time to time, or (b) its Fiscal Year.
9.13. LIMITATIONS ON PARTNERSHIPS.
The Company will not and will not permit any of its Subsidiaries to
become a general partner in any general or limited partnership or any joint
venture.
9.14. LIMITATIONS ON SPECULATIVE TRANSACTIONS.
The Company will not and will not permit any of its Subsidiaries to
engage in any transaction involving commodity options or futures contracts or
any similar speculative transactions (including, without limitation, take-or-pay
contracts), except for the Hedge Agreements of the Company in effect on the date
of this Agreement and described in item 60 on Schedule 5.21 attached hereto and
item 1 on Schedule 9.7 attached hereto.
9.15. EMPLOYMENT OF, OR COMPETITION BY, KEY EMPLOYEES.
The Company will not (a) cease to employ Mr. Alfred West or (b) suffer
to exist competition by any of Mr. Alfred West, Mr. Steven West or Mr. Gary
Bondi with the business now or at any time hereafter conducted by the Company or
any of its Subsidiaries.
9.16. LIMITATIONS ON CAPITAL EXPENDITURES.
The Company will not and will not permit any of its Subsidiaries to
make any Capital Expenditures (including, without limitation, installment
purchases or Capitalized Leases) that would cause the aggregate amount of all
such Capital Expenditures made by the Company and its Subsidiaries in any Fiscal
Year, commencing with the Fiscal Year ending December 31, 1997, to exceed
$10,000,000.
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50
10. FINANCIAL COVENANTS.
From the date of this Agreement and, thereafter, so long as any of the
Notes shall be outstanding or you shall have any Commitment hereunder, the
Company will perform and comply with each of the following covenants:
10.1. MINIMUM CONSOLIDATED EBITDA.
The Company will maintain for itself and its Subsidiaries Consolidated
EBITDA for each fiscal quarter of the Company of not less than $(2,500,000).
10.2. CONSOLIDATED DEBT SERVICE COVERAGE RATIO.
The Company will maintain for itself and its Subsidiaries a
Consolidated Debt Service Coverage Ratio for each fiscal quarter of the Company
of not less than 1.10 to 1.
10.3. CONSOLIDATED FUNDED INDEBTEDNESS TO NET WORTH RATIO.
The Company will maintain for itself and its Subsidiaries a ratio of
Consolidated Funded Indebtedness to Consolidated Net Worth at all times of not
greater than 3.00 to 1.
10.4. MINIMUM CASH BALANCE.
The Company will maintain for itself and its Subsidiaries a balance of
cash and Cash Equivalents at all times of not less than $1,000,000, which cash
and Cash Equivalents shall be free and clear of all Liens.
11. EVENTS OF DEFAULT.
11.1. EVENTS OF DEFAULT.
An "Event of Default" shall exist if any of the following conditions
or events shall occur and be continuing (each, an "EVENT OF DEFAULT"):
(a) the Company defaults in the payment of any principal of or
premium, if any, on any Note when the same becomes due and payable, whether
by scheduled maturity or at a date fixed for prepayment, redemption or
repurchase or by declaration, demand or otherwise; or
(b) the Company defaults in the payment of any interest on any Note,
or any Obligor defaults in the payment of any other amount owing under or
in respect of any of the Note Documents, and such default shall continue
for at least three days after the same becomes due and payable, whether by
scheduled maturity or at a date fixed for prepayment, redemption or
repurchase or by declaration, demand or otherwise; or
(c) the Company defaults in the performance of or compliance with any
term, covenant or agreement contained in (i) Section 8.1, 8.6, 8.8, 8.10 or
8.11, any of Sections 9.1
<PAGE>
51
through 9.17 or any of Sections 10.1 through 10.4 or (ii) Section 8.2 or
8.5 and such default shall remain unremedied for at least ten consecutive
days after the occurrence thereof; or
(d) any Obligor defaults in the performance of or compliance with any
term, covenant or agreement contained in any of the Note Documents on its
part to be performed or complied with that is not referred to in Section
11.1(a), 11.1(b) or 11.1(c), and such default shall remain unremedied for
at least 20 consecutive days after the earlier of the first date on which
(i) a Responsible Officer becomes aware of such default and (ii) the
Company receives notice of such default from the Collateral Agent or any
holder of a Note; or
(e) any representation or warranty made or deemed made on any
Purchase Date by or on behalf of any Obligor or by any officer of any
Obligor under or pursuant to the terms of this Agreement or any of the
other Note Documents or in any writing furnished to you pursuant to the
terms of this Agreement or any of the other Note Documents proves to have
been false or incorrect in any material respect on the date as of which it
was made or deemed to have been made; or
(f) (i) the Company or any of its Subsidiaries shall fail to pay (A)
any principal of, or premium or interest on, Indebtedness that is
outstanding in a principal or notional amount of at least $100,000 (or the
equivalent thereof in one or more other currencies), either individually or
in the aggregate (but excluding Indebtedness outstanding hereunder), of the
Company and its Subsidiaries, taken as a whole, when the same becomes due
and payable (whether by scheduled maturity, required prepayment, redemption
or repurchase, acceleration, demand or otherwise), and such failure shall
continue after the applicable grace period, if any, specified in any
agreement or instrument relating to such Indebtedness, or (B) any other
amount of Indebtedness greater than $100,000 (or the equivalent thereof in
one or more other currencies), either individually or in the aggregate (but
excluding Indebtedness outstanding hereunder), of the Company and its
Subsidiaries when the same becomes due and payable (whether by scheduled
maturity, required prepayment, redemption or repurchase, acceleration,
demand or otherwise), and such failure shall continue after the applicable
grace period, if any, specified in any agreement or instrument relating to
such Indebtedness; or (ii) any other event shall occur or condition shall
exist under any agreement or instrument evidencing, securing or otherwise
relating to any Indebtedness referred to in clause (i) of this Section
11.1(f) and shall continue after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the maturity
of such Indebtedness or otherwise to cause, or to permit the holder or
holders thereof (or a trustee or agent on behalf of such holders) to cause
such Indebtedness to mature; or (iii) any Indebtedness referred to in
clause (i) of this Section 11.1(f) shall be declared to be due and payable
or required to be prepaid, redeemed or repurchased (other than by a
regularly scheduled required prepayment or redemption), purchased or
defeased, or an offer to prepay, redeem, repurchase, purchase or defease
any such Indebtedness shall be required to be made, in each case prior to
the stated maturity thereof or any date fixed for prepayment, redemption or
repurchase thereunder; or
(g) the Company or any of its Subsidiaries, or any of the
Shareholders, shall generally not pay its or his debts as such debts become
due, or shall admit in writing its or his inability to pay its or his debts
generally, or shall make a general assignment for the benefit of creditors;
or any proceeding shall be instituted by or against the Company or any of
its Subsidiaries, or any of
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52
the Shareholders, seeking to adjudicate it or him a bankrupt or insolvent,
or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of it or its or his debts
under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee or other similar official for it or him
or for any substantial part of its or his property and assets and, in the
case of any such proceeding instituted against it or him (but not
instituted by it or him) that is being diligently contested by it or him in
good faith, either such proceeding shall remain undismissed or unstayed for
a period of 30 consecutive days or any of the actions sought in such
proceeding (including, without limitation, the entry of an order for relief
against, or the appointment of a receiver, trustee, custodian or other
similar official for, it or him or any substantial part of its or his
property and assets) shall occur; or the Company or any of its
Subsidiaries, or any of the Shareholders, shall take any action to
authorize any of the actions set forth above in this subsection (g); or
(h) one or more judgments or orders for the payment of money
aggregating $100,000 (or the equivalent thereof in one or more other
currencies) or more are rendered against one or more of the Company and its
Subsidiaries and remain unsatisfied and either (i) enforcement proceedings
shall have been commenced by any creditor upon any such judgment or order
or (ii) there shall be a period of at least 10 consecutive days after entry
thereof during which a stay of enforcement of any such judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect;
PROVIDED, HOWEVER, that any such judgment or order shall not give rise to
an Event of Default under this subsection (h) if and for so long as (A) the
amount of such judgment or order is covered by a valid and binding policy
of insurance between the defendant and the insurer covering full payment
thereof and (B) such insurer has been notified, and has not disputed the
claim made for payment, of the amount of such judgment or order; or
(i) one or more writs or warrants of attachment, garnishment,
execution, distraint or similar process with respect to Obligations of the
Company or any of its Subsidiaries aggregating $25,000 (or the equivalent
thereof in one or more other currencies) or more have been issued against
the Company or any of its Subsidiaries or any of their respective property
or assets and remain unsatisfied and there shall be a period of at least 10
consecutive days after the issuance thereof during which a stay of
enforcement of any such writ or warrant, by reason of a pending appeal or
otherwise, shall not be in effect; or
(j) any nonmonetary judgment or order shall be rendered against any
Obligor or any of its Subsidiaries that, either individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect
and there shall be any period of 10 consecutive days after entry thereof
during which a stay of enforcement of any such judgment or order, by reason
of a pending appeal or otherwise, shall not be in effect; or
(k) any provision of any of the Note Documents after delivery thereof
pursuant to Section 3.1 or 8.10 shall for any reason (other than pursuant
to the express terms thereof) cease to be valid and binding on or
enforceable against any of the Obligors intended to be a party to it or
shall cease to give you or any of the Other Purchasers any of the rights,
powers or privileges purported to be created thereunder, or any such
Obligor shall so state any of the foregoing in writing; or
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53
(l) any Collateral Document after delivery thereof pursuant to
Section 3.1 or 8.10 shall for any reason (other than pursuant to the
express terms thereof) cease to create a valid and perfected lien on and
security interest in the Collateral purported to be covered thereby (with
the intended priority thereof pursuant to the terms of the Note Documents);
or
(m) any of the following events or conditions shall have occurred and
such event or condition, when aggregated with any and all other such events
or conditions, has resulted or could reasonably be expected to result in a
liability of the Company and/or ERISA Affiliates in an aggregate amount
exceeding $100,000 at any time outstanding:
(i) any Termination Event shall have occurred with respect to
a Plan;
(ii) the Company or any ERISA Affiliate shall have been
notified by the sponsor of a Multiemployer Plan that it has incurred
Withdrawal Liability to such Multiemployer Plan;
(iii) the Company or any ERISA Affiliate shall have been
notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization, is insolvent or is being
terminated, within the meaning of Title IV of ERISA, and, as a result
of such reorganization, insolvency or termination, the aggregate
annual contributions of the Company and the ERISA Affiliates to all
Multiemployer Plans that are in reorganization or being terminated at
such time have been or will be increased over the amounts contributed
to such Multiemployer Plans for the plan years of such Multiemployer
Plans immediately preceding the plan year in which such
reorganization, insolvency or termination occurs;
(iv) any "ACCUMULATED FUNDING DEFICIENCY" (as defined in
Section 302 of ERISA and Section 412 of the Internal Revenue Code),
whether or not waived, shall exist with respect to one or more Plans,
or any Lien shall exist on the property and assets of the Company or
any ERISA Affiliate in favor of the PBGC or a Plan; or
(v) any prohibited transaction (within the meaning of Section
406 of ERISA or Section 4975 of the Internal Revenue Code) or any
breach of fiduciary responsibility shall occur that may subject the
Company or any ERISA Affiliate to any liability under Section 406,
409, 502(i) or 502(l) of ERISA or Section 4975 of the Internal Revenue
Code, or under any agreement or instrument pursuant to which the
Company or any ERISA Affiliate has agreed or is required to indemnify
any Person against such liability; or
(n) any Governmental Authorization necessary in order to permit the
Company or any of its Subsidiaries to fully own or lease and operate their
respective property and assets or to properly conduct their respective
businesses shall cease to be in effect or the Company or such Subsidiary
shall cease to have the full intended benefit thereof or rights thereunder,
unless the revocation, termination, cancellation, denial, impairment or
modification of such Governmental Authorization, either individually or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect.
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54
11.2. ACCELERATION.
(a) If an Event of Default described in Section 11.1(g) shall occur
with respect to the Company, all of the Notes then outstanding shall become
automatically and immediately due and payable.
(b) If any other Event of Default shall occur and be continuing, the
Required Holders may at any time, at their option, by notice or notices to the
Company, declare all of the Notes then outstanding to be immediately due and
payable.
(c) If any Event of Default described in Section 11.1(a) or 11.1(b)
has occurred and is continuing, any holder or holders of the Notes at the time
outstanding affected by such Event of Default may at any time, at its or their
option, by notice or notices to the Company, declare all of the Notes held by it
or them to be immediately due and payable. If any holder of the Notes shall
exercise its rights under this Section 11.2(c) at any time, the Company will
give prompt notice thereof to the holders of all other Notes at such time
outstanding and each such holder may (whether or not such notice is given or
received), by notice to the Company, declare the aggregate principal amount of
all Notes held by it to be, and the same shall forthwith become, due and
payable.
(d) Upon any Note becoming due and payable under this Section 11.2,
whether automatically or by declaration, such Note will forthwith mature and the
entire unpaid principal amount of such Note, PLUS all accrued and unpaid
interest thereon and all other amounts due and payable to the holder thereof
under the Note Documents, shall be immediately due and payable, in each and
every case without presentment, demand, protest or further notice of any kind,
all of which are hereby expressly waived by the Company.
11.3. OTHER REMEDIES.
If one or more Defaults or Events of Default shall occur and be
continuing, and irrespective of whether any of the Notes have become or have
been declared immediately due and payable under Section 11.2, the Required
Holders may proceed to protect and enforce the rights of the holders of the
Notes by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement contained herein or in any
of the other Note Documents, or for an injunction against a violation of any of
the terms hereof or thereof, or in aid of the exercise of any power granted
hereby or thereby or by applicable law or otherwise.
11.4. RESCISSION.
At any time after any Notes have been declared due and payable
pursuant to Section 11.2(b) or 11.2(c), as the case may be, the holders of not
less than 75% of the aggregate principal amount of the Notes then outstanding,
by notice to the Company, may rescind and annul any such declaration and its
consequences if (a) the Company has paid all overdue interest on the Notes, all
principal of and premium, if any, on the Notes that are due and payable and are
unpaid other than by reason of such declaration, and all interest on such
overdue principal and (to the fullest extent permitted by applicable law) any
overdue interest in respect of the Notes, at the Default Rate, (b) all Defaults
and Events of Default, other than nonpayment of amounts that have become due
solely by reason of such declaration, have been remedied or have been waived
pursuant to Section 16 and (c) no judgment or decree has been entered for the
payment of any monies due pursuant to the Notes or any of the other Note
<PAGE>
55
Documents. No rescission and annulment under this Section 11.4 will extend to
or affect any subsequent Default or Event of Default or impair any right, power
or remedy consequent thereon.
11.5. RESTORATION OF RIGHTS AND REMEDIES.
If any holder of the Notes has instituted any proceeding to enforce
any right or remedy under this Agreement or any of the other Note Documents and
such proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to such holder, then, and in each such case, the Obligors
and the holders of Notes shall, subject to any determination in such proceeding,
be restored severally to their respective former positions hereunder and under
the other Note Documents and, thereafter, all rights and remedies of the holders
of the Notes shall continue as though no such proceeding had been instituted.
11.6. NO WAIVERS OR ELECTION OF REMEDIES, ETC.
No course of dealing and no delay on the part of any holder of the
Notes in exercising any right, power or remedy shall operate as a waiver thereof
or otherwise prejudice such holder's rights, powers or remedies. No right,
power or remedy conferred by this Agreement or any of the other Note Documents
upon any holder of the Notes shall be exclusive of any other right, power or
remedy referred to herein or therein or now or hereafter available at law, in
equity, by statute or otherwise.
12. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
12.1. REGISTRATION OF NOTES.
The Company shall keep at its principal executive office a register
for the registration and registration of transfers of Notes. The name and
address of each holder of one or more Notes, each transfer thereof and the name
and address of each transferee of one or more Notes shall be registered in such
register. Prior to due presentment for registration of transfer, the Person in
whose name any Note shall be registered shall be deemed and treated as the owner
and holder thereof for all purposes of this Agreement and the other Notes
Documents, and the Company shall not be affected by any notice or knowledge to
the contrary. The Company shall give to any holder of the Notes that is an
Institutional Investor, promptly upon request therefor, a complete and correct
copy of the names and addresses of all registered holders of Notes.
12.2. TRANSFER AND EXCHANGE OF NOTES.
(a) Upon surrender of any Note at the principal executive office of
the Company for registration of transfer or exchange (and, in the case of a
surrender for registration of transfer, duly endorsed or accompanied by a
written instrument of transfer duly executed by the registered holder of such
Note or its attorney duly authorized in writing and accompanied by the address
for notices of each transferee of such Note or part thereof), the Company shall
execute and deliver, at the Company's expense (except as provided below), one or
more new Notes (as requested by the holder thereof) in exchange therefor, in an
aggregate principal amount equal to the unpaid principal amount of the
surrendered Note. Each such new Note shall be payable to such Person as such
holder may request and, subject to subsection (c) of this Section 12.2, shall be
in substantially the form of Exhibit A attached hereto. Each such new
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56
Note shall be dated and bear interest from the date to which interest shall have
been paid on the surrendered Note or dated the date of the surrendered Note if
no interest shall have been paid thereon. The Company may require payment of a
sum sufficient to cover any stamp tax or other governmental charge imposed in
respect of any such transfer of Notes. Notes shall not be transferred in
denominations of less than $2,500,000, PROVIDED that, if necessary to enable the
registration of transfer by a holder of its entire holding of Notes, one Note
may be in a denomination of less than $2,500,000.
(b) Any transferee, by its acceptance of a Note registered in its
name (or the name of its nominee), shall be deemed (i) to have made the
representations set forth in Sections 6.1, 6.2 and 6.3 and (ii) to confirm to
and agree with the transferor and the other parties hereto as follows:
(A) other than as provided in any written instrument of transfer
executed by the transferor and such transferee, such transferor makes no
representation or warranty and assumes no responsibility with respect to
any statements, warranties or representations made in or in connection with
this Agreement or any of the other Note Documents, or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of,
or the perfection or priority of any lien or security interest created or
purported to be created under or in connection with, this Agreement or any
of the other Note Documents or any other instrument or document furnished
pursuant hereto or thereto;
(B) such transferor makes no representation or warranty and assumes
no responsibility with respect to the financial condition of the Company or
any other Obligor or the performance or observance by any Obligor of any of
its Obligations under this Agreement or any of the other Note Documents or
any other instrument or document furnished pursuant thereto;
(C) such transferee confirms that it has received a copy of this
Agreement, together with copies of the financial statements referred to in
Section 8.1 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to purchase the
Note or Notes being purchased thereby;
(D) such transferee will, independently and without reliance upon the
transferor or any other holder of the Notes and based on such documents and
information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement;
(E) such transferee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of this Agreement are
required to be performed by it as a holder of the Notes;
(F) solely in the case of any direct transferee of MS Group, such
transferee represents that it is a "QUALIFIED INSTITUTIONAL BUYER" (as
defined in Rule 144A under the Securities Act), without giving effect to
the provisions of Rule 144A(a)(1)(i), that would require such transferee to
own and invest on a discretionary basis at least $100,000,000 in securities
of issuers that are not affiliated with such transferee; and
(G) such transferee appoints MS Group as the Collateral Agent
therefor with respect to all of the liens and security interests granted by
the Obligors in the Collateral pursuant to the
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57
terms of the Collateral Documents, and agrees to be bound by all of the
terms and provisions relating to the Collateral Agent's rights,
responsibilities and protections as are set forth in the Collateral
Documents or appended to the Note or Notes to be held by such transferee
and, if reasonably requested by the Collateral Agent, agrees to enter into
a collateral agency agreement with the Collateral Agent, the Company and
the other holders of the Notes setting forth such rights, responsibilities
and protections of the Collateral Agent as the Collateral Agent shall
reasonably specify.
(c) The Company hereby acknowledges and agrees that MS Group is the
Collateral Agent for the Secured Parties with respect to all of the liens and
security interests granted by the Obligors in the Collateral pursuant to the
terms of the Collateral Documents, and, if reasonably requested by the
Collateral Agent, agrees to enter into a collateral agency agreement among the
Collateral Agent, the Company and the holders of the Notes with respect thereto.
12.3. REPLACEMENT OF NOTES.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the ownership and the loss, theft, destruction or mutilation of any Note
(which evidence shall be, in the case of an Institutional Investor, notice from
such Institutional Investor of such ownership and such loss, theft, destruction
or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it; PROVIDED that, if the holder of such Note is
an original purchaser of any of the Notes or any other Institutional
Investor, such Person's own unsecured agreement of indemnity shall be
deemed to be satisfactory, or
(b) in the case of mutilation, upon surrender and cancellation
thereof,
the Company, at its own expense, shall execute and deliver, in lieu thereof, a
new Note, dated and bearing interest from the date to which interest shall have
been paid on such lost, stolen, destroyed or mutilated Note or dated the date of
such lost, stolen, destroyed or mutilated Note if no interest shall have been
paid thereon.
13. PAYMENTS ON NOTES.
13.1. PLACE OF PAYMENT.
Subject to Section 13.2, payments of principal, premiums, if any, and
interest becoming due and payable on the Notes shall be made in New York, New
York, at the principal office of the Company in such jurisdiction. The Company
may, at any time, by notice to each holder of the Notes, change the place of
payment of the Notes so long as such place of payment shall be either the
principal office of the Company in such jurisdiction or the principal office of
a bank or trust company in such jurisdiction.
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58
13.2. HOME OFFICE PAYMENT.
So long as you or your nominee shall be the holder of any Note, and
notwithstanding anything contained in Section 13.1 or in such Note to the
contrary, the Company will pay all sums becoming due on such Note for principal,
premium, if any, and interest by the method and at the address specified for
such purpose below your name on Schedule I attached hereto, or by such other
method or at such other address located in the United States of America as you
shall have from time to time specified to the Company for such purpose, without
the presentation or surrender of such Note or the making of any notation
thereon, except that upon the request of the Company made concurrently with or
reasonably promptly after payment or prepayment in full of any Note, you shall
surrender such Note for cancellation, reasonably promptly after any such
request, to the Company at its principal executive office or at the place of
payment most recently designated by the Company pursuant to Section 13.1. Prior
to any permitted sale, transfer or other disposition of any Note held by you or
your nominee, you will, at your election, either endorse thereon the amount of
principal paid thereon and the last date to which interest has been paid thereon
or surrender such Note to the Company in exchange for a new Note or Notes
pursuant to Section 12.2. The Company will afford the benefits of this Section
13.2 to any Institutional Investor that is the direct or indirect transferee of
any Note purchased by you under this Agreement and that has made the same
agreement relating to such Note as you have made in this Section 13.2 and in
Section 19.
14. EXPENSES, INCREASED COSTS AND INDEMNIFICATION, ETC.
14.1. TRANSACTION EXPENSES.
Whether or not any of the transactions contemplated hereby are
consummated, the Company will pay, within 15 days of each demand therefor (such
demand to be accompanied by supporting documentation in reasonable detail), (a)
all of the costs and expenses incurred by the Collateral Agent, you, each Other
Purchaser and each other holder of a Note (including, without limitation,
reasonable attorneys' fees of a special counsel and, if reasonably required,
local or other appropriate counsel for you and the Other Purchasers) in
connection with the preparation, execution and delivery of this Agreement, the
Notes and the other Note Documents to the extent provided in the Fee Letter and,
(b) all of the costs and expenses incurred by the Collateral Agent, you, each
Other Purchaser and each other holder of a Note (including, without, limitation,
reasonable attorneys' fees of a special counsel and if reasonably required,
local or other appropriate counsel for the Collateral Agent, you and the Other
Purchasers) in connection with the administration and enforcement of this
Agreement, the Notes and the other Note Documents, and the custody and
preservation of, or the sale or collection from, or other realization upon, any
of the Collateral, and (c) all of the amendments, waivers or consents under or
in respect of this Agreement, the Notes or any of the other Note Documents
(whether or not such amendment, waiver or consent becomes effective), including,
without limitation: (i) the reasonable costs and expenses incurred in enforcing
or defending (or determining whether or how to enforce or defend) any rights
under this Agreement, the Notes or any of the other Note Documents or in
responding to any subpoena or other legal process or informal investigative
demand issued in connection with this Agreement, the Notes or any of the other
Note Documents, or by reason of being a holder of the Notes, and (ii) the
reasonable costs and expenses (including, without limitation, financial
advisors' fees) incurred in connection with the insolvency or bankruptcy of any
Obligor or any of its Subsidiaries or in connection with any work-out,
renegotiation or restructuring of any of the transactions contemplated hereby,
by the Notes or by the other Note Documents. The Company will pay, and will
save you and each other holder
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59
of the Notes harmless from, all claims in respect of any fees, costs or
expenses, if any, of brokers and finders (other than those retained by you or
any such holder).
14.2. INDEMNITY.
(a) In addition to the payment of costs and expenses pursuant to
Section 14.1, the Company agrees to indemnify, pay and hold the Collateral
Agent, you, each MS Group Additional Investor, each Other Purchaser and each
other Person who is or was at any time an MS Group Additional Investor or an
Other Purchaser and each other Person in whose name or for whose benefit such
Person holds or at any time held Notes, and your and their affiliates and your
and their respective officers, directors, employees, attorneys, agents and other
advisors (each, an "INDEMNIFIED PARTY"), harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits
and claims, and all reasonable costs, expenses and disbursements, of any kind or
nature whatsoever (including, without limitation, reasonable fees and
disbursements of counsel for such Indemnified Parties) that may be incurred by
or asserted or awarded against any Indemnified Party, in each case arising out
of or in connection with or by reason of, or in connection with the preparation
for a defense of, any investigation, litigation or proceeding arising out of,
related to, or in connection with (i) this Agreement, the Notes, the other Note
Documents or any of the transactions contemplated hereby or thereby, (ii) your
or any Other Purchaser's agreement to purchase Notes, (iii) any use or intended
use of the proceeds of any of the Notes, (iv) any sale or collection from or
other realization upon, or any other remedies expressed in respect of, any or
all of the Collateral or (v) the actual or alleged presence of Hazardous
Materials on any property of the Company or any of its Subsidiaries or any
Environmental Action relating in any way to the Company or any of its
Subsidiaries, in each case whether or not such investigation, litigation or
proceeding is brought by the Company, any of its Subsidiaries, its directors,
shareholders or creditors or an Indemnified Party or any Indemnified Party is
otherwise a party thereto and whether or not any sale and purchase of the Notes
pursuant to this Agreement is effected (collectively, the "INDEMNIFIED
LIABILITIES"); PROVIDED that the Company shall not have any obligation to any
Indemnified Party hereunder with respect to any Indemnified Liabilities arising
from the gross negligence or bad faith of such Indemnified Party as determined
in a final, nonappealable judgment by a court of competent jurisdiction.
(b) The Company will not, without the prior written consent of the
applicable Indemnified Party, settle, compromise, consent to the entry of any
judgment in or otherwise seek to terminate any action, claim, suit or proceeding
in respect of which indemnification of such Indemnified Party may be sought
under subsection (a) of this Section 14.2 (whether or not such Indemnified Party
is a party thereto) unless such settlement, compromise, consent or termination
includes a full and unconditional release of such Indemnified Party from any and
all claims against such Indemnified Party and any and all liabilities thereof
arising out of or relating to such action, claim, suit or proceeding.
(c) The Company also agrees not to assert any claim against the
Collateral Agent, you, any MS Group Additional Investor, any Other Purchaser,
any other Person who is or was at any time an MS Group Additional Investor or
an Other Purchaser or any other Person in whose name or for whose benefit such
Person holds or at any time held any Notes, or any of your or their affiliates,
or any of your or their respective officers, directors, employees, attorneys,
agents and other advisors, on any theory of liability, for special, indirect,
consequential or punitive damages arising out of or otherwise relating to (i)
this Agreement, the Notes or any of the other Note Documents, or any of the
transactions contemplated hereby or thereby, (ii) your or any Other Purchaser's
agreement to purchase the Notes, (iii) any sale or
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60
collection from or other realization upon, or any other remedies exercised in
respect of any or all of the Collateral or (iv) any use or intended use of the
proceeds of any of the Notes.
(d) If and to the extent that the undertaking to indemnify, pay and
hold harmless the Indemnified Parties set forth in this Section 14.2 is
judicially determined to be unavailable to an Indemnified Party in respect of,
or is insufficient with respect to, any liabilities, obligations, losses,
damages, penalties, actions, judgments, suits or claims referred to herein,
then, in lieu of indemnifying such Indemnified Party hereunder, the Company
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits or claims (and reasonable costs, expenses and disbursements
relating thereto) (i) in such proportion as is appropriate to reflect the
relative benefits to the Company and its Subsidiaries, on the one hand, and such
Indemnified Party, on the other hand, from this Agreement and the sale and
purchase of the Notes or (ii) if the allocation provided by clause (i) of this
subsection (d) is not available, in such proportion as is appropriate to reflect
not only the relative benefits referred to in such clause (i) but also the
relative fault of each of the Company and its Subsidiaries, on the one hand, and
such Indemnified Party, on the other hand, in connection with such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits or claims, as
well as any other relevant equitable considerations.
14.3. TAXES.
(a) Any and all payments by or on behalf of the Company hereunder or
under the Notes and the Note Documents shall be made, in accordance with the
terms of the Notes and the other applicable Note Documents, free and clear of
and without deduction for any and all present or future taxes, levies, imposts,
deductions, withholdings or other governmental charges, and all liabilities with
respect thereto, EXCLUDING net income taxes and branch profits taxes that are
imposed by the United States of America and net income taxes and franchise taxes
(whether based on income or capital) that are imposed on such holder of the
Notes by the state or foreign jurisdiction under the laws of which such holder
of the Notes is organized or has its principal office or any political
subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions,
withholdings, other governmental charges and liabilities in respect of payments
hereunder, under the Notes or the Note Documents being hereinafter referred to
as "TAXES"). If the Company shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder, under any Note or any of the Note
Documents to any holder of the Notes, (i) the sum payable shall be increased as
may be necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 14.3) such
holder of the Notes receives an amount equal to the sum it would have received
had no such deductions been made, (ii) the Company shall make such deductions
and (iii) the Company shall pay the full amount deducted to the relevant
taxation authority or other Governmental Authority in accordance with applicable
law.
(b) In addition, the Company shall pay any present or future
transfer, stamp, documentary, excise, property or other similar taxes,
assessments, charges or levies that arise from any payment made hereunder or
under the Notes or the other Note Documents or from the execution, delivery,
filing or registration of, performance under, or otherwise with respect to, this
Agreement, any Note or any of the other Note Documents (other than any stamp tax
or other governmental charge that arises solely from any transfer of Notes in
respect of which the Company is entitled to receive payment under Section 12.2),
and all reasonable costs, expenses, taxes, assessments and other charges
incurred in connection with any filing or perfection of any lien, pledge or
security interest contemplated under any of the Collateral Documents or any of
the other documents referred to herein or therein (hereinafter referred to as
"OTHER TAXES").
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61
(c) The Company agrees to indemnify, pay and hold each holder of the
Notes harmless from and against the full amount of Taxes and Other Taxes, and
for the full amount of taxes of any kind imposed by any jurisdiction on amounts
payable under this Section 14.3, imposed on or paid by such holder of the Notes
as a result of receiving any payment by or on behalf of the Company hereunder or
under the Notes or the other Note Documents and any liability (including
penalties, additions to tax, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from the
date such holder of the Notes makes written demand therefor accompanied by
evidence as is reasonably available to such holder demonstrating that holder is
liable for or must otherwise pay such Taxes or Other Taxes.
(d) Within 30 days after the date of any payment of Taxes, the
Company shall furnish to each holder of the Notes, at its address referred to in
Section 17, the original receipt of payment thereof or a certified copy of such
receipt. In the case of any payment hereunder or under any Note or any of the
other Note Documents by or on behalf of the Company through an account or branch
outside the United States or by or on behalf of the Company by a payor that is
not a United States person, if the Company determines that no Taxes are payable
in respect thereof, the Company shall furnish, or shall cause such payor to
furnish, to each holder of the Notes, at such address, an opinion of counsel
acceptable to each holder of the Notes stating that such payment is exempt from
Taxes. For purposes of this subsection (d) and subsection (e) of this Section
14.3, the terms "UNITED STATES" and "UNITED STATES PERSON" shall have the
meanings specified in Section 7701 of the Internal Revenue Code.
(e) Each holder of the Notes organized under the laws of a
jurisdiction outside the United States shall, on or prior to the date of its
execution and delivery of this Agreement, in the case of each original purchaser
of the Notes, and on the date on which it becomes a holder of the Notes, in the
case of each subsequent holder of the Notes, and from time to time thereafter as
requested in writing by the Company (so long as there has been no change in law
that would render such holder unable to do so), provide the Company with two
original Internal Revenue Service forms 1001 or 4224 or, in the case of a holder
of the Notes that has certified in writing to the Company that it is not a
"BANK" (as defined in Section 881(c)(3)(A) of the Internal Revenue Code, form
W-8) and, if such holder of the Notes delivers a form W-8, a certificate
representing that such holder of the Notes is not a "bank" for purposes of
Section 881(c) of the Internal Revenue Code, is not a 10-percent shareholder
(within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the
Company and is not a controlled foreign corporation related to the Company
(within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as
appropriate, or any successor or other form prescribed by the Internal Revenue
Service), certifying that such holder of the Notes is exempt from or entitled to
a reduced rate of United States withholding tax on payments pursuant to this
Agreement, the Notes held thereby or the other Note Documents or, in the case of
a holder of the Notes that has provided a form W-8, certifying that such holder
of the Notes is a foreign corporation, partnership, estate or trust. If the
form provided by a holder of the Notes pursuant to this subsection (e) at the
time such holder of the Notes first becomes a party to this Agreement indicates
a United States interest withholding tax rate in excess of zero, withholding tax
at such rate shall be considered excluded from Taxes unless and until such
holder of the Notes provides the appropriate form certifying that a lesser rate
applies, whereupon withholding tax at such lesser rate only shall be considered
excluded from Taxes for periods governed by such form. If any form or document
referred to in this subsection (e) requires the disclosure of information, other
than information necessary to compute the tax payable and information required
on the date hereof by Internal Revenue Service form 1001, 4224 or W-8 (or the
related certificate described above) that the holder of the Notes reasonably
considers to be confidential, the holder of the Notes shall give notice thereof
to the Company and shall not be obligated to include in such form or document
such confidential information.
<PAGE>
62
(f) For any period with respect to which a holder of the Notes has
failed to provide the Company with the appropriate form or document described in
subsection (e) of this Section 14.3 (OTHER THAN if such failure is due to a
change in law occurring after the date on which a form originally was required
to be provided or if such form otherwise is not required under such
subsection (e)), such holder of the Notes shall not be entitled to additional
amounts or indemnification under subsection (a) or (c) of this Section 14.3 with
respect to Taxes imposed by the United States by reason of such failure;
PROVIDED, HOWEVER, that should a holder of the Notes become subject to Taxes
because of its failure to deliver a form required hereunder, the Company shall
take such steps as such holder of the Notes shall reasonably request to assist
such holder of the Notes to recover such Taxes.
(g) Any holder of the Notes claiming any additional amounts payable
pursuant to this Section 14.3 shall use reasonable efforts (consistent with its
internal policy and legal and regulatory restrictions) to file any certificate
or document reasonably requested by the Company or to change the jurisdiction of
its applicable lending office if the making of such a filing or such change
would avoid the need for or reduce the amount of any such additional amounts
that may thereafter accrue and would not, in the sole determination of such
holder, be otherwise disadvantageous to such holder.
14.4. SURVIVAL.
The Obligations of the Company under this Section 14 shall survive the
payment or transfer of any Note, the enforcement, amendment or waiver of any
provision of this Agreement, the Notes or any of the other Note Documents, and
the termination of this Agreement and any commitment to purchase Notes hereunder
and, in respect of any Person who was at any time an Other Purchaser or in whose
name or for whose benefit such Person held any Note, the date on which such
Person no longer holds, or no longer holds in the name of or for the benefit of
any other Person, any Note.
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein and in the other
Note Documents, and in any certificate or other instrument delivered by or on
behalf of any Obligor pursuant to this Agreement or any of the other Note
Documents, shall survive the execution and delivery of this Agreement and the
Notes, the purchase or transfer by you of any Notes or portion thereof or
interest therein and the payment of any Notes, and may be relied upon by any
subsequent holder of the Notes as of the date made or deemed made, regardless of
any investigation made at any time by or on behalf of you or any other holder of
the Notes. Subject to Section 21.6, this Agreement, the Notes and the other
Note Documents embody the entire agreement and understanding between you and the
Obligors and supersede all prior agreements and understandings relating to the
subject matter hereof.
16. AMENDMENT AND WAIVER.
16.1. REQUIREMENTS.
This Agreement and the Notes may be amended, and the observance of any
term hereof or of the Notes may be waived (either retroactively or
prospectively), with and only with the written consent of the Company and the
Required Holders, except that (a) no amendment or waiver of any of the
<PAGE>
63
provisions of Section 1, 2, 3, 4, 5, 6 or 20 will be effective as to you unless
consented to in writing by you and (b) no such amendment or waiver shall,
without the written consent of the holder of each Note at the time outstanding,
do any of the following at any time:
(i) subject to the provisions of Section 11 relating to
acceleration or rescission, change the amount or the time of any
prepayment, repurchase or payment of principal of, or reduce the rate, or
change the time fixed for any payment or change the method of computation
of interest on, the Notes;
(ii) change the percentage of the aggregate principal amount of the
Notes the holders of which are required to consent to any such amendment or
waiver;
(iii) subordinate the Notes (or any of them) to any other
Obligations of the Company now or hereafter existing;
(iv) reduce or limit any Obligor's liability with respect to any
Obligations owing to you, any Other Purchaser or any other holder of any
Note under or in respect of any of the Note Documents;
(v) release a material portion of the Collateral in any
transaction or any series of related transactions;
(vi) permit the creation, incurrence, assumption or existence of
any Lien on a material portion of the Collateral in any transaction or any
series of related transactions to secure any Obligations other than
Obligations owing to you, the Other Purchasers and the other holders of
Notes under the Note Documents; or
(vii) amend any of Section 7, 11.1(a), 11.1(b), 11.2 through 11.6,
16.1 or 19.
Notwithstanding any of the foregoing provisions of this Section 16.1, none of
the defined terms set forth in Schedule II attached hereto shall be amended,
supplemented or otherwise modified in any manner that would change the meaning,
purpose or effect of this Section 16.1 or any Section referred to herein unless
such amendment or modification is agreed to in writing by the holders of the
Notes otherwise required to amend or waive such Section under the terms of this
Section 16.1.
16.2. SOLICITATION OF HOLDERS OF NOTES.
(a) SOLICITATION. The Company will provide each holder of the
Notes (irrespective of the amount of Notes then owned or otherwise held by it at
the time) with sufficient information, reasonably far in advance of the date a
decision is required, to enable such holder to make an informed and considered
decision with respect to any proposed amendment, waiver or consent in respect of
any of the provisions of this Agreement or any of the other Note Documents. The
Company will deliver executed or true and correct copies of each amendment,
waiver or consent effected pursuant to the provisions of this Section 16 to each
holder of outstanding Notes promptly following the date on which it is executed
and delivered by, or receives the consent or approval of, the requisite holders
of the Notes.
<PAGE>
64
(b) PAYMENT. The Company will not directly or indirectly pay or
cause to be paid any remuneration, whether by way of supplemental or additional
interest, fee or otherwise, or grant any security, to any holder of Notes as
consideration for or as an inducement to the entering into by any holder of
Notes of any waiver or amendment of any of the terms and provisions of this
Agreement or any of the other Note Documents, unless such remuneration is
concurrently paid, or security is concurrently granted, on the same terms,
ratably to each holder of Notes then outstanding even if such holder did not
consent to such waiver or amendment.
16.3. BINDING EFFECT, ETC.
Any amendment or waiver consented to as provided in this Section 16
applies equally to all holders of Notes and is binding upon them, upon each
future holder of any Note and upon each Obligor without regard to whether such
Note has been marked to indicate such amendment or waiver. No such amendment or
waiver will extend to or affect any obligation, covenant, agreement, Default or
Event of Default not expressly amended or waived or impair any right, power or
remedy consequent thereon. No course of dealing nor any delay on the part of
any holder of any Note in exercising any right, power or remedy hereunder or
under any of the other Note Documents shall operate as a waiver of any right,
power or remedy of any holder of such Note; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. The
remedies provided under this Agreement and the other Note Documents are
cumulative and not exclusive of any rights, powers or remedies provided by
applicable law.
16.4. NOTES HELD BY COMPANY, ETC.
Solely for the purpose of determining whether the holders of the
requisite percentage of the aggregate principal amount of Notes then outstanding
approved or consented to any amendment, waiver or consent to be given under this
Agreement or any of the other Note Documents, or have directed the taking of any
action provided for herein or in any of the other Note Documents to be taken
upon the direction of the holders of a specified percentage of the aggregate
principal amount of Notes then outstanding, Notes directly or indirectly owned
by the Company or any of its Affiliates shall be deemed not to be outstanding.
17. NOTICES.
(a) All notices and other communications provided for hereunder
shall be in writing and delivered by telecopier or (if expressly permitted under
the applicable provisions hereof) by telephone, if the sender on the same day
sends a confirming copy of such notice by a recognized overnight delivery
service (charges prepaid), by registered or certified mail with return receipt
requested (postage prepaid) or by a recognized overnight delivery service (with
charges prepaid). Any such notice must be sent:
(i) if to you or your nominee, to you or it at the address
specified for such communications in Schedule I attached hereto, or at such
other address as you or it shall have specified to the Company in writing;
(ii) if to any other holder of any Note, to such holder at such
address as such other holder shall have specified to the Company in
writing; or
<PAGE>
65
(iii) if to the Company, to the Company at its address set forth on
the first page of this Agreement (Telecopier No. (212) 964-4771) to the
attention of the Chief Financial Officer, or at such other address as the
Company shall have specified to the holder of each Note in writing.
All notices and other communications provided for under this Section 17 will be
deemed given and effective only when actually received.
(b) If any notice required under this Agreement or any of the other
Note Documents is permitted to be made, and is made, by telephone, actions taken
or omitted to be taken in reliance thereon by you shall be binding upon the
Company notwithstanding any inconsistency between the notice provided by
telephone and any subsequent writing in confirmation thereof provided to you;
PROVIDED that any such action taken or omitted to be taken by you shall have
been in good faith and in accordance with the terms of this Agreement.
18. REPRODUCTION OF DOCUMENTS.
This Agreement, each of the other Note Documents and all other
agreements, certificates and other documents relating thereto, including,
without limitation, (a) amendments, waivers and consents of or to this Agreement
or any other Note Document that may hereafter be executed, (b) documents
received by you on the Initial Purchase Date (except the Notes themselves) and
(c) financial statements, certificates and other information previously or
hereafter furnished to you, may be reproduced by you by any photographic,
photostatic, microfilm, microcard, miniature photographic or other similar
process. The Company agrees and stipulates that, to the extent permitted by
applicable law, any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made by you in
the regular course of business) and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
This Section 18 shall not prohibit the Company or any other holder of Notes from
contesting any such reproduction to the same extent that it could contest the
original or from introducing evidence to demonstrate the inaccuracy of any such
reproduction.
19. CONFIDENTIAL INFORMATION.
You hereby agree to maintain, and to cause each of the Persons
referred to in clause (a) of this Section 19 to which you deliver or disclose
Confidential Information to maintain, the confidentiality of all Confidential
Information in accordance with procedures adopted by you in good faith to
protect confidential information of third parties delivered to you; PROVIDED
that you may deliver or disclose Confidential Information to (a) your affiliates
and your and their respective directors, officers, employees, agents, attorneys
and other advisors (to the extent such disclosure reasonably relates to the
administration of the investment represented by your Notes), (b) your counsel
and your financial and other professional advisors who agree to hold
confidential the Confidential Information substantially in accordance with the
terms of this Section 19, (c) any other holder of any Note or any MS Group
Additional Investor, (d) any Institutional Investor to which you sell or offer
to sell any Note or any part thereof or any participation therein (if such
Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by provisions similar to the provisions of this Section
19), (e) any Person from which you offer to purchase any security of the Company
(if such Person has agreed in writing prior to its receipt of such
<PAGE>
66
Confidential Information to be bound by provisions similar to the provisions of
this Section 19), (f) to the extent required or requested thereby, any federal
or state regulatory authority having jurisdiction over you, (g) the National
Association of Insurance Commissioners, any other insurance company or
regulatory examiners or auditors or accountants or any similar organization, or
any nationally recognized rating agency that requires access to information
about your investment portfolio or (h) any other Person to which such delivery
or disclosure may be necessary (i) in order to effect compliance with any
Requirement of Law applicable to you, (ii) in response to any subpoena or other
legal process or (iii) in connection with any litigation to which you or any
other holder of any Note are a party. Each holder of a Note, by its acceptance
of a Note, will be deemed to have agreed to be bound by and to be entitled to
the benefits of this Section 19 as though it were a party to this Agreement.
Upon the reasonable request of the Company in connection with the delivery to
any holder of a Note of information required to be delivered to such holder
under this Agreement or requested by such holder (other than a holder that is a
party to this Agreement or its nominee), such holder will enter into an
agreement with the Company embodying the provisions of this Section 19. Nothing
in this Section 19 shall obligate you or any other holder of the Notes to return
any Confidential Information furnished by or on behalf of the Company or any of
its Subsidiaries to the Company or any such Subsidiary.
20. SUBSTITUTION OF PURCHASER.
You shall have the right to substitute any one of your Affiliates that
constitutes an Institutional Investor as the purchaser of the Notes that you
have agreed to purchase hereunder, by notice to the Company, which notice shall
be signed by both you and such Affiliate, shall contain such Affiliate's
agreement to be bound by this Agreement and shall contain a confirmation by such
Affiliate of the accuracy with respect to it of the representations set forth in
Section 6. Upon receipt of such notice, wherever the word "YOU" is used in this
Agreement (other than in this Section 20), such word shall be deemed to refer to
such Affiliate in lieu of you. In the event that such Affiliate is so
substituted as a purchaser hereunder and such Affiliate thereafter transfers to
you all of the Notes then held by such Affiliate, upon receipt by the Company of
notice of such transfer, wherever the word "YOU" is used in this Agreement
(other than in this Section 20), such word shall no longer be deemed to refer to
such Affiliate, but shall refer to you, and you shall have all of the rights of
an original holder of the Notes under this Agreement.
21. MISCELLANEOUS.
21.1. SUCCESSORS AND ASSIGNS.
All covenants and other agreements contained in this Agreement or any
of the other Note Documents by or on behalf of any of the parties hereto bind
and inure to the benefit of their respective successors and assigns (including,
without limitation, any subsequent holder of a Note), whether or not so
expressed.
21.2. PAYMENTS DUE ON NON-BUSINESS DAYS.
Anything in this Agreement or the Notes to the contrary
notwithstanding, any payment of principal of, or premium, if any, or interest
on, any Note that is due on a date other than a Business Day
<PAGE>
67
shall be made on the next succeeding Business Day without including the
additional days elapsed in the computation of the items payable on such next
succeeding Business Day.
21.3. SATISFACTION REQUIREMENT.
Except as otherwise provided herein or in any of the other Note
Documents, if any agreement, certificate or other writing, or any action taken
or to be taken, is by the terms of this Agreement or any of the other Note
Documents required to be satisfactory to you or to the Required Holders, the
determination of such satisfaction shall be made by you or the Required Holders,
as the case may be, in the sole and exclusive judgment (exercised reasonably and
in good faith) of the Person or Persons making such determination.
21.4. SEVERABILITY.
Any provision of this Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by applicable law) not
invalidate or render unenforceable such provision in any other jurisdiction.
21.5. CONSTRUCTION; ACCOUNTING TERMS, ETC.
(a) Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant. Where any provision herein refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
(b) Except as otherwise expressly provided in this Agreement or any
of the other Note Documents, all accounting terms used herein or therein shall
be interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to you hereunder shall be prepared,
in accordance with GAAP.
21.6. SURVIVAL OF FEE LETTER.
Notwithstanding anything to the contrary contained in this Agreement,
all of the provisions of the Fee Letter shall survive the execution and delivery
of this Agreement and the occurrence of the Initial Purchase Date.
21.7. COMPUTATION OF TIME PERIODS.
In this Agreement, in the computation of periods of time from a
specific date to a later specified date, the word "FROM" means "from and
including", the word "THROUGH" means "through and including", and the words "TO"
and "UNTIL" each mean "to but not excluding".
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68
21.8. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Agreement by telecopier shall be effective as delivery of
a manually executed counterpart of this Agreement.
21.9. GOVERNING LAW; SUBMISSION TO JURISDICTION, ETC.
(a) This Agreement shall be governed by, and construed in accordance
with, the law of the State of New York.
(b) The Company hereby irrevocably and unconditionally submits, for
itself and its property and assets, to the nonexclusive jurisdiction of any
New York state court or federal court of the United States of America sitting in
New York City, New York, and any appellate court from any thereof, in any action
or proceeding arising out of or relating to this Agreement, the Notes or the
other Note Documents, or for recognition or enforcement of any judgment in
respect thereof, and the Company hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in any such New York state court or, to the fullest extent permitted
by applicable law, in such federal court. The Company hereby irrevocably
consents to the service of copies of any summons and complaint and any other
process which may be served in any such action or proceeding by certified mail,
return receipt requested, or by delivering a copy of such process to the
Company, at its address specified in Section 17, or by any other method
permitted by law. The Company hereby agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
applicable law. Nothing in this Agreement shall affect any right that any
holder of Notes may otherwise have to bring any action or proceeding relating to
this Agreement, the Notes or the other Note Documents in the courts of any
jurisdiction.
(c) The Company hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection that it may
now or hereafter have to the laying of venue of any action or proceeding arising
out of or relating to this Agreement, the Notes or the other Note Documents in
any New York state or federal court. The Company hereby irrevocably waives, to
the fullest extent permitted by applicable law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
21.10. WAIVER OF JURY TRIAL.
EACH OF THE COMPANY AND THE HOLDERS OF THE NOTES HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER NOTE
<PAGE>
69
DOCUMENTS, ANY DOCUMENT DELIVERED UNDER THE NOTE DOCUMENTS, THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, OR THE ACTIONS OF ANY HOLDER OF THE NOTES IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
Very truly yours,
ECONOPHONE, INC.
By ________________________
Name:
Title:
* * * * *
If you are in agreement with the foregoing, please sign in the
appropriate space provided below and return it to the Company, whereupon the
foregoing shall become a binding agreement between you and the Company.
Very truly yours,
MORGAN STANLEY GROUP INC.
By _________________________
Name:
Title:
<PAGE>
SCHEDULE I
INFORMATION RELATING TO THE PURCHASERS
NAME OF PURCHASER: COMMITMENT
Morgan Stanley Group Inc. $15,000,000
NAME(S) FOR REGISTRATION OF NOTES PURCHASED:
MAILING ADDRESS: 1585 Broadway
36th Floor
New York, New York 10036
Attn: Mr. David R. Powers
TELEPHONE NO.: (212) 761-6559
TELECOPIER NO.: (212) 761-0517
WIRE INSTRUCTIONS (INCLUDING ABA NO. AND ACCOUNT NO.)
FOR PAYMENT OF PRINCIPAL AND INTEREST:
To: Citibank, NY
ABA
In favor of: Morgan Stanley Group
Account #:
UNITED STATES TAX IDENTIFICATION NO. (IF ANY): 13-2838811
PHYSICAL DELIVERY INSTRUCTIONS:
1585 Broadway
36th Floor
New York, New York 10036
Attn: Mr. David R. Powers
<PAGE>
SCHEDULE II
DEFINED TERMS
As used in this Agreement, the following terms shall have the
respective meanings set forth below (such meanings to be equally applicable to
both the singular and plural forms of the term defined):
"ADDITIONAL AVAILABILITY DATE" means the first date on which all of
the conditions set forth in Section 8.10(a) have been satisfied.
"AFFILIATE" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common
control with such Person, or is a director or officer of such Person or,
with respect to any individual, has a relationship with such individual by
blood, marriage or adoption not more remote than first cousin. For
purposes of this definition, the term "CONTROL" (including the terms
"CONTROLLING", "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") of a Person
means the possession, direct or indirect, of the power to vote 5% or more
of the Voting Interest of such Person or to direct or cause the direction
of the management and policies of such Person, whether through the
ownership of Voting Interest, by contract or otherwise.
"AGREEMENT" means this Note Purchase Agreement, as such agreement may
be amended, supplemented or otherwise modified from time to time in
accordance with the terms of Section 16.
"ASSET SALE" means the conveyance, sale, lease, sublease, transfer or
other disposition (other than solely for security purposes) by the Company
or any of its Subsidiaries to any Person other than the Company or any of
its wholly owned Subsidiaries of (a) any of the shares of capital stock of
the Company or any of its Subsidiaries, (b) all or substantially all of the
property and assets of any division or line of business of the Company or
any of its Subsidiaries or (c) any other property or assets (whether
tangible or intangible) of the Company or any of its Subsidiaries.
"AVAILABLE COMMITMENT" means, with respect to you or any of the Other
Purchasers at any time, (a) your Commitment or the Commitment of such Other
Purchaser, as the case may be, at such time LESS (b) the aggregate
principal amount of all Notes purchased by you or such Other Purchaser
(whether or not any such principal amount remains outstanding) at such
time.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or any
other day on which commercial banks are required or authorized by law to be
closed in New York, New York.
"CAPITAL ASSETS" means, with respect to any Person, all equipment,
fixed assets and real property or improvements of such Person, or
replacements or substitutions therefor or additions thereto, that have been
or should be, in accordance with GAAP, reflected as additions to property,
plant or equipment on the balance sheet of such Person or that have a
useful life of more than one year.
"CAPITAL EXPENDITURES" means, with respect to any Person for any
period, (a) all expenditures made directly or indirectly by such Person
(whether paid in cash or other consideration or accrued as a liability and
including, without limitation, all expenditures for maintenance and repairs
which are required, in accordance with GAAP, to be capitalized on the books
of such Person) during such period for Capital Assets and (b) solely to the
extent not otherwise included in clause (a) of this definition, the
aggregate principal amount of all
<PAGE>
II-2
Indebtedness (including, without limitation, Capitalized Lease Obligations)
assumed or incurred during such period in connection with any such
expenditures for Capital Assets.
"CAPITALIZED LEASE" means any lease with respect to which the lessee
is required to recognize concurrently the acquisition of property or an
asset and the incurrence of a liability in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" means, with respect to any Person, all
lease obligations of such Person which, in accordance with GAAP, are or
will be required to be capitalized on the books of such Person, in each
case valued at the amount thereof accounted for as debt in accordance with
GAAP.
"CASH EQUIVALENTS" means any of the following types of Investments, to
the extent owned by the Company or any of its Subsidiaries free and clear
of all Liens (other than Liens created under the Collateral Documents):
(a) readily marketable obligations issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof having maturities of not more than 360 days
from the date of acquisition thereof; PROVIDED that the full faith and
credit of the United States of America is pledged in support thereof;
(b) time deposits with, or insured certificates of deposit or
bankers' acceptances of, any commercial bank that (i) is organized
under the laws of the United States of America, any state thereof or
the District of Columbia or is the principal banking subsidiary of a
bank holding company organized under the laws of the United States of
America, any state thereof or the District of Columbia and is a member
of the Federal Reserve System, (ii) issues (or the parent of which
issues) commercial paper rated as described in clause (c) of this
definition and (iii) has combined capital and surplus of at least
$1,000,000,000, in each case with maturities of not more than 180 days
from the date of acquisition thereof;
(c) commercial paper issued by any Person organized under the
laws of any state of the United States of America and rated at least
"Prime-1" (or the then equivalent grade) by Moody's Investors Service,
Inc. or at least "A-1" (or the then equivalent grade) by Standard &
Poor's Ratings Services, a Division of The McGraw-Hill Companies,
Inc., in each case with maturities of not more than 270 days from the
date of acquisition thereof;
(d) Investments, classified in accordance with GAAP as current
assets of the Company or any of its Subsidiaries, in money market
investment programs registered under the Investment Company Act of
1940, as amended, which are administered by financial institutions
that have the highest rating obtainable from either Moody's Investors
Service, Inc. or Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, Inc., and the portfolios of which are limited
solely to Investments of the character and quality described in
clauses (a), (b) and (c) of this definition; and
<PAGE>
II-3
(e) repurchase agreements entered into by the Company or any
such Subsidiary with a bank or trust company or recognized securities
dealer having combined capital and surplus of at least $500,000,000
for direct obligations issued by or fully guaranteed by the United
States of America in which the Company or such Subsidiary shall have a
valid and perfected first priority security interest (subject to no
other Liens); PROVIDED that each such repurchase agreement shall have
a fair market value of at least 100% of the amount of the repurchase
obligations thereunder on the date of purchase thereof.
"CHANGE OF CONTROL" means, at any time, (a) Mr. Alfred West ceases to
be the "BENEFICIAL OWNER" (as defined in Rule 13d-3 under the Exchange Act)
of Voting Interests representing at least 25% of the combined voting power
of all of the Voting Interests of the Company (on a fully diluted basis),
(b) any "PERSON" or "GROUP" (within the meaning of Section 13d-3 or
14(d)(2) of the Exchange Act) becomes the beneficial owner of Voting
Interests of the Company representing a greater percentage of the combined
voting power of all of the Voting Interests of the Company (on a fully
diluted basis) than the percentage of such combined voting power
beneficially owned by Mr. Alfred West (on a fully diluted basis) at such
time or (c) the Company, either individually or together with one or more
of its Subsidiaries, shall convey, sell, lease, assign, transfer or
otherwise dispose of, or agree in writing to convey, sell, lease, assign,
transfer or otherwise dispose of, all or substantially all of the property
and assets of the Company or the Company and its Subsidiaries, taken as a
whole (either in one transaction or a series of related transactions).
"CHANGE OF CONTROL OFFER" has the meaning specified in Section 7.2(a).
"CHANGE OF CONTROL PAYMENT" has the meaning specified in Section
7.2(a).
"CHANGE OF CONTROL REPURCHASE DATE" has the meaning specified in
Section 7.2(b).
"COLLATERAL" means all of the "Collateral" referred to in the
Collateral Documents and all other property and assets of the Obligors and
their Subsidiaries that are or are intended under the terms of the
Collateral Documents to be subject to Liens in favor of you, the Other
Purchasers, if any, and the other holders of the Notes.
"COLLATERAL AGENT" means Morgan Stanley Group Inc., as collateral
agent for itself and the other Secured Parties.
"COLLATERAL DOCUMENTS" means, collectively, the Shareholder Pledge
Agreements, the other pledge agreements, security agreements, mortgages,
charges and other similar documents entered into by the Shareholders or by
the Company or any of its Subsidiaries pursuant to Section 8.10 and all
other agreements that create or purport to create Liens in favor of you,
the Other Purchasers, if any, and the other holders of the Notes.
"COMMITMENT" means, with respect to you or any of the Other Purchasers
at any time, the amount set forth opposite your or such Other Purchaser's
name on Schedule I attached hereto under the caption "Commitment", as such
amount may be reduced at or prior to such time pursuant to Section 7.2 or
7.7.
<PAGE>
II-4
"COMMUNICATIONS LAW" means, collectively, (a) the Communications Act
of 1934, as amended from time to time, and any similar or successor federal
law or statute, and the regulations promulgated and the rulings issued by
the FCC from time to time thereunder, and (b) any state law governing the
provision of telecommunications services, and the regulations promulgated
and the rulings issued by any PUC from time to time thereunder, in each
case as in effect from time to time.
"COMPANY" has the meaning specified on page one of this Agreement.
"CONFIDENTIAL INFORMATION" means materials, documents and other
information delivered to you by or on behalf of the Company or any of its
Subsidiaries in connection with any of the transactions contemplated by or
otherwise pursuant to this Agreement or any of the other Note Documents,
whether before or after the date of this Agreement, that is proprietary in
nature and that was clearly marked, labeled or otherwise adequately
identified when received by you as being confidential information of the
Company or such Subsidiary, but does not include any such information that
(a) is or was generally available to the public (other than as a result of
a breach of your confidentiality obligations hereunder) or (b) becomes
known or available to you on a nonconfidential basis other than through
disclosure by the Company or any of its Subsidiaries.
"CONSOLIDATED CASH FLOWS" means, for any period, (a) Consolidated Net
Income of the Company and its Subsidiaries for such period, PLUS (b) all
noncash items otherwise deducted in calculating the Consolidated Net Income
of the Company and its Subsidiaries for such period LESS (c) the sum of (i)
all noncash items otherwise added in calculating the Consolidated Net
Income of the Company and its Subsidiaries for such period, (ii) the
aggregate amount of all Restricted Payments made on or in respect of any
shares of capital stock of the Company during such period to the extent
otherwise permitted to be made under Section 9.5, (iii) the aggregate
amount of all regularly scheduled payments of Subordinated Indebtedness
made during such period and (iv) unless the applicable conditions set forth
in Section 4 cannot be satisfied as of any requested Purchase Date during
such period, the aggregate Available Commitments of you and the Other
Purchasers, if any, remaining on the last day of such period.
"CONSOLIDATED DEBT SERVICE" means, for any period, the sum of (a) all
regularly scheduled principal payments and all required prepayments,
repurchases, redemptions or similar acquisitions for value of Indebtedness
of the Company and its Subsidiaries (including, without limitation, the
principal component of payments due on all Capitalized Leases) made during
such period and (b) all regularly scheduled interest payments and all
interest payments required to be made in connection with any such
prepayments, repurchases, redemptions or similar acquisitions for value of
Indebtedness of the Company and its Subsidiaries made during such period,
all determined on a consolidated basis for such period, but excluding
therefrom any such payments, prepayments, redemptions, repurchases or other
acquisitions to the extent refinanced through the incurrence of additional
Indebtedness otherwise expressly permitted under Section 9.3.
"CONSOLIDATED DEBT SERVICE COVERAGE RATIO" means, for any period, the
ratio of (a) the aggregate Consolidated Cash Flows for such period to (b)
the aggregate Consolidated Debt Service for such period.
<PAGE>
II-5
"CONSOLIDATED EBITDA" means, for any period, (a) Consolidated Net
Income of the Company and its Subsidiaries for such period, PLUS (b) the
sum of each of the following expenses that have been deducted from the
determination of Consolidated Net Income of the Company and its
Subsidiaries for such period: (i) Consolidated Interest Expense for such
period, (ii) all income tax expense (whether federal, state, local, foreign
or otherwise) of the Company and its Subsidiaries for such period, (iii)
all depreciation expense of the Company and its Subsidiaries for such
period and (iv) all amortization expense of the Company and its
Subsidiaries for such period, in each case determined on a consolidated
basis and in accordance with GAAP for such period.
"CONSOLIDATED FUNDED INDEBTEDNESS" means Indebtedness in respect of
the Notes, and all other Indebtedness of the Company or any of its
Subsidiaries that by its terms matures more than one year after the date of
determination or matures within one year from such date but is renewable or
extendible, at the option of the Company or such Subsidiary, to a date more
than one year after such date or arises under a revolving credit or similar
agreement that obligates the lender or lenders to extend credit during a
period of more than one year after such date; PROVIDED, HOWEVER, that the
term "FUNDED INDEBTEDNESS" shall not include any Subordinated Indebtedness
(if and to the extent such Subordinated Indebtedness would otherwise be
included in such term on any date of determination).
"CONSOLIDATED INTEREST EXPENSE" means, for any period, all interest
expense (whether paid or accrued) on all Indebtedness of the Company or any
of its Subsidiaries for such period, determined on a consolidated basis and
in accordance with GAAP for such period, including, without limitation,
(a) interest expense paid or payable in respect of Indebtedness resulting
from the Notes, (b) the interest component of all obligations under
Capitalized Leases and (c) the net payment, if any, payable in connection
with Hedge Agreements, LESS the net credit, if any, received in connection
with Hedge Agreements.
"CONSOLIDATED NET INCOME" means, for any period, the net income (or
net loss) of the Company and its Subsidiaries for such period, determined
on a consolidated basis and in accordance with GAAP for such period.
"CONSOLIDATED NET WORTH" means, at any date of determination, the sum
of (a) the capital stock and additional paid-in capital, PLUS (b) retained
earnings (or LESS accumulated deficits) of the Company and its
Subsidiaries, determined on a consolidated basis and in accordance with
GAAP for such period.
"CONTINGENT OBLIGATION" means, as to any Person, any obligation of
such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("PRIMARY OBLIGATIONS") of any other Person
(the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly,
including, without limitation, (a) the direct or indirect guaranty,
endorsement (other than for collection or deposit in the ordinary course of
business), co-making, discounting with recourse or sale with recourse by
such Person of the obligation of a primary obligor, (b) the obligation to
make take-or-pay or similar payments, if required, regardless of
nonperformance by any other party or parties to an agreement, (c) any
obligation of such Person, whether or not contingent, (i) to purchase any
such primary obligation or any property constituting direct or indirect
security therefor, (ii) to advance or supply funds (A) for the purchase or
payment of any such primary obligation or (B) to maintain working capital
or equity capital of the primary obligor
<PAGE>
II-6
or otherwise to maintain the net worth or solvency of the primary obligor,
(iii) to purchase property, assets, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation
or (iv) otherwise to assure or hold harmless the holder of such primary
obligation against loss in respect thereof; PROVIDED, HOWEVER, that the
term "CONTINGENT OBLIGATION" shall not include any products warranties
extended in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made (or, if less, the maximum amount of such
primary obligation for which such Person may be liable pursuant to the
terms of the instrument evidencing such Contingent Obligation) or, if not
stated or determinable, the maximum reasonably anticipated liability in
respect thereof (assuming such Person is required to perform thereunder),
as determined by such Person in good faith.
"CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT" means that certain
securities purchase agreement dated as of November 1, 1996 between the
Company and Princes Gate Investors II, L.P., as such agreement may be
amended, supplemented or otherwise modified from time to time in accordance
with its terms.
"CURRENT VALUE" has the meaning specified in Section 3 of ERISA.
"DEFAULT" means any Event of Default or any event or condition that
would constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
"DEFAULT RATE" means 3% per annum above the rate of interest stated in
clause (a), (b) or (c), as applicable, of the second paragraph of the
Notes.
"DOMESTIC SUBSIDIARY" means, at any time, any Subsidiary of the
Company of any of its Subsidiaries that is incorporated or organized under
the laws of any state of the United States of America or the District of
Columbia at such time.
"EMPLOYEE BENEFIT PLAN" means an "EMPLOYEE BENEFIT PLAN", within the
meaning of Section 3(3) of ERISA, that is subject to the provisions of
Title I, Subtitle B, Part 4 of ERISA or to Section 4975 of the Internal
Revenue Code.
"ENVIRONMENTAL ACTION" means any action, suit, demand, demand letter,
claim, notice of noncompliance or violation, notice of liability or
potential liability, investigation, proceeding, consent order or consent
agreement, abatement order or other order or directive (conditional or
otherwise) relating in any way to any Environmental Law, any Environmental
Permit or any Hazardous Materials or arising from alleged injury or threat
to health, safety, natural resources or the environment, including, without
limitation, (a) by any Governmental Authority for enforcement, cleanup,
removal, response, remedial or other actions or damages and (b) by any
Governmental Authority or other third party for damages, contribution,
indemnification, cost recovery, compensation or injunctive relief.
"ENVIRONMENTAL LAW" means any Requirement of Law, or any judicial or
agency interpretation or other requirement of any Governmental Authority,
relating to (a) the generation, use, handling, transportation, treatment,
storage, disposal, release or discharge of Hazardous
<PAGE>
II-7
Materials, (b) pollution or protection of the environment, health, safety
or natural resources or (c) occupational safety and health, industrial
hygiene, land use or the protection of human, plant or animal health or
welfare, including the Comprehensive Environmental Response, Compensation,
and Liability Act (42 U.S.C. Section 9601 ET SEQ.), the Hazardous
Materials Transportation Act (49 U.S.C. Section 1801 ET SEQ.), the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901 ET SEQ.),
the Federal Water Pollution Control Act (33 U.S.C. Section 1251 ET SEQ.),
the Clean Air Act (42 U.S.C. Section 7401 ET SEQ.), the Toxic Substances
Control Act (15 U.S.C. Section 2601 ET SEQ.), the Federal Insecticide,
Fungicide and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.), the
Occupational Safety and Health Act (29 U.S.C. Section 651 ET SEQ.), the
Oil Pollution Act (33 U.S.C. Section 2701 ET SEQ.) and the Emergency
Planning and Community Right-to-Know Act (42 U.S.C. Section 11001 ET
SEQ.), in each case as amended from time to time, and including the
regulations promulgated and the rulings issued from time to time
thereunder.
"ENVIRONMENTAL PERMIT" means any permit, approval, license,
identification number or other authorization required under any
Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and the rulings
issued from time to time thereunder.
"ERISA AFFILIATE" means any Person that for purposes of Title IV of
ERISA is a member of the controlled group of the Company or any of its
Subsidiaries, or under common control with the Company or any of its
Subsidiaries, within the meaning of Section 414 of the Internal Revenue
Code.
"ERISA PLAN" means an "EMPLOYEE BENEFIT PLAN" (as defined in Section
3(3) of ERISA) that is or, within the preceding five years, has been
established or maintained, or to which contributions are or, within the
preceding five years, have been made or required to be made, by the Company
or any ERISA Affiliate or with respect to which the Company or any ERISA
Affiliate may have any liability.
"EVENT OF DEFAULT" has the meaning specified in Section 11.1.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and the regulations promulgated and the rulings issued
from time to time thereunder.
"FCC" means the Federal Communications Commission of the United States
of America and any successor thereto.
"FEE LETTER" means that certain letter dated April 24, 1997 from MS
Group to the Company, as such letter may be amended, supplemented or
otherwise modified from time to time in accordance with its terms.
"FISCAL YEAR" means, with respect to the Company or any of its
Subsidiaries, the period commencing on January 1 in any calendar year and
ending on the next succeeding December 31.
"FOREIGN SUBSIDIARY" means, at any time, any Subsidiary of the Company
or any of its Subsidiaries that is not a Domestic Subsidiary at such time.
<PAGE>
II-8
"FUNDS SOURCE" has the meaning specified in Section 6.3.
"GAAP" means generally accepted accounting principles in effect in the
United States of America and applied on a consistent basis with the
generally accepted accounting principles applied in the preparation of the
audited consolidated financial statements of the Company and its
Subsidiaries for the Fiscal Year ended December 31, 1995 which are referred
to in Section 5.5(a).
"GOVERNMENTAL AUTHORITY" means any nation or government, any state,
province, city, municipal entity or other political subdivision thereof,
and any governmental, executive, legislative, judicial, administrative or
regulatory agency, department, authority, instrumentality, commission,
board or similar body, whether federal, state, provincial, territorial,
local or foreign.
"GOVERNMENTAL AUTHORIZATION" means any authorization, approval,
consent, franchise, license, covenant, order, ruling, permit,
certification, exemption, notice, declaration or similar right, undertaking
or other action of, to or by, or any filing, qualification or registration
with, any Governmental Authority.
"HAZARDOUS MATERIALS" means: (a) any chemical, material or substance
at any time defined as or included in the definition of "HAZARDOUS
SUBSTANCES", "HAZARDOUS WASTES", "HAZARDOUS MATERIALS", "EXTREMELY
HAZARDOUS WASTE", "ACUTELY HAZARDOUS WASTE", "RADIOACTIVE WASTE",
"BIOHAZARDOUS WASTE", "POLLUTANT", "TOXIC POLLUTANT", "CONTAMINANT",
"RESTRICTED HAZARDOUS WASTE", "INFECTIOUS WASTE", "TOXIC SUBSTANCES", or
any other term or expression intended to define, list or classify
substances by reason of properties harmful to health, safety or the indoor
or outdoor environment (including, without limitation, harmful properties
such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity,
reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar
import under any applicable Environmental Laws); (b) any oil, petroleum,
petroleum fraction or petroleum derived substance; (c) any drilling fluids,
produced waters and other wastes associated with the exploration,
development or production of crude oil, natural gas or geothermal
resources; (d) any flammable substances or explosives; (e) any radioactive
materials; (f) any asbestos-containing materials; (g) any urea formaldehyde
foam insulation; (h) any electrical equipment which contains any oil or
dielectric fluid containing polychlorinated biphenyls; (i) any pesticides;
(j) any radon gas; and (k) any other chemical, material or substance
designated, classified or regulated as hazardous or toxic or as a pollutant
or contaminant under any Environmental Law or which could pose a hazard to
health, safety or the environment.
"HEDGE AGREEMENTS" means interest rate swap, cap or collar agreements,
interest rate future or option contracts, commodity future or option
contracts, currency swap agreements, currency future or option contracts
and other similar agreements.
"HOLDER" means, with respect to any Note, the Person in whose name
such Note is registered in the register maintained by the Company pursuant
to Section 12.1.
"INDEBTEDNESS" means, with respect to any Person (without
duplication):
(a) all indebtedness of such Person for borrowed money;
<PAGE>
II-9
(b) all Obligations of such Person for the deferred purchase
price of property and assets or services (other than trade payables or
other accounts payable incurred in the ordinary course of such
Person's business and not past due for more than 180 days after the
date on which each such trade payable or account payable was created);
(c) all Obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, or upon which interest
payments are customarily made;
(d) all Obligations of such Person created or arising under any
conditional sale or other title retention agreement with respect to
property or assets acquired by such Person, even though the rights and
remedies of the seller or the lender under such agreement in the event
of default are limited to repossession or sale of such property or
assets;
(e) all Capitalized Lease Obligations of such Person;
(f) all Obligations, contingent or otherwise, of such Person
under acceptance, standby letter of credit or similar facilities;
(g) all Obligations of such Person to purchase, redeem, retire,
defease or otherwise make any payment in respect of any shares of
capital stock of (or other ownership or profit interest in) such
Person or in any other Person, or any warrants, rights or options to
acquire such shares (or such other ownership or profit interests);
(h) all Obligations of such Person in respect of Hedge
Agreements, take-or-pay agreements or other similar arrangements;
(i) all Contingent Obligations; and
(j) all Obligations referred to in clauses (a) through (i) of
this definition of another Person secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise,
to be secured by) any Lien on property or assets (including, without
limitation, accounts and contract rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of
such Indebtedness.
The Indebtedness of any Person shall include (i) all Obligations of the
types described in clauses (a) through (j) above of any partnership in
which such Person is a general partner and (ii) all Obligations of the
types described in clauses (a) through (j) above of such Person to the
extent such Person remains legally liable in respect thereof
notwithstanding that any such Obligation is deemed to be extinguished under
generally accepted accounting principles in effect at any date of
determination.
"INDEMNIFIED LIABILITIES" has the meaning specified in
Section 14.2(a).
"INDEMNIFIED PARTY" has the meaning specified in Section 14.2(a).
<PAGE>
II-10
"INITIAL NOTE DOCUMENTS COLLATERAL" means all of the Initial Pledged
Interests and the Initial Pledged Indebtedness, all of the additional
equity interests in the Company and the additional intercompany
Indebtedness of the Company required to be pledged to the Collateral Agent
pursuant to the Shareholder Pledge Agreements, as in effect on the Initial
Purchase Date, and all proceeds of the foregoing.
"INITIAL PLEDGED INDEBTEDNESS" has the meaning specified in Section 1
of the applicable Shareholder Pledge Agreement.
"INITIAL PLEDGED INTERESTS" has the meaning specified in Section 1 of
the applicable Shareholder Pledge Agreement.
"INITIAL PURCHASE DATE" has the meaning specified in Section 2.3.
"INSTITUTIONAL INVESTOR" means (a) you, (b) any Other Purchaser or
(c) any bank, trust company, savings and loan association or other
financial institution, any pension plan, any investment company, any
insurance company, any broker or dealer or any other similar financial
institution or entity, regardless of legal form.
"INTERCREDITOR AGREEMENT" has the meaning specified in Section
8.10(a)(iii).
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and the rulings
issued from time to time thereunder.
"INVESTMENT" has the meaning specified in Section 9.7.
"LIEN" means, with respect to any Person, any mortgage, lien
(statutory or other), pledge, hypothecation, security interest, charge or
other preference or encumbrance of any kind (including, without limitation,
any agreement to give any of the foregoing), or any sale of accounts
receivable or chattel paper, or any assignment, deposit arrangement or
lease intended as, or having the effect of, security, or any other interest
or title of any vendor, lessor, lender or other secured party to or of such
Person under any conditional sale or other title retention agreement or any
Capitalized Lease or upon or with respect to any property or asset of such
Person (including, in the case of shares of capital stock, stockholder
agreements, voting trust agreements and other similar arrangements).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, condition (financial or otherwise), operations, results of
operations, assets, property, liabilities or prospects of the Company and
its Subsidiaries, taken as a whole, (b) the ability of any of the Obligors
to perform its Obligations under this Agreement or any of the other Note
Documents to which it is or is to be a party, (c) the rights and remedies
afforded to the Collateral Agent, you, any of the Other Purchasers or any
of the other holders of the Notes under this Agreement or any of the other
Note Documents or (d) the ability of the Company to refinance the Notes
prior to the stated maturity thereof.
"MS GROUP" means Morgan Stanley Group Inc., a Delaware corporation.
<PAGE>
II-11
"MS GROUP ADDITIONAL INVESTOR" means any member, shareholder or other
investor or holder of other interests in, or any successor to or transferee
of, MS Group.
"MULTIEMPLOYER PLAN" means a multiemployer plan (as defined in
Section 4001(a)(3) of ERISA) to which the Company or any ERISA Affiliate is
making or accruing an obligation to make contributions, or has within any
of the preceding five plan years made or accrued an obligation to make
contributions.
"MULTIPLE EMPLOYER PLAN" means a single employer plan (as defined in
Section 4001(a)(15) of ERISA) that (a) is maintained for employees of the
Company or any ERISA Affiliate and at least one Person other than the
Company and the ERISA Affiliates or (b) was so maintained and in respect of
which the Company or any ERISA Affiliate could have liability under
Section 4064 or 4069 of ERISA in the event such plan has been or were to be
terminated.
"NET CASH PROCEEDS" means, with respect to the issuance or incurrence
of any Indebtedness by any Person, or the sale or issuance by any Person of
any shares of its capital stock (or other ownership or profit interests
therein), any securities convertible into or exchangeable for shares of its
capital stock (or other ownership or profit interests therein) or any
warrants, options or other rights for the purchase or acquisition of any
shares of its capital stock (or other ownership or profit interests
therein), or any Asset Sale, as the case may be, the aggregate amount of
cash received from time to time (whether as initial consideration or
through payment or disposition of deferred consideration) by or on behalf
of such Person for its own account in connection with any such transaction,
after deducting therefrom only:
(a) brokerage commissions, underwriting fees and discounts,
legal fees, finder's fees and other similar fees and commissions;
(b) the amount of taxes payable in connection with or as a
result of such transaction;
(c) in the case of any Asset Sale, the outstanding principal
amount of, and the premium or penalty, if any, and any accrued and
unpaid interest on, any Indebtedness (other than the Notes, the loans
made by the NTFC Lenders pursuant to the terms of the NTFC Loan
Agreement and any intercompany Indebtedness) that is secured by a Lien
on the property and assets subject to such Asset Sale and is required
to be repaid under the terms thereof as a result of such Asset Sale;
and
(d) in the case of any Asset Sale, the amount required to be
reserved, in accordance with generally accepted accounting principles
in effect on the date on which the Net Cash Proceeds from such Asset
Sale are calculated, and so reserved against liabilities under
indemnification obligations, liabilities related to environmental
matters or other similar contingent liabilities associated with the
property and assets subject to such Asset Sale that are required to be
so provided for under the terms of the documentation for such Asset
Sale;
<PAGE>
II-12
in each case to the extent, but only to the extent, that the amounts so
deducted are, at the time of receipt of such cash, actually paid to a
Person that is not an Affiliate of such Person and are properly
attributable to such transaction or to the property or asset that is the
subject thereof.
"1996 FLEXIBLE INCENTIVE PLAN" means the stock incentive plan of the
Company pursuant to which options for up to 3,561,000 shares of common
stock of the Company may from time to time be granted or sold to key
employees of the Company and its Subsidiaries in order to retain or to
create an incentive for such key employees.
"NON-VOTING EQUITY INTERESTS" has the meaning specified in Section
8.10(b).
"NOTE DOCUMENTS" means, collectively, this Agreement, the Other
Agreements, the Notes, the Collateral Documents, the Intercreditor
Agreement, the Fee Letter, and all other agreements and instruments
evidencing any Obligation of the Company or any of the other Obligors
secured by the Collateral Documents, in each case as such agreement,
instrument or other document may be amended, supplemented or otherwise
modified hereafter from time to time in accordance with the terms thereof
and Section 16.
"NOTES" has the meaning specified in Section 1.
"NOTICE OF SALE AND PURCHASE" has the meaning specified in Section
2.2.
"NTFC" means NTFC Capital Corporation, a Delaware corporation.
"NTFC COLLATERAL" means all of the property and assets of the Obligors
(other than any equipment of the Company or any of its Subsidiaries located
outside of the United States of America) pledged to NTFC, or in which NTFC
has been or is purported to have been granted a lien and security interest,
pursuant to the terms of the NTFC Loan Documents, as in effect from time to
time prior to the Additional Availability Date, including, without
limitation, all of the shares of common stock of the Company pledged by the
Shareholders, all of the equipment of the Company located in any state of
the United States of America and subject thereto and all proceeds of the
foregoing.
"NTFC LENDERS" means NTFC and the other holders, if any, of the
promissory notes originally issued to NTFC under the NTFC Loan Agreement.
"NTFC LOAN AGREEMENT" means that certain Amended and Restated
Equipment Loan and Security Agreement dated as of March 27, 1997 between
NTFC and the Company, as such agreement may have been amended, supplemented
or otherwise modified through the Initial Purchase Date.
"NTFC LOAN DOCUMENTS" means, collectively, the NTFC Loan Agreement,
the promissory notes issued thereunder from time to time, the security
agreements and pledge agreements under which the liens and security
interests in favor of NTFC, on behalf of itself and the other NTFC Lenders,
have been or hereafter are to be granted, in each case as such agreement or
instrument may have been amended, supplemented or otherwise modified
through the Initial Purchase Date.
<PAGE>
II-13
"OBLIGATION" means, with respect to any Person, any payment,
performance or other obligation of such Person of any kind, including,
without limitation, any liability of such Person on any claim, whether or
not the right of any creditor to payment in respect of such claim is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
disputed, undisputed, legal, equitable, secured or unsecured, and whether
or not such claim is discharged, stayed or otherwise affected by any
proceeding referred to in Section 11.1(g). Without limiting the generality
of the foregoing, the Obligations of the Obligors under the Note Documents
include the obligation to pay principal, interest, premiums, charges,
expenses, fees, attorneys' fees and disbursements, indemnities and other
amounts payable by any of the Obligors under any of the Note Documents.
"OBLIGORS" means, collectively, the Company, each of the Shareholders
and each Subsidiary of the Company that becomes party to any pledge
agreement, security agreement, mortgage, charge or other similar document
or any guarantee after the date of this Agreement pursuant to Section 8.10.
"OFFICER'S CERTIFICATE" means, with respect to any Person, a
certificate executed on behalf of such Person by its chairman of the board
(if an officer), its president or one of its vice presidents or a Senior
Financial Officer thereof (or persons performing similar functions to the
foregoing); PROVIDED that each Officer's Certificate shall include (a) a
statement that the officer making or giving such Officer's Certificate has
read the provisions of this Agreement or the other Note Document requiring
the delivery thereof and any definitions or other provisions contained in
this Agreement relating thereto, (b) a statement that, in the opinion of
the signer, he has made or has caused to be made such examination or
investigation as is necessary to enable him to express an informed opinion
as to whether or not such term or condition has been satisfied or complied
with or the certifications required to be made therein are complete and
accurate, (c) a statement as to whether, in the opinion of the signer, such
term or condition has been satisfied or complied with and (d) all other
statements and determinations required by the related terms and conditions
giving rise to the delivery of such Officer's Certificate.
"OTHER AGREEMENTS" has the meaning specified in Section 2.1.
"OTHER PURCHASERS" has the meaning specified in Section 2.1.
"OTHER TAXES" has the meaning specified in Section 14.3(b).
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA, or any successor thereto.
"PERMITTED LIENS" means the following types of Liens (excluding any
such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal
Revenue Code or by ERISA, any such Lien relating to or imposed in
connection with any Environmental Action and any such Lien expressly
prohibited by the applicable terms of any of the Collateral Documents), in
each case as to which no enforcement, collection, execution, levy or
foreclosure proceeding shall have been commenced:
<PAGE>
II-14
(a) Liens for taxes, assessments and governmental charges or
levies the payment of which is not, at the time, required under
Section 8.5(a);
(b) Liens imposed by law, such as materialmen's, mechanics',
carriers', workmen's, storage and repairmen's Liens and other similar
Liens arising in the ordinary course of business and securing
obligations (other than Indebtedness for borrowed money) (i) that are
not overdue for a period of more than 30 days or (ii) the amount,
applicability or validity of which are being contested in good faith
and by appropriate proceedings diligently conducted and with respect
to which the Company or any of its Subsidiaries, as the case may be,
has established reserves in accordance with generally accepted
accounting principles in effect from time to time;
(c) pledges or deposits to secure obligations incurred in the
ordinary course of business under workers' compensation laws,
unemployment insurance laws or other similar social security
legislation (other than in respect of Employee Benefit Plans) or to
secure public or statutory obligations;
(d) Liens securing the performance of, or payment in respect of,
bids, tenders, government contracts (other than for the repayment of
borrowed money), surety and appeal bonds and other obligations of a
similar nature incurred in the ordinary course of business;
(e) any interest or title of a lessor or sublessor and any
restriction or encumbrance to which the interest or title of such
lessor or sublessor may be subject that is incurred in the ordinary
course of business and that, either individually or when aggregated
with all other Permitted Liens in effect on any date of determination,
could not be reasonably expected to have a Material Adverse Effect;
(f) Liens arising solely from precautionary filings of financing
statements (or the equivalent thereof) under the Uniform Commercial
Code (or any similar law or statute) of the applicable jurisdictions
relating to operating leases otherwise permitted under the terms of
the Note Documents;
(g) Liens in favor of customs and revenue authorities arising as
a matter of law or pursuant to a bond to secure payment of customs
duties in connection with the importation of goods;
(h) Liens arising out of judgments or awards that do not
constitute an Event of Default under Section 11.1(h), 11.1(i) or
11.1(j) and in respect of which the Company or any of its Subsidiaries
subject thereto shall be prosecuting an appeal or proceedings for
review in good faith and, pending such appeal or proceedings, shall
have secured within 10 days after the entry thereof a subsisting stay
of execution and shall be maintaining reserves, in accordance with
generally accepted accounting principles in effect from time to time,
with respect to any such judgment or award; and
(i) easements, rights of way, zoning restrictions and other
encumbrances and similar restrictions on title to, or the use of, real
property that do not, either individually
<PAGE>
II-15
or in the aggregate, materially and adversely affect either the use of
such real property for its intended purposes or the conduct of the
business of the Company or any of its Subsidiaries in the ordinary
course.
"PERSON" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a government
or any political subdivision or agency thereof.
"PLAN" means a Single Employer Plan or a Multiple Employer Plan.
"PRESENT VALUE" has the meaning specified in Section 3 of ERISA.
"PROPERTY" or "PROPERTIES" means, unless otherwise expressly stated in
this Agreement, real or personal property of any kind, tangible or
intangible, choate or inchoate.
"PUC" means the public utilities commission (or similar Governmental
Authority) for any jurisdiction in which the Company or any of its
Subsidiaries owns or leases and operates any of its property and assets or
conducts any of its business, or any successor thereto, including, without
limitation, the New York Public Service Commission.
"PURCHASE DATE" has the meaning specified in Section 2.2.
"QPAM" has the meaning specified in Section 6.3(e).
"REFINANCING" means the private placement or public offering and sale
by the Company of senior or subordinated notes or debentures of the Company
in order to refinance all of the Obligations owing under or in respect of
the Notes.
"REQUIRED HOLDERS" means, at any time, the holders of at least a
majority in interest of the aggregate principal amount of all of the Notes
outstanding at such time (excluding from any calculation thereof any Notes
then owned or held by the Company or any of its Subsidiaries or other
Affiliates).
"REQUIREMENTS OF LAW" means, with respect to any Person, all laws,
constitutions, statutes, treaties, ordinances, rules and regulations, all
orders, writs, decrees, injunctions, judgments, determinations or awards of
an arbitrator, a court or any other Governmental Authority, and all
Governmental Authorizations, binding upon or applicable to such Person or
to any of its properties, assets or businesses.
"RESPONSIBLE OFFICER" means any Senior Financial Officer of the
Company or any other officer of the Company or any of its Subsidiaries
responsible for overseeing the administration of, or reviewing compliance
with, all or any portion of this Agreement or any of the other Note
Documents.
"RESTRICTED PAYMENT" means (a) any dividend or other distribution,
direct or indirect, on account of any shares of any class of capital stock
of (or other ownership or profit interests in) the Company or any of its
Subsidiaries, now or hereafter outstanding, (b) any repurchase,
<PAGE>
II-16
redemption, retirement, defeasance, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, of any shares
of any class of capital stock of (or other ownership or profit interests
in) the Company or any direct or indirect parent of the Company, now or
hereafter outstanding, (c) any payment made to retire, or to obtain the
surrender of, any outstanding warrants, options or other rights for the
purchase or acquisition of shares of any class of capital stock of (or
other ownership or profit interests in) the Company or any direct or
indirect parent of the Company, now or hereafter outstanding, (d) any
return of capital to any shareholders or other equity holders of the
Company or any of its Subsidiaries, or any other distribution of property,
assets, shares of capital stock (or other ownership or profit interests),
warrants, rights, options, obligations or securities thereto as such or (e)
the payment of any management fees or any other fees or expenses (including
the reimbursement thereof by the Company or any of its Subsidiaries)
pursuant to any management, consulting or other services agreement to any
of the Shareholders of the Company or any of its Subsidiaries or other
Affiliates or to any other Subsidiaries or Affiliates or the Company.
"SECURED PARTIES" means the Collateral Agent, you, the Other
Purchasers, if any, the other holders of the Notes and the other Persons,
if any, the Obligations owing to which are or are purported to be secured
by the Collateral under the terms of the Collateral Documents.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time.
"SENIOR FINANCIAL OFFICER" means, with respect to any Person, the
chief financial officer, the principal accounting officer, the treasurer or
the controller of such Person.
"SEPARATE ACCOUNT" has the meaning specified in Section 3 of ERISA.
"SERIES A PREFERRED STOCK" means the Redeemable Convertible Preferred
Stock, Series A, of the Company, par value $0.01 per share, issued
initially to Princes Gate Investors II, L.P. pursuant to the Convertible
Preferred Stock Purchase Agreement and the amendment to the certificate of
incorporation of the Company dated as of November 1, 1996.
"SHAREHOLDER PLEDGE AGREEMENTS" has the meaning specified in Section
3.1(b).
"SHAREHOLDERS" means, collectively, Mr. Alfred West, Mr. Steven West
and Mr. Gary Bondi and any other Person that becomes or is required to
become a party to one or more of the Shareholder Pledge Agreements pursuant
to the terms thereof.
"SINGLE EMPLOYER PLAN" means a single employer plan (as defined in
Section 4001(a)(15) of ERISA) that (a) is maintained for employees of the
Company or any ERISA Affiliate and no Person other than the Company and the
ERISA Affiliates or (b) was so maintained and in respect of which the
Company or any ERISA Affiliate could have liability under Section 4069 of
ERISA in the event such plan has been or were to be terminated.
"SOLVENT" and "SOLVENCY" mean, with respect to any Person on any date
of determination, that, on such date:
<PAGE>
II-17
(a) the fair value of the property and assets of such Person is
greater than the total amount of liabilities (including, without
limitation, contingent liabilities) of such Person;
(b) the present fair salable value of the property and assets of
such Person is not less than the amount that will be required to pay
the probable liability of such Person on its debts as they become
absolute and matured;
(c) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person's ability to pay
such debts and liabilities as they mature; and
(d) such Person is not engaged in business or in a transaction,
and is not about to engage in business or in a transaction, for which
such Person's property and assets would constitute an unreasonably
small capital.
The amount of contingent liabilities at any time shall be computed as the
amount that, in the light of all of the facts and circumstances existing at
such time, represents the amount that could reasonably be expected to
become an actual or matured liability.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company or any
of its Subsidiaries that is subordinated in right of payment to the Notes
or the other Obligations of such Subsidiary under or in respect of the Note
Documents, if any.
"SUBSIDIARY" means, with respect to any Person at any time, any
corporation, partnership, joint venture, limited liability company, trust
or estate of which (or in which) more than 50% of:
(a) the issued and outstanding shares of capital stock having
ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether at the time shares of
capital stock of any other class or classes of such corporation shall
or might have voting power upon the occurrence of any contingency);
(b) the interest in the capital or profits of such partnership,
joint venture or limited liability company; or
(c) the beneficial interest in such trust or estate,
is, at such time, directly or indirectly owned or controlled by such
Person, by such Person and one or more of its other Subsidiaries or by one
or more of such Person's other Subsidiaries.
"TAXES" has the meaning specified in Section 14.3(a).
"TERMINATION EVENT" means:
(a) (i) the occurrence of a reportable event, within the meaning
of Section 4043(c) of ERISA, with respect to any Plan unless the
30-day notice requirement with respect to such event has been waived
by the PBGC or (ii) the requirements of
<PAGE>
II-18
paragraph (1) of Section 4043(b) of ERISA (without regard to paragraph
(2) of such Section) are met with respect to a contributing sponsor,
as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event
described in paragraph (9), (10), (11), (12) or (13) of Section
4043(c) of ERISA could reasonably be expected to occur with respect to
such Plan within the following 30 days;
(b) the application for a minimum funding waiver with respect to
a Plan;
(c) the provision by the administrator of any Plan of a notice
of intent to terminate such Plan pursuant to Section 4041(a)(2) of
ERISA (including any such notice with respect to a plan amendment
referred to in Section 4041(e) of ERISA);
(d) the cessation of operations at a facility of the Company or
any ERISA Affiliate in the circumstances described in Section 4062(e)
of ERISA;
(e) the withdrawal by the Company or any ERISA Affiliate from a
Multiple Employer Plan during a plan year for which it was a
substantial employer, as defined in Section 4001(a)(2) of ERISA;
(f) the conditions for the imposition of a lien under
Section 302(f) of ERISA shall have been met with respect to any Plan;
(g) the adoption of an amendment to a Plan requiring the
provision of security to such Plan pursuant to Section 307 of ERISA;
or
(h) the institution by the PBGC of proceedings to terminate a
Plan pursuant to Section 4042 of ERISA, or the occurrence of any event
or condition described in Section 4042 of ERISA, that constitutes
grounds for the termination of, or the appointment of a trustee to
administer, a Plan.
"VOTING EQUITY INTERESTS" has the meaning specified in Section
8.10(b).
"VOTING INTERESTS" means shares of capital stock issued by a
corporation, or equivalent interests in any other Person, the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
the election of directors (or persons performing similar functions) of such
Person, even if the right so to vote has been suspended by the happening of
such a contingency.
"WITHDRAWAL LIABILITY" has the meaning specified in Part I of
Subtitle E of Title IV of ERISA.
<PAGE>
SCHEDULE 5.4 (a)
CAPITALIZATION OF THE COMPANY
PART A Authorized, Issued and Outstanding Capital Stock
- ----------------------------------------------------------
(1) 29,250,000 shares of Voting Common Stock, par value $.0001 per share, of
which 20,000,000 are issued and outstanding, and of which 4,012,000 shares
have been reserved for conversion of the Series A Preferred Stock.
(2) 500,000 shares of Non-Voting Common Stock, par value $.0001 per share, none
of which are issued and outstanding.
(3) 250,000 shares of Preferred Stock, par value $.01 per share, of which
140,000 shares of Series A Preferred Stock are issued and outstanding.
(4) 2,706,500 options designated for grant under the 1996 Flexible Incentive
Plan with an exercise price of $2.50 per share as of March 1, 1997.
PART B Arrangements Relating to Issuance of Capital Stock
- ------------------------------------------------------------
(1) Employment Agreement, dated August 1, 1996, between Company and Alan Levy,
as amended October 31, 1996.
(2) 1996 Flexible Incentive Plan.
PART C Rights to Acquire Capital Stock
- -----------------------------------------
(1) 3,000,000 total options designated for grant under the 1996 Flexible
Incentive Plan with an exercise price of $2.50 per share, of which
2,706,500 have been granted as of March 1, 1997.
(2) Employment Agreement, dated August 1, 1996, between Company and Alan Levy,
as amended October 31, 1996.
<PAGE>
SCHEDULE 5.4(b)
SUBSIDIARIES
================================================================================
Name; Jurisdiction; % of Shares of each class of
its capital stock or similar
equity interests outstanding
that are owned by the Company
and/or one or more of its
Subsidiaries
- --------------------------------------------------------------------------------
American Telemedia, Inc. Delaware 100%
- --------------------------------------------------------------------------------
American Telemedia, Ltd. United Kingdom 100%
- --------------------------------------------------------------------------------
Econophone, Ltd. Ireland 100%
- --------------------------------------------------------------------------------
Econophone, GMBH Germany 100%
- --------------------------------------------------------------------------------
Econophone, Hellas S.A. Greece 100%
- --------------------------------------------------------------------------------
Econophone, Ltd. Brussels 100%
- --------------------------------------------------------------------------------
Econophone France SARL France 100%
- --------------------------------------------------------------------------------
Gemlink Antwerp 100%
- --------------------------------------------------------------------------------
Telco Global United Kingdom 70%
Communications, Limited
================================================================================
<PAGE>
SCHEDULE 5.5(c)
ACTIVITIES SINCE THE INITIAL PURCHASE DATE
None.
<PAGE>
SCHEDULE 5.7
GOVERNMENTAL AUTHORIZATIONS
AND OTHER APPROVALS
(1) Waiver by Princes Gate Investors II, L.P., Econophone, Inc., Alfred West,
Steven West, and Gary Bondi, relating to the Certificate of Amendment to
the Certificate of Incorporation of the Company.
(2) First Amendment to the Amended and Restated Equipment Loan and Security
Agreement between NTFC Capital Corporation and Company, dated as of
April 24, 1997.
(3) Waiver incorporated into Alfred West's Shareholder Pledge Agreement,
relating to the Securityholders Agreement dated as of November 1, 1996,
among Alfred West, Princes Gate Investors II, L. P. and the Company.
<PAGE>
SCHEDULE 5.8
DISCLOSED LITIGATION
None.
<PAGE>
SCHEDULE 5.12
LICENSE AND INTELLECTUAL PROPERTY INFRINGEMENTS
Part A Actions Pending or Threatened Against the Company or its Subsidiaries
- -------------------------------------------------------------------------------
none
Part B Violations/Infringements by the Company or its Subsidiaries
- ---------------------------------------------------------------------
none
<PAGE>
SCHEDULE 5.19
ENVIRONMENTAL MATTERS
None.
<PAGE>
SCHEDULE 5.21
EXISTING INDEBTEDNESS
- --------------------------------------------------------------------------------
Payee; Description Total as of
approx. 3/31/97
- --------------------------------------------------------------------------------
1. Intelligent Leasing Printers, Scanner 5,435.48
- --------------------------------------------------------------------------------
2. NEC Ind. Telephone System 24,543.75
- --------------------------------------------------------------------------------
3. General Auto-Texas Computer 40,266.16
- --------------------------------------------------------------------------------
4. Canon Financial Computer Equip. 53,305.62
- --------------------------------------------------------------------------------
5. Master Lease Computer Equip. 41,010.45
- --------------------------------------------------------------------------------
6. Finova-7176170 Voice Mail 20,077.04
- --------------------------------------------------------------------------------
7. Finova-7182940 Telephone Sys. - Upgrade 23,620.79
- --------------------------------------------------------------------------------
8. Finova-7185791 Telephone Equipment 11,240.52
- --------------------------------------------------------------------------------
9. AT&T Cap. -556260 Computer Equip. 14,655.60
- --------------------------------------------------------------------------------
10. AT&T Cap. -565053 Computer Equip. 3,955.16
- --------------------------------------------------------------------------------
11. AT&T Cap. -571208 Computer Equip. 8,276.31
- --------------------------------------------------------------------------------
12. AT&T Cap. -585377 Computer Equip. -Texas 11,327.39
- --------------------------------------------------------------------------------
13. AT&T Cap. -586026 Computer Equip. -Texas 9,753.15
- --------------------------------------------------------------------------------
14. Americorp 4682-1 Cisco Router&Peripherals 21,170.42
- --------------------------------------------------------------------------------
15. Green Tree Vendor Debit Card Box 31,400.12
- --------------------------------------------------------------------------------
16. Green Tree Vendor Debit Card Box 33,082.28
- --------------------------------------------------------------------------------
17. Imperial Business Debit Card Box 29,772.80
- --------------------------------------------------------------------------------
18. NTFC - Tranche I Nortel Equipment 1,755,237.60*
- --------------------------------------------------------------------------------
19. NTFC - Tranche II Nortel Equipment 2,824,801.00*
- --------------------------------------------------------------------------------
20. Israel Discount Bank $300,000 line of credit 0.00
- --------------------------------------------------------------------------------
21. Israel Discount Bank $3M line of credit 0.00
- --------------------------------------------------------------------------------
Israel Discount Bank Installment Note 350,000.00*
- --------------------------------------------------------------------------------
22. Sprint Note Payable 637,126.55*
- --------------------------------------------------------------------------------
23. IDT Note Payable 836,670.26*
- --------------------------------------------------------------------------------
24. NEC America, Inc. Telephone Equip. - Texas 175,000.00*
- --------------------------------------------------------------------------------
25. PTAT-1 Equipment 130,000*
125,000*
224,000*
- --------------------------------------------------------------------------------
26. PTAT-1 Backhaul Agreement 40,000
40,000
80,000
- --------------------------------------------------------------------------------
27. Optel Equipment 60,000
- --------------------------------------------------------------------------------
28. Liebowitz Note Payable 35,018
- --------------------------------------------------------------------------------
29. R. West Note Payable 200,000
- --------------------------------------------------------------------------------
30. R. West Note Payable 108,000
- --------------------------------------------------------------------------------
* Further documentation will be provided.
<PAGE>
SCHEDULE 5.24
MATERIAL CONTRACTS
(1) Stock Pledge Agreement, dated March 27, 1997, between Alfred West and NTFC
Capital Corporation.
(2) Stock Pledge Agreement, dated March 27, 1997, between Steven West and NTFC
Capital Corporation.
(3) Stock Pledge Agreement, dated March 27, 1997, between Gary Bondi and NTFC
Capital Corporation.
(4) Collateral Assignment of Contract, dated May 28, 1996, between Company and
NTFC Capital Corporation.
(5) Sublease, dated February 1, 1996, between Company and Amex, Inc.
(6) Lease, dated May, 1996, between Eklam Realty Corp. and Company.
(7) Lease, dated April 15, 1993, between Company and Hudson Telegraph
Associates.
(8) Amendment of lease, dated June 28, 1996, between Company and Hudson
Telegraph Associates.
(9) Lease, dated March 8, 1996, between Company and R&S Leasing.
(10) Lease, dated August 14, 1996, between Company and One Wilshire Arcade
Imperial, Ltd.
(11) Employment Agreement, dated August 1, 1996, between Company and Alan Levy,
as amended October 31, 1996.
(12) Debit Card Resale Arrangement, between Company and Cardlink Services.
[Unexecuted contract, yet parties are operating according to draft
agreement that was supplied to Purchaser]
(13) Authorized Representative Agreement, dated March 17, 1996, between Company
and National Business Society Inc.
(14) Carrier Transport Switched Services Agreement, dated June 2, 1994, between
Company and Sprint Communications Company L.P.
(15) Carrier Services SS7 Interconnection Agreement, dated October 21, 1994,
between Company and Sprint Communications Company L.P.
<PAGE>
(16) IDT/Econophone Agreement in regards to Debmar Project, dated June 27, 1996,
between Company and IDT. [Terminated by letter agreement dated October 22,
1996].
(17) $2,896,812.78 Promissory Note, dated October 22, 1996, by Company in favor
of IDT Corporation.
(18) Security Agreement dated October 22, 1996, between Company and IDT
Corporation
(19) Indefeasible Right of Use Agreement, dated December 15, 1994 ("PTAT-1
Agreement"), between Company and Private Trans-Atlantic Telecommunications
System, Inc., as amended January 18, 1995 and December 27, 1995.
(20) Indefeasible Right of Use Agreement, dated December 15, 1994 ("Backhaul
Agreement") between Company and Private Trans-Atlantic Telecommunications
System, Inc., as amended January 18, 1995 and December 27, 1995.
(21) Fiber Restoration Contract, dated April 1, 1996, between Company and
Private Trans-Atlantic Telecommunications System, Inc.
(22) Interconnect Agreement, dated December 14, 1995, among Company, Colt
Telecommunications and Telelink Communications (USA) Limited.
(23) Agreement, dated February 27, 1996, between Company and Gerard Klauer
Mattison & Co.
(24) Digital Services Agreement, dated March 17, 1996, between Company and
Worldcom Network Services, Inc. d/b/a Wiltel.
(25) Reseller Agreement, dated March 27, 1996, between Company and Wiltel, Inc.
(26) Telecommunications Services Agreement, dated March 27, 1996, between
Company and Worldcom Network Services, Inc. d/b/a/ Wiltel.
(27) Carrier Service Agreement, dated June 16, 1996, between Company and Viatel,
Inc.
(28) Carrier Service Agreement, dated September 25, 1995, between Company and
Star Vending Inc. as amended by Rate Amendments.
(29) Switched Services Agreement, dated July 2, 1996, between Company and NACS
Communications, Inc. d/b/a Texcom U.S.A.
(30) Carrier Service Agreement, dated June 28, 1996, between Company and
Startec, Inc.
(31) Carrier Services Agreement, dated April 9, 1996, between Company and
Startec, Inc. as amended by Amendment 1, dated July 24, 1996.
<PAGE>
(32) Telephone Services Agreement, dated June 23, 1996, between Company and
Alliance Telecommunications International, Ltd. with Addendum, dated August
8, 1996.
(33) Carrier Terminating Switched Services Agreement, dated July 10, 1996,
between Company and Quest Communications Corporation.
(34) Telecommunications Services Agreement, dated July 1, 1996, between Company
and Quest Communications Corporation.
(35) SSI Service Agreement, dated September 5, 1996, between Company and Switch
Services, Inc.
(36) SSI Service Agreement, dated June 12, 1995, between Company and Switch
Services, Inc.
(37) Telecommunications Services Agreement, dated March 18, 1996, between
Company and MFS Intelnet, Inc.
(38) International Carrier Voice Service Agreement, dated July 22, 1996, between
Company and Facilicom International, L.L.C.
(39) Carrier Agreement, dated July 7, 1995, between Company and Cherry
Communications Incorporated, amended by second amendment, dated April 1,
1996.
(40) Carrier Service Agreement, dated April 1, 1996, between Company and Comtech
International, Inc.
(41) Com Tech International Service Agreement, dated June 7, 1996, between
Company and ComTech International Corporation.
(42) Long Distance Service Agreement, dated March 21, 1996, between Company and
ACC Long Distance Corp.
(43) Basic Supply Agreement, dated August 11, 1995, between Company and Northern
Telecom Inc.
(44) Agreement, dated June 5, 1996, between Company and Joshua V. Meisels.
(45) Agreement, dated July 25, 1995, between Company and Frontier Communications
International, Inc.
(46) [intentionally deleted]
(47) Agreement, dated August 29, 1996, between Company and Belgacom.
(48) Consulting Agreement, dated the last day of January, 1996, between Company
and DLM Communications.
<PAGE>
(49) Letter Agreement, dated October 3, 1996, between Company and Patrick
Atallah.
(50) Letter Agreement, dated October 4, 1996, between Company and Jeremy Kagan.
(51) Letter Agreement, dated December 24, 1994, among Alfred West, Steven West
and Gary Bondi.
(52) Letter Agreement, dated September 13, 1996, between Company and Ira
Riesenberg.
(53) Unilateral Confidentiality Agreement, dated November 8, 1995, between
Company and Colt Telecommunications Limited.
(54) $350,000 Installment Note by Company in favor of Israel Discount Bank of
New York.
(55) $300,000 line of credit made by Israel Discount Bank of New York in favor
of Company.
(56) $1,877,022.07 Promissory Note, dated October 4, 1996, by Company in favor
of Sprint Communications Company, L.P.
(57) Agreement dated January 3, 1997 between DLM Communications (David Mer) and
Company.
(58) Lease dated January 31, 1997 between Paramount Group, Inc. (45 Broadway
Limited Partnership) and Company.
(59) Agreement dated as of March 27, 1997 between NTFC Capital Corporation and
Company.
(60) $3,000,000 line of credit with Israel Discount Bank.
<PAGE>
SCHEDULE 9.1
TRANSACTIONS WITH AFFILIATES
(1) $35,018 note, dated August 1, 1993, by Company in favor of Jack Liebowitz
that matures on August 1, 1998.
(2) $200,000 note, dated December 9, 1992, by Company in favor of R. West that
matures on December 8, 1997.
(3) $108,000 note, dated November 16, 1993, by Company in favor of R. West that
matures on November 15, 1998.
(4) Non-interest bearing loan to Alfred West, in the amount of $183,128 thru
March 31, 1997.
(5) Non interest bearing loan to Gary Bondi in the amount of $50,000.
(6) Alfred West owns 100% of E-Gram Corporation, a related company.
(7) Oral employment agreements of Company and Alfred West, Steven West, and
Gary Bondi.
<PAGE>
SCHEDULE 9.2
EXISTING LIENS
(1) Lien of Israel Discount Bank of New York on all of Company's property,
equipment, inventory, fixtures, goods, products of collateral and accounts.
(2) Lien of Primex Leasing Corporation on the Company's Quikcard Thermal
Transfer Printer. [assigned to Advanta Leasing Corp.]
(3) Lien of Sprint Communications L.P. on all accounts receivable and proceeds
of Company.
(4) Lien of Master Lease Division of Tokai on Company's lease of computer
equipment.
(5) Liens of FINOVA Capital Corporation.
(6) Lien of Canon Financial Services, Inc. on Company's lease of office
equipment.
(7) Lien of Pitney Bowes Credit Corporation on Company's lease of
office-related equipment.
(8) Lien of NTFC Capital Corporation on Company's Collateral as defined in
Section 3.01 of the NTFC Capital Corporation Equipment Loan and Security
Agreement, dated May 28, 1996, between Company and NTFC Capital
Corporation.
(9) Lien of NTFC Capital Corporation on Company's present and future rights,
titles and interests in, under, to or arising from the Basic Supply
Agreement between Company and Northern Telecom, Inc.
(10) Lien of IDT Corporation on Company's Collateral pursuant to Promissory
Note, dated October 22, 1996.
(11) Lien of Teleglobe (Cantat-3) Inc. ("TC-3") on equipment purchased pursuant
to two financing agreements Company entered into with TC-3 during December,
1996.
(12) Lien of Private Trans-Atlantic Telecommunications System-1 ("PTAT-1") on
equipment purchased pursuant to three agreements Company entered into with
PTAT-1 during 1994 and 1995.
(13) Lien of Optel Communications, Inc. ("Optel") on equipment purchased
pursuant to a financing agreement Company entered into with Optel during
December, 1996.
(14) Liens of NEC on telephone equipment.
<PAGE>
(15) Lien of NTFC Capital Corporation on Company's Collateral as defined in
Section 3.01 of the NTFC Capital Corporation Equipment Loan and
Security Agreement, dated March 28, 1997, between Company and NTFC
Capital Corporation.
(16) Lien of Imperial Business Credit, assigned from RCC Finance Group.
(17) Lien of Advanta on Toshiba equipment.
<PAGE>
SCHEDULE 9.7
EXISTING INVESTMENTS
(1) $3,000,000 line of credit from Israel Discount Bank, to be used for hedging
currencies. As of the Initial Purchase Date, the Company has not drawn
on the line.
<PAGE>
SCHEDULE 9.8
EXISTING DIVIDEND AND PAYMENT RESTRICTIONS
(1) Securities Purchase Agreement dated as of November 1, 1996 between Princes
Gate Investors II, L.P. and Company.
(2) Amended and Restated Equipment Loan and Security Agreement dated as of
March 27, 1997 between NTFC Capital Corporation and Company, and the First
Amendment thereto, dated as of April 24, 1997.
(3) Certificate of Amendment to the Certificate of Incorporation of Company,
dated as of November 1, 1996.
<PAGE>
EXHIBIT A TO THE NOTE PURCHASE AGREEMENT
FORM OF NOTE
(See Exhibit 4.3)
<PAGE>
EXHIBIT B TO THE NOTE
PURCHASE AGREEMENTS
FORM OF NOTICE OF SALE AND PURCHASE
[Proposed Purchase Date]
[NAME OF PURCHASER]
______________________
______________________
Attention: ___________
Ladies and Gentlemen:
The undersigned, Econophone, Inc., a New York corporation, refers to
that certain Note Purchase Agreement dated as of April 24,1997 (as amended,
supplemented or otherwise modified from time to time, the "Note Purchase
Agreement"; the terms defined therein being used herein as therein defined)
between the undersigned and you, and hereby gives you notice, irrevocably,
pursuant to Section 2.2 of the Note Purchase Agreement t hat the undersigned
hereby proposes that it will sell to you, and you will purchase, Notes pursuant
to the terms of the Note Purchase Agreement and, in that connection, sets forth
the information relating to such sale and purchase (the "Proposed Sale and
Purchase") as required by Section 2.2 of the Note Purchase Agreement:
(a) The proposed Purchase Date is ______________ __, 1997.
(b) The aggregate principal amount of Notes to be purchased by you in
the Proposed Sale and Purchase is $________.
(c) The aggregate principal amount of Notes to be purchased by all of
the Other Purchasers, if any, on the proposed Purchase Date is $________.
The undersigned hereby certifies that the following statements are
true on and as of the date hereof and will be true on and as of the proposed
Purchase Date:
- ------------------------------
* Each proposed Purchase Date shall be a Business Day. No Proposed Sale and
Purchase shall occur, or shall be requested to occur, within five Business
Days following the date on which any other sale and purchase of Notes
(whether from the addressee of this Notice of Sale and Purcase or from any
Other Purchaser) shall have occurred or been requested to occur.
<PAGE>
(i) The representations and warranties of each of the Obligors
contained in the Note Purchase Agreement and each of the other Note
Documents are complete and correct on and as of such date, before and after
giving effect to the Proposed Sale and Purchase and to the application of
the proceeds therefrom as contemplated by Section 5.15(a) of the Note
Purchase Agreement, as though made on and as of such date;
(ii) After giving effect to the Proposed Sale and Purchase and to the
application of the proceeds therefrom as contemplated by Section 5.15(a) of
the Note Purchase Agreement, no Default or an Event of Default has occurred
and is continuing;
(iii) Mr. Alfred West is in good health, is employed as a senior
executive officer of the Company and, in such capacity, is actively
involved in managing the businesses and financial matters of the Company
and has not expressed any intention to terminate his employment by the
Company; and
(iv) All of the other applicable conditions to the Proposed Sale and
Purchase set forth in Section 4 of the Note Purchase Agreement have been
satisfied, or will be satisfied, on or prior to the proposed Purchase Date
in accordance with their terms.
The undersigned hereby further certifies that it neither has nor will
have sold any Note or Notes to you or any of the Other Purchasers, or requested
the sale to and purchase by you or any of the Other Purchasers of any Note or
Notes, within the period of five consecutive Business Days ending on the
proposed Purchase Date.
Very truly yours,
ECONOPHONE, INC.
By:
------------------------------
Name:
Title:
cc: Morgan Stanley Group Inc.
1585 Broadway, 36th Floor
New York, New York 10036
Attention: Mr. David R. Powers
<PAGE>
EXHIBIT C TO THE NOTE
PURCHASE AGREEMENTS
FORM OF SHAREHOLDER PLEDGE AGREEMENT
Dated April 24, 1997
From
[NAME OF SHAREHOLDER],
as Pledgor,
to and in favor of
MORGAN STANLEY GROUP INC.,
as Collateral Agent
<PAGE>
SHAREHOLDER PLEDGE AGREEMENT
PLEDGE AGREEMENT dated April 24, 1997 made by [NAME OF SHAREHOLDER],
an individual residing in the State of ___________ (the "Pledgor"), to and in
favor of MORGAN STANLEY GROUP INC., a Delaware corporation ("MS Group"), as the
collateral agent (the "Collateral Agent") for itself, the Other Purchasers (as
defined in the Note Purchase Agreements referred to below), if any, and the
other holders of the Senior Secured Increasing Rate Notes due April 24, 1998
(the "Notes") of Econophone, Inc., a New York corporation (the "Company").
PRELIMINARY STATEMENTS
(1) The Company has entered into one or more separate Note Purchase
Agreements dated as of April 24, 1997 (as amended, supplemented or otherwise
modified from time to time, the "Note Purchase Agreements") with MS Group and
the respective Other Purchasers (collectively, the "Purchasers") parties
thereto. Capitalized terms not otherwise defined in this Agreement shall have
the same meanings as specified in the Note Purchase Agreements and, unless
otherwise defined in this Agreement or in the Note Purchase Agreements, terms
used in Article 9 of the N.Y. Uniform Commercial Code (as defined in Section
10(a)) are used herein as therein defined.
(2) The Pledgor is the owner of the number and percentage of each
type of issued and outstanding Company Equity Interests (as hereinafter defined)
described in Part A of Schedule I attached hereto (which, as of the date of this
Agreement, represents at least 49% of the combined voting power of all issued
and outstanding Voting Interests in the Company owned by the Pledgor) and is the
owner of all of the indebtedness described in Part B of Schedule I attached
hereto and issued by the Company or one or more of the Subsidiaries of the
Company referred to therein. The Pledgor will receive substantial direct and
indirect benefits from the extensions of credit to the Company by the Purchasers
and the other holders of the Notes and, in consideration thereof, has agreed to
pledge to the Collateral Agent, for its benefit and the benefit of the Secured
Parties, (a) all of the Company Equity Interests now or hereafter owned by him
other than, so long as the NTFC Loan Agreement remains in effect, the Excluded
Company Interests (as hereinafter defined) and (b) all of the indebtedness
described on Part B of Schedule I attached hereto. For purposes of this
Agreement, the term "Company Equity Interests" means, collectively, all of the
shares of capital stock of the Company, all of the warrants, options or other
rights for the purchase or acquisition from the Company of shares of capital
stock of the Company, and all of the other ownership or profit interests in the
Company, whether voting or nonvoting, and whether or not such shares, warrants,
options, rights or other interests are authorized or otherwise existing on the
date of this Agreement. Furthermore, for purposes of this Agreement, the term
"Excluded Company Interests" means Voting Interests in the Company owned by the
Pledgor at any time which, together with the Voting Interests in the Company
owned by all of the other Shareholders at such time, represents not more than
51% of the combined voting power of all of the issued and outstanding Voting
Interests in the Company on the date of this Agreement.
(3) It is a condition precedent to the obligations of the Purchasers
to purchase the Notes to be sold from time to time by the Company, and to pay
the purchase price therefor to the Company, under the Note Purchase Agreements
that the Pledgor shall have made the pledge and granted the assignment and
security interest contemplated by this Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the premises and in order to
induce each of the Purchasers to purchase the Notes to be sold from time to time
by the Company, and to pay the purchase price therefor to the Company, under the
Note Purchase Agreements, the Pledgor hereby agrees with the Collateral Agent,
for the ratable benefit of the Secured Parties, as follows:
SECTION 1. GRANT OF SECURITY. The Pledgor hereby pledges and assigns
to the Collateral Agent, for the ratable benefit of the Secured Parties, and
hereby grants to the Collateral Agent, for the ratable benefit of the Secured
Parties, a security interest in, all of its right, title and interest in and to
the following, whether now owned or hereafter acquired and whether now or
hereafter existing (collectively, the "Collateral"):
(a) all of the Company Equity Interests described in Part A of
Schedule I attached hereto (the "INITIAL PLEDGED INTERESTS" and, together
with the Company Equity Interests referred to in clause (b) of this Section
1, the "PLEDGED INTERESTS") and all of the certificates, if any,
representing such Initial Pledged Interests, all security therefor and all
dividends, cash, instruments and other property and assets from time to
time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Initial Pledged Interests;
(b) all of the additional Company Equity Interests from time to time
acquired by the Pledgor in any manner other than, so long as the NTFC Loan
Agreement remains in effect, the Excluded Company Interests, whether or not
evidenced by certificates, and all of the certificates, if any,
representing such additional Company Equity Interests, all security
therefor and all dividends, cash, instruments and other property and assets
from time to time received, receivable or otherwise distributed in respect
of or in exchange for any or all of such additional Company Equity
Interests;
(c) all of the indebtedness described in Part B of Schedule I
attached hereto (collectively, the "INITIAL PLEDGED INDEBTEDNESs" and,
together with the indebtedness referred to in clause (d) of this Section 1,
the "PLEDGED INDEBTEDNESS") and all of the instruments, if any, evidencing
such Initial Pledged Indebtedness, all security therefor and all interest,
cash, instruments and other property and assets from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or
all of the Initial Pledged Indebtedness;
(d) all of the additional indebtedness from time to time owed to the
Pledgor by the Company or any of its Subsidiaries and all of the
instruments, if any, evidencing such indebtedness, all security therefor
and all interest, cash, instruments and other property and assets from time
to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such additional indebtedness; and
(e) all of the proceeds of any and all of the foregoing Collateral
(including, without limitation, proceeds that constitute property and
assets of the types described in clauses (a) through (d) of this
Section 1).
SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement, and the pledge
and assignment of, and the grant of a security interest in, the Collateral by
the Pledgor hereunder, secures the payment of all Obligations of the Company and
its Subsidiaries now or hereafter existing from time to time under the Note
Purchase Agreements, the Notes and the other Note Documents (including, without
limitation, any extensions, modifications, substitutions, amendments or renewals
of any or all
<PAGE>
of the foregoing Obligations), whether direct or indirect, absolute or
contingent, and whether for principal, interest, premium, fees, indemnification
payments, contract causes of action, costs, expenses or otherwise (all such
Obligations being the "Secured Obligations").
SECTION 3. DELIVERY OF THE COLLATERAL. All certificates or
instruments representing or evidencing the Collateral shall be delivered to and
held by or on behalf of the Collateral Agent pursuant hereto and shall be in
suitable form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
reasonably satisfactory to the Collateral Agent. The Collateral Agent shall
have the right, at any time and from time to time upon the occurrence and during
the continuance of a Default under Section 11.1(a), 11.1(b) or 11.1(g) of the
Note Purchase Agreements or an Event of Default, to transfer to or register in
the name of the Collateral Agent or any of its nominees any or all of the
Collateral. In addition, the Collateral Agent shall have the right at any time
and from time to time to exchange certificates or instruments representing or
evidencing the Collateral for certificates or instruments of smaller or larger
denominations.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents
and warrants as follows:
(a) POWER AND AUTHORITY. The Pledgor has his principal residence at
_____________, ___________, ___________ ______, in the County of _______,
and the State of __________, and has all of the requisite capacity, power
and authority, and the legal right, without the consent or approval of any
other Person, to execute, deliver and perform all of his Obligations under
or in respect of this Agreement and the other Collateral Documents to which
he is or is to be a party and to consummate all of the transactions
contemplated hereby and thereby.
(b) ENFORCEABILITY. This Agreement and each of the other Collateral
Documents to which the Pledgor is or is to be a party have been duly
executed and delivered by the Pledgor and constitute the legal, valid and
binding obligations of the Pledgor, enforceable against the Pledgor in
accordance with their respective terms.
(c) COMPLIANCE WITH LAW, OTHER INSTRUMENTS, ETC. The execution,
delivery and performance by the Pledgor of this Agreement and each of the
other Collateral Documents to which he is or is to be a party and the
consummation of the transactions contemplated hereby and thereby do not (i)
violate any Requirement of Law, (ii) conflict with or result in the breach
of, or constitute a default under, any loan or purchase agreement,
mortgage, deed of trust, lease, instrument, contract or other agreement
binding on or affecting the Pledgor or any of his property or assets or
(iii) except for the Liens created under the Collateral Documents to which
the Pledgor is or is to be a party, result in or require the creation or
imposition of any Lien upon or with respect to any of the property or
assets of the Pledgor.
(d) GOVERNMENTAL AUTHORIZATIONS, ETC. No Governmental Authorization,
and no consent, approval or authorization of, or notice to, or other action
by, any other Person, is required for (i) the due execution, delivery or
performance by the Pledgor of this Agreement or any of the other Collateral
Documents to which he is or is to be a party or the consummation of any of
the transactions contemplated hereby or thereby, (ii) the pledge of the
Collateral pursuant to this Agreement and the other Collateral Documents to
which he is or is to be a party, or the grant of the assignment and
security interest granted by the Pledgor pursuant to
<PAGE>
this Agreement and the other Collateral Documents to which he is or is to
be a party, (iii) the perfection or maintenance of the pledge, assignment
and security interest created under this Agreement and the other Collateral
Documents to which he is or is to be a party (including the first priority
nature thereof) or (iv) the exercise by the Collateral Agent or any of the
other Secured Parties of any of its voting or other rights provided for
under the Note Documents or its remedies in respect of the Collateral
pursuant to the Collateral Documents, except for such Governmental
Authorizations as may be required (A) in connection with the disposition of
any portion of the Pledged Interests by laws affecting the offer and sale
of securities generally or (B) from the FCC or any PUC under the applicable
Communications Laws.
(e) OWNERSHIP OF COLLATERAL. The Pledgor is, and at the time of any
delivery of Collateral to the Collateral Agent pursuant to the terms of
Section 3 will be, the sole legal and beneficial owner of the Collateral,
free and clear of all Liens, except for the pledge, assignment and security
interest created under this Agreement. No effective financing statement or
other instrument similar in effect covering all or any part of the
Collateral is on file in any recording office or other similar office,
except such as may have been filed in favor of the Collateral Agent
relating to this Agreement.
(f) PLEDGED INTERESTS. The Pledged Interests constitute the number
and percentage of each type of issued and outstanding Company Equity
Interests set forth on Part A of Schedule I attached hereto, and the
Pledgor does not own any Company Equity Interests of any kind other than
the issued and outstanding Company Equity Interests set forth on Schedule I
attached hereto and the Excluded Company Interests. All of the Pledged
Interests have been duly authorized and validly issued and are fully paid
and nonassessable. There are no existing options, warrants, calls or
commitments of any character whatsoever relating to any of the Pledged
Interests, except as are set forth in the Securityholders Agreement dated
as of November 1, 1996 (as amended, supplemented or otherwise modified
through the date hereof, the "Securityholders Agreement") among the
Pledges, the Company and Princes Gate Investors II, L.P.
(g) PLEDGED INDEBTEDNESS. The Pledged Indebtedness constitutes all
of the outstanding indebtedness owed to the Pledgor by the Company or any
of its Subsidiaries. The Pledged Indebtedness (i) has been duly
authorized, authenticated or issued and delivered, (ii) is the legal, valid
and binding obligation of the respective issuers thereof and (iii) is
evidenced by one or more promissory notes (which notes have been delivered
to the Collateral Agent). No party to any Pledged Indebtedness is in
default thereunder.
(h) NO OTHER INSTRUMENTS; NOTATION ON BOOKS. None of the Collateral
is evidenced by a share certificate or other instrument that has not been
delivered to the Collateral Agent in its original form. The pledge of the
Pledged Interests by the Pledgor has been duly and conspicuously registered
on the books and records of the Company.
(i) RESIDENCE AND SOCIAL SECURITY NUMBER. The residence of the
Pledgor and the place where the Pledgor keeps his records concerning the
Collateral is located at the address specified therefor in Section 4(a),
and the Social Security number of the Pledgor is _____________. The
Pledgor does not use, has not within the past calendar year used, and has
not established the right to use, any other name, any assumed name or any
trade name.
(j) NO RESTRICTIONS ON PLEDGE OR SALE, ETC. There are no
restrictions on the
<PAGE>
pledge, assignment, encumbrance, ownership, transfer, sale, conveyance or
other disposition of any of the Collateral, either by the Pledgor or,
following the occurrence of any Event of Default and the exercise of any of
the rights and remedies afforded to the Collateral Agent under Section 10,
by the Collateral Agent or any purchaser of all or any of the Collateral
therefrom (whether contained in the certificate of incorporation or bylaws
of the Company or in any agreement, instrument or other document binding
upon or affecting the Pledgor, the Company or any of the property and
assets comprising part of the Collateral or imposed by any applicable
Requirement of Law), except for (A) restrictions, if any, imposed by the
FCC, (B) restrictions applicable to the disposition of any portion of the
Pledged Interests by laws affecting the offer and sale of securities
generally and (C) the restrictions described on Part A of Schedule II
attached hereto. There are no shareholder agreements, voting trust
agreements or other agreements to which the Pledgor is a party or by which
the Pledgor may otherwise be bound that affect the voting or other rights
of a holder of any of the Company Equity Interests, except for (1) this
Agreement and the other Collateral Documents, (2) the restrictions referred
to in the immediately preceding sentence of this subsection (j) and (3) the
other agreements described on Part B of Schedule II attached hereto.
(k) FIRST PRIORITY SECURITY INTEREST. This Agreement, and the
pledge, assignment and granting of a security interest pursuant hereto,
create a valid and perfected first priority lien on and security interest
in the Collateral in favor of the Collateral Agent, for the benefit of
itself and the other Secured Parties, securing the payment of the Secured
Obligations. All of filings and other actions necessary to perfect and
protect such pledges, assignments and security interests have been duly
made or taken and are in full force and effect or will be duly made or
taken in accordance with the terms of the Note Documents; and all filing
and recording fees and taxes related to any of the foregoing have been duly
paid.
(l) SATISFACTION OF CONDITIONS PRECEDENT. There are no conditions
precedent to the effectiveness of this Agreement that have not been
satisfied or waived.
SECTION 5. COVENANTS. From the date of this Agreement and,
thereafter, so long as any of the Notes shall be outstanding, any of the
Purchasers shall have Commitments under the Note Purchase Agreements or any of
the other Secured Obligations shall remain unsatisfied, the Pledgor will at all
times perform and comply with each of the following covenants:
(a) NOTICES, ETC. RELATING TO THE COLLATERAL. The Pledgor will
furnish to the Collateral Agent and each of the other Secured Parties:
(i) promptly after the Pledgor obtains knowledge thereof,
notice, in reasonable detail, of (A) any claim made or asserted
(including, without limitation, any Lien or assertion of a Lien)
against all or any portion of the Collateral, (B) any change in the
type, amount or terms of any of the Collateral, (C) the occurrence of
a Change of Control or any change in the members of the board of
directors of, or any material change in the management of, the Company
or (D) the occurrence of any other development, event or circumstance
which, either individually or in the aggregate, could reasonably be
expected to have an adverse effect on any of the Collateral or the
pledge, assignment and security interest created under this Agreement
or any of the other Collateral Documents to which the Pledgor is or is
to be a party; and
(ii) with reasonable promptness, statements and schedules further
<PAGE>
identifying and describing the Collateral or such other reports in
connection with the Collateral as the Collateral Agent or any of the
other Secured Parties, through the Collateral Agent, may from time to
time reasonably request, all in reasonable detail.
(b) COMPLIANCE WITH LAWS, ETC. The Pledgor (i) will comply in all
material respects with all Requirements of Law to which he (to the extent
the failure to comply with such restrictions could reasonably be expected
to adversely affect the Collateral or the pledge, assignment and security
interest created under this Agreement or any of the other Collateral
Documents) or the Collateral is subject and all applicable restrictions
imposed on the Collateral by any Governmental Authority and (ii) will
obtain and maintain in effect all Governmental Authorizations that are
necessary for the due execution, delivery or performance by him of this
Agreement or any of the other Collateral Documents to which he is or is to
be a party, or for the consummation of any of the transactions contemplated
hereby or thereby.
(c) PAYMENT OF TAXES AND OTHER CLAIMS. The Pledgor will pay and
discharge all taxes, assessments, levies, fees and other governmental
charges imposed upon him or any of the Collateral or any income or
franchises therefrom, to the extent such taxes, assessments, levies, fees
and other governmental charges have become due and payable and before they
have become delinquent, and all claims for which sums have become due and
payable that have resulted or could result in a Lien upon any of the
Collateral; provided, however, that the Pledgor shall not be required to
pay or to discharge any such tax, assessment, levy, fee, other charge or
claim the amount, applicability or validity of which is being contested in
good faith and by appropriate proceedings diligently conducted and with
respect to which the Pledgor has established reserves in accordance with
generally accepted accounting principles in effect from time to time,
unless and until any Lien resulting therefrom attaches to the Collateral
and becomes enforceable by his other creditors.
(d) MAINTENANCE OF RECORDS; INSPECTION. (i) The Pledgor will
maintain, at his sole expense, complete, correct and (in the judgment of
the Collateral Agent) reasonably detailed records of all of the Collateral,
including, without limitation, records of all dividends, interest payments,
distributions and other amounts received in respect of, and other
transactions involving, the Collateral. The Pledgor will mark all of his
books and records relating to the Collateral in such a manner as to
properly evidence this Agreement and the pledge, assignment and security
interest created hereunder. For the further security of the Collateral
Agent and the other Secured Parties, the Pledgor hereby agrees that the
Collateral Agent, on behalf of itself and the other Secured Parties, shall
have a special property interest in all of the books and records of the
Pledgor relating to the Collateral, and the Pledgor will deliver and turn
over any or all of such books and records to the Collateral Agent at any
time following the occurrence and during the continuance of an Event of
Default, upon the request of the Collateral Agent therefor.
(ii) The Pledgor will permit the Collateral Agent and each of the
other Secured Parties and any of the agents or representatives thereof,
upon reasonable notice and at the sole expense of the Pledgor, at any time
and from time to time during normal business hours, to examine and make
copies of and abstracts from all of the books, records and correspondence
of the Pledgor relating to the Company or any of its Subsidiaries or to any
of the Collateral, and to discuss the affairs, finances and accounts of the
Company and/or any such Subsidiary, as the case may be, with, and be
advised as to the same by, the Pledgor.
<PAGE>
(e) COMPLIANCE WITH CONTRACTS, ETC. The Pledgor will perform and
comply in all material respects with all of his Obligations under or in
respect of all agreements or arrangements relating to the Company or any of
its Subsidiaries or to the Collateral to which the Pledgor is a party or by
which he is bound.
(f) CHANGE OF RESIDENCE. The Pledgor will keep his residence and the
place where he keeps his records concerning the Collateral at the location
specified therefor in Section 4(a) or, upon at least 30 days' prior written
notice to the Collateral Agent, at such other location in a jurisdiction
where all actions required by Section 5(i) shall have been taken with
respect to all of the Collateral.
(g) ADDITIONAL COMPANY EQUITY INTERESTS. The Pledgor hereby agrees
that:
(i) he will not consent to the issuance by the Company of, or any
agreement or other commitment of the Company to issue (whether by possible
exercise at a future date of any outstanding warrant, option or other right
or otherwise), any Company Equity Interests of any kind or any other
securities if, after giving effect to any such issuance or agreement or
commitment to issue, the Collateral Agent would not have a valid and
perfected first priority lien on and security interest in the issued and
outstanding Company Equity Interests representing at least 49% of the
combined power of all Voting Interests of the Company (on a fully diluted
basis); and
(ii) he shall pledge hereunder, immediately upon his acquisition
directly or indirectly thereof, any and all additional Company Equity
Interests acquired by him at any time and from time to time that, so long
as the NTFC Loan Agreement remains in effect, do not comprise part of the
Excluded Company Interests.
The Pledgor further agrees to deliver to the Collateral Agent any amendments or
supplements to this Agreement that may be necessary or that the Collateral Agent
may deem reasonably desirable and may request to reflect the inclusion of any
such additional Company Equity Interests or other securities (including any
additional indebtedness referred to in Section 1(d)) in the Collateral.
(h) VOTING RIGHTS; DIVIDENDS; ETC. (i) The Pledgor shall be entitled, so
long as no Event of Default shall have occurred and be continuing:
(A) to exercise any and all voting and other consensual rights
pertaining to the Collateral or any part thereof for any purpose not
otherwise prohibited under or inconsistent with the terms of this Agreement
or any of the other Note Documents and so long as any such exercise or
refrain from exercising any such right could not reasonably be expected to
materially and adversely affect the value of the Collateral or any part
thereof; and
(B) to receive and retain any and all dividends, interest and
distributions paid or other amounts received in respect of the Collateral;
provided, however, that any and all:
(1) dividends and interest paid or payable other than in cash in
respect of, and instruments and other property and assets received,
receivable
<PAGE>
or otherwise distributed in respect of, or in exchange for, any
Collateral; and
(2) cash paid, payable or otherwise distributed in respect of
principal of, or in redemption of, or in exchange for, any Collateral,
shall be, and shall be forthwith delivered to the Collateral Agent to hold
as, Collateral and, if received by the Pledgor, shall be received thereby
in trust for the benefit of the Collateral Agent, shall be segregated from
the other property and funds of the Pledgor and shall be forthwith
delivered to the Collateral Agent as Collateral in the same form as so
received (with any necessary endorsement or assignment).
In furtherance of the foregoing provisions of this Section 5(h), the Collateral
Agent shall execute and deliver (or cause to be executed and delivered) to the
Pledgor all such proxies and other instruments as the Pledgor may reasonably
request for the purpose of enabling the Pledgor to exercise the voting and other
consensual rights that he is entitled to exercise pursuant to subclause (i)(A)
of this Section 5(h) and to receive the dividends, interest payments,
distributions or other amounts that he is authorized to receive and retain
pursuant to subclause (i)(B) of this Section 5(h).
(ii) Upon the occurrence and during the continuance of an Event of
Default:
(A) all rights of the Pledgor to exercise or refrain from exercising
the voting and other consensual rights that he would otherwise be entitled
to exercise pursuant to Section 5(h)(i)(A) shall, upon notice to the
Pledgor by the Collateral Agent, cease, and all such rights with respect to
any such matters shall thereupon become vested in the Collateral Agent,
which shall thereupon have the sole right to exercise or refrain from
exercising such voting and other consensual rights; and
(B) all rights of the Pledgor to receive the dividends, interest
payments, distributions and other amounts that he would otherwise be
authorized to receive and retain pursuant to Section 5(h)(i)(B) shall
automatically cease, and all such rights shall thereupon become vested in
the Collateral Agent, which shall thereupon have the sole right to receive
and retain as Collateral such dividends, interest payments, distributions
and other amounts.
All dividends, interest payments, distributions and other amounts that are
received by the Pledgor contrary to the provisions of subclause (ii)(B) of this
Section 5(h) shall be received in trust for the benefit of the Collateral Agent,
shall be segregated from other property and funds of the Pledgor and shall be
forthwith paid over to the Collateral Agent as Collateral in the same form as so
received (with any necessary endorsement or assignment). The agreement of the
Pledgor in this clause (ii) shall constitute an irrevocable proxy, coupled with
an interest, exercisable by the Collateral Agent in accordance with the terms
hereof. The Pledgor, promptly upon the reasonable request of the Collateral
Agent, shall execute such documents and do such acts as may be necessary or in
the reasonable judgment of the Collateral Agent may be desirable to give effect
to clause (ii) of this Section 5(h).
(i) FURTHER ASSURANCES. (i) The Pledgor hereby agrees that from time to
time, at his sole expense, he will promptly execute and deliver all further
instruments and documents, and take all further actions, that may be necessary
or that the Collateral Agent may deem
<PAGE>
reasonably desirable and may request, in order to perfect and protect the
pledge, assignment or security interest granted or purported to be granted by
the Pledgor hereunder (including, without limitation, the first priority nature
thereof) or to enable the Collateral Agent to exercise and enforce its rights
and remedies hereunder or under any of the other Collateral Documents with
respect to any of the Collateral. Without limiting the generality of the
foregoing, the Pledgor will:
(A) if any Collateral shall be evidenced by a certificate or other
instrument, immediately deliver and pledge to the Collateral Agent
hereunder such certificate or other instrument, duly endorsed and
accompanied by duly executed instruments of transfer or assignment, all in
form and substance reasonably satisfactory to the Collateral Agent; and
(B) execute and file such financing statements, continuation
statements or other similar documents, or amendments thereto, and such
other instruments or notices, or take such other actions, as may be
necessary or as the Collateral Agent may deem reasonably desirable and may
request, in order to perfect and preserve the pledge, assignment and
security interest granted or purported to be granted by the Pledgor under
this Agreement.
(ii) The Pledgor hereby authorizes the Collateral Agent to file one or more
financing statements, continuation statements or other similar documents, and
amendments thereto, relating to all or any part of the Collateral without the
signature of the Pledgor, where permitted by applicable law. A photocopy or
other reproduction of this Agreement or any financing statement or other similar
document covering the Collateral or any part thereof shall be sufficient as a
financing statement or other similar document, where permitted by applicable
law.
(j) LIENS, ETC. The Pledgor will not create, incur, assume or suffer to
exist any Lien on or with respect to any of the Collateral, whether now owned or
hereafter acquired, or file or suffer to exist under the Uniform Commercial Code
or any similar law or statute of any jurisdiction, a financing statement (or the
equivalent thereof) that extends to or covers any of the Collateral, or sign or
suffer to exist any pledge or security agreement authorizing any secured party
thereunder to file any such financing statement (or the equivalent thereof),
except (i) for the pledge, assignment and security interest created therein
under this Agreement and the other Collateral Documents to which he is or is to
be a party (and the filing and existence of financing statements and other
similar documents pursuant hereto and thereto) and (ii) on and after the
Additional Availability Date, for the pledge, assignment and security interest
created in the Pledged Interests under the NTFC Loan Documents (as amended,
supplemented or otherwise modified at such date in a manner otherwise permitted
under Section 8.10 of the Note Purchase Agreements), which pledge, assignment
and security interests shall be subject in all respects to the prior lien and
security interest in the Collateral created under this Agreement and the other
Collateral Documents.
(k) TRANSFERS OF COLLATERAL. The Pledgor will not convey, sell, transfer,
assign (by operation of law or otherwise) or otherwise dispose of, or grant any
option or other right to purchase or otherwise acquire, any of the Collateral or
any of the other Company Equity Interests owned or otherwise held thereby,
whether now owned or hereafter acquired.
<PAGE>
SECTION 6. CONSENT AND WAIVER REGARDING OTHER SECURITYHOLDERS. (a)
The Pledgor hereby unconditionally and irrevocably consents to (i) the
execution, delivery and performance by all of the other Shareholders of the
other Shareholder Pledge Agreements and the Collateral Documents to which they
are or are to be a party, (ii) the pledge, assignment, encumbrance, transfer
and/or sale of any of the Company Equity Interests, or other securities or
indebtedness of the Company or any of its Subsidiaries, owned or otherwise held
by the other Shareholders to the Collateral Agent or its nominee, subagent,
assignee or successor, or any purchaser therefrom, pursuant to the terms of the
Note Documents and (iii) the substitution in accordance with the terms of this
Agreement and the other Collateral Documents of the Collateral Agent or its
nominee, subagent, assignee or successor, or any purchaser therefrom, as a
shareholder of the Company for purposes of any and all agreements,
understandings or arrangements among the Shareholders (in such capacity).
(b) The Pledgor hereby unconditionally and irrevocably waives all
restrictions on the transfer or sale of any Company Equity Interests, or other
securities or indebtedness of the Company or any of its Subsidiaries, by any of
the Shareholders (including, without limitation, any options, rights of first
refusal, rights of first offer, tag-along rights or other similar rights),
whether contained in the certificate of incorporation or bylaws of the Company
or in any agreement, instrument or other document among any of the Shareholders
or imposed by any applicable Requirement of Law.
[(c) The Pledgor hereby unconditionally and irrevocably waives his
right under Section 4.3 of the Securityholders Agreement to request the Transfer
(as defined in the Securityholders Agreement) of shares of Series A Preferred
Stock (or any securities into which such shares are convertible or exchangeable
or for which such shares are exercisable) by the holders thereof to the extent
such right relates to the pledge, assignment and security interest granted by
the Pledgor under this Agreement or any of the other Collateral Documents to
which he is or is to be a party or, on and after the Additional Availability
Date, under the applicable pledge agreements entered into by the Pledgor with
NTFC, on behalf of itself and the other NTFC Lenders, pursuant to, and in
accordance with the terms of, Section 8.10 of the Note Purchase Agreements.] (1)
SECTION 7. THE COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. The
Pledgor hereby irrevocably appoints the Collateral Agent and any officer or
agent thereof as its true and lawful attorney-in-fact, with full power of
substitution and full and irrevocable power and authority in the place and stead
of the Pledgor and in the name of the Pledgor, its own name or otherwise, from
time to time in the Collateral Agent's discretion following the occurrence and
during the continuance of a Default under Section 11.1(g) of the Note Purchase
Agreements or an Event of Default, to take any and all actions and to execute
and deliver any and all instruments and other documents that may be necessary or
that the Collateral Agent may deem reasonably appropriate to accomplish the
purposes of this Agreement and the other Note Documents, including, without
limitation:
(a) to ask for, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for any and all moneys due and to
become due under or in respect of any of the Collateral;
(b) to receive, endorse, assign and collect any and all drafts,
acceptances, chattel paper, instruments and other documents in connection
with this Agreement (including, without
- -----------------------------
(1) Paragraph (c) of Section 6 is to be included only in the Shareholder Pledge
Agreement executed by Mr. Alfred West.
<PAGE>
limitation, all instruments representing or evidencing any interest payment
or other distribution in respect of the Collateral or any part thereof) and
to give full discharge for the same;
(c) to sell, transfer, assign or otherwise deal with the Collateral
or any part thereof in the same manner and to the same extent as if the
Collateral Agent were the absolute owner thereof;
(d) (i) to direct any Person liable to the Pledgor for any payment
with respect to the Collateral to make payment of any and all moneys due
and to become due thereunder directly to the Collateral Agent or as the
Collateral Agent shall direct, (ii) to receive payment of and receipt for
any and all moneys, claims and other amounts due and to become due at any
time in respect of or arising out of any Collateral, (iii) to defend any
suit, action or proceeding brought against the Pledgor with respect to any
of the Collateral and (iv) to settle, compromise or adjust any suit, action
or proceeding described in clause (iii) of this subsection (d) and, in
connection therewith, to give such discharges or releases as the Collateral
Agent may deem appropriate;
(e) to file any application, petition or other request with the FCC,
any PUC or any other Governmental Authority for the purpose of obtaining
any consent, approval or authorization therefrom or satisfying any
registration, filing, notice or other requirement thereof necessary in
order to fully and properly effect the sale, transfer or other disposition
of any or all of the Collateral, to permit a change of control of the
Company or to permit the complete and/or continued operation of the
telecommunications system of the Company and its Subsidiaries in accordance
with its intended design and at its full capacity, or any of its other
businesses or activities related thereto; and
(f) to file any claims, to institute any proceedings and to take any
other action, at the sole expense and for the account of the Pledgor, that
may be necessary or that the Collateral Agent may deem reasonably desirable
for the collection of any or all of the Collateral (or any or all moneys
due with respect thereto) or otherwise to enforce the rights of the
Collateral Agent with respect to any of the Collateral.
SECTION 8. THE COLLATERAL AGENT MAY PERFORM. If the Pledgor fails to
perform any agreement contained herein, the Collateral Agent may (but shall not
be obligated to) itself perform, or cause performance of, such agreement, and
the expenses of the Collateral Agent incurred in connection therewith shall be
payable by the Pledgor under Section 14(b).
SECTION 9. THE COLLATERAL AGENT'S DUTIES. The powers conferred on
the Collateral Agent hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon it to exercise any such powers.
Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Collateral Agent
shall have no duty as to any Collateral, as to ascertaining or taking action
with respect to calls, conversions, exchanges, maturities, tenders or other
matters relative to any Collateral, whether or not the Collateral Agent or any
of the other Secured Parties has or is deemed to have knowledge of such matters,
or as to the taking of any steps necessary to preserve rights against any
parties or any other rights pertaining to any Collateral, whether or not the
Collateral Agent has or is deemed to have such rights. The Collateral Agent
shall be deemed to have exercised reasonable care in the custody and
preservation of any Collateral in its possession if such Collateral is accorded
treatment substantially equal to that which MS Group accords its own property of
like tenor.
<PAGE>
SECTION 10. REMEDIES. If any Event of Default shall have occurred
and be continuing:
(a) The Collateral Agent may exercise in respect of the Collateral,
in addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party upon
default under the Uniform Commercial Code in effect in the State of
New York at such time (the "N.Y. UNIFORM COMMERCIAL CODE"), whether or not
the N.Y. Uniform Commercial Code applies to the affected Collateral, and
also may:
(i) require the Pledgor to, and the Pledgor hereby agrees that
he will at his own expense and upon request of the Collateral Agent
forthwith, assemble all or part of the Collateral as directed by the
Collateral Agent and make it available to the Collateral Agent at a
place to be designated by the Collateral Agent that is reasonably
convenient to both parties;
(ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or
private sale, at any exchange or broker's board or at any of the
Collateral Agent's offices or elsewhere, for cash, on credit or for
future delivery, and upon such other terms as the Collateral Agent may
deem commercially reasonable; and
(iii) notify the Pledgor that all of his rights to exercise or
refrain from exercising the voting and other consensual rights that he
would otherwise be entitled to exercise with respect to the Collateral
pursuant to Section 5(h)(i) or 5(h)(ii) shall cease and all such
rights shall thereupon become vested in the Collateral Agent, who
shall thereupon have the sole right to exercise or refrain from
exercising such voting and other consensual rights.
The Pledgor hereby agrees that, to the extent notice of sale shall be
required by applicable law, at least ten days' notice to the Pledgor of the
time and place of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification. The Collateral
Agent shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Collateral Agent may adjourn any
public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale, without further notice, may be made at
the time and place to which it was so adjourned.
(b) If the Collateral Agent proceeds to exercise its right to sell
any or all of the Collateral, the Pledgor shall, upon the written request
of the Collateral Agent therefor, cause the Company to furnish to the
Collateral Agent all such information as the Collateral Agent may request
in order to determine the number of shares and other instruments included
in such Collateral that may be sold by the Collateral Agent in transactions
exempt under the Securities Act and the rules and regulations of the
Securities and Exchange Commission thereunder, or any similar law, rule or
regulation in effect from time to time in any other relevant jurisdiction.
(c) Each purchaser of all or any part of the Collateral at any such
sale that has been made in accordance with all applicable Requirements of
Law shall hold the property sold absolutely free from any claim,
encumbrance or other right on the part of the Pledgor, and the Pledgor
hereby waives, to the fullest extent permitted by applicable law, all
rights of
<PAGE>
redemption, stay and/or appraisal that he now has or may at any time in the
future have under any rule of law or statute now existing or hereafter
enacted with respect to any such sale.
(d) All proofs of claim, rights of action and rights to assert claims
under this Agreement or any of the Collateral Documents to which the
Pledgor is or is to be a party may be enforced by the Collateral Agent
without the possession of any of the Notes at any proceeding instituted by
the Collateral Agent, and any such proceeding may be brought in its own
name as agent, and any recovery or judgment shall be for the benefit of the
Secured Parties. In any proceeding brought by the Collateral Agent (and in
any proceeding involving the interpretation of any provisions of any of the
Collateral Documents to which the Collateral Agent is a party), the
Collateral Agent shall be held to represent all of the Secured Parties, and
it shall not be necessary to make any of the other Secured Parties party to
such proceeding.
(e) All cash held by the Collateral Agent as Collateral and all cash
proceeds received by the Collateral Agent in respect of any sale of,
collection from, or other realization upon, all or any part of the
Collateral may, in the discretion of the Collateral Agent, be held by the
Collateral Agent as collateral for, and/or then or at any time thereafter
applied (after payment of any amounts payable to the Collateral Agent
pursuant to Section 14) in whole or in part by the Collateral Agent, for
the ratable benefit of the Secured Parties, against, all or any part of the
Secured Obligations in such order as the Collateral Agent shall elect. Any
surplus of cash or cash proceeds held by the Collateral Agent in accordance
with this Section 10(e) and remaining after payment in full in cash of all
the Secured Obligations and all of the other Obligations owing under or in
respect of the Note Documents shall be paid over to the Pledgor or to
whomsoever may be lawfully entitled to receive such surplus.
(f) The Collateral Agent may exercise any and all rights and remedies
of the Pledgor in respect of the Collateral.
(g) All payments received by the Pledgor under, in connection with or
in respect of any Collateral shall be received in trust for the benefit of
the Collateral Agent, shall be segregated from other property and funds of
the Pledgor and shall be forthwith paid over to the Collateral Agent in the
same form as so received (with any necessary endorsement or assignment).
(h) In connection with the exercise and enforcement by the Collateral
Agent of any of the rights and remedies afforded to it following the
occurrence and during the continuance of an Event of Default, the Pledgor
agrees to, and shall use his reasonable best efforts to cause the Company
to, join and cooperate fully, in each case at the Collateral Agent's
election, with the Collateral Agent, any receiver or trustee, and/or the
successful bidder or bidders at any foreclosure, sale or other disposition
of the Collateral and in the filing of any and all applications (and
furnishing of all additional information that may be required in connection
with such application) with the FCC, any PUC and any other applicable
Governmental Authorities, requesting their prior consent, approval or
authorization of (i) the operation or abandonment of all or any portion of
the telecommunications system of the Company and its Subsidiaries, or any
of its other businesses or activities related thereto, (ii) the transfer or
assignment of any or all Governmental Authorizations issued to the Company
or any of its Subsidiaries by the FCC, any PUC and any other applicable
Governmental Authorities with respect to the telecommunications system of
the Company and its Subsidiaries, or any of its other businesses or
activities related thereto, to the Collateral Agent, any such receiver or
<PAGE>
trustee, and/or any such successful bidder or bidders or (iii) the
transfer, sale or other disposition of any of the Collateral. In
connection with the foregoing, the Pledgor agrees to use his reasonable
best efforts to cause the Company to take any and all such further actions,
and execute and deliver any and all such further agreements, instruments
and other documents as may be necessary or as the Collateral Agent may deem
reasonably desirable and may request. If required, the Pledgor shall file
any application, notice, petition or other request with the FCC, any PUC
and any other applicable Governmental Authorities for the purpose of
obtaining the consent, approval or authorization from, or satisfying any
registration, filing, notice or other requirement of, any Governmental
Authority in order to fully and properly effect a transfer, sale or other
disposition of all or any of the Collateral, to permit a change of control
of the Company or to permit the Collateral Agent, any such receiver or
trustee, and/or any such successful bidder or bidders to complete and
operate the telecommunications system of the Company and its Subsidiaries
in accordance with its intended design and at its full capacity, or any of
its other businesses or activities related thereto.
SECTION 11. ACKNOWLEDGEMENTS RELATING TO COLLATERAL. The Pledgor
recognizes that, by reason of certain prohibitions contained in the Securities
Act and applicable state securities laws (or other similar laws, rules or
regulations of other relevant jurisdictions), the Collateral Agent may be
compelled with respect to any sale of all or any part of the Collateral to limit
the purchases thereof to those Persons who will agree, among other things, to
acquire the Collateral for their own account, for investment and not with a view
to the distribution or resale thereof. The Pledgor hereby acknowledges that any
such private sale may be at a price and on terms less favorable to the
Collateral Agent and the other Secured Parties than those obtainable through a
public sale without such restrictions (including, without limitation, a public
offering made pursuant to a registration statement under the Securities Act)
and, notwithstanding such circumstances, the Pledgor hereby agrees that any
private sale shall be deemed to have been made in a commercially reasonable
manner and that the Collateral Agent shall have no obligation to engage in
public sales and no obligation to delay the sale of any Collateral for the
period of time necessary to permit the issuer thereof to register it for a form
of public sale requiring registration under the Securities Act or any applicable
state securities laws (or other similar laws, rules or regulations of other
relevant jurisdictions), even if the Pledgor would agree to do so. The Pledgor
hereby waives any claims against the Collateral Agent arising by reason of the
fact that the price at which any Collateral may have been sold at such a private
sale was less than the price that might have been obtained at a public sale,
even if the Collateral Agent accepts the first offer received and does not offer
such Collateral to more than one offeree.
SECTION 12. AMENDMENTS; WAIVERS; ETC. (a) No amendment or waiver of
any provision of this Agreement, and no consent to any departure by the Pledgor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Collateral Agent, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
(b) No failure on the part of the Collateral Agent to exercise, and
no delay in exercising any right, power or privilege hereunder, shall operate as
a waiver thereof or consent thereto; nor shall any single or partial exercise of
any such right, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
herein provided are cumulative and not exclusive of any remedy provided by
applicable law.
SECTION 13. NOTICES. (a) All notices and other communications
provided for hereunder shall be in writing and delivered by telecopier or (if
expressly permitted under the applicable
<PAGE>
provisions hereof) by telephone, in either case if the sender on the same day
sends a confirming copy of such notice by a recognized overnight delivery
service (charges prepaid), by registered or certified mail with return receipt
requested (postage prepaid) or by a recognized overnight delivery service (with
charges prepaid). Any such notice must be sent:
(i) if to the Collateral Agent, to the Collateral Agent at its
address at 1585 Broadway, 36th Floor, New York, New York 10036 (Telecopier
Number: (212) 761-0517), Attention: Mr. David R. Powers;
(ii) if to any of the other Secured Parties, to such Secured Party at
its address referred to in Section 17(a) of the Note Purchase Agreements;
or
(iii) if to the Pledgor, to the Pledgor at his address set forth in
Section 4(a), or such other address as the Pledgor shall have specified to
the Collateral Agent and each of the other Secured Parties in writing.
All notices and other communications provided for under this Section 13 will be
deemed given and effective only when actually received.
(b) If any notice required under this Agreement is permitted to be
made, and is made, by telephone, actions taken or omitted to be taken in
reliance thereon by the Collateral Agent or any of the other Secured Parties
shall be binding upon the Pledgor notwithstanding any inconsistency between the
notice provided by telephone and any subsequent writing in confirmation thereof
provided to the Collateral Agent or such other Secured Party; provided that any
such action taken or omitted to be taken by the Collateral Agent or such other
Secured Party shall have been in good faith and in accordance with the terms of
this Agreement.
SECTION 14. LIMITATION ON LIABILITY; EXPENSES, ETC. (a) The
Pledgor agrees not to assert any claim against the Collateral Agent, any of the
other Secured Parties or any other Person who is or was at any time a Purchaser
or any other Person in whose name or for whose benefit such Person holds or at
any time held any Notes, or any of their affiliates, or any of their respective
officers, directors, employees, attorneys, agents and other advisors, on any
theory of liability, for special, indirect, consequential or punitive damages
arising out of or otherwise relating to this Agreement, including, without
limitation, enforcement of this Agreement, or any of the Collateral.
(b) The Pledgor shall, upon demand, pay to the Collateral Agent the
amount of any and all reasonable expenses (including, without limitation, the
reasonable fees and disbursements of its counsel and of any experts and agents)
that the Collateral Agent may incur in connection with the failure by the
Pledgor to perform or observe any of the provisions of this Agreement or any of
the other Collateral Documents to which he is or is to be a party.
(c) Without prejudice to the survival of any other agreement of the
Pledgor under this Agreement, the agreement and obligations of the Pledgor
contained in this Section 14 shall survive the payment in full of all of the
Secured Obligations and all of the other Obligations owing under or in respect
of the Note Documents.
SECTION 15. CONTINUING SECURITY INTEREST; TRANSFERS UNDER THE NOTE
PURCHASE AGREEMENT. This Agreement shall create a continuing security interest
in the Collateral and (a) shall remain in full force and effect until the later
of (i) the payment in full in cash of all of the Secured
<PAGE>
Obligations and all of the other Obligations owing under or in respect of the
Note Documents and (ii) the termination of the aggregate Commitments of the
Purchasers under the Note Purchase Agreements, (b) be binding upon the Pledgor,
his successors and assigns and (c) inure, together with the rights and remedies
of the Collateral Agent hereunder, to the benefit of, and be enforceable by, the
Collateral Agent and each of the other Secured Parties and their respective
successors, transferees and assigns.
SECTION 16. TERMINATION. Upon the later of (a) the payment in full
in cash of all of the Secured Obligations and all of the other Obligations owing
under or in respect of the Note Documents and (b) the termination of the
aggregate Commitments of the Purchasers under the Note Purchase Agreements the
pledge, assignment and security interest of the Pledgor under this Agreement
shall terminate and all rights in and to the Collateral shall revert to the
Pledgor. Upon any such termination, the Collateral Agent will, at the Pledgor's
sole expense, return to the Pledgor such of the Collateral in its possession as
shall not have been sold or otherwise applied pursuant to the terms of the Note
Documents, and shall execute and deliver to the Pledgor such documents as the
Pledgor shall reasonably request to evidence such termination and reversion.
SECTION 17. SECURITY INTEREST ABSOLUTE. The Obligations of the
Pledgor under this Agreement and the other Collateral Documents to which he is
or is to be a party are independent of the Obligations of any other Obligor
under or in respect of the Note Documents, and a separate action or actions may
be brought or prosecuted against the Pledgor, irrespective of whether any action
is brought against any other Obligor or whether any other Obligor is joined in
any such action or actions. All rights of the Collateral Agent and the pledges,
assignments and security interests created hereunder and under the other
Collateral Documents to which the Pledgor is or is to be a party, and all
Obligations of the Pledgor hereunder, shall be direct, absolute and
unconditional, irrespective of, and the Pledgor hereby irrevocably waives any
defenses he may now or hereafter have in any way relating to, any or all of the
following:
(a) any lack of validity or enforceability of, or any
misrepresentation, irregularity or other defect in, any of the Note Documents or
any agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations or any of the other
Obligations of any other Obligor under the Note Documents, or any other
amendment or waiver of or any consent to departure from any of the Note
Documents;
(c) any taking, exchange, release or nonperfection of any collateral,
or any taking, release, amendment or waiver of or consent to departure from any
guaranty, for all or any of the Secured Obligations;
(d) any manner of application of collateral, or proceeds thereof, to
all or any of the Secured Obligations, or any manner of sale, transfer or other
disposition of any collateral for all or any of the Secured Obligations or any
of the other Obligations of any other Obligor under or in respect of the Note
Documents;
(e) any insolvency, bankruptcy, reorganization, receivership or
similar proceeding affecting any other Obligor or its property and assets, or
the release or discharge of any other Obligor from any of their respective
Obligations under or in respect of the Note Documents;
(f) any change, restructuring or termination of the corporate
structure or existence
<PAGE>
of the Company or any of its Subsidiaries;
(g) any failure of the Collateral Agent or any of the other Secured
Parties to disclose to any Obligor any information relating to the financial
condition, operations, properties or prospects of the Company or any of its
Subsidiaries now or hereafter known to the Collateral Agent or such other
Secured Party; or
(h) any other circumstance (including, without limitation, any
statute of limitations or the existence of or reliance upon any representation
by the Collateral Agent or any of the other Secured Parties) that might
otherwise constitute a defense available to, or a discharge of, such Pledgor or
a third party grantor of a security interest.
SECTION 18. REINSTATEMENT. This Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Secured Obligations is rescinded or must otherwise be returned by the
Collateral Agent or any of the other Secured Parties or by any other Person upon
the insolvency, bankruptcy or reorganization of the Pledgor or otherwise, all as
though such payment had not been made.
SECTION 19. SEVERABILITY. The provisions of this Agreement are
severable, and if any term or provision shall be held illegal, invalid or
unenforceable in whole or in part in any jurisdiction, then such illegality,
invalidity or unenforceability shall affect only such term or provision, or part
thereof, in such jurisdiction, and shall not in any manner affect such term or
provision in any other jurisdiction, or any other term or provision of this
Agreement in any jurisdiction.
SECTION 20. DELIVERY BY TELECOPIER. Delivery of an executed
signature page to this Agreement by telecopier shall be effective as delivery of
a manually executed signature page to this Agreement.
SECTION 21. JURISDICTION, ETC. (a) The Pledgor hereby irrevocably
and unconditionally submits, for himself and his property and assets, to the
nonexclusive jurisdiction of any New York state court or any federal court of
the United States of America sitting in New York City, New York, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or any of the other Collateral Documents to which he
is a party, or for recognition or enforcement of any judgment in respect
thereof, and the Pledgor hereby irrevocably and unconditionally agrees that all
claims in respect of any such action or proceeding may be heard and determined
in any such New York state court or, to the fullest extent permitted by
applicable law, in any such federal court. The Pledgor hereby irrevocably
consents to the service of copies of any summons and complaint and any other
process which may be served in any such action or proceeding by the mailing
thereof by certified mail, return receipt requested, or by delivering a copy of
such process to the Pledgor, at his address referred to in Section 13, or by any
other method permitted by applicable law. The Pledgor hereby agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by applicable law. Nothing in this Agreement shall affect any right the
Collateral Agent or any of the other Secured Parties may otherwise have to bring
any action or proceeding relating to this Agreement or any of the other
Collateral Documents to which he is a party in the courts of any jurisdiction.
(b) The Pledgor hereby irrevocably and unconditionally waives, to the
fullest extent he may legally and effectively do so, any objection that it may
now or hereafter have to the
<PAGE>
laying of venue in any action or proceeding arising out of or relating to this
Agreement or any of the other Collateral Documents to which he is or is to be a
party in any New York state or federal court. The Pledgor hereby irrevocably
waives, to the fullest extent permitted by applicable law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
SECTION 22. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, except to the
extent that the perfection of the pledge, assignment and security interest
created hereunder, or remedies hereunder, in respect of any particular
Collateral are governed by the laws of a jurisdiction other than the State of
New York.
SECTION 23. WAIVER OF JURY TRIAL. THE PLEDGOR HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY OF THE OTHER NOTE DOCUMENTS, THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY OR THE ACTIONS OF THE COLLATERAL AGENT OR ANY OF THE OTHER
SECURED PARTIES IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
THEREOF.
IN WITNESS WHEREOF, the Pledgor has duly executed and delivered this
Agreement as of the date first above written.
By
------------
[NAME OF SHAREHOLDER]
<PAGE>
SCHEDULE I
----------
A. Pledged Interest
B. Pledged Indebtedness
<PAGE>
SCHEDULE II
-----------
Restriction on Company Equity Interests
SCHEDULES
Schedule I - Pledged Interests and Pledged Indebtedness
Schedule II - Restriction on Company Equity Interests
<PAGE>
EXHIBIT D TO THE NOTE
PURCHASE AGREEMENTS
FORM OF SOLVENCY CERTIFICATE OF
ECONOPHONE, INC.
Econophone, Inc., a New York corporation (the "COMPANY"), hereby
certifies that the officer executing this Solvency Certificate, Mr. Alan Levy,
is the Chief Financial Officer of the Company and that such officer is duly
authorized to execute this Certificate, which is hereby delivered on behalf of
the Company pursuant to Section 3.1(i) of the Note Purchase Agreement dated as
of April 24, 1997 (as amended, supplemented or otherwise modified from time to
time, the "NOTE PURCHASE AGREEMENT") between the Company and Morgan Stanley
Group Inc., as the purchaser (the "PURCHASER") of the Notes. Capitalized terms
not otherwise defined in this Certificate shall have the same meanings as
specified in the Note Purchase Agreement.
The Company further certifies that such officer is generally familiar
with the properties, businesses and assets of the Company and has carefully
reviewed the Note Documents and the contents of this Certificate and, in
connection herewith, has reviewed such other documentation and information and
has made such investigations and inquiries as the Company and such officer deem
necessary and prudent therefor. The Company further certifies that the
financial information and assumptions that underlie and form the basis for the
representations and certifications made in this Certificate were reasonable when
made and were made in good faith and continue to be reasonable as of the date of
this Certificate.
The Company will apply the proceeds from the sale and purchase of the
Notes from time to time under the Note Purchase Agreement solely to finance
Capital Expenditures of the Company and its Subsidiaries, to pay fees and
expenses incurred in connection with the sale and purchase of the Notes, and for
other general corporate purposes of the Company and its Subsidiaries not
otherwise prohibited under the terms of the Note Documents (including, without
limitation, to fund financial losses suffered from time to time by the Company
and its Subsidiaries).
To secure the payment of the Obligations of the Company and the other
Obligors under and in respect of the Note Documents, the Shareholders of the
Company (a) are pledging to the Collateral Agent, on behalf of itself and the
other Secured Parties, on the date of this Certificate, at least 49% of the
combined voting power of all issued and outstanding Voting Interests in the
Company owned by them, and all of the Indebtedness of the Company or any of its
Subsidiaries owing from time to time to any of the Shareholders, pursuant to the
terms of the Shareholder Pledge Agreements and (b) have covenanted and agreed to
pledge to the Collateral Agent, on behalf of itself and the other Secured
Parties, on or prior to May 24, 1997, subject to the priority of the
obligations of the Company owing to NTFC and the other NTFC Lenders under the
NTFC Loan Documents, all of the other issued and outstanding Company Equity
Interests owned by them. The Company has covenanted and agreed with the
Purchasers that, as further security for the payment of the Obligations of the
Company and the other Obligors under and in respect of the Note Documents, (i)
it will grant to the Collateral Agent, on behalf of itself and the other Secured
Parties, on or before May 24, 1997, (A) a valid and perfected first priority
lien on and security interest in (subject to Permitted Liens) all of the
property and assets of the Company that are located in the United States of
America and are not subject to the lien or security interest of any other Person
at such time and (B) a valid and perfected second priority lien on and
<PAGE>
security interest in (subject to Permitted Liens and the lien and security
interest granted to NTFC, on behalf of itself and the other NTFC Lenders,
pursuant to, and on the terms and conditions set forth in, the NTFC Loan
Documents) all of the property and assets of the Company that are located in the
United States of America and comprise part of the NTFC Collateral, in each case
in accordance with the terms of the Collateral Documents entered into in
connection therewith pursuant Section 8.10(a) of the Note Purchase Agreement and
the Intercreditor Agreement and (ii) if any of the Notes are outstanding at any
time after October 31, 1997 then, upon the request of any of the Purchasers
therefor, it will pledge up to 661/2% of the shares of the common stock of each
of the Foreign Subsidiaries so requested to be pledged, in accordance with the
terms of the Collateral Documents entered into in connection therewith pursuant
Section 8.10(b) of the Note Purchase Agreement.
The Company understands that the Purchaser is relying upon the truth
and accuracy of this Certificate in connection with the sale and purchase of the
Notes thereto and the other transactions contemplated by the Note Documents.
The Company hereby further certifies that:
1. On the date of this Certificate, immediately before and
immediately after giving effect to the Note Documents and all of the
transactions contemplated thereby to occur on or about the date hereof, and
assuming the sale and purchase of Notes on the date hereof in an aggregate
principal amount of $15,000,000, the fair value of the property and assets of
the Company and its Subsidiaries, taken as a whole, is greater than the total
amount of liabilities (including contingent, subordinated, absolute, fixed,
matured or unmatured and liquidated or unliquidated liabilities but excluding
obligations in respect of the Series A Preferred Stock) of the Company and its
Subsidiaries, taken as a whole.
2. On the date of this Certificate, immediately before and
immediately after giving effect to the Note Documents and all of the
transactions contemplated thereby to occur on or about the date hereof, and
assuming the sale and purchase of Notes on the date hereof in an aggregate
principal amount of $15,000,000, the present fair saleable value of the property
and assets of the Company and its Subsidiaries, taken as a whole, exceeds the
amount that will be required to pay the probable liabilities of the Company and
its Subsidiaries, taken as a whole, on their debts as they become absolute and
matured.
3. The Company does not currently intend or believe that it, either
individually or together with its Subsidiaries, will incur debts and liabilities
that will be beyond its ability to pay (including, without limitation, with the
proceeds of indebtedness for borrowed money) as such debts and liabilities
mature.
4. On the date of this Certificate, immediately before and
immediately after giving effect to the Note Documents and all of the
transactions contemplated thereby to occur on or about the date hereof, and
assuming the sale and purchase of Notes on the date hereof in an aggregate
principal amount of $15,000,000, the Company and its Subsidiaries, taken as a
whole, are not engaged in business or in a transaction, and are not about to
engage in business or in a transaction, for which their property and assets
would constitute unreasonably small capital.
5. The Company does not intend, in consummating the sale and
purchase of the Notes and the other transactions contemplated by the Note
Documents, to hinder, delay or defraud either present or future creditors or any
other Person to which the Company is or, on or after the date
<PAGE>
of this Certificate, will become indebted.
6. In reaching the conclusions set forth in this Certificate, the
Company has considered, among other things:
(a) the cash and other current assets of the Company and its
Subsidiaries reflected in the unaudited consolidated balance sheet of the
Company and its Subsidiaries as of September 30, 1996;
(b) all contingent liabilities of the Company and its Subsidiaries,
including, without limitation, any claims arising out of pending or, to the best
knowledge of the undersigned, threatened litigation against the Company or any
of its Subsidiaries or any of their respective property and assets and, in so
doing, the Company has computed the amount of each such contingent liability as
the amount that, in light of all of the facts and circumstances existing on the
date hereof, represents the amount that can reasonably be expected to become an
actual or matured liability (collectively, the "CONTINGENT LIABILITIES");
(c) all obligations and liabilities of the Company and its
Subsidiaries, whether matured or unmatured, liquidated or unliquidated, disputed
or undisputed, secured or unsecured, subordinated, absolute, fixed or contingent
(other than Contingent Liabilities);
(d) historical and anticipated growth in the sales volume of the
Company and its Subsidiaries and in the income stream generated by the Company
and its Subsidiaries;
(e) the customary sales terms and trade payables and other accounts
payable of the Company and its Subsidiaries;
(f) the amount of the credit extended by and to customers of the
Company and its Subsidiaries;
(g) the interest payable by the Company on the Notes; and
(h) the level of capital customarily maintained by the Company and
its Subsidiaries and, to the extent that the Company has knowledge thereof,
other entities engaged in the same or similar business as the businesses of the
Company and its Subsidiaries.
Delivery of an executed signature page to this Certificate by
telecopier shall be effective as delivery of a manually executed signature page
hereof.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed by its Chief Financial Officer thereunto duly authorized on this 24th
day of April, 1997.
ECONOPHONE, INC.
By
----------------------------------
Alan Levy
Chief Financial Officer
<PAGE>
EXHIBIT E-1 TO
THE NOTE PURCHASE AGREEMENTS
[LETTERHEAD OF SCHULTE ROTH & ZABEL LLP]
April 24, 1997
To Morgan Stanley Group, Inc., as the
sole purchaser of the Note referred to
below under the Note Purchase Agreement
referred to below and as collateral agent
(the "Collateral Agent") for the holders of the Notes
Ladies and Gentlemen:
We have acted as special counsel to Econophone, Inc., a New York
corporation (the "Company"), and Mr. Alfred West, Mr. Steven West and Mr. Gary
Bondi (individually a "Shareholder" and collectively the "Shareholders" and,
together with the Company, individually an "Obligor" and collectively the
"Obligors") in connection with the preparation, execution and delivery of the
Note Purchase Agreement dated as of April 24, 1997 (the "Note Purchase
Agreement") between the Company and Morgan Stanley Group, Inc. ("MS Group") and
the issuance and sale by the Company to MS Group on the date hereof of a Senior
Secured Increasing Rate Note of the Company, dated the date hereof and made
payable to MS Group, or registered assigns, in the principal amount of
$3,000,000 (the "Note"). This opinion is furnished to you pursuant to Section
3.2(a) of the Note Purchase Agreement. Terms defined in the Note Purchase
Agreement or the Shareholder Pledge Agreements referred to therein and not
otherwise defined herein are used herein as defined therein.
In connection with this opinion, we have examined:
<PAGE>
(a) an executed counterpart of the Note Purchase Agreement;
(b) the executed Note;
(c) an executed counterpart of each Shareholder Pledge Agreement;
(d) financing statements (the "Financing Statements"), each executed
by a Shareholder, naming such Shareholder as debtor and the
Collateral Agent as secured party and delivered to the Collateral
Agent pursuant to Section 3.1 of the Note Purchase Agreement for
filing in one of the offices (the "Filing Offices") listed on
Schedule I; and
(e) the certificate of incorporation and bylaws of the Company, in
each case as amended through the date hereof.
The agreements and instruments listed in clauses (a) through (c) above
are hereinafter referred to collectively as the "Note Documents" and
individually as a "Note Document".
In addition, we have examined the originals, or copies certified to
our satisfaction, of such other corporate records of the Company, certificates
of public officials and officers of the Company and agreements, instruments and
other documents as we have deemed necessary or appropriate as a basis for this
opinion, including the documents listed in a certificate of the Chief Financial
Officer of the Company dated the date hereof (the "Certificate"), certifying,
among other things, that the documents listed therein are all of the agreements
and instruments, and all of the orders, writs, judgments, injunctions, decrees,
determinations and awards, that affect or purport to affect the obligations of
the Company under the Note Purchase Agreement, or the right of the Company to
borrow money, to guarantee the obligations of other Persons, to create Liens on
its property or assets or to consummate transactions such as the transactions
contemplated by the Note Documents. As to questions of fact material to this
opinion, we have, when relevant facts were not independently known or
established by us, relied upon such certificates, including the Certificate, and
upon representations and warranties contained in the Note Documents. We have
relied, in rendering our opinion expressed in paragraph 11 below, upon those
representations and warranties made by MS Group in Sections 6.1, 6.2 and 6.3 of
the Note Purchase Agreement.
In our examination of the documents referred to above, we have assumed
(i) the genuiness of all signatures, (ii) the authenticity of all such documents
submitted to us as originals and (iii) the conformity to originals of all such
documents submitted to us as copies, and the authenticity of the originals of
all such latter documents.
Any reference in this opinion to "our knowledge" or any similar phrase
means the actual knowledge of the attorneys of the Firm with primary
responsibility for the review and negotiation of the Note Documents on behalf of
the Obligors.
Based upon the foregoing and such investigation as we have deemed
necessary,
<PAGE>
and subject to the assumptions, exceptions and other qualifications set forth
herein, we are of the opinion that:
1. The Company (i) is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of New York and (ii)
has all corporate power and authority to own or hold under lease all of the
property and assets it purports to own or hold under lease and to conduct the
business it presently conducts.
2. The execution, delivery and performance by the Company of the
Note Purchase Agreement and the Note, and the issuance and sale by the Company
to MS Group of the Note are within the Company's corporate powers, have been
duly authorized by all necessary corporate action of the Company, and do not
contravene the Company's certificate of incorporation or bylaws.
3. The execution, delivery and performance by the Company of the
Note Purchase Agreement and the Note, and the issuance and sale of the Note by
the Company to MS Group, do not (i) violate any applicable provision of any
presently existing law or regulation of the United States of America or any
Governmental Authority thereof or of the State of New York or (ii) conflict with
or result in the breach of, or constitute a default under, or result in or
require the creation or imposition of any Lien upon or with respect to any of
the property or assets of the Company under any agreement or instrument listed
in the Certificate.
4. No consent, approval or authorization of, or notice to, or other
action by, any United States federal or New York State Governmental Authority is
required for (i) the due execution, delivery or performance by the Company of
the Note Purchase Agreement or the Note, or the issuance and sale of the Note by
the Company to MS Group, (ii) the grant by any Shareholder of the security
interest created by the Shareholder Pledge Agreement to which such Shareholder
is a party in any Collateral (as defined therein) a security interest in which
may be created under the N.Y. Uniform Commercial Code (the "N.Y. Uniform
Commercial Code"), (iii) the perfection of the security interest created
pursuant to any Shareholder Pledge Agreement in any Collateral, or (iv) the
exercise by the Collateral Agent of its remedies in respect of the Collateral
pursuant to any Shareholder Pledge Agreement, except for the filing of the
Financing Statements in the Filing Offices, routine filings required to be made
by the Obligors to comply with their affirmative covenants under the Note
Documents and any requisite compliance with federal and state securities laws in
connection with a sale of any portion of the Collateral.
5. Each of the Note Purchase Agreement and the Note has been duly
executed and delivered by the Company.
6. Each of the Note Purchase Agreement and the Note constitutes the legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms. Each of the Shareholder Pledge Agreements
constitutes the legal, valid and binding obligation of the Shareholder party
thereto, enforceable against such Shareholder in accordance with its terms.
7. To our knowledge, there is no action, suit or proceeding pending
or
<PAGE>
threatened in writing against or affecting the Company in any court or before
any arbitrator or by or before any Governmental Authority that (i) either
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or (ii) purports to affect adversely the legality,
validity or enforceability of the Note Purchase Agreement, the Note or any of
the Shareholder Pledge Agreements, or the consummation of the transactions
contemplated thereby.
8. The delivery to the Collateral Agent today in the State of New
York pursuant to each Shareholder Pledge Agreement of the certificates
representing the Initial Pledged Interest referred to in such Shareholder Pledge
Agreement, together with such Shareholder Pledge Agreement, is effective to
create a valid and perfected security interest in such Collateral (as defined in
such Shareholder Pledge Agreement) in favor of the Collateral Agent, for the
benefit of the Secured Parties, securing the payment of the Secured Obligations
(as defined in such Shareholder Pledge Agreement), subject to no other security
interest created therein under the N.Y. Uniform Commercial Code in favor of any
other Person. Each Shareholder Pledge Agreement is effective to create a valid
security interest in any rights comprising part of the Collateral (as defined
therein) to the extent that such Collateral (the "Article 9 Collateral")
consists of the type of property in which a security interest may be created
under Article 9 of the N.Y. Uniform Commercial Code. The filing of the
applicable Financing Statements in the applicable Filing Offices will be
sufficient to perfect the security interests created under any Shareholder
Pledge Agreement in any rights comprising part of such Article 9 Collateral to
the extent that such Collateral consists of the type of property in which a
security interest may be perfected by the filing of a financing statement under
the N.Y. Uniform Commercial Code.
9. The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company" (each as defined in the Investment Company Act of 1940, as amended).
10. The Company is not a "holding company", or a "subsidiary company"
of a "holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company" (each within the meaning of the
Public Utility Holding Company Act of 1935, as amended).
11. The offering and sale of the Note by the Company to MS Group
pursuant to the terms of the Securities Purchase Agreement is exempt from
registration under the Securities Act of 1933, as amended, and the securities
laws of the State of New York.
The opinions herein are subject to the following qualifications:
(a) Enforceability may be limited by applicable bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium and similar
laws affecting the enforcement of creditors' rights generally and
by general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
<PAGE>
(b) Certain remedial provisions of the Shareholder Pledge Agreements
may be unenforceable in whole or in part, but the inclusion of
such provisions does not affect the validity of any Shareholder
Pledge Agreement as a whole, and the Note Documents, taken as a
whole, contain, in our judgment, adequate provisions for the
practical realization of the principal benefits afforded thereby,
except for the economic consequences resulting from any delay
imposed by, or any procedure required by, applicable law.
(c) The enforceability of rights to indemnification or contribution
under the Note Documents may be limited by federal or state
securities laws or regulations or the public policy underlying
such laws.
(d) We express no opinion as to whether any court other than a court
of the State of New York or a Federal court sitting in the State
of New York would give effect (A) to the choice of New York law
to govern any Note Document or (B) to any provision as to forum
selection or as to submission to jurisdiction (including, without
limitation, any waiver of any objection that a court is an
inconvenient forum).
(e) We express no opinion as to the right or title of the Company or
any Shareholder in or to any Collateral.
(f) The security interests created by any Shareholder Pledge
Agreement will not be enforceable against such Shareholder, or
third parties, and will not attach to Collateral, until such
Shareholder has rights therein, and the security interests
created by such Collateral Document will not be enforceable
against the competing interests of those third parties who would,
in accordance with the provisions of Section 9-308 of the N.Y.
Uniform Commercial Code, take free of such security interests
notwithstanding their perfection.
(g) We express no opinion as to any security interest in any cash or
any deposit account.
(h) Except as provided in the first sentence of paragraph 8, we
express no opinion as to the priority of any security interest.
(i) Article 9 of the N.Y. Uniform Commercial Code requires the filing
of a continuation statement within the period of six months prior
to the expiration of five years from the date of the original
filing of a financing statement in order to maintain the
effectiveness of such filing.
(j) Perfection of any security interest which is perfected by the
filing of any Financing Statement will be terminated as to any
Collateral acquired by the debtor named therein more than four
months after such Person changes his name so as to make such
Financing Statement seriously misleading, unless a
<PAGE>
new appropriate financing statement indicating the new name of
such Person are properly filed before the expiration of such four
months.
(k) We express no opinion as to the enforceability of any security
interest created by any Note Document insofar as such security
interest purports to secure obligations other than for the
payment of money.
(l) The perfection of any security interest in proceeds is subject to
the provisions of Section 9-306 of the N.Y. Uniform Commercial
Code.
(m) Insofar as any Collateral Document purports to create a security
interest in after-acquired property, such security interest will
be subject to Section 547 and Section 552 of the Bankruptcy Code.
(n) The opinions in the first sentence of paragraph 8 above are
subject to the qualification that we assume that the Collateral
Agent and the Secured Parties (i) are without notice of any
adverse claim with respect to (x) the Collateral described in
such paragraph or (y) any of the security interests therein
created by the applicable Shareholder Pledge Agreement, and
(ii) will not voluntarily waive, subordinate or modify the
perfection or priority of the security interests referenced in
such paragraph or act in any way inconsistent with the
maintenance or perfection of such security interest.
(o) We assume that each Person who is a party to any of the Note
Documents (other than the Company) is duly organized, validly
existing and in good standing under the laws of its jurisdiction
of organization; that each of such Note Documents has been duly
authorized by each Person a party thereto (other than the
Company); that each of the Note Documents has been duly executed
and delivered by each Person who is a party thereto (other than
the Company) and constitutes or will constitute the legal, valid
and binding obligation of each Person (other than the Company),
enforceable in accordance with its terms; and that each Person
(other than the Company) that is a party to any Note Documents
has the requisite power and authority to perform its or his
obligations under such Note Documents. We express no opinion
with respect to (i) any regulatory matters relating to the
business of the Issuer and, in particular, matters governed by or
related to (A) the U.S. Communications Act of 1934, as amended,
or the rules, regulations or policies of the Federal
Communications Commission and (B) the public utilities laws of
the various states of the United States of America, or the rules,
regulations or policies of any state public utilities regulatory
authorities or (ii) the effect of any compliance or
non-compliance by the Agent or any Purchaser with any state or
Federal laws or regulations applicable to the transactions
contemplated by the Note Documents because of the nature of such
Person's business.
<PAGE>
(p) We express no opinion herein as to any law other than the laws of
the State of New York and the Federal law of the United States.
This opinion is rendered only to MS Group, as the sole purchaser of
the Note and the Collateral Agent, as of the date hereof and is solely for its
benefit in connection with the transactions contemplated by the Note Purchase
Agreement. This opinion may not be relied upon by MS Group for any other
purpose, or relied upon by any other Person for any purpose, without our prior
written consent. We do not undertake to update, revise or supplement any
opinion or statement herein for any reason whatsoever.
Very truly yours,
<PAGE>
Schedule I
----------
FINANCING STATEMENTS
<TABLE>
<CAPTION>
Debtor Secured Party Filing Office
- ------ ------------- -------------
<S> <C> <C>
Alfred West MS Group, as Collateral Agent New York Department of State
Alfred West MS Group, as Collateral Agent Filing officer, Kings County
Steven West MS Group, as Collateral Agent New York Department of State
Steven West MS Group, as Collateral Agent Filing Officer, Rockland County
Gary Bondi MS Group, as Collateral Agent New York Department of State
Gary Bondi MS Group, as Collateral Agent Filing Officer, Rockland County
</TABLE>
<PAGE>
EXHIBIT E-2 TO
THE NOTE PURCHASE AGREEMENTS
[LETTERHEAD OF LACHER & FOX]
April 24, 1997
To Morgan Stanley Group, Inc., as the
sole purchaser of the Note referred to
below under the Note Purchase Agreement
referred to below and as collateral agent
(the "Collateral Agent") for the holders of the Notes
Ladies and Gentlemen:
We have acted as special counsel to Econophone, Inc., a New York
corporation (the "Company"), and Mr. Alfred West, Mr. Steven West and Mr. Gary
Bondi (individually a "Shareholder" and collectively the "Shareholders" and,
together with the Company, individually an "Obligor" and collectively the
"Obligors") in connection with the preparation, execution and delivery of the
Note Purchase Agreement dated as of April 24, 1997 (the "Note Purchase
Agreement") between the Company and Morgan Stanley Group, Inc. ("MS Group") and
the issuance and sale by the Company to MS Group on the date hereof of a Senior
Secured Increasing Rate Note of the Company, dated the date hereof and made
payable to MS Group, or registered assigns, in the principal amount of
$3,000,000 (the "Note"). This opinion is furnished to you pursuant to Section
3.2(a) of the Note Purchase Agreement. Terms defined in the Note Purchase
Agreement or the Shareholder Pledge Agreements referred to therein and not
otherwise defined herein are used herein as defined therein.
In connection with this opinion, we have examined:
(a) an executed counterpart of the Note Purchase Agreement;
(b) the executed Note;
(c) an executed counterpart of each Shareholder Pledge Agreement;
<PAGE>
(d) financing statements (the "Financing Statements"), each executed
by a Shareholder, naming such Shareholder as debtor and the
Collateral Agent as secured party and delivered to the Collateral
Agent pursuant to Section 3.1 of the Note Purchase Agreement; and
(e) the certificate of incorporation and bylaws of the Company, in
each case as amended through the date hereof.
The agreements and instruments listed in clauses (a) through (c) above
are hereinafter referred to collectively as the "Note Documents" and
individually as a "Note Document".
In addition, we have examined the originals, or copies certified to
our satisfaction, of such other corporate records of the Company, certificates
of public officials and officers of the Company and agreements, instruments and
other documents as we have deemed necessary or appropriate as a basis for this
opinion, including the documents listed in a certificate of the Chief Financial
Officer of the Company, dated the date hereof (the "Certificate"), certifying,
among other things, that the documents listed therein are all of the agreements
and instruments, and all of the orders, writs, judgments, injunctions, decrees,
determinations and awards, that affect or purport to affect the obligations of
the Company under any of the Note Documents to which the Company is a party, or
the right of the Company to borrow money, to guarantee the obligations of other
Persons, to create Liens on its property or assets or to consummate transactions
such as the transactions contemplated by the Note Documents. As to questions of
fact material to this opinion, we have, when relevant facts were not
independently known or established by us, relied upon such certificates,
including the Certificate, and upon representations and warranties contained in
the Note Documents.
In our examination of the documents referred to above, we have assumed
(i) the genuiness of all signatures, (ii) the authenticity of all such documents
submitted to us as originals and (iii) the conformity to originals of all such
documents submitted to us as copies, and the authenticity of the originals of
all such latter documents.
Any reference in this opinion to "our knowledge" or any similar phrase
means the actual knowledge of the attorneys of the Firm with primary
responsibility for the review and negotiation of the Note Documents on behalf of
the Obligors.
Based upon the foregoing and such investigation as we have deemed
necessary, and subject to the assumptions, exceptions and other qualifications
set forth herein, we are of the opinion that:
1. The Company (i) is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of New York (ii) is
duly qualified as a foreign corporation and in good standing in each other
jurisdiction in which the ownership, lease or operation of its property and
assets or the conduct of its business requires qualification, other than in any
such jurisdiction where the failure to be so qualified or in good standing,
either individually or in the aggregate, could not reasonably be expected to
have a Material Adverse
<PAGE>
Effect, and (iii) has all corporate power and authority to own or hold under
lease all of the property and assets it purports to own or hold under lease and
to conduct the business it presently conducts.
2. The execution, delivery and performance by the Company of the
Note Purchase Agreement and the Note, and the issuance and sale by the Company
to MS Group of the Note are within the Company's corporate powers, have been
duly authorized by all necessary corporate action of the Company, and do not
contravene the Company's certificate of incorporation or bylaws. Each of the
Shareholders has all of the requisite capacity, power and authority, and the
legal right, to execute, deliver and perform all of his obligations under or in
respect of the Shareholder Pledge Agreement to which he is a party.
3. The execution, delivery and performance by each Shareholder of
the Shareholder Pledge Agreement to which he is a party, do not (i) violate any
applicable provision of any presently existing law or regulation of the United
States of America or any Governmental Authority thereof or of the State of New
York or (ii) to our knowledge, conflict with or result in the breach of, or
constitute a default under, or (except for the Liens created under such
Shareholder Pledge Agreement) result in or require the creation or imposition of
any Lien upon or with respect to any of the property or assets of such
Shareholder under any agreement or instrument binding on such Shareholder.
4. No consent, approval or authorization of, or notice to, or other
action by, any United States federal or New York State Governmental Authority is
required for (i) the due execution, delivery or performance by any Shareholder
of the Shareholder Pledge Agreement to which he is a party, (ii) the grant by
any Shareholder of the security interest created by the Shareholder Pledge
Agreement to which such Shareholder is a party in any Collateral (as defined
therein) a security interest in which may be created under the Uniform
Commercial Code currently in effect in the State of New York (the "N.Y. Uniform
Commercial Code"), (iii) the perfection of the security interest created
pursuant to any Shareholder Pledge Agreement in any Collateral, or (iv) the
exercise by the Collateral Agent of its remedies in respect of the Collateral
pursuant to any Shareholder Pledge Agreement except for the filing of the
Financing Statements in the applicable filing offices, routine filings required
to be made by the Obligors to comply with their affirmative covenants under the
Note Documents and any requisite compliance with federal and state securities
laws in connection with a sale of any portion of the Collateral.
5. Each of the Shareholder Pledge Agreements has been duly executed
and delivered by the Shareholder party thereto.
6. Each of the Shareholders is the record owner of all the Initial
Pledged Interests pledged by him pursuant to the Shareholder Pledge Agreement to
which he is a party. All of the Pledged Interests have been validly issued, are
fully paid and nonassessable and are free from preemptive rights.
7. To our knowledge, there is no action, suit or proceeding pending
or threatened in writing against or affecting any Obligor in any court or before
any arbitrator or by or before any Governmental Authority that (i) either
individually or in the aggregate, could
<PAGE>
reasonably be expected to have a Material Adverse Effect or (ii) purports to
affect adversely the legality, validity or enforceability of the Note Purchase
Agreement, the Note or any of the Shareholder Pledge Agreements, or the
consummation of the transactions contemplated thereby.
We assume that each Person who is a party to any of the Note Documents
(other than the Obligors) is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; that each of such
Note Documents has been duly authorized by each Person a party thereto (other
than the Obligors); that each of the Note Documents has been duly executed and
delivered by each Person who is a party thereto (other than the Obligors) and
constitutes or will constitute the legal, valid and binding obligation of each
Person (other than the Obligors), enforceable in accordance with its terms; and
that each Person (other than the Obligors) that is a party to any Note Documents
has the requisite corporate or other organizational power and authority to
perform its obligations under such Note Documents. We express no opinion with
respect to (i) any regulatory matters relating to the business of the Issuer
and, in particular, matters governed by or related to (A) the U.S.
Communications Act of 1934, as amended, or the rules, regulations or policies of
the Federal Communications Commission and (B) the public utilities laws of the
various states of the United States of America, or the rules, regulations or
policies of any state public utilities regulatory authorities or (ii) the effect
of any compliance or non-compliance by the Collateral Agent or any Purchaser
with any state or Federal laws or regulations applicable to the transactions
contemplated by the Note Documents because of the nature of such Person's
business.
We express no opinion herein as to any law other than the laws of the
State of New York and the Federal law of the United States.
This opinion is rendered only to MS Group, as the sole purchaser of the Note and
the Collateral Agent, as of the date hereof and is solely for its benefit in
connection with the transactions contemplated by the Note Purchase Agreement.
This opinion may not be relied upon by MS Group for any other purpose,
or relied upon by any other Person for any purpose, without our prior written
consent. We do not undertake to update, revise or supplement any opinion or
statement herein for any reason whatsoever.
Very truly yours,
<PAGE>
EXHIBIT F TO THE NOTE
PURCHASE AGREEMENTS
ECONOPHONE, INC.
FORM OF COMPLIANCE CERTIFICATE
Pursuant to Section 8.1(d) of
the Note Purchase Agreements referred to below
I, ____________________, [Title of Senior Financial Officer] of
Econophone, Inc., a New York corporation (the "Company"), DO HEREBY CERTIFY, in
connection with the one or more separate Note Purchase Agreements dated as of
April 24, 1997 (the "Note Purchase Agreements"; terms used herein have the same
meanings as therein defined) between the Company and the respective purchasers
of the Notes named therein, that:
1. I am the duly elected, qualified and acting [Title of Senior
Financial Officer] of the Company and, as such, have access to the Company's
corporate records, have examined such records, agreements and other documents as
I have deemed necessary for purposes of giving this Certificate and am familiar
with the matters therein contained and herein certified.
2. To the best of my knowledge after due inquiry, no Default or
Event of Default has occurred and is continuing[, except as set forth on Exhibit
A attached hereto, which Exhibit describes in reasonable detail the nature of
each such Default or Event of Default and the action that the Company has taken
and proposes to take with respect thereto].
3. Exhibit B attached hereto completely and accurately sets forth
the computations used by the Company in determining compliance with the
covenants contained in each of Sections 10.1 through 10.4 of the Note Purchase
Agreements for the fiscal period covered by the financial statements (the
"Financial Statements") delivered herewith pursuant to Section [8.1(b)] [8.1(c)]
of the Note Purchase Agreements (including with respect to each subsection in
such Section, where applicable, the calculations of the maximum or minimum
amount, ratio or percentage, as the case may be, permissible under the terms of
such subsection, and the calculation of the amount, ratio or percentage then in
existence).
4. Exhibit C attached hereto completely and accurately sets forth
(a) in reasonable detail all of the changes, if any, from GAAP in the generally
accepted accounting principles applied in the preparation of the Financial
Statements and (b) a statement of reconciliation if and to the extent necessary
for determining whether any of the changes in the generally accepted accounting
principles applied in the preparation of the Financial Statements would affect
the calculation of, or compliance with, any of the covenants set forth in
Section 10, conforming the Financial Statements to GAAP.
<PAGE>
IN WITNESS WHEREOF, I have signed this Certificate this __th day of
____, 199_.
------------------------------
Name:
Title:
<PAGE>
EXHIBIT A TO THE COMPLIANCE CERTIFICATE
DEFAULTS AND EVENTS OF DEFAULT
<PAGE>
EXHIBIT B TO THE COMPLIANCE CERTIFICATE
COMPLIANCE WITH FINANCIAL COVENANTS
[Form to be developed by the Company and MS Group promptly after closing.]
<PAGE>
EXHIBIT C TO THE COMPLIANCE CERTIFICATE
GAAP RECONCILIATION STATEMENT
<PAGE>
Exhibit 4.5
EXECUTION COPY
=============================================
ECONOPHONE, INC.,
Issuer
and
THE BANK OF NEW YORK,
Trustee
______________________
Indenture
Dated as of July 1, 1997
______________________
131/2% Senior Notes Due 2007
=============================================
<PAGE>
CROSS-REFERENCE TABLE
TIA SECTIONS . . . . . . . . . . . . . . INDENTURE SECTIONS
Section 310(a)(1) . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . 7.10
(b). . . . . . . . . . . . . 7.08
Section 312(a). . . . . . . . . . . . . 2.03
Section 313(c). . . . . . . . . . . . . 7.06; 11.02
Section 314(a). . . . . . . . . . . . . 4.17; 11.02
(a)(4) . . . . . . . . . . . 4.17; 11.02
(b). . . . . . . . . . . . . 10.01
(c)(1) . . . . . . . . . . . 11.03
(c)(2) . . . . . . . . . . . 11.03
(d). . . . . . . . . . . . . 10.01
(e). . . . . . . . . . . . . 11.04
Section 315(b). . . . . . . . . . . . . 7.05; 11.02
(e). . . . . . . . . . . . . 6.11
Section 316(a)(1)(A). . . . . . . . . . 6.05
(a)(1)(B). . . . . . . . . . 6.04
(b). . . . . . . . . . . . . 6.07
(c). . . . . . . . . . . . . 9.03
Section 317(a)(1) . . . . . . . . . . . 6.08
(a)(2) . . . . . . . . . . . 6.09
(b). . . . . . . . . . . . . 2.05
Section 318(a). . . . . . . . . . . . . 11.01
(c). . . . . . . . . . . . . 11.01
Note: The Cross-Reference Table shall not for any purpose be deemed to be
a part of the Indenture.
<PAGE>
TABLE OF CONTENTS*
PAGE
RECITALS OF THE COMPANY
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions................................................... 2
SECTION 1.02. Incorporation by Reference of Trust Indenture Act............. 23
SECTION 1.03. Rules of Construction......................................... 24
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating............................................... 24
SECTION 2.02. Restrictive Legends........................................... 25
SECTION 2.03. Execution, Authentication and Denominations................... 28
SECTION 2.04. Registrar and Paying Agent.................................... 29
SECTION 2.05. Paying Agent to Hold Money in Trust........................... 29
SECTION 2.06. Transfer and Exchange......................................... 30
SECTION 2.07. Book-Entry Provisions for Global Notes........................ 31
SECTION 2.08. Special Transfer Provisions................................... 33
SECTION 2.09. Replacement Notes............................................. 36
SECTION 2.10. Outstanding Notes............................................. 37
SECTION 2.11. Temporary Notes............................................... 38
SECTION 2.12. Cancellation.................................................. 38
SECTION 2.13. CUSIP Numbers................................................. 38
SECTION 2.14. Defaulted Interest............................................ 39
SECTION 2.15. Issuance of Additional Notes.................................. 39
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption........................................... 39
SECTION 3.02. Notices to Trustee............................................ 40
SECTION 3.03. Selection of Notes to Be Redeemed............................. 40
SECTION 3.04. Notice of Redemption.......................................... 40
SECTION 3.05. Effect of Notice of Redemption................................ 41
SECTION 3.06. Deposit of Redemption Price................................... 42
i
<PAGE>
SECTION 3.07. Payment of Notes Called for Redemption........................ 42
SECTION 3.08. Notes Redeemed in Part........................................ 42
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes.............................................. 42
SECTION 4.02. Maintenance of Office or Agency............................... 43
SECTION 4.03. Limitation on Indebtedness.................................... 43
SECTION 4.04. Limitation on Restricted Payments............................. 46
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries............................. 49
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries....................................... 51
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted
Subsidiaries...................................................52
SECTION 4.08. Limitation on Transactions with Shareholders and Affiliates... 52
SECTION 4.09. Limitation on Liens........................................... 53
SECTION 4.10. Limitation on Sale-Leaseback Transactions..................... 54
SECTION 4.11. Limitation on Asset Sales..................................... 55
SECTION 4.12. Repurchase of Notes upon a Change of Control.................. 56
SECTION 4.13. Existence..................................................... 56
SECTION 4.14. Payment of Taxes and Other Claims............................. 56
SECTION 4.15. Maintenance of Properties and Insurance....................... 57
SECTION 4.16. Compliance Certificates....................................... 57
SECTION 4.17. Commission Reports and Reports to Holders..................... 58
SECTION 4.18. Waiver of Stay, Extension or Usury Laws....................... 58
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc................................... 58
SECTION 5.02. Successor Substituted......................................... 60
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default............................................. 60
SECTION 6.02. Acceleration.................................................. 61
SECTION 6.03. Other Remedies................................................ 62
SECTION 6.04. Waiver of Past Defaults....................................... 62
SECTION 6.05. Control by Majority........................................... 63
SECTION 6.06. Limitation on Suits........................................... 63
SECTION 6.07. Rights of Holders to Receive Payment.......................... 64
SECTION 6.08. Collection Suit by Trustee.................................... 64
ii
<PAGE>
SECTION 6.09. Trustee May File Proofs of Claim.............................. 64
SECTION 6.10. Priorities.................................................... 64
SECTION 6.11. Undertaking for Costs......................................... 65
SECTION 6.12. Restoration of Rights and Remedies............................ 65
SECTION 6.13. Rights and Remedies Cumulative................................ 65
SECTION 6.14. Delay or Omission Not Waiver.................................. 66
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General....................................................... 66
SECTION 7.02. Certain Rights of Trustee..................................... 66
SECTION 7.03. Individual Rights of Trustee.................................. 67
SECTION 7.04. Trustee's Disclaimer.......................................... 68
SECTION 7.05. Notice of Default............................................. 68
SECTION 7.06. Reports by Trustee to Holders................................. 68
SECTION 7.07. Compensation and Indemnity.................................... 68
SECTION 7.08. Replacement of Trustee........................................ 69
SECTION 7.09. Successor Trustee by Merger, Etc.............................. 70
SECTION 7.10. Eligibility................................................... 70
SECTION 7.11. Money Held in Trust........................................... 70
SECTION 7.12. Withholding Taxes............................................. 70
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations.......................... 71
SECTION 8.02. Defeasance and Discharge of Indenture......................... 72
SECTION 8.03. Defeasance of Certain Obligations............................. 74
SECTION 8.04. Application of Trust Money.................................... 75
SECTION 8.05. Repayment to Company.......................................... 76
SECTION 8.06. Reinstatement................................................. 76
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders.................................... 77
SECTION 9.02. With Consent of Holders....................................... 77
SECTION 9.03. Revocation and Effect of Consent.............................. 78
SECTION 9.04. Notation on or Exchange of Notes.............................. 79
SECTION 9.05. Trustee to Sign Amendments, Etc............................... 79
SECTION 9.06. Conformity with Trust Indenture Act........................... 80
iii
<PAGE>
ARTICLE TEN
SECURITY
SECTION 10.01. Security..................................................... 80
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939.................................. 82
SECTION 11.02. Notices...................................................... 82
SECTION 11.03. Certificate and Opinion As to Conditions Precedent........... 83
SECTION 11.04. Statements Required in Certificate or Opinion................ 84
SECTION 11.05. Acts of Holders.............................................. 84
SECTION 11.06. Rules by Trustee, Paying Agent or Registrar.................. 85
SECTION 11.07. Payment Date Other Than a Business Day....................... 85
SECTION 11.08. Governing Law................................................ 85
SECTION 11.09. No Adverse Interpretation of Other Agreements................ 86
SECTION 11.10. No Recourse Against Others................................... 86
SECTION 11.11. Successors................................................... 86
SECTION 11.12. Duplicate Originals.......................................... 86
SECTION 11.13. Separability................................................. 86
SECTION 11.14. Table of Contents, Headings, Etc............................. 86
SIGNATURES................................................................... 87
iv
<PAGE>
EXHIBIT A Form of Note
EXHIBIT B Form of Certificate
EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to
Non-QIB Accredited Investors
EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers
Pursuant to Regulation S
v
<PAGE>
INDENTURE, dated as of July 1, 1997, between ECONOPHONE, INC., a New
York corporation (the "Company"), and The Bank of New York, a New York banking
corporation, as trustee (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance initially of up to $155,000,000 aggregate
principal amount of the Company's 131/2% Senior Notes Due 2007 (the "Notes")
issuable as provided in this Indenture. Pursuant to the terms of a Placement
Agreement, dated June 26, 1997, between the Company and Morgan Stanley & Co.
Incorporated, as placement agent (the "Placement Agreement"), the Company has
agreed to issue and sell 155,000 units (the "Units"), each Unit consisting of
one Note and one warrant ("Warrant") to purchase 8.167 shares of Voting Common
Stock, par value $0.0001 per share, of the Company (the "Econophone Common
Stock"). The Notes and the Warrants included in each Unit will become
separately transferable at the close of business upon the earliest to occur of
(i) the date that is 180 days following the Closing Date, (ii) the commencement
of an exchange offer with respect to the Notes undertaken pursuant to the Notes
Registration Rights Agreement and (iii) the effectiveness of a shelf
registration statement with respect to the Notes (the "Separation Date"). The
Notes will be partially secured pursuant to the terms of a Pledge Agreement (as
defined herein) by Pledged Securities as provided by Article Ten of this
Indenture. All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done, and the Company has done
all things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company as hereinafter provided.
This Indenture is subject to, and shall be governed by, the provisions
of the Trust Indenture Act of 1939, as amended, that are required to be a part
of and to govern indentures qualified under the Trust Indenture Act of 1939, as
amended.
AND THIS INDENTURE FURTHER WITNESSETH
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows:
<PAGE>
2
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or is merged into or
consolidated with a Restricted Subsidiary or assumed in connection with an Asset
Acquisition by a Restricted Subsidiary, whether or not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; PROVIDED that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period determined in conformity with GAAP; PROVIDED that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of any Person (other than net income
or loss attributable to a Restricted Subsidiary) in which any Person (other than
the Company or any of its Restricted Subsidiaries) has an equity interest and
the net income (or loss) of any Unrestricted Subsidiary, except that Adjusted
Consolidated Net Income for any period shall include the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such other Person or such Unrestricted Subsidiary during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
Section 4.04 (and in such case, except to the extent includable pursuant to
clause (i) above), the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or consolidated with
the Company or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by the Company or any of its
Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary 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 permitted 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; (iv) any gains or losses attributable to Asset
Sales; (v) except for purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of Section 4.04,
any amount paid or accrued as dividends on Preferred Stock of the Company or any
Restricted Subsidiary owned by Persons other than the Company and any of its
Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other
<PAGE>
3
valuation reserves), except to the extent resulting from write-ups of capital
assets (excluding write-ups in connection with accounting for acquisitions in
conformity with GAAP), after deducting therefrom (i) all current liabilities of
the Company and its Restricted Subsidiaries (excluding intercompany items) and
(ii) all goodwill, trade names, trademarks, patents, unamortized debt discount
and expense and other like intangibles, all as set forth on the most recent
quarterly or annual consolidated balance sheet of the Company and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the Commission
pursuant to Section 4.17.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent, authenticating agent or
co-Registrar.
"Agent Members" has the meaning provided in Section 2.07(a).
"Asset Acquisition" means (i) an investment by the Company or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; PROVIDED that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; PROVIDED that the property and
assets acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company
or any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary of the Company or (ii) all or substantially all of the
assets that constitute a division or line of business of the Company or any of
its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including
by way of merger, consolidation or sale-leaseback transaction but excluding any
Lien granted in compliance with Section 4.09) in one transaction or a series of
related transactions by the Company or any of its Restricted Subsidiaries to any
Person other than the Company or any of its Restricted
<PAGE>
4
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not (A) a Restricted Payment
permitted under Section 4.04 or (B) governed by the provisions of this Indenture
applicable to mergers, consolidations and sales of all or substantially all of
the assets of the Company; PROVIDED that "Asset Sale" shall not include (a)
sales or other dispositions of inventory, receivables and other current assets,
(b) sales or other dispositions of assets or the issuance of any Capital Stock
of any Restricted Subsidiary or Permitted Joint Venture for consideration at
least equal to the fair market value of the assets sold or disposed of; PROVIDED
that the consideration received would satisfy clause (B) of Section 4.11,
including consideration that consists of technology, licenses or expertise
useful in the business of Econophone and its Restricted Subsidiaries, (c) sales
or other dispositions of obsolete or outdated equipment; PROVIDED that each such
sale or other disposition or series of such sales or such other dispositions
shall not involve assets that are material to the business of the Company and
its Restricted Subsidiaries, taken as a whole, and (d) sales or other
dispositions during any 12-month period of assets with an aggregate fair market
value not in excess of $1.0 million.
"Attributable Indebtedness" means, when used in connection with a
sale-leaseback transaction referred to in Section 4.10, at any date of
determination, the product of (i) the net proceeds from such sale-leaseback
transaction and (ii) a fraction, the numerator of which is the number of full
years of the term of the lease relating to the property involved in such
sale-leaseback transaction (without regard to any options to renew or extend
such term) remaining at the date of the making of such computation and the
denominator of which is the number of full years of the term of such lease
(without regard to any options to renew or extend such term) measured from the
first day of such term.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means the Board of Directors of the Company or
any committee of such Board of Directors duly authorized to act under this
Indenture.
"Board Resolution" means a copy of a resolution, certified by the
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.
<PAGE>
5
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the Closing Date, including, without limitation, all Common Stock
and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) (a) prior to the occurrence
of a Public Market, a "person" or "group" (within the meaning of Section
13(d) or 14(d)(2) under the Exchange Act) becomes the ultimate "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock
representing a greater percentage of the total voting power of the Voting Stock
of the Company, on a fully diluted basis, than is held by the Existing
Stockholders and their Affiliates on such date and (b) after the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total
voting power of the Voting Stock of the Company on a fully diluted basis and
such ownership represents a greater percentage of the total voting power of the
Voting Stock of the Company, on a fully diluted basis, than is held by the
Existing Stockholders and their Affiliates on such date; or (ii) individuals who
on the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the members of the Board of Directors then in office who either
were members of the Board of Directors on the Closing Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under this Indenture.
"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 instrument such Commission is not existing and
performing the duties now assigned to it under the TIA, then the body performing
such duties at such time.
<PAGE>
6
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether now outstanding or issued after the Closing Date,
including, without limitation, all series and classes of such common stock.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to Article Five of this Indenture and,
thereafter, means the successor.
"Company Order" means a written request or order signed in the name of
the Company (i) by its Chairman, a Vice Chairman, its President or a Vice
President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary and delivered to the Trustee; PROVIDED, HOWEVER, that such
written request or order may be signed by any two of the Persons listed in
clause (i) above in lieu of being signed by one of such Persons listed in such
clause (i) and one of the officers listed in clause (ii) above.
"Consolidated EBITDA" means, for any period, the sum of the amounts
for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated
Interest Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of
(1) the number of shares of outstanding Common Stock of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries divided by (2) the total number of shares of outstanding
Common Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers'
<PAGE>
7
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; excluding, however,
(i) any amount of such interest of any Restricted Subsidiary, if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis outstanding on such Transaction
Date to (ii) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which financial statements of the Company have
been filed with the Commission pursuant to Section 4.17, or, with respect to
quarters for which no reports are required to be filed, for which such financial
statements are then available, as determined by the Company (such four fiscal
quarter period being the "Four Quarter Period"); PROVIDED that (A) (x) pro forma
effect shall be given to any Indebtedness (including, if applicable, the Notes)
Incurred during such Four Quarter Period or subsequent to the end of such Four
Quarter Period and on or prior to the Transaction Date, in each case as if such
Indebtedness had been Incurred, and the proceeds thereof had been applied, on
the first day of such Four Quarter Period and (y) pro forma effect shall be
given to any Indebtedness that was outstanding during such Four Quarter Period
or thereafter but that is not outstanding or is to be repaid, defeased or
satisfied on the Transaction Date, as if such Indebtedness had been repaid,
defeased or satisfied on the first day of the Four Quarter Period; (B) pro forma
effect shall be given to Asset Dispositions and Asset Acquisitions (including
giving pro forma effect to the application of proceeds of any Asset Disposition)
that occur during the period beginning on the first day of such Four Quarter
Period and ending on the Transaction Date (the "Reference Period"), as if they
had occurred and such proceeds had been applied on the first day of such
Reference Period; and (C) pro forma effect shall be given to asset dispositions
and asset acquisitions (including giving pro forma effect to the application of
proceeds of any asset disposition) that have been made by any Person that has
become a Restricted Subsidiary or has been merged with or into, or consolidated
with, the Company or any Restricted Subsidiary during such Reference Period and
that would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if such
asset dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; PROVIDED
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters
<PAGE>
8
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed of, for which financial
information is available.
"Consolidated Net Tangible Assets" means the total book value of the
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves) after deducting
therefrom (i) all current liabilities of the Company and its consolidated
Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, all as set forth on the most recently available
consolidated balance sheet of the Company and its consolidated Restricted
Subsidiaries, prepared in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date of this Indenture,
located at 101 Barclay Street, Floor 21 West, New York, New York 10286,
Attention: Corporate Trust Administration.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees, and
their respective successors, until a successor Depositary shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Depositary" shall mean or include each Person who is then a Depositary
hereunder.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for
<PAGE>
9
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; PROVIDED that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in Sections 4.11 and 4.12
and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant to
Sections 4.11 and 4.12.
"Econophone Common Stock" has the meaning specified in the recitals to
this Indenture.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Proceeds" has the meaning provided in Section 4.11.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means any securities of the Company containing terms
identical to the Notes (except that such Exchange Notes shall be registered
under the Securities Act) that are issued and exchanged for the Notes pursuant
to the Notes Registration Rights Agreement and this Indenture.
"Existing Stockholders" means Alfred West, Steven West and any spouse
or lineal descendant thereof or any estate thereof or any trust of which any of
the foregoing are the exclusive beneficiaries, and Princes Gate.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the Board of Directors, whose determination shall
be conclusive if evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those 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; PROVIDED, HOWEVER, that all reports and other
financial information provided by the Company to the Holders of the Notes or the
Trustee shall be prepared in accordance with GAAP as in effect on the date of
such report or other financial
<PAGE>
10
information. All ratios and computations contained or referred to in this
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of this Indenture shall be
made without giving effect to (i) the amortization or write off of any expenses
incurred in connection with the offering of the Notes, the Bridge Notes and the
Series A Preferred Stock and (ii) except as otherwise provided, the amortization
of any amounts required or permitted by Accounting Principles Board Opinion Nos.
16 and 17.
"Global Notes" has the meaning provided in Section 2.01.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holder" or "Noteholder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "Incurrence" of Indebtedness by reason of a Person
becoming a Restricted Subsidiary; PROVIDED that neither the accrual of interest
nor the accretion of original issue discount shall be considered an Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
<PAGE>
11
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v),
(vi) or (vii) below) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third Business
Day following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; PROVIDED that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
PROVIDED (A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the original issue price of such Indebtedness,
(B) that "Indebtedness" shall not include any money borrowed and set aside, at
the time of the incurrence of related Indebtedness, to fund cash interest
payments on such related Indebtedness, and shall also not include reasonable
deferred compensation for directors, officers or employees of the Company or its
Restricted Subsidiaries and (C) that "Indebtedness" shall not include any
liability for federal, state, local or other taxes.
"Indenture" means this Indenture as originally executed or as it may
be amended or supplemented from time to time by one or more indentures
supplemental to this Indenture entered into pursuant to the applicable
provisions of this Indenture.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"Interest Payment Date" means each semiannual interest payment date on
January 15 and July 15 of each year, commencing January 15, 1998.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement, option or future contract or other
similar agreement or arrangement.
<PAGE>
12
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries
and Trade Payables for which the Company or its Restricted Subsidiaries receive
fair market value) or capital contribution to (by means of any transfer of cash
or other property), or any payment for property or services for the account or
use of, or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall include
(i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and
(ii) the fair market value of the Capital Stock (or any other Investment), held
by the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary, including, without limitation, by
reason of any transaction permitted by clause (iii) of Section 4.06. For
purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (i)
"Investment" shall include the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Subsidiaries))
of any Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary, (ii) the fair market value of the assets
(net of liabilities (other than liabilities to the Company or any of its
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) any relocation expenses and severance or
shut-down costs incurred as a result of such Asset Sale, (iv) payments made to
repay Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or
(B) is required to be paid as a result of such sale and (v) reserves
<PAGE>
13
against adjustments in the sale price of the asset or assets subject to such
Asset Sale and reserves against any liabilities associated with such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
determined in conformity with GAAP and (b) with respect to any issuance or sale
of Capital Stock, the proceeds of such issuance or sale in the form of cash or
cash equivalents, including payments in respect of deferred payment obligations
(to the extent corresponding to the principal, but not interest, component
thereof) when received in the form of cash or cash equivalents (except to the
extent such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary of the Company) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net of attorney's
fees, accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof.
"Non-U.S. Person" means a person who is not a "U.S. person" (as
defined in Regulation S).
"Note Register" has the meaning provided in Section 2.04.
"Notes" means any of the securities, as defined in the first paragraph
of the recitals hereof, that are authenticated and delivered under this
Indenture. For all purposes of this Indenture, the term "Notes" shall include
the Notes initially issued on the Closing Date, any Exchange Notes to be issued
and exchanged for any Notes pursuant to the Notes Registration Rights Agreement
and this Indenture and any other Notes issued after the Closing Date under this
Indenture. For purposes of this Indenture, all Notes shall vote together as one
series of Notes under this Indenture.
"Notes Registration Rights Agreement" means the Notes Registration
Rights Agreement, dated as of the date hereof, between the Company and Morgan
Stanley & Co. Incorporated, and certain permitted assigns specified therein.
"Offer to Purchase" means an offer to purchase Notes by the Company
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business Day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to
accrue interest (or original issue discount) pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest (or original issue discount) on and after the Payment Date; (v) that
Holders electing to have a Note purchased pursuant to the Offer to Purchase will
be required to
<PAGE>
14
surrender the Note, together with the form entitled "Option of the Holder to
Elect Purchase" on the reverse side of the Note completed, to the Paying Agent
at the address specified in the notice prior to the close of business on the
Business Day immediately preceding the Payment Date; (vi) that Holders will be
entitled to withdraw their election if the Paying Agent receives, not later than
the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the principal amount of Notes delivered for purchase and a
statement that such Holder is withdrawing his election to have such Notes
purchased; and (vii) 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; PROVIDED that each Note purchased and each new Note
issued shall be in a principal amount at maturity of $1,000 or integral
multiples thereof. On the Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to an
Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay
the purchase price of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee all Notes or portions
thereof so accepted together with an Officers' Certificate specifying the Notes
or portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the Holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; PROVIDED that each Note purchased and each new Note issued
shall be in a principal amount at maturity of $1,000 or integral multiples
thereof. The Company will publicly announce the results of an Offer to Purchase
as soon as practicable after the Payment Date. The Trustee shall act as the
Paying Agent for an Offer to Purchase. The Company will comply with 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 the event that the
Company is required to repurchase Notes pursuant to an Offer to Purchase.
"Officer" means with respect to the Company, (i) the Chairman of the
Board, the President, any Vice President, the Chief Financial Officer, and
(ii) the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant
Secretary.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in
clause (ii) of the definition thereof. Each Officers' Certificate (other than
certificates provided pursuant to TIA Section 314(a)(4)) shall include the
statements provided for in TIA Section 314(e).
"Offshore Global Notes" has the meaning provided in Section 2.01.
"Offshore Notes Exchange Date" has the meaning provided in Section
2.01.
"Offshore Physical Notes" has the meaning provided in Section 2.01.
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15
"Opinion of Counsel" means a written opinion signed by legal counsel.
Such counsel may be an employee of or counsel to the Company or the Trustee.
Each such Opinion of Counsel shall include the statements provided for in TIA
Section 314(e). Opinions of Counsel required to be delivered may have
qualifications customary for opinions of the type required.
"Paying Agent" has the meaning provided in Section 2.04, except that,
for the purposes of Article Eight, the Paying Agent shall not be the Company or
a Subsidiary of the Company or an Affiliate of any of them. The term "Paying
Agent" includes any additional Paying Agent.
"Permanent Offshore Global Note" has the meaning provided in Section
2.01.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into, or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP and reasonable advances to sales representatives;
(iv) Investments received in satisfaction of judgments, bankruptcy, insolvency,
workouts or similar arrangements; (v) loans to employees of the Company or any
Restricted Subsidiary (A) evidenced by unsubordinated promissory notes, to the
extent the proceeds thereof are used to purchase Capital Stock of the Company,
that do not in the aggregate exceed at any one time outstanding $3.0 million and
(B) to pay relocation or similar expenses that do not in the aggregate exceed at
any one time outstanding $500,000; (vi) Investments in debt securities or other
evidences of Indebtedness (A) that are issued by companies engaged in the
telecommunications business and (B) for which no public market exists; PROVIDED
that when each Investment pursuant to this clause (vi) is made, the aggregate
amount of Investments outstanding under this clause (vi) does not exceed the
greater of (I) $2.0 million and (II) 1% of Consolidated EBITDA for the Four
Quarter Period; (vii) Investments existing on the Closing Date; (viii) Strategic
Investments not to exceed $10 million at any one time outstanding; and (ix)
Investments in Permitted Joint Ventures not to exceed $10 million at any one
time outstanding.
"Permitted Joint Venture" means any Unrestricted Subsidiary or any
other Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and whose
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries at the time of determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly
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16
instituted and diligently conducted and for which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made; (ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or personal
property acquired after the Closing Date; PROVIDED that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with
Section 4.03, (1) to finance the cost (including the cost of design,
development, improvement, construction, installation or integration) of the item
of property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness previously so secured, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and
(c) any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries,
taken as a whole; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; (xi) Liens on property of, or on shares of Capital
Stock or Indebtedness of, any Person existing at the time such Person becomes,
or becomes a part of, any Restricted Subsidiary; PROVIDED that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property, assets, Capital Stock or Indebtedness of the
Person so acquired; (xii) Liens in favor of the Company or any Restricted
Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order
against the Company or any Restricted Subsidiary of the Company that does not
give rise to an Event of Default; (xiv) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xv)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in
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17
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens
on or sales of receivables and (xix) Liens existing on the Closing Date.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Physical Notes" has the meaning provided in Section 2.01.
"Pledge Account" means an account established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the proceeds from the sale
of the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such Agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the securities originally purchased by the
Company with a portion of the proceeds from the sale of the Notes, which shall
consist of Government Securities, to be deposited in the Pledge Account, all in
accordance with the terms of the Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference equity,
whether now outstanding or issued after the Closing Date, including, without
limitation, all series and classes of such preferred stock or preference stock.
"Principal" of a debt security, including the Notes, means the
principal amount due on the Stated Maturity as shown on such debt security.
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18
"Private Placement Legend" means the legend initially set forth on the
Notes in the form set forth in Section 2.02.
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity
Offering has been consummated and (ii) at least 15% of the total issued and
outstanding Common Stock of the Company has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in Section 4.11 and Section 4.12 and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Section
4.11 and Section 4.12.
"Redemption Date," when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price," when used with respect to any Note to be redeemed,
means the price at which such Note is to be redeemed pursuant to this Indenture.
"Registrar" has the meaning provided in Section 2.04.
"Registration Statement" means the Registration Statement as defined
and described in the Notes Registration Rights Agreement.
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19
"Regular Record Date" for the interest payable on any Interest Payment
Date means the January 1 or July 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act.
"Released Indebtedness" means, with respect to any Asset Sale,
Indebtedness (i) which is owed by the Company or any Restricted Subsidiary (the
"Obligors") prior to such Asset Sale, (ii) which is assumed by the purchaser or
any affiliate thereof in connection with such Asset Sale and (iii) with respect
to which the Obligors receive written, unconditional, valid and enforceable
releases from each creditor, no later than the closing date of such Asset Sale.
"Repurchase Offer" has the meaning provided in the Warrant Agreement.
"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, any assistant vice
president, the secretary, any assistant secretary, the treasurer, any 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 (including any officer within the Corporate
Trust Administration (or any successor group) of the Trustee) and also means,
with respect to a particular corporate trust matter, any other officer to whom
such matter is referred because of his or her knowledge of and familiarity with
the particular subject.
"Restricted Payments" has the meaning provided in Section 4.04.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Ratings Services, a division of McGraw
Hill, Inc., and its successors.
"Securities Act" means the Securities Act of 1933, as amended.
"Separation Date" has the meaning specified in the recitals to this
Indenture.
"Shelf Registration Statement" has the meaning provided in the Notes
Registration Rights Agreement.
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20
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Specified Date" means any Redemption Date, any Payment Date for an
Offer to Purchase pursuant to Section 4.11 or Section 4.12 or any date on which
the Notes first become due and payable after an Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Strategic Investments" means (A) Investments that the Board of
Directors has determined in good faith will enable the Company or any of its
Restricted Subsidiaries to obtain additional business that it might not be able
to obtain without making such Investment and (B) Investments in entities the
principal function of which is to perform research and development with respect
to products and services that may be used or useful in the telecommunications
business; PROVIDED that the Company or one of its Restricted Subsidiaries is
entitled or otherwise reasonably expected to obtain rights to such products or
services as a result of such Investment.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) bankers' acceptances, time deposit accounts, certificates
of deposit and money market deposits maturing within 270 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50 million (or
the foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying
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21
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States of America with a rating at
the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, (v) securities with
maturities of nine months or less from the date of acquisition issued or fully
and unconditionally guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by S&P or Moody's, (vi) direct obligations of
the British, Belgian, Dutch, French, German or Swiss governments or obligations
fully and unconditionally guaranteed by any of such governments and
(vii) certificates of deposit, bank promissory notes and bankers' acceptances
denominated in the currency of any country of the European Union maturing not
more than 365 days after the acquisition thereof and issued or guaranteed by any
one of the 20 largest banks (based on assets as of the immediately preceding
December 31) organized under the laws of any country in the European Union;
PROVIDED such bank is not under intervention, receivership or any similar
arrangement at the time of acquisition of such certificates of deposit, bank
promissory notes or bankers' acceptances; PROVIDED that the aggregate principal
amount of all obligations and Indebtedness included in clauses (vi) and
(vii) above shall not exceed at any one time outstanding $10 million.
"Temporary Offshore Global Note" has the meaning provided in Section
2.01.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended (15 U.S. Code Sections 77aaa-77bbb), as in effect on the date this
Indenture was executed, except as provided in Section 9.06.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of this
Indenture until a successor replaces it in accordance with the provisions of
Article Seven of this Indenture and thereafter means such successor.
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22
"United States Bankruptcy Code" means the Bankruptcy Reform Act of
1978, as amended and as codified in Title 11 of the United States Code, as
amended from time to time hereafter, or any successor federal bankruptcy law.
"Units" has the meaning provided in the recitals to this Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under Section 4.04 and (C) if
applicable, the Incurrence of Indebtedness and the Investment referred to in
clause (A) of this proviso would be permitted under Sections 4.03 and 4.04. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that immediately after giving effect to such designation
(x) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have been
permitted to be incurred for all purposes of the Indenture and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Global Note" has the meaning provided in Section 2.01.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the 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 at any time prior
to the Stated Maturity of the Notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a 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
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23
depository receipt from any amount received by the custodian in respect of the
U.S. Government Obligation or the specific payment of interest on or principal
of the U.S. Government Obligation evidenced by such depository receipt.
"U.S. Physical Notes" has the meaning provided in Section 2.01.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Warrant Agreement" means the Warrant Agreement dated as of the date
hereof between the Company and The Bank of New York, as warrant agent.
"Warrants" means the warrants issued under the Warrant Agreement, each
of which initially entitles the holder thereof to purchase 8.167 shares of
Econophone Common Stock at $.01 per share, subject to adjustment.
"Wholly Owned" means, with respect to any Subsidiary of any Person,
the ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes;
"indenture security holder" means a Holder or a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture securities means the Company or any other
obligor on the Notes.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by a rule of the
Commission and not otherwise defined herein have the meanings assigned to them
therein.
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24
SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and words in the
plural include the singular;
(v) provisions apply to successive events and transactions;
(vi) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or
other subdivision;
(vii) all ratios and computations based on GAAP contained in this
Indenture shall be computed in accordance with the definition of GAAP set
forth in Section 1.01; and
(viii) all references to Sections or Articles refer to Sections or
Articles of this Indenture unless otherwise indicated.
ARTICLE TWO
THE NOTES
SECTION 2.01. FORM AND DATING. The Notes and the Trustee's
certificate of authentication shall be substantially in the form annexed hereto
as Exhibit A with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture. The Notes may
have notations, legends or endorsements required by law, stock exchange
agreements to which the Company is subject or usage. The Company shall approve
the form of the Notes and any notation, legend or endorsement on the Notes.
Each Note shall be dated the date of its authentication.
The terms and provisions contained in the form of the Notes annexed
hereto as Exhibit A shall constitute, and are hereby expressly made, a part of
this Indenture. To the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
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25
Notes offered and sold in reliance on Rule 144A shall be issued
initially in the form of one or more permanent global Notes in registered form,
substantially in the form set forth in Exhibit A (collectively, the "U.S. Global
Notes"), deposited with the Trustee, as custodian for the Depositary, duly
executed by the Company and authenticated by the Trustee as hereinafter
provided. The aggregate principal amount of the U.S. Global Notes may from time
to time be increased or decreased by adjustments made on the records of the
Trustee, as custodian for the Depositary or its nominee, as hereinafter
provided.
Notes offered and sold in offshore transactions in reliance on
Regulation S shall be issued initially in the form of one or more temporary
global Notes in registered form substantially in the form set forth in Exhibit A
(collectively, the "Temporary Offshore Global Notes") deposited with the
Trustee, as custodian for the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. At any time following the
later of the Separation Date and August 10, 1997 (the "Offshore Notes Exchange
Date"), upon receipt by the Trustee and the Company of a certificate
substantially in the form of Exhibit B hereto, one or more permanent global
Notes in registered form substantially in the form set forth in Exhibit A (the
"Permanent Offshore Global Notes"; and together with the Temporary Offshore
Global Notes, the "Offshore Global Notes") duly executed by the Company and
authenticated by the Trustee as hereinafter provided shall be deposited with the
Trustee, as custodian for the Depositary, and the Registrar shall reflect on its
books and records the date and a decrease in the principal amount of the
Temporary Offshore Global Notes in an amount equal to the principal amount of
the beneficial interest in the Temporary Offshore Global Notes transferred.
Notes offered and sold in reliance on Regulation D under the
Securities Act shall be issued in the form of permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A (the "U.S.
Physical Notes"). Notes issued pursuant to Section 2.07 in exchange for
interests in the Offshore Global Note shall be in the form of permanent
certificated Notes in registered form substantially in the form set forth in
Exhibit A (the "Offshore Physical Notes").
The Offshore Physical Notes and U.S. Physical Notes are sometimes
collectively herein referred to as the "Physical Notes." The U.S. Global Notes
and the Offshore Global Notes are sometimes referred to herein as the "Global
Notes."
The definitive Notes shall be typed, printed, lithographed or engraved
or produced by any combination of these methods or may be produced in any other
manner permitted by the rules of any securities exchange on which the Notes may
be listed, all as determined by the Officers executing such Notes, as evidenced
by their execution of such Notes.
SECTION 2.02. RESTRICTIVE LEGENDS. Unless and until a Note is
exchanged for an Exchange Note in connection with an effective Registration
Statement pursuant to the Notes
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Registration Rights Agreement, each U.S. Global Notes, Temporary Offshore
Global Notes and U.S. Physical Note shall bear the legend, set forth below on
the face thereof:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3)
OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD
REFERRED TO IN RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE
144(d), IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF
TRANSFER OF SUCH NOTE RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO
ECONOPHONE, INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE
UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE
144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES
TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM
OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS
IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES OF LESS THAN $250,000,
AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN
COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER
MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO
THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE
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27
TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED
INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE
AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS
EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS
BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE
INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER
ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS.
Each Global Note, whether or not an Exchange Note, shall also bear the
following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY
(AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTION 2.08 OF THE INDENTURE.
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28
Prior to the Separation Date, each Note shall bear the following
legend on the face thereof:
THIS NOTE IS INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF
WHICH CONSISTS OF ONE NOTE AND ONE WARRANT INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 8.167 SHARES OF VOTING COMMON STOCK, PAR VALUE $.0001
PER SHARE, OF ECONOPHONE, INC. (A "WARRANT"). PRIOR TO THE CLOSE OF
BUSINESS UPON THE EARLIEST TO OCCUR OF (i) DECEMBER 28, 1997, (ii) THE
COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT TO THE NOTES, AND (iii) THE
EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT WITH RESPECT TO THE NOTES,
THE NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED
SEPARATELY FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH,
THE WARRANTS.
SECTION 2.03. EXECUTION, AUTHENTICATION AND DENOMINATIONS. Subject
to Article Four, the aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is unlimited. The Notes shall
be executed by two Officers of the Company, by facsimile or manual signature, in
the name and on behalf of the Company.
If an Officer whose signature is on a Note no longer holds that office
at the time the Trustee or authenticating agent authenticates the Note, the Note
shall be valid nevertheless.
A Note shall not be valid until the Trustee or authenticating agent
manually signs the certificate of authentication on the Note. The signature
shall be conclusive evidence that the Note has been authenticated under this
Indenture.
At any time and from time to time after the execution of this
Indenture, the Trustee or an authenticating agent shall upon receipt of a
Company Order authenticate for original issue Notes in the aggregate principal
amount specified in such Company Order; PROVIDED that the Trustee shall be
entitled to receive an Officers' Certificate and an Opinion of Counsel of the
Company in connection with such authentication of Notes. Such Company Order
shall specify the amount of Notes to be authenticated, the date on which the
original issue of Notes is to be authenticated and the aggregate principal
amount of Notes then authorized and in case of an issuance of Notes pursuant to
Section 2.15, shall certify that such issuance is in compliance with Article
Four.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such authenticating
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
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29
The Notes shall be issuable only in registered form without coupons
and only in denominations of $1,000 in principal amount and any integral
multiple thereof.
SECTION 2.04. REGISTRAR AND PAYING AGENT. The Company shall maintain
an office or agency where Notes may be presented for registration of transfer or
for exchange (the "Registrar"), an office or agency where Notes may be presented
for payment (the "Paying Agent") and an office or agency where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served, which shall be in the Borough of Manhattan, The City of New York. The
Company shall cause the Registrar to keep a register of the Notes and of their
transfer and exchange (the "Note Register"). The Note Register shall be in
written form or any other form capable of being converted into written form
within a reasonable time. The Company may have one or more co-Registrars and
one or more additional Paying Agents. The term "Registrar" includes any
co-Registrar.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall give
prompt written notice to the Trustee of the name and address of any such Agent
and any change in the address of such Agent. If the Company fails to maintain a
Registrar, Paying Agent and/or agent for service of notices and demands, the
Trustee shall act as such Registrar, Paying Agent and/or agent for service of
notices and demands. The Company may remove any Agent upon written notice to
such Agent and the Trustee; PROVIDED that no such removal shall become effective
until (i) the acceptance of an appointment by a successor Agent to such Agent as
evidenced by an appropriate agency agreement entered into by the Company and
such successor Agent and delivered to the Trustee or (ii) notification to the
Trustee that the Trustee shall serve as such Agent until the appointment of a
successor Agent in accordance with clause (i) of this proviso. The Company, any
Subsidiary of the Company, or any Affiliate of any of them may act as Paying
Agent, Registrar or co-Registrar, and/or agent for service of notice and
demands.
The Company initially appoints the Trustee as Registrar, Paying Agent,
authenticating agent and agent for service of notice and demands. The Trustee
shall preserve in as current a form as is reasonably practicable the most recent
list available to it of the names and addresses of all Holders and shall
otherwise comply with TIA Section 312(a). If, at any time, the Trustee is not
the Registrar, the Company shall furnish, or cause to be furnished, to the
Trustee at least seven Business Days before each Interest Payment Date and at
such other times as the Trustee may reasonably request, the names and addresses
of the Holders as they appear in the Note Register.
SECTION 2.05. PAYING AGENT TO HOLD MONEY IN TRUST. Not later than
10:00 a.m., New York City time, each due date of the principal, premium, if any,
and interest on any Notes, the Company shall deposit with the Paying Agent money
in immediately available funds sufficient to pay such principal, premium, if
any, and interest so becoming due. However, the
<PAGE>
30
Company, at its option, may pay principal, premium, if any, and interest by its
check payable in such money. It may mail an interest check to a Holder's
registered address (as reflected in the Note Register). The Company shall
require each Paying Agent other than the Trustee to agree in writing that such
Paying Agent shall hold in trust for the benefit of the Holders or the Trustee
all money held by the Paying Agent for the payment of principal of, premium, if
any, and interest on the Notes (whether such money has been paid to it by the
Company or any other obligor on the Notes), and such Paying Agent shall promptly
notify the Trustee of any default by the Company (or any other obligor on the
Notes) in making any such payment. The Company at any time may require a Paying
Agent to pay all money held by it to the Trustee and account for any funds
disbursed, and the Trustee may at any time during the continuance of any payment
default, upon written request to a Paying Agent, require such Paying Agent to
pay all money held by it to the Trustee and to account for any funds disbursed.
Upon doing so, the Paying Agent shall have no further liability for the money so
paid over to the Trustee. If the Company or any Subsidiary of the Company or
any Affiliate of any of them acts as Paying Agent, it will, on or before each
due date of any principal of, premium, if any, or interest on the Notes,
segregate and hold in a separate trust fund for the benefit of the Holders a sum
of money sufficient to pay such principal, premium, if any, or interest so
becoming due until such sum of money shall be paid to such Holders or otherwise
disposed of as provided in this Indenture, and will promptly notify the Trustee
of its action or failure to act.
SECTION 2.06. TRANSFER AND EXCHANGE. The Notes are issuable only in
registered form. The Notes shall initially be issued as part of an issuance of
Units, each of which consists of one Note and one Warrant. Prior to the
Separation Date, the Notes may not be transferred or exchanged separately from,
but may be transferred or exchanged only together with the Warrants issued in
connection with such Notes. A Holder may transfer a Note by written application
to the Registrar stating the name of the proposed transferee and otherwise
complying with the terms of this Indenture. No such transfer shall be effected
until, and such transferee shall succeed to the rights of a Holder only upon,
final acceptance and registration of the transfer by the Registrar in the Note
Register. Prior to the registration of any transfer by a Holder as provided
herein, the Company, the Trustee, and any agent of the Company shall treat the
person in whose name the Note is registered as the owner thereof for all
purposes whether or not the Note shall be overdue, and neither the Company, the
Trustee, nor any such agent shall be affected by notice to the contrary.
Furthermore, any Holder of a Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Note may be
effected only through a book entry system maintained by the Holder of such
Global Note (or its agent) and that ownership of a beneficial interest in the
Note shall be required to be reflected in a book entry. When Notes are
presented to the Registrar or a co-Registrar with a request to register the
transfer or to exchange them for an equal principal amount of Notes of other
authorized denominations (including an exchange of Notes for Exchange Notes),
the Registrar shall register the transfer or make the exchange as requested if
its requirements for such transactions are met; PROVIDED that no exchanges of
Notes for Exchange Notes shall occur until a Registration Statement shall have
been declared effective by the
<PAGE>
31
Commission (confirmed in an Officers' Certificate delivered to the Trustee) and
that any Notes that are exchanged for Exchange Notes shall be cancelled by the
Trustee. To permit registrations of transfers and exchanges, the Company shall
execute and the Trustee shall authenticate Notes at the Registrar's request. No
service charge shall be made for any registration of transfer or exchange or
redemption of the Notes, but the Company may require payment of a sum sufficient
to cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer taxes or other similar governmental
charge payable upon exchanges pursuant to Section 2.11, 3.08 or 9.04).
The Registrar shall not be required (i) to issue, register the
transfer of or exchange any Note during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 3.03 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
SECTION 2.07. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES. (a) The U.S.
Global Notes and Offshore Global Notes initially shall (i) be registered in the
name of the Depositary for such Global Notes or the nominee of such Depositary,
(ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear
legends as set forth in Section 2.02.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depositary, or the Trustee as its custodian, or under the
Global Note, and the Depositary may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of such Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee, from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers of
such Global Note in whole, but not in part, to the Depositary, its successors or
their respective nominees. Interests of beneficial owners in a Global Note may
be transferred in accordance with the rules and procedures of the Depositary and
the provisions of Section 2.08. In addition, U.S. Physical Notes and Offshore
Physical Notes shall be transferred to all beneficial owners in exchange for
their beneficial interests in the U.S. Global Note or the Offshore Global Note,
respectively, if (i) the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for the U.S. Global Note or the Offshore Global
Note, as the case may be, and a successor depositary is not appointed by the
Company within 90 days of such notice, (ii) an Event of Default has occurred and
is continuing and the Registrar has received a request to the foregoing
<PAGE>
32
effect from the Depositary or (iii) in accordance with the rules and procedures
of the Depositary and the provisions of Section 2.08.
(c) Any beneficial interest in one of the Global Notes that is
transferred to a person who takes delivery in the form of an interest in any
other Global Note will, upon transfer, cease to be an interest in the first
Global Note and become an interest in the other Global Note and, accordingly,
will thereafter be subject to all transfer restrictions, if any, and other
procedures applicable to beneficial interests in such other Global Note for as
long as it remains such an interest.
(d) In connection with any transfer of a portion of the beneficial
interests in the U.S. Global Notes or Permanent Offshore Global Notes to
beneficial owners pursuant to paragraph (b) of this Section, the Registrar shall
reflect on its books and records the date and a decrease in the principal amount
of the U.S. Global Note or Permanent Offshore Global Note in an amount equal to
the principal amount of the beneficial interest in the U.S. Global Note or
Permanent Offshore Global Note to be transferred, and the Company shall execute,
and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes
or Offshore Physical Notes, as the case may be, of like tenor and amount.
(e) In connection with the transfer of the entire U.S. Global Note
or Offshore Global Note to beneficial owners pursuant to paragraph (b) of this
Section, the U.S. Global Note or Offshore Global Note, as the case may be, shall
be deemed to be surrendered to the Trustee for cancellation, and the Company
shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depositary in exchange for its beneficial
interest in the U.S. Global Note or Offshore Global Note, as the case may be, an
equal aggregate principal amount of U.S. Physical Notes or Offshore Physical
Notes, as the case may be, of authorized denominations.
(f) Any U.S. Physical Note delivered in exchange for an interest
in the U.S. Global Note pursuant to paragraph (b) or (d) of this Section shall,
except as otherwise provided by paragraph (f) of Section 2.08, bear the legend
regarding transfer restrictions applicable to the U.S. Physical Note set forth
in Section 2.02.
(g) Any Offshore Physical Note delivered in exchange for an
interest in the Offshore Global Note pursuant to paragraph (b) or (d) of this
Section shall, except as otherwise provided by paragraph (f) of Section 2.08,
bear the legend regarding transfer restrictions applicable to the Offshore
Physical Note set forth in Section 2.02.
(h) The registered holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
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33
(i) Beneficial owners of interests in the U.S. Global Note may
receive U.S. Physical Notes (which shall bear the Private Placement Legend if
required by Section 2.02) in accordance with the procedures of the Depositary.
In connection with the execution, authentication and delivery of such U.S.
Physical Notes, the Registrar shall reflect on its books and records a decrease
in the principal amount of the U.S. Global Note equal to the principal amount of
such U.S. Physical Notes and the Company shall execute and the Trustee shall
authenticate and deliver one or more U.S. Physical Notes having an equal
aggregate principal amount.
SECTION 2.08. SPECIAL TRANSFER PROVISIONS. Unless and until a Note
is exchanged for an Exchange Note in connection with an effective Registration
Statement pursuant to the Notes Registration Rights Agreement, the following
provisions shall apply:
(a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The
following provisions shall apply with respect to the registration of any
proposed transfer of a Note to any Institutional Accredited Investor which
is not a QIB (excluding Non-U.S. Persons):
(i) The Registrar shall register the transfer of any Note,
whether or not such Note bears the Private Placement Legend, if (x)
the requested transfer is after the time period referred to in Rule
144(k) under the Securities Act or (y) the proposed transferee has
delivered to the Registrar (A) a certificate substantially in the form
of Exhibit C hereto and (B) if the aggregate principal amount of the
Notes being transferred is less than $250,000, an opinion of counsel
acceptable to the Company that such transfer is in compliance with the
Securities Act.
(ii) If the proposed transferor is an Agent Member holding a
beneficial interest in the U.S. Global Note, upon receipt by the
Registrar of (x) the documents, if any, required by paragraph (i) and
(y) instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the U.S.
Global Note in an amount equal to the principal amount of the
beneficial interest in the U.S. Global Note to be transferred, and the
Company shall execute, and the Trustee shall authenticate and deliver,
one or more U.S. Physical Notes of like tenor and amount.
(b) TRANSFERS TO QIBS. The following provisions shall apply with
respect to the registration of any proposed transfer of a U.S. Physical
Note or an interest in the U.S. Global Note to a QIB (excluding Non-U.S.
Persons):
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34
(i) If the Note to be transferred consists of (x) U.S.
Physical Notes, the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the
box provided for on the form of Note stating, or has otherwise advised
the Company and the Registrar in writing, that the sale has been made
in compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar in writing, that
it is purchasing the Note for its own account or an account with
respect to which it exercises sole investment discretion and that it
and any such account is a QIB within the meaning of Rule 144A, and is
aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the
Company as it has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the
transferor is relying upon its foregoing representations in order to
claim the exemption from registration provided by Rule 144A or (y) an
interest in the U.S. Global Note, the transfer of such interest may be
effected only through the book entry system maintained by the
Depositary.
(ii) If the proposed transferee is an Agent Member, and the
Note to be transferred consists of U.S. Physical Notes, upon receipt
by the Registrar of the documents referred to in clause (i) and
instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the principal amount of the U.S.
Global Note in an amount equal to the principal amount of the U.S.
Physical Note, to be transferred, and the Trustee shall cancel the
U.S. Physical Note so transferred.
(c) TRANSFERS OF INTERESTS IN THE TEMPORARY OFFSHORE GLOBAL NOTE.
The following provisions shall apply with respect to registration of any
proposed transfer of interests in the Temporary Offshore Global Note:
(i) The Registrar shall register the transfer of any Note
(x) if the proposed transferee is a Non-U.S. Person and the proposed
transferor has delivered to the Registrar a certificate substantially
in the form of Exhibit D hereto or (y) if the proposed transferee is a
QIB and the proposed transferor has checked the box provided for on
the form of Note stating, or has otherwise advised the Company and the
Registrar in writing, that the sale has been made in compliance with
the provisions of Rule 144A to a transferee who has signed the
certification provided for on the form of Note stating, or has
otherwise advised the Company and the Registrar in writing, that it is
purchasing the Note for its own account or an account with respect to
which it exercises sole investment discretion and that it and any such
account is a QIB within the
<PAGE>
35
meaning of Rule 144A, and is aware that the sale to it is being made
in reliance on Rule 144A and acknowledges that it has received such
information regarding the Company as it has requested pursuant to Rule
144A or has determined not to request such information and that it is
aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Registrar of the documents referred to in clause (i)(y)
above and instructions given in accordance with the Depositary's and
the Registrar's procedures, the Registrar shall reflect on its books
and records the date and an increase in the principal amount at
maturity of the U.S. Global Note, in an amount equal to the principal
amount at maturity of the Temporary Offshore Global Note to be
transferred, and the Trustee shall decrease the amount of the
Temporary Offshore Global Note in such an amount.
(d) TRANSFERS OF INTERESTS IN THE PERMANENT OFFSHORE GLOBAL NOTE
OR UNLEGENDED OFFSHORE PHYSICAL NOTES. The following provisions shall
apply with respect to any transfer of interests in the Permanent Offshore
Global Note or unlegended Offshore Physical Notes: the Registrar shall
register the transfer of any such Note without requiring any additional
certification.
(e) TRANSFERS TO NON-U.S. PERSONS AT ANY TIME. The following
provisions shall apply with respect to any transfer of a Note to a Non-U.S.
Person:
(i) Prior to August 10, 1997, the Registrar shall register
any proposed transfer of a Note to a Non-U.S. Person upon receipt of a
certificate substantially in the form of Exhibit D hereto from the
proposed transferor.
(ii) On and after August 10, 1997, the Registrar shall
register any proposed transfer to any Non-U.S. Person if the Note to
be transferred is a U.S. Physical Note or an interest in the U.S.
Global Note, upon receipt of a certificate substantially in the form
of Exhibit D from the proposed transferor.
(iii) (a) If the proposed transferor is an Agent Member
holding a beneficial interest in the U.S. Global Note, upon receipt by
the Registrar of (x) the documents, if any, required by paragraph (ii)
and (y) instructions in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the U.S.
Global Note in an amount equal to the principal amount of the
beneficial interest in the U.S. Global Note to be transferred, and (b)
if the proposed transferee is an Agent Member, upon receipt by the
Registrar of
<PAGE>
36
instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the principal amount of the
Offshore Global Note in an amount equal to the principal amount of the
U.S. Physical Notes or the U.S. Global Note, as the case may be, to be
transferred, and the Trustee shall cancel the Physical Note, if any,
so transferred or decrease the amount of the U.S. Global Note.
(f) PRIVATE PLACEMENT LEGEND. Upon the transfer, exchange or
replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement
Legend. Upon the transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear
the Private Placement Legend unless either (i) the circumstances
contemplated by the second sentence of the fourth paragraph of Section 2.01
or paragraphs (a)(i)(x) or (e)(ii) of this Section 2.08 exist or (ii) there
is delivered to the Registrar an Opinion of Counsel reasonably satisfactory
to the Company and the Trustee to the effect that neither such legend nor
the related restrictions on transfer are required in order to maintain
compliance with the provisions of the Securities Act.
(g) GENERAL. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions
on transfer of such Note set forth in this Indenture and in the Private
Placement Legend and agrees that it will transfer such Note only as
provided in this Indenture. The Registrar shall not register a transfer of
any Note unless such transfer complies with the restrictions on transfer of
such Note set forth in this Indenture. In connection with any transfer of
Notes, each Holder agrees by its acceptance of the Notes to furnish the
Registrar or the Company such certifications, legal opinions or other
information as either of them may reasonably require to confirm that such
transfer is being made pursuant to an exemption from, or a transaction not
subject to, the registration requirements of the Securities Act; PROVIDED
that the Registrar shall not be required to determine (but may rely on a
determination made by the Company with respect to) the sufficiency of any
such certifications, legal opinions or other information.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 2.07 or this Section 2.08.
The Company shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time upon the giving
of reasonable written notice to the Registrar.
SECTION 2.09. REPLACEMENT NOTES. If a mutilated Note is surrendered
to the Trustee or if the Holder claims that the Note has been lost, destroyed or
wrongfully taken, then, in the absence of notice to the Company or the Trustee
that such Note has been acquired by a bona fide purchaser, the Company shall
issue and the Trustee shall authenticate a replacement Note of like tenor and
principal amount; PROVIDED that the requirements of this Section 2.09 are
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37
met. If required by the Trustee or the Company, an indemnity bond must be
furnished by the relevant Holder that is sufficient in the judgment of both the
Trustee and the Company to protect the Company, the Trustee or any Agent from
any loss that any of them may suffer if a Note is replaced. The Company may
charge such Holder for the expenses of the Company and the Trustee in replacing
a Note. In case any such mutilated, lost, destroyed or wrongfully taken Note
has become or is about to become due and payable, the Company in its discretion
may pay such Note instead of issuing a new Note in replacement thereof.
Every replacement Note is an additional obligation of the Company and
shall be entitled to the benefits of this Indenture.
SECTION 2.10. OUTSTANDING NOTES. Notes outstanding at any time are
all Notes that have been authenticated by the Trustee except for those cancelled
by it, those delivered to it for cancellation and those described in this
Section 2.10 as not outstanding.
If a Note is replaced pursuant to Section 2.09 (other than a mutilated
Note surrendered for replacement), it ceases to be outstanding unless and until
the Trustee and the Company receive proof satisfactory to each of them that the
replaced Note is held by a BONA FIDE purchaser. A mutilated Note ceases to be
outstanding upon surrender of such security and replacement thereof pursuant to
Section 2.09.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on a Redemption Date or the Stated Maturity of the Notes money
sufficient to pay Notes payable on that date, then on and after that date such
Notes cease to be outstanding and interest on them shall cease to accrue.
Notes, or portions thereof, for the payment or redemption of which
moneys or U.S. Government Obligations (as provided for in Article Eight) in the
necessary amount shall have been deposited in trust with the Trustee or with any
Paying Agent (other than the Company) or shall have been set aside, segregated
and held in trust by the Company for the Holders of such Notes (if the Company
shall act as its own Paying Agent), on and after that time shall cease to be
outstanding and, in the case of redemption, interest on such Notes shall cease
to accrue; PROVIDED that if such Notes, or portions thereof, are to be redeemed
prior to the maturity thereof, notice of such redemption shall have been given
as herein provided, or provision satisfactory to the Trustee shall have been
made for giving such notice.
A Note does not cease to be outstanding because the Company or one of
its Affiliates holds such Note; PROVIDED, HOWEVER, that, in determining whether
the Holders of the requisite principal amount of the outstanding Notes have
given any request, demand, authorization, direction, notice, consent or waiver
hereunder, Notes owned by the Company or any other obligor upon the Notes or any
Affiliate of the Company or of such other obligor shall be disregarded and
deemed not to be outstanding, except that, in determining whether the
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Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Notes which the
Trustee knows to be so owned shall be so disregarded. Notes 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 Notes and that the pledgee is not the Company or any other
obligor upon the Notes or any Affiliate of the Company or of such other obligor.
SECTION 2.11. TEMPORARY NOTES. Until definitive Notes are ready for
delivery, the Company may prepare and execute and the Trustee shall authenticate
temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes but may have insertions, substitutions, omissions and other
variations determined to be appropriate by the Officers executing the temporary
Notes, as evidenced by their execution of such temporary Notes. If temporary
Notes are issued, the Company will cause definitive Notes to be prepared without
unreasonable delay. After the preparation of definitive Notes, the temporary
Notes shall be exchangeable for definitive Notes upon surrender of the temporary
Notes at the office or agency of the Company designated for such purpose
pursuant to Section 4.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Notes the Company shall execute and
the Trustee shall authenticate and deliver in exchange therefor a like principal
amount of definitive Notes of authorized denominations. Until so exchanged, the
temporary Notes shall be entitled to the same benefits under this Indenture as
definitive Notes.
SECTION 2.12. CANCELLATION. The Company at any time may deliver, to
the Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and may
deliver to the Trustee for cancellation any Notes previously authenticated
hereunder which the Company has not issued and sold. The Registrar and the
Paying Agent shall forward to the Trustee any Notes surrendered to them for
transfer, exchange or payment. The Trustee shall cancel all Notes surrendered
for transfer, exchange, payment, replacement or cancellation and shall return
such cancelled Notes to the Company.
SECTION 2.13. CUSIP NUMBERS. The Company in issuing the Notes may
use "CUSIP," "CINS" and "ISIN" numbers (if then generally in use), and the
Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in notices of
redemption or exchange as a convenience to Holders; PROVIDED that any such
notice shall state that no representation is made as to the correctness of such
CUSIP, CINS or ISIN numbers either as printed on the Notes or as contained in
any notice of redemption or exchange and that reliance may be placed only on the
other identification numbers printed on the Notes; and PROVIDED FURTHER that
failure to use CUSIP, CINS or ISIN numbers in any notice of redemption or
exchange shall not affect the validity or sufficiency of such notice. The
Company shall promptly notify the Trustee of any change in CUSIP numbers.
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39
SECTION 2.14. DEFAULTED INTEREST. If the Company defaults in a
payment of interest on the Notes, it shall pay, or shall deposit with the Paying
Agent money in immediately available funds sufficient to pay the defaulted
interest, plus (to the extent lawful) any interest payable on the defaulted
interest, to the Persons who are Holders on a subsequent special record date. A
special record date, as used in this Section 2.14 with respect to the payment of
any defaulted interest, shall mean the 15th day next preceding the date fixed by
the Company for the payment of defaulted interest, whether or not such day is a
Business Day. At least 15 days before the subsequent special record date, the
Company (or the Trustee, in the name of and at the expense of the Company) shall
mail to each Holder a notice that states the subsequent special record date, the
payment date and the amount of defaulted interest to be paid.
SECTION 2.15. ISSUANCE OF ADDITIONAL NOTES. The Company may, subject
to Article Four of this Indenture, issue additional Notes under this Indenture.
The Notes issued on the Closing Date and any additional Notes subsequently
issued shall be treated as a single class for all purposes under this Indenture.
ARTICLE THREE
REDEMPTION
SECTION 3.01. RIGHT OF REDEMPTION. (a) The Notes will be
redeemable, at the Company's option, in whole or in part, at any time or from
time to time, on or after July 15, 2002 and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first class mail to each
Holder's last address as it appears in the Note Register, at the following
Redemption Prices (expressed in percentages of principal amount), plus accrued
and unpaid interest to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is prior to the Redemption Date
to receive interest due on an Interest Payment Date), if redeemed during the
12-month period commencing July 15 of the years set forth below:
Redemption
Year Price
---- ----------
2002 . . . . . . . . . 106.750%
2003 . . . . . . . . . 103.375%
2004 and thereafter . . . 100.000%
(b) In addition, at any time prior to July 15, 2000, the Company
may redeem up to 35% of the principal amount of the Notes with the proceeds of
one or more Public Equity Offerings, following which a Public Market occurs, at
any time as a whole or from time to time in part, at a Redemption Price
(expressed as a percentage of principal amount) of 113.50%; PROVIDED that (1) at
least $100.0 million aggregate principal amount of Notes remains outstanding
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40
after each such redemption and (2) each such redemption occurs within 180 days
of the related Public Equity Offering.
SECTION 3.02. NOTICES TO TRUSTEE. If the Company elects to redeem
Notes pursuant to Section 3.01(a) or (b), it shall notify the Trustee in writing
of the Redemption Date, the principal amount at Stated Maturity of Notes to be
redeemed and the clause of this Indenture pursuant to which the redemption shall
occur.
The Company shall give each notice provided for in this Section 3.02
in an Officers' Certificate at least 45 days before the Redemption Date (unless
a shorter period shall be satisfactory to the Trustee).
SECTION 3.03. SELECTION OF NOTES TO BE REDEEMED. If less than all of
the Notes are to be redeemed at any time, the Trustee will select the Notes, or
portions thereof, for redemption in compliance with the requirements as
certified to it by the Company, of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
national securities exchange, on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate; PROVIDED that no Note of $1,000 in principal amount or less shall
be redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating 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.
The Trustee shall make the selection from the Notes outstanding and
not previously called for redemption. Notes in denominations of $1,000 in
principal amount may only be redeemed in whole. The Trustee may select for
redemption portions (equal to $1,000 in principal amount or any integral
multiple thereof) of Notes that have denominations larger than $1,000 in
principal amount. Provisions of this Indenture that apply to Notes called for
redemption also apply to portions of Notes called for redemption. The Trustee
shall notify the Company and the Registrar promptly in writing of the Notes or
portions of Notes to be called for redemption.
SECTION 3.04. NOTICE OF REDEMPTION. With respect to any redemption
of Notes pursuant to Section 3.01(a) or (b), at least 30 days but not more than
60 days before a Redemption Date, the Company shall mail or cause to be mailed,
a notice of redemption by first class mail (pursuant to the requirements of
Section 11.02) to each Holder whose Notes are to be redeemed.
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41
The notice shall identify the Notes to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the name and address of the Paying Agent;
(iv) that Notes called for redemption must be surrendered to the
Paying Agent in order to collect the Redemption Price;
(v) that, unless the Company defaults in making the redemption
payment, interest on Notes called for redemption ceases to accrue on and
after the Redemption Date and the only remaining right of the Holders is to
receive payment of the Redemption Price plus accrued and unpaid interest to
the Redemption Date upon surrender of the Notes to the Paying Agent;
(vi) that, if any Note is being redeemed in part, the portion of
the principal amount (equal to $1,000 in principal amount or any integral
multiple thereof) of such Note to be redeemed and that, on and after the
Redemption Date, upon surrender of such Note, a new Note or Notes in
principal amount equal to the unredeemed portion thereof will be reissued;
(vii) that, if any Note contains a CUSIP, CINS or ISIN number as
provided in Section 2.13, no representation is being made as to the
correctness of the CUSIP, CINS or ISIN number either as printed on the
Notes or as contained in the notice of redemption and that reliance may be
placed only on the other identification numbers printed on the Notes; and
(viii) the aggregate principal amount of Notes being redeemed.
At the Company's request (which request may be revoked by the Company
at any time prior to the time at which the Trustee shall have given such notice
to the Holders), made in writing to the Trustee, at least 45 days (or such
shorter period as shall be satisfactory to the Trustee) before a Redemption
Date, the Trustee shall give the notice of redemption in the name and at the
expense of the Company. If, however, the Company gives such notice to the
Holders, the Company shall concurrently deliver to the Trustee an Officers'
Certificate stating that such notice has been given.
SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION. Once notice of
redemption is mailed, Notes called for redemption become due and payable on the
Redemption Date and at the
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Redemption Price. Upon surrender of any Notes to the Paying Agent, such Notes
shall be paid at the Redemption Price, plus accrued and unpaid interest to the
Redemption Date.
Notice of redemption shall be deemed to be given when mailed, whether
or not the Holder receives the notice. In any event, failure to give such
notice, or any defect therein, shall not affect the validity of the proceedings
for the redemption of Notes held by Holders to whom such notice was properly
given.
SECTION 3.06. DEPOSIT OF REDEMPTION PRICE. On or prior to 10:00 a.m.
New York City time on any Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company is acting as its own Paying Agent, shall
segregate and hold in trust as provided in Section 2.05) money in immediately
available funds sufficient to pay the Redemption Price of and accrued and unpaid
interest on all Notes to be redeemed on that date other than Notes or portions
thereof called for redemption on that date that have been delivered by the
Company to the Trustee for cancellation.
SECTION 3.07. PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of
redemption has been given in the manner provided above, the Notes or portion of
Notes specified in such notice to be redeemed shall become due and payable on
the Redemption Date at the Redemption Price stated therein, together with
accrued and unpaid interest to such Redemption Date, and on and after such date
(unless the Company shall default in the payment of such Notes at the Redemption
Price and accrued and unpaid interest to the Redemption Date, in which case the
principal, until paid, shall bear interest from the Redemption Date at the rate
prescribed in the Notes), such Notes shall cease to accrue interest. Upon
surrender of any Note for redemption in accordance with a notice of redemption,
such Note shall be paid and redeemed by the Company at the Redemption Price,
together with accrued and unpaid interest to the Redemption Date; PROVIDED that
installments of interest whose record date is prior to the Redemption Date shall
be payable to the Holders registered as such at the close of business such
record date, if any.
SECTION 3.08. NOTES REDEEMED IN PART. Upon surrender of any Note
that is redeemed in part, the Company shall at its expense issue and execute and
the Trustee shall authenticate and deliver for the Holder a new Note equal in
principal amount to the unredeemed portion of such surrendered Note.
ARTICLE FOUR
COVENANTS
SECTION 4.01. PAYMENT OF NOTES. The Company shall pay the principal
of, premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes and this Indenture. An installment of principal, premium,
if any, or interest shall be considered
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43
paid on the date due if the Trustee or Paying Agent (other than the Company, a
Subsidiary of the Company, or any Affiliate of any of them) holds as of 10:00
A.M. New York City time on the due date money deposited by the Company in
immediately available funds and designated for and sufficient to pay the
installment. If the Company or any Subsidiary of the Company or any Affiliate
of any of them, acts as Paying Agent, an installment of principal, premium, if
any, or interest shall be considered paid on the due date if the entity acting
as Paying Agent complies with the last sentence of Section 2.05. As provided in
Section 6.09, upon any bankruptcy or reorganization procedure relative to the
Company, the Trustee shall serve as the Paying Agent and conversion agent, if
any, for the Notes.
The Company shall pay interest on overdue principal, premium, if any,
and interest on overdue installments of interest, to the extent lawful, at the
rate per annum specified in the Notes.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will
maintain in the Borough of Manhattan, The City of New York an office or agency
where Notes may be surrendered for registration of transfer or exchange or for
presentation for payment and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The Company will give
prompt written notice to the Trustee of the location, and any change in the
location, of 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 address of the Trustee set forth in Section 11.02.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; PROVIDED
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York for such purposes. The Company will give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
The Company hereby initially designates the Corporate Trust Office of
the Trustee as such office of the Company in accordance with Section 2.04.
SECTION 4.03. LIMITATION ON INDEBTEDNESS. (a) The Company will not,
and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Notes and Indebtedness existing on the Closing
Date); PROVIDED that the Company may Incur Indebtedness if, after giving effect
to the Incurrence of such Indebtedness and the receipt and application of the
proceeds thereof, the Consolidated Leverage Ratio would be greater than zero and
(i) less than 5 to 1, for Indebtedness Incurred by the Company, or (ii) less
than 2 to 1, for Indebtedness Incurred by any Restricted Subsidiary.
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44
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(i) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed $100 million, less any amount of Indebtedness
permanently repaid as provided under Section 4.11;
(ii) Indebtedness (A) to the Company evidenced by an unsubordinated
promissory note or (B) to any of its Restricted Subsidiaries; PROVIDED that
any event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness not
permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to renew, extend, defease, refinance or refund, then
outstanding Indebtedness, other than Indebtedness Incurred under clause
(i), (ii), (iv), (vi), (viii) or (ix) of this paragraph, and any
refinancings thereof in an amount not to exceed the amount so renewed,
extended, defeased, refinanced or refunded (plus premiums, accrued
interest, fees and expenses); PROVIDED that Indebtedness the proceeds of
which are used to renew, extend, defease, refinance or refund the Notes in
part or Indebtedness that is PARI PASSU with, or subordinated in right of
payment to, the Notes shall only be permitted under this clause (iii) if
(A) in case the Notes are refinanced in part or the Indebtedness to be
refinanced is PARI PASSU with the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is outstanding, is expressly made PARI PASSU with, or
subordinate in right of payment to, the remaining Notes, (B) in case the
Indebtedness to be refinanced is subordinated in right of payment to the
Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes
at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as of
the date of Incurrence of such new Indebtedness, does not mature prior to
the Stated Maturity of the Indebtedness to be renewed, extended, defeased,
refinanced or refunded, and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to be
renewed, extended, defeased, refinanced or refunded; and PROVIDED FURTHER
that in no event may Indebtedness of the Company be refinanced by means of
any Indebtedness of any Restricted Subsidiary pursuant to this clause
(iii);
(iv) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (B) under Currency
Agreements and Interest Rate Agreements; PROVIDED that such agreements
(a) are designed solely to protect the
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45
Company or its Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the Indebtedness
of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder and (C)
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of the
Company or any of its Restricted Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of any business,
assets or Restricted Subsidiary of the Company (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition;
(v) Indebtedness of the Company, to the extent the net proceeds
thereof are promptly (A) used to purchase Notes tendered in an Offer to
Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described in Sections 8.02 and 8.03;
(vi) Guarantees of the Notes and Guarantees of Indebtedness of the
Company by any Restricted Subsidiary; PROVIDED that the Guarantee of such
Indebtedness is permitted by and made in accordance with Section 4.07;
(vii) Indebtedness Incurred to finance the cost (including the cost
of design, development, construction, installation or integration) of
equipment, inventory or other tangible assets used or useful in the
telecommunications business of the Company and its Restricted Subsidiaries
acquired by the Company or a Restricted Subsidiary after the Closing Date;
(viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by the Company after
the Closing Date from the issuance and sale of its Capital Stock (other
than Disqualified Stock) to a Person that is not a Subsidiary of the
Company to the extent such Net Cash Proceeds have not been used pursuant to
clause (C)(2) of the first paragraph of, or clause (iii) or (iv) of the
second paragraph of, Section 4.04 to make a Restricted Payment; PROVIDED
that such Indebtedness does not mature prior to the Stated Maturity of the
Notes and has an Average Life longer than the Notes; and
(ix) Indebtedness of the Company and any Restricted Subsidiary;
PROVIDED that at the time of the Incurrence of any Indebtedness under this
clause (ix) the amount of Indebtedness under this clause (ix) does not
exceed in aggregate 70% of the accounts receivable (net of accounts more
than 60 days past due and reserves and allowances for
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46
doubtful accounts, determined in accordance with GAAP) of the Company and
its Restricted Subsidiaries on a consolidated basis as set forth on the
balance sheet of the Company most recently filed with the Commission
pursuant to Section 4.17.
(b) Notwithstanding any other provision of this Section 4.03, the
maximum amount of Indebtedness that the Company or a Restricted Subsidiary may
Incur pursuant to this Section 4.03 shall not be deemed to be exceeded, with
respect to any outstanding Indebtedness, due solely to the result of
fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of
Indebtedness under this Section 4.03, (1) Guarantees, Liens, letters of credit
or other obligations supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in Section 4.09
shall not be treated as Indebtedness. For purposes of determining compliance
with this Section 4.03, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or make any distribution on or with respect to
its Capital Stock (other than (x) dividends or distributions payable solely in
shares of its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to acquire shares of such Capital Stock and (y) pro
rata dividends or distributions on Common Stock of Restricted Subsidiaries held
by minority stockholders; PROVIDED that such dividends do not in the aggregate
exceed the minority stockholders' pro rata share of such Restricted
Subsidiaries' net income from the first day of the fiscal quarter beginning
immediately following the Closing Date) held by Persons other than the Company
or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of (x) the Company or an
Unrestricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person other than the Company or any
Wholly Owned Restricted Subsidiary or (y) a Restricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock) held
by any Affiliate of the Company (other than a Wholly Owned Restricted
Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the
Capital Stock of the Company, (iii) make any voluntary or optional principal
payment, or voluntary or optional redemption, repurchase, defeasance, or other
acquisition or retirement for value, of Indebtedness of the Company (other than
Indebtedness outstanding on the Closing Date) that is subordinated in right of
payment to the Notes (other than the purchase, repurchase or the acquisition of
Indebtedness in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in any case due within one year of the date of
acquisition) or (iv) make any Investment, other than a Permitted Investment, in
any Person (such payments or any other actions described in clauses
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(i) through (iv) being collectively "Restricted Payments") if, at the time of,
and after giving effect to, the proposed Restricted Payment: (A) a Default or
Event of Default shall have occurred and be continuing, (B) except with respect
to Investments, the Company could not Incur at least $1.00 of Indebtedness under
the first paragraph of Section 4.03 or (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss (determined by excluding amounts referred to in clause (3) below))
accrued on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed pursuant to Section 4.17 PLUS
(2) (A) the aggregate Net Cash Proceeds received by the Company after the
Closing Date from the issuance and sale permitted by this Indenture of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, or from the issuance to a Person who is not a
Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any convertible
Indebtedness, Disqualified Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Notes), (B) the aggregate Net Cash Proceeds
received after the Closing Date by the Company from the issuance or sale (other
than to a Subsidiary of the Company) of debt securities or shares of
Disqualified Stock that have been converted into or exchanged for Common Stock
of the Company, together with the aggregate cash received by the Company at the
time of such conversion or exchange, in each case except to the extent such Net
Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) of the
second paragraph of Section 4.03 and (C) the amount by which Indebtedness of the
Company and its Restricted Subsidiaries is reduced upon the conversion or
exchange subsequent to the Closing Date of any Indebtedness which is convertible
into or exchangeable for Capital Stock (other than Disqualified Stock) of the
Company PLUS (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
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The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (iii) of the second paragraph of part (a) of Section 4.03;
(iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock of the Company (other than
Disqualified Stock);
(iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to
the Notes in exchange for, or out of the proceeds of, a substantially
concurrent offering of, shares of the Capital Stock of the Company (other
than Disqualified Stock);
(v) payments or distributions, to dissenting stockholders pursuant
to applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of this
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company;
(vi) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company to the
extent necessary, in the good faith judgment of the Board of Directors of
the Company, to prevent the loss or secure the renewal or reinstatement of
any license or franchise held by the Company or any Restricted Subsidiary
for any governmental agency;
(vii) the declaration or payment of dividends on the Common Stock of
the Company following a Public Equity Offering of such Common Stock, of up
to 6% per annum of the Net Cash Proceeds received by the Company in all
Public Equity Offerings;
(viii) the purchase, redemption, retirement or other acquisition for
value of Capital Stock of the Company, or options to purchase such shares,
held by directors, employees or former directors or employees of the
Company or any Restricted Subsidiary
<PAGE>
49
(or their estates or beneficiaries under their estates) upon death,
disability, retirement, termination of employment or pursuant to the terms
of any agreement under which such shares of Capital Stock or options were
issued; PROVIDED that the aggregate consideration paid for such purchase,
redemption, acquisition, cancellation or other retirement of such shares of
Capital Stock or options after the Closing Date does not exceed $500,000 in
any calendar year, or $2.0 million in the aggregate after the Closing Date;
(ix) any Investment, to the extent the consideration therefor paid
by the Company and its Restricted Subsidiaries consists solely of
(A) Capital Stock (other than Disqualified Stock) of the Company or (B) the
Net Cash Proceeds from the sale of such Capital Stock during the six months
preceding such Investment, in each case except to the extent such Capital
Stock or Net Cash Proceeds have been used under clause (iii) or (iv) above;
PROVIDED that, except in the case of clauses (i) and (iii), no Default or
Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein; and
(x) repurchases of Warrants pursuant to a Repurchase Offer.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof, the Net Cash Proceeds from any issuance of Capital
Stock referred to in clauses (iii) and (iv) thereof and the Restricted Payment
referred to in clause (ix)(A) thereof) shall be included in calculating whether
the conditions of clause (C) of the first paragraph of this Section 4.04 have
been met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of the Notes, or Indebtedness that
is PARI PASSU with the Notes, then the Net Cash Proceeds of such issuance shall
be included in clause (C) of the first paragraph of this Section 4.04 only to
the extent such proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
Any Restricted Payments made other than in cash shall be valued at
fair market value. The amount of any Investment "outstanding" at any time shall
be deemed to be equal to the amount of such Investment on the date made, less
the return of capital to the Company and its Restricted Subsidiaries with
respect to such Investment (up to the amount of such Investment on the date
made).
SECTION 4.05. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS
AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not permit
any Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay
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50
any Indebtedness owed to the Company or any other Restricted Subsidiary,
(iii) make loans or advances to the Company or any other Restricted Subsidiary
or (iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in this Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that the encumbrances
and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the Holders
than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or assets
of such Person acquired by the Company or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or
the property or assets of such Person so acquired, and any extensions,
refinancings, renewals or replacements of the agreement containing such
encumbrance or restriction; PROVIDED that the encumbrances and restrictions
in any such extensions, refinancings, renewals or replacements are no less
favorable in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended,
refinanced, renewed or replaced;
(iv) in the case of clause (iv) of the first paragraph of this
Section 4.05, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue
of any transfer of, agreement to transfer, option or right with respect to,
or Lien on, any property or assets of the Company, or any Restricted
Subsidiary not otherwise prohibited by this Indenture or (C) arising or
agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract
from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted
Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant
to an agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock of, or property and assets
of, such Restricted Subsidiary;
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51
(vi) contained in the terms of Indebtedness having an aggregate
principal amount not in excess of the greater of (1) $10 million or (2) 10%
of Consolidated EBITDA for the Four Quarter Period or any agreement
pursuant to which such Indebtedness is outstanding (in each case Incurred
by a Restricted Subsidiary in compliance with Section 4.03) if (A) the
encumbrance or restriction applies only in the event of a payment default
or a default with respect to a financial covenant contained in such
Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders than is customary in
comparable financings (as determined by the Company), (C) the Company
determines that any such encumbrance or restriction will not materially
affect its ability to make principal or interest payments on the Notes, (D)
if the aggregate principal amount of such Indebtedness exceeds the greater
of (1) $5 million and (2) 5% of Consolidated EBITDA for the Four Quarter
Period, the documents pursuant to which all such indebtedness in excess of
such amount is outstanding expressly state that such Restricted Subsidiary
shall be entitled to take the actions referred to in clauses (i) through
(iv) of the first paragraph of this Section 4.05 in an amount not to exceed
50% of the consolidated net income of such Restricted Subsidiary (after
making adjustments thereto in the nature of the adjustments referred to in
the definition of "Adjusted Consolidated Net Income") and (E) the
Investments made by the Company and its Restricted Subsidiaries in such
Restricted Subsidiary are reasonably related to the business of such
Restricted Subsidiary; and
(vii) provisions contained in agreements or instruments which
prohibit the payment of dividends or the making of other distributions with
respect to any particular class of Capital Stock of a Person other than on
a PRO RATA basis. Nothing contained in this Section 4.05 shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted in Section 4.09 or
(2) restricting the sale or other disposition of property or assets of the
Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
SECTION 4.06. LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF
RESTRICTED SUBSIDIARIES. The Company will not sell, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of
Capital Stock of a Restricted Subsidiary (including options, warrants or other
rights to purchase shares of such Capital Stock) except (i) to the Company or a
Wholly Owned Restricted Subsidiary; (ii) issuances of director's qualifying
shares or sales to foreign nationals of shares of Capital Stock of foreign
Restricted Subsidiaries, to the extent required by applicable law; (iii) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary; PROVIDED that any
Investment in such Person remaining after giving effect to such issuance or sale
would have been permitted to be made under Section 4.04, if made on the date of
such issuance or sale; (iv) issuances or sales of Common Stock, the net cash
proceeds of which, if any, are promptly applied pursuant to clause (A) or (B) of
Section 4.11; and
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52
(v) issuances and sales of up to 6% of the Common Stock of each Restricted
Subsidiary in connection with employee benefit plans or arrangements.
SECTION 4.07. LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED
SUBSIDIARIES. The Company will not permit any Restricted Subsidiary, directly
or indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to this Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary 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 Subsidiary Guarantee; PROVIDED that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
and each Restricted Subsidiary's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by this Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
SECTION 4.08. LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND
AFFILIATES. The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with 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,
except upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
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53
The foregoing limitation does not limit, and shall not apply to:
(i) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which the Company or a
Restricted Subsidiary delivers to the Trustee a written opinion of a
nationally recognized investment banking firm stating that the transaction
is fair to the Company or such Restricted Subsidiary from a financial point
of view;
(ii) any transaction solely between the Company and any of its
Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees to
directors of the Company who are not employees of the Company;
(iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company
files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes;
(v) any Restricted Payments not prohibited by Section 4.04;
(vi) employment agreements with, and loans and advances to,
officers and employees of the Company and its Restricted Subsidiaries, in
each case in the ordinary course of business;
(vii) customary indemnification arrangements in favor of directors
and officers of the Company and its Restricted Subsidiaries; or
(viii) transactions in accordance with the provisions of the Series A
Preferred Stock of the Company as set forth in the Certificate of
Incorporation of the Company on the Closing Date.
Notwithstanding the foregoing, any transaction covered by the first
paragraph of this Section 4.08 and not covered by clauses (ii) through (vi) of
this paragraph, the aggregate amount of which exceeds $3 million in value, must
be approved or determined to be fair in the manner provided for in clause
(i)(A) or (B) above.
SECTION 4.09. LIMITATION ON LIENS. The Company will not, and will
not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Lien on any of its assets or properties of any character, or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
this Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the
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54
Notes, prior to) the obligation or liability secured by such Lien unless, after
giving effect thereto, the aggregate amount of any Indebtedness so secured, plus
the Attributable Indebtedness for all sale-leaseback transactions permitted
under Section 4.10, does not exceed 10% of Consolidated Net Tangible Assets.
The foregoing limitation does not apply to:
(i) Liens existing on the Closing Date;
(ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such
other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of Section 4.03; PROVIDED that such Liens do
not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced;
(v) Liens on assets acquired by the Company or its Restricted
Subsidiaries after the Closing Date, that are not incurred in contemplation
of or in connection with such acquisition; or
(vi) Permitted Liens.
In the event that the Lien the existence of which gives rise to a Lien
securing the Notes pursuant to the provisions of this Section 4.09 ceases to
exist, the Lien securing the Notes required by the first paragraph of this
Section 4.09 shall automatically be released and the Trustee shall execute
appropriate documentation.
SECTION 4.10. LIMITATION ON SALE-LEASEBACK TRANSACTIONS. The Company
will not, and will not permit any Restricted Subsidiary to enter into any
sale-leaseback transaction involving any of its assets or properties whether now
owned or hereafter acquired, whereby the Company or a Restricted Subsidiary
sells or transfers such assets or properties and then or thereafter leases such
assets or properties or any part thereof or any other assets or properties which
the Company or such Restricted Subsidiary, as the case may be, intends to use
for substantially the same purpose or purposes as the assets or properties sold
or transferred.
<PAGE>
55
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(i) the lease is for a period, including renewal rights, of not in
excess of three years;
(ii) the lease secures or relates to industrial revenue or
pollution control bonds;
(iii) the transaction is solely between the Company and any Wholly
Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of Section 4.11.
SECTION 4.11. LIMITATION ON ASSET SALES. The Company will not, and
will not permit any Restricted Subsidiary to, consummate any Asset Sale unless
(i) the consideration received by the Company or such Restricted Subsidiary
(including any Released Indebtedness) is at least equal to the fair market value
of the assets sold or disposed of and (ii) at least 85% of the consideration
received (including any Released Indebtedness) consists of (1) cash, Temporary
Cash Investments or Released Indebtedness and (2) Indebtedness of any Person
which is either repaid in cash or sold for cash within 90 days of such Asset
Sale (for purposes of calculating the amount of such Indebtedness, such
Indebtedness shall be valued at its principal amount, if it matures within 180
days of the consummation of such Asset Sale, or its fair market value, in all
other cases). In the event and to the extent that the Net Cash Proceeds
received by the Company or any of its Restricted Subsidiaries from one or more
Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its subsidiaries has
been filed pursuant to Section 4.17), then the Company shall or shall cause the
relevant Restricted Subsidiary to (i) within twelve months after the date Net
Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to Section 4.07 or Indebtedness of any
other Restricted Subsidiary, in each case owing to a Person other than the
Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within twelve months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment and (ii) apply
(no later than the end of the twelve-month
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56
period referred to in clause (i)) such excess Net Cash Proceeds (to the extent
not applied pursuant to clause (i)) as provided in the following paragraph of
this Section 4.11. The amount of such excess Net Cash Proceeds required to be
applied (or to be committed to be applied) during such twelve-month period as
set forth in clause (i) of the preceding sentence and not applied as so required
by the end of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
Section 4.11 totals at least $5 million, the Company must commence, not later
than the fifteenth Business Day of such month, and consummate an Offer to
Purchase from the Holders on a pro rata basis an aggregate principal amount of
Notes on the relevant Payment Date equal to the Excess Proceeds on such date, at
a purchase price equal to 101% of the principal amount of the Notes on the
relevant Payment Date, plus accrued interest (if any) to the Payment Date. Upon
the consummation of an Offer to Purchase pursuant to this Section 4.11 the
amount of Excess Proceeds shall be deemed to be equal to zero, plus the amount
of any Excess Proceeds not theretofore subject to an Offer to Purchase.
SECTION 4.12. REPURCHASE OF NOTES UPON A CHANGE OF CONTROL. The
Company shall commence, within 30 days of the occurrence of a Change of Control,
and consummate an Offer to Purchase for all Notes then outstanding, at a
purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.
SECTION 4.13. EXISTENCE. Subject to Articles Four and Five of this
Indenture, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each of its Restricted Subsidiaries in accordance with the respective
organizational documents of the Company and each such Subsidiary and the rights
(whether pursuant to charter, partnership certificate, agreement, statute or
otherwise), licenses and franchises of the Company and each such Subsidiary;
PROVIDED that the Company shall not be required to preserve any such right,
license or franchise, or the existence of any Restricted Subsidiary, if the
maintenance or preservation thereof is no longer desirable in the conduct of the
business, as determined in good faith by the Company's Board of Directors, of
the Company and its Restricted Subsidiaries taken as a whole; and PROVIDED
FURTHER that any Restricted Subsidiary may consolidate with, merge into, or
sell, convey, transfer, lease or otherwise dispose of all or part of its
property and assets to the Company or any Wholly Owned Restricted Subsidiary.
SECTION 4.14. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will
pay or discharge and shall cause each of its Restricted Subsidiaries to pay or
discharge, or cause to be paid or discharged, before the same shall become
delinquent (i) all material taxes, assessments and governmental charges levied
or imposed upon (a) the Company or any such Subsidiary, (b) the income or
profits of any such Subsidiary which is a corporation or (c) the property of the
Company or any such Subsidiary and (ii) all material lawful claims for labor,
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57
materials and supplies that, if unpaid, might by law become a lien upon the
property of the Company or any such Subsidiary; PROVIDED 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 the amount, applicability or validity of which
is being contested in good faith by appropriate proceedings and for which
adequate reserves have been established.
SECTION 4.15. MAINTENANCE OF PROPERTIES AND INSURANCE. The Company
will cause all properties used or useful in the conduct of its business or the
business of any Restricted Subsidiary and material to the Company and its
Restricted Subsidiaries taken as a whole, to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the 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 that nothing in
this Section 4.15 shall prevent the Company or any such Restricted Subsidiary
from discontinuing the use, operation or maintenance of any of such properties
or disposing of any of them, if such discontinuance or disposal is, in the
judgment of the Board of Directors or the board of directors of such Restricted
Subsidiary having managerial responsibility for any such property, desirable in
the conduct of the business of the Company or such Restricted Subsidiary.
The Company will provide or cause to be provided, for itself and its
Restricted Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds customarily insured against by corporations
similarly situated and owning like properties, with reputable insurers or with
the government of the United States of America, or an agency or instrumentality
thereof, in such amounts, with such deductibles and by such methods as the
Company in good faith shall determine to be reasonable and appropriate in the
circumstances.
SECTION 4.16. COMPLIANCE CERTIFICATES. (a) The Company shall
deliver to the Trustee, within 90 days after the end of each fiscal year, an
Officers' Certificate stating whether or not the signers know of any Default or
Event of Default that occurred during such fiscal year. Such certificate shall
comply with the applicable provisions of the TIA. If any of the signers of the
Officers' Certificate have knowledge of such a Default or Event of Default, the
certificate shall describe any such Default or Event of Default and its status.
(b) The Company shall deliver to the Trustee, within 90 days after
the end of the Company's fiscal year, a certificate signed by the Company's
independent certified public accountants stating (i) that their audit
examination has included a review of the terms of this Indenture and the Notes
as they relate to accounting matters, (ii) that they have read the most recent
Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this
Section 4.16 and (iii) whether, in connection with their audit examination,
anything came to their attention that caused them to believe that the Company
was not in compliance with any of the terms, covenants, provisions or conditions
of Article Four and Section 5.01 of this Indenture as they
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58
pertain to accounting matters and, if any Default or Event of Default has come
to their attention, specifying the nature and period of existence thereof;
PROVIDED that such independent certified public accountants shall not be liable
in respect of such statement by reason of any failure to obtain knowledge of any
such Default or Event of Default that would not be disclosed in the course of an
audit examination conducted in accordance with generally accepted auditing
standards in effect at the date of such examination.
(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware
of any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or proposes to
take with respect thereto.
SECTION 4.17. COMMISSION REPORTS AND REPORTS TO HOLDERS. At all
times from and after January 15, 1998, whether or not the Company is then
required to file reports with the Commission, the Company shall deliver for
filing to the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Exchange Act if it were subject thereto. The Company shall supply the Trustee
and each Holder or shall supply to the Trustee for forwarding to each such
Holder, without cost to such Holder, copies of such reports and other
information. In addition, at all times prior to the Registration, upon the
request of any Holder or any prospective purchaser of the Notes designated by a
Holder, the Company shall supply to such Holder or such prospective purchaser
the information required under Rule 144A under the Securities Act.
SECTION 4.18. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or other law
that would prohibit or forgive the Company from paying all or any portion of the
principal of, premium, if any, or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or that may affect the
covenants or the performance of this Indenture; and (to the extent that it may
lawfully do so) the Company hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. WHEN COMPANY MAY MERGE, ETC. The Company shall not
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one
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59
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless:
(i) the Company shall be the continuing Person, or the Person (if
other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of
the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, all of the obligations of the Company on all of the Notes and
under this Indenture;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro
forma basis, the Company or any Person becoming the successor obligor of
the Notes shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such
transaction;
(iv) immediately after giving effect to such transaction on a pro
forma basis, (A) the Consolidated Leverage Ratio of the Company, or any
Person becoming the successor obligor of the Notes, as the case may be, is
no worse than 110% of the Consolidated Leverage Ratio of the Company
without giving effect to such transaction or (B) the Company, or any Person
becoming the successor obligor of the Notes, as the case may be, could
Incur at least $1.00 of Indebtedness under the first paragraph of Section
4.03; PROVIDED, HOWEVER, that this clause (iv) shall not apply to a
consolidation or merger with or into a Wholly Owned Restricted Subsidiary
with a positive net worth; PROVIDED that, in connection with any such
merger or consolidation, no consideration (other than Common Stock in the
surviving Person or the Company shall be issued or distributed to the
stockholders of the Company; and
(v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clauses (iii) and (iv)) and Opinion of Counsel, in each case stating that
such consolidation, merger or transfer and such supplemental indenture
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with;
PROVIDED, HOWEVER, that clauses (iii) and (iv) above do not apply if, in the
good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
PROVIDED FURTHER that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
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SECTION 5.02. SUCCESSOR SUBSTITUTED. Upon any consolidation or
merger, or any sale, conveyance, transfer, lease or other disposition of all or
substantially all of the property and assets of the Company in accordance with
Section 5.01 of this Indenture, the successor Person formed by such
consolidation or into which the Company is merged or to which such sale,
conveyance, transfer, lease or other disposition 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, except in the case of a lease, the Company shall be
relieved from all obligations and covenants under this Indenture and the Notes.
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall occur
with respect to the Notes if:
(a) the Company defaults in the payment of principal of (or
premium, if any, on) any Note when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise;
(b) the Company defaults in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a
period of 30 days; PROVIDED that a failure to make any of the first six
scheduled interest payments on the Notes on the applicable Interest Payment
Date will constitute an Event of Default with no grace or cure period;
(c) the Company defaults in the performance or breaches the
provisions of Article Five or fails to make or consummate an Offer to
Purchase in accordance with the provisions of Section 4.11 or Section 4.12;
(d) the Company defaults in the performance of or breaches any
other covenant or agreement of the Company in this Indenture or under the
Notes (other than a default specified in clause (a), (b) or (c) above) and
such default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Notes;
(e) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $5.0 million or more in the aggregate for
all such issues of all such Persons, whether such Indebtedness now exists
or shall hereafter be created, (A) an event of default that has caused the
holder thereof to declare such Indebtedness to be due and payable prior to
its
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Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (B) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall
not have been made, waived or extended within 30 days of such payment
default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5.0 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate
amount for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $5 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B) appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs
of the Company or any Significant Subsidiary and, in each case, such decree
or order shall remain unstayed and in effect for a period of 30 consecutive
days;
(h) the Company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any
general assignment for the benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force and
effect or enforceable in accordance with its terms, other than in
accordance with its terms.
SECTION 6.02. ACCELERATION. If an Event of Default (other than an
Event of Default specified in clause (g) or (h) of Section 6.01 that occurs with
respect to the Company) occurs and is continuing under this Indenture, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
outstanding Notes, by written notice to the Company (and to
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the Trustee if such notice is given by the Holders), may, and the Trustee at the
request of such Holders shall, declare the principal amount of, premium, if any,
and accrued interest, if any, on the Notes to be immediately due and payable.
Upon a declaration of acceleration, such principal amount, premium, if any, and
accrued interest, if any, shall be immediately due and payable. In the event of
a declaration of acceleration because an Event of Default set forth in clause
(e) of Section 6.01 has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) of Section 6.01 occurs with respect to the
Company, the principal amount of, premium, if any, and accrued interest, if any,
on the Notes then outstanding 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.
At any time after such a declaration of acceleration, but before a
judgment or decree for the payment of the money due has been obtained by the
Trustee, the Holders of at least a majority in aggregate principal amount of the
outstanding Notes by written notice to the Company and to the Trustee may on
behalf of all the Holders waive all past Defaults and rescind and annul such
declaration of acceleration and its consequences if (i) all existing Events of
Default, other than the non-payment of the principal amount of, premium, if any,
and accrued interest on the Notes that have become due solely by such
declaration of acceleration, have been cured or waived and (ii) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction.
SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy by proceeding at law or
in equity to collect the payment of principal of, premium, if any, or interest
on the Notes or to enforce the performance of any provision of the Notes, the
Pledge Agreement or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding.
SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Sections 6.02,
6.07 and 9.02, the Holders of at least a majority in aggregate principal amount
of the outstanding Notes, by notice to the Company and the Trustee, may waive an
existing Default or Event of Default and its consequences, except a Default in
the payment of principal of, premium, if any, or interest on any Note as
specified in clause (a) or (b) of Section 6.01 (including in connection with an
Offer to Purchase) or in respect of a covenant or provision of this Indenture
which cannot be modified or amended without the consent of the Holder of each
outstanding Note affected. 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
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no such waiver shall extend to any subsequent or other Default or Event of
Default or impair any right consequent thereto.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of at least a
majority in aggregate principal amount of the outstanding Notes may 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. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of Notes not joining in the giving of such direction and may take any
other action it deems proper that is not inconsistent with any such direction
received from Holders of Notes.
SECTION 6.06. LIMITATION ON SUITS. A Holder may not institute any
proceeding, judicial or otherwise, with respect to this Indenture or the Notes,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless:
(i) such Holder has previously given the Trustee written notice of
a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes 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;
(iii) such Holder or Holders have offered the Trustee indemnity
reasonably satisfactory to the Trustee against any costs, liabilities or
expenses to be incurred in compliance with such request;
(iv) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding;
and
(v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes have not given the
Trustee a direction that is inconsistent with such written request.
For purposes of Section 6.05 of this Indenture and this Section 6.06,
the Trustee shall comply with TIA Section 316(a) in making any determination of
whether the Holders of the required aggregate principal amount of outstanding
Notes have concurred in any request or direction of the Trustee to pursue any
remedy available to the Trustee or the Holders with respect to this Indenture or
the Notes or otherwise under the law.
A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over such other Holder.
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SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding
any other provision of this Indenture, the right of any Holder of a Note to
receive payment of the principal amount of, premium, if any, or interest on such
Holder's Note on or after the respective due dates expressed on such Note
(including in a notice with respect to an Offer to Purchase), or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in
payment of principal, premium or interest specified in clause (a) or (b) of
Section 6.01 occurs and is continuing, the Trustee may recover judgment in its
own name and as trustee of an express trust against the Company or any other
obligor of the Notes for the whole amount of principal, premium, if any, and
accrued interest remaining unpaid, together with interest on overdue principal,
premium, if any, and, to the extent that payment of such interest is lawful,
interest on overdue installments of interest, in each case at the rate specified
in the Notes, and 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.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file
such proofs of claim and 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 any other amounts due the Trustee under
Section 7.07) and the Holders allowed in any judicial proceedings relative to
the Company (or any other obligor of the Notes), its creditors or its property
and shall be entitled and empowered to collect and receive any monies,
securities or other property payable or deliverable upon conversion or exchange
of the Notes or upon any such claims and to distribute the same, and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
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 to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agent and counsel, and any other
amounts due the Trustee under Section 7.07. Nothing herein contained shall be
deemed to empower 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 Notes 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 6.10. PRIORITIES. If the Trustee collects any money pursuant
to this Article Six, it shall pay out the money in the following order:
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First: to the Trustee for amounts due under Section 7.07, including
payment of all compensation, expense and liabilities incurred, and all
advances made, by the Trustee and the costs and expenses of collection;
Second: to Holders for amounts then due and unpaid for principal
amount of, premium, if any, and interest on the Notes 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 Notes for principal, premium, if any, and interest,
respectively; and
Third: to the Company or any other obligors of the Notes, as their
interests may appear, or as a court of competent jurisdiction may direct.
The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Holders pursuant to this Section
6.10.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section 6.11 does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.07 of this Indenture, or a
suit by Holders of more than 10% in principal amount of the outstanding Notes.
SECTION 6.12. 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 Company, Trustee and the Holders shall continue as though no
such proceeding had been instituted.
SECTION 6.13. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or wrongfully taken Notes in Section 2.09, 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
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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 6.14. DELAY OR OMISSION NOT WAIVER. No delay or omission of
the Trustee or of any Holder 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 Six 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.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. GENERAL. Except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in this Indenture. The duties and responsibilities of
the Trustee shall be as provided by the TIA and as set forth herein.
Notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. Whether or not therein expressly
so provided, every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Article Seven.
SECTION 7.02. CERTAIN RIGHTS OF TRUSTEE. Subject to TIA Sections
315(a) through (d):
(i) 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 person. The Trustee need not investigate any fact or matter
stated in the document;
(ii) before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, which shall
conform to Section 10.04. The Trustee shall not be liable for any action
it takes or omits to take in good faith in reliance on such certificate or
opinion;
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(iii) the Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent appointed
with due care;
(iv) 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, unless such Holders shall have offered
reasonable security or indemnity reasonably satisfactory to the Trustee
against the costs, expenses and liabilities that might be incurred by it in
compliance with such request or direction;
(v) the Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within its
rights or powers or for any action it takes or omits to take in accordance
with the direction of the Holders of a majority in principal amount of the
outstanding Notes relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred upon the Trustee, under this Indenture; PROVIDED that
the Trustee's conduct does not constitute negligence or bad faith;
(vi) 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 Officer's Certificate;
(vii) 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; and
(viii) 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.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its
individual or any other capacity, may become the owner or pledgee of Notes and
may otherwise deal with the Company or its Affiliates with the same rights it
would have if it were not the Trustee. Any Agent may do the same with like
rights. However, the Trustee is subject to TIA Sections 310(b) and 311.
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SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee (i) makes no
representation as to the validity or adequacy of this Indenture or the Notes,
(ii) shall not be accountable for the Company's use or application of the
proceeds from the Notes and (iii) shall not be responsible for any statement in
the Notes other than its certificate of authentication.
SECTION 7.05. NOTICE OF DEFAULT. If any Default or any Event of
Default occurs and is continuing and if such Default or Event of Default is
known to a Responsible Officer of the Trustee, the Trustee shall mail to each
Holder in the manner and to the extent provided in TIA Section 313(c) notice of
the Default or Event of Default within 45 days after it occurs, unless such
Default or Event of Default has been cured; PROVIDED, HOWEVER, that, except in
the case of a default in the payment of the principal of, premium, if any, or
interest on any Note, 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
determine that the withholding of such notice is in the interest of the Holders.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after
each May 15, beginning with May 15, 1998, the Trustee shall mail to each Holder
as provided in TIA Section 313(c) a brief report dated as of such May 15, if
required by TIA Section 313(a).
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to
the Trustee such compensation as shall be agreed upon in writing for its
services. The compensation of the Trustee shall not be limited by any law on
compensation of a trustee of an express trust. The Company shall reimburse the
Trustee upon request for all reasonable out-of-pocket expenses and advances
incurred or made by the Trustee. Such expenses shall include the reasonable
compensation and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss or liability or expense incurred by it without negligence or
bad faith on its part in connection with the acceptance or administration of
this Indenture and its duties under this Indenture and the Notes, including the
costs and expenses of defending itself against any claim or liability and of
complying with any process served upon it or any of its officers in connection
with the exercise or performance of any of its powers or duties under this
Indenture and the Notes.
The Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. However, failure by the Trustee to so promptly notify
the Company shall not relieve the Company of its obligations under this
paragraph except to the extent such failure shall have materially prejudiced the
Company. The Company shall, unless the Trustee requests separate counsel,
defend any such claim and the Trustee shall cooperate in the defense of such
claim. If the Trustee is advised by counsel that it may have available to it
defenses that are in conflict with any defenses available to the Company, the
Trustee may have separate counsel and
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the Company shall pay the reasonable fees and expenses of such counsel. The
Company need not pay for any settlement made without its consent, which consent
shall not be unreasonably withheld.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Notes on all money or property held or
collected by the Trustee, in its capacity as Trustee, except money or property
held in trust pursuant to the Pledge Agreement or otherwise to pay principal of,
premium, if any, and interest on particular Notes.
If the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in clause (g) or (h) of Section
6.01, the expenses and the compensation for the services will be intended to
constitute expenses of administration under Title 11 of the United States
Bankruptcy Code or any applicable federal or state law for the relief of
debtors.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of
the Trustee and appointment of a successor Trustee shall become effective only
upon the successor Trustee's acceptance of appointment as provided in this
Section 7.08.
The Trustee may resign at any time by so notifying the Company in
writing at least 30 days prior to the date of the proposed resignation. The
Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee by so notifying the Trustee and the Company in writing and may
appoint a successor Trustee with the consent of the Company. The Company may
remove the Trustee, by Company Order if:
(i) the Trustee fails to comply with Section 7.10;
(ii) the Trustee is adjudged a bankrupt or an insolvent;
(iii) a receiver or other public officer takes charge of the Trustee
or its property; or
(iv) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed, or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company. If
the successor Trustee does not deliver its written acceptance required by the
next succeeding paragraph of this Section 7.08 within 30 days after the retiring
Trustee resigns or is removed, the retiring Trustee, the Company or the Holders
of a majority in
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principal amount of the outstanding Notes may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after the
delivery of such written acceptance, subject to the lien provided in Section
7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee
to the successor Trustee, (ii) the resignation or removal of the retiring
Trustee shall become effective and (iii) the successor Trustee shall have all
the rights, powers and duties of the Trustee under this Indenture. A successor
Trustee shall mail notice of its succession to each Holder.
If the Trustee is no longer eligible under Section 7.10, any Holder
who satisfies the requirements of TIA Section 310(b) may petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee.
The Company shall give notice of any resignation and any removal of
the Trustee and each appointment of a successor Trustee to all Holders. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligation under Section 7.07 shall continue for the benefit
of the retiring Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation or national banking
association, the resulting, surviving or transferee corporation or national
banking association without any further act shall be the successor Trustee with
the same effect as if the successor Trustee had been named as the Trustee
herein.
SECTION 7.10. ELIGIBILITY. This Indenture shall always have a
Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee
shall have a combined capital and surplus of at least $25,000,000 as set forth
in its most recent published annual report of condition.
SECTION 7.11. MONEY HELD IN TRUST. The Trustee shall not be liable
for interest on any money received by it except as the Trustee may agree in
writing with the Company. Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law and except for
money held in trust under Article Eight of this Indenture.
SECTION 7.12. WITHHOLDING TAXES. The Trustee, as agent for the
Company, shall exclude and withhold from each payment of principal and interest
and other amounts due hereunder or under the Notes any and all withholding taxes
applicable thereto as required by
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law. The Trustee agrees to act as such withholding agent and, in connection
therewith, whenever any present or future taxes or similar charges are required
to be withheld with respect to any amounts payable in respect of the Notes, to
withhold such amounts and timely pay the same to the appropriate authority in
the name of and on behalf of the holders of the Notes, that it will file any
necessary withholding tax returns or statements when due. The Company or the
Trustee shall, as promptly as possible after the payment of the taxes described
above, deliver to each holder of a Note appropriate documentation showing the
payment thereof, together with such additional documentary evidence as such
holders may reasonably request from time to time.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. TERMINATION OF COMPANY'S OBLIGATIONS. Except as
otherwise provided in this Section 8.01, the Company may terminate its
obligations under the Notes and this Indenture if:
(i) all Notes previously authenticated and delivered (other than
destroyed, lost or stolen Notes that have been replaced or Notes that are
paid pursuant to Section 4.01 or Notes for whose payment money or
securities have theretofore been held in trust and thereafter repaid to the
Company, as provided in Section 8.05) have been delivered to the Trustee
for cancellation and the Company has paid all sums payable by it hereunder;
or
(ii) (A) the Notes have become due and payable, mature within one
year or all of them are to be called for redemption within one year under
arrangements satisfactory to the Trustee for giving the notice of
redemption, (B) the Company irrevocably deposits in trust with the Trustee
during such one-year period, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee, as trust funds
solely for the benefit of the Holders for that purpose, money or U.S.
Government Obligations sufficient (in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee), without consideration of
any reinvestment of any interest thereon, to pay, through the payment of
principal and interest in accordance with their terms not later than one
day prior to the relevant due date, principal, premium, if, any, and
interest on the Notes to maturity or redemption, as the case may be, and to
pay all other sums payable by it hereunder, (C) no Default or Event of
Default with respect to the Notes shall have occurred and be continuing on
the date of such deposit, (D) such deposit will not result in a breach or
violation of, or constitute a default under, this Indenture or any other
agreement or instrument to which the Company is a party or by which it is
bound and (E) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion
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72
of Counsel, in each case stating that all conditions precedent provided for
herein relating to the satisfaction and discharge of this Indenture have
been complied with.
With respect to the foregoing clause (i), the Company's obligations
under Section 7.07 shall survive. With respect to the foregoing clause (ii),
the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.09, 2.14, 4.01,
4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Notes are no
longer outstanding. Thereafter, only the Company's obligations in Sections
7.07, 8.04, 8.05 and 8.06 shall survive. After any such irrevocable deposit,
the Trustee upon request shall acknowledge in writing the discharge of the
Company's obligations under the Notes and this Indenture except for those
surviving obligations specified above.
SECTION 8.02. DEFEASANCE AND DISCHARGE OF INDENTURE. The Company
will be deemed to have paid and will be discharged from any and all obligations
in respect of the Notes on the 123rd day after the date of the deposit referred
to in clause (A) of this Section 8.02, and the provisions of this Indenture will
no longer be in effect with respect to the Notes, and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging the same,
except as to (i) rights of registration of transfer and exchange, (ii)
substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes,
(iii) rights of Holders to receive payments of principal thereof and interest
thereon, (iv) the Company's obligations under Section 4.02, (v) the rights,
obligations and immunities of the Trustee hereunder and (vi) the rights of the
Holders as beneficiaries of this Indenture with respect to the property so
deposited with the Trustee payable to all or any of them; PROVIDED that the
following conditions shall have been satisfied:
(A) the Company has deposited with the Trustee in trust, money
and/or U.S. Government Obligations that, through the payment of interest
and principal in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment referred
to in this clause (A), money in an amount 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 the principal
of, premium, if any, and accrued interest on the Notes on the Stated
Maturity of such payments in accordance with the terms of this Indenture
and the Notes and shall have irrevocably instructed the Trustee to apply
such money to the payment of such principal, premium and interest;
(B) the Company has delivered to the Trustee (i) either (x) an
Opinion of Counsel to the effect that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of the Company's
exercise of its option under this Section 8.02 and will be subject to
federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon
(and accompanied by a copy of) a ruling of the Internal Revenue Service to
the
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73
same effect unless there has been a change in applicable federal income tax
law after the date of this Indenture such that a ruling is no longer
required or (y) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned Opinion of Counsel
and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the passage of 123 days following the deposit (except, with respect
to any trust funds for the account of a Holder who may be deemed to be an
"insider" for purposes of the United States Bankruptcy Code, after one year
following the deposit), the trust fund will not be subject to the effect of
Section 547 of the United States Bankruptcy Code or Section 15 of the New
York Debtor and Creditor Law in a case commenced by or against the Company
under either such statute, and either (I) the trust funds will no longer
remain the property of the Company (and therefore will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally) or (II) if a court were
to rule under any such law in any case or proceeding that the trust funds
remained property of the Company, (a) assuming such trust funds remained in
the possession of the Trustee prior to such court ruling to the extent not
paid to the Holders, the Trustee will hold, for the benefit of the Holders,
a valid and perfected security interest in such trust funds that is not
avoidable in bankruptcy or otherwise except for the effect of Section
552(b) of the United States Bankruptcy Code on interest on the trust funds
accruing after the commencement of a case under such statute, (b) the
Holders will be entitled to receive adequate protection of their interests
in such trust funds if such trust funds are used in such case or proceeding
and (c) no property, rights in property or other interests granted to the
Trustee or the Holders in exchange for, or with respect to, such trust
funds will be subject to any prior rights of holders of other Indebtedness
of the Company or any of its Subsidiaries;
(C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge; and
(E) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02 have been complied with.
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Notwithstanding the foregoing, prior to the end of the 123-day (or one
year) period referred to in clause (B)(ii) of this Section 8.02, none of the
Company's obligations under this Indenture shall be discharged. Subsequent to
the end of such 123-day (or one year) period with respect to this Section 8.02,
the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.09, 2.14, 4.01,
4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Notes are no
longer outstanding. Thereafter, only the Company's obligations in Sections
7.07, 8.05 and 8.06 shall survive. If and when a ruling from the Internal
Revenue Service or an Opinion of Counsel referred to in clause (B)(i) of this
Section 8.02 is able to be provided specifically without regard to, and not in
reliance upon, the continuance of the Company's obligations under Section 4.01,
then the Company's obligations under such Section 4.01 shall cease upon delivery
to the Trustee of such ruling or Opinion of Counsel and compliance with the
other conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02.
After any such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Notes and this Indenture except for those surviving obligations in the
immediately preceding paragraph.
SECTION 8.03. DEFEASANCE OF CERTAIN OBLIGATIONS. The Company may
omit to comply with any term, provision or condition set forth in clauses (iii)
and (iv) under Section 5.01 and Sections 4.03 through 4.12, 4.13 (except with
respect to the corporate existence of the Company) and 4.14 through 4.17 and
clauses (c) and (d) under Section 6.01 with respect to such clauses (iii) and
(iv) under Section 5.01 and Sections 4.03 through 4.12, 4.13 (except with
respect to the corporate existence of the Company) and 4.14 through 4.17, and
clauses (e) and (f) under Section 6.01 shall be deemed not to be Events of
Default, in each case with respect to the outstanding Notes if:
(i) the Company has deposited with the Trustee in trust, money
and/or U.S. Government Obligations that, through the payment of interest
and principal in respect thereof in accordance with their terms, will
provide, not later than one day before the due date of any payment referred
to in this clause (i), money in an amount 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 the principal
of, premium, if any, and accrued interest on the Notes on the Stated
Maturity of such payments in accordance with the terms of this Indenture
and the Notes and shall have irrevocably instructed the Trustee to apply
such money to the payment of such principal, premium and interest;
(ii) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
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75
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(iii) the Company has delivered to the Trustee an Opinion of Counsel
to the effect that (A) the creation of the defeasance trust does not
violate the Investment Company Act of 1940, (B) the Holders will not
recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance of certain obligations and will be subject
to federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such deposit and defeasance had
not occurred and (C) after the passage of 123 days following the deposit
(except, with respect to any trust funds for the account of any Holder who
may be deemed to be an "insider" for purposes of the United States
Bankruptcy Code, after one year following the deposit), the trust funds
will not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a
case commenced by or against the Company under either such statute, and
either (I) the trust funds will no longer remain the property of the
Company (and therefore will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally) or (II) if a court were to rule under any such law in any
case or proceeding that the trust funds remained property of the Company,
(a) assuming such trust funds remained in the possession of the Trustee
prior to such court ruling to the extent not paid to the Holders, the
Trustee will hold, for the benefit of the Holders, a valid and perfected
security interest in such trust funds that is not avoidable in bankruptcy
or otherwise except for the effect of Section 552(b) of the United States
Bankruptcy Code on interest on the trust funds accruing after the
commencement of a case under such statute, (b) the Holders will be entitled
to receive adequate protection of their interests in such trust funds if
such trust funds are used in such case or proceeding and (c) no property,
rights in property or other interests granted to the Trustee or the Holders
in exchange for, or with respect to, such trust funds will be subject to
any prior rights of holders of other Indebtedness of the Company or any of
its Subsidiaries;
(iv) at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge; and
(v) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.03 have been complied with.
SECTION 8.04. APPLICATION OF TRUST MONEY. Subject to Sections 8.05
and 8.06, the Trustee or Paying Agent shall hold in trust money or U.S.
Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03,
as the case may be, and shall apply the deposited
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76
money and the money from U.S. Government Obligations, together with earnings
thereon, in accordance with the Notes and this Indenture to the payment of
principal of, premium, if any, and interest on the Notes; but such money need
not be segregated from other funds except to the extent required by law.
SECTION 8.05. REPAYMENT TO COMPANY. Subject to Sections 7.07, 8.01,
8.02 and 8.03 and the terms of the Pledge Agreement, the Trustee and the Paying
Agent shall promptly pay to the Company upon request set forth in an Officers'
Certificate any excess money or U.S. Government Obligations held by them at any
time and thereupon shall be relieved from all liability with respect to such
money. The Trustee and the Paying Agent shall pay to the Company upon written
request any money or U.S. Government Obligations held by them for the payment of
principal, premium, if any, or interest that remains unclaimed for two years;
PROVIDED that the Trustee or such Paying Agent before being required to make any
payment may cause to be published at the expense of the Company once in a
newspaper of general circulation in the City of New York, or mail to each Holder
entitled to such money at such Holder's address (as set forth in the Note
Register) notice that such money remains unclaimed and that after a date
specified therein (which shall be at least 30 days from the date of such
publication or mailing) any unclaimed balance of such money then remaining will
be repaid to the Company. After payment to the Company, Holders entitled to
such money must look to the Company for payment as general creditors unless an
applicable law designates another Person, and all liability of the Trustee and
such Paying Agent with respect to such money shall cease.
SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Notes shall be revived and
reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or
8.03, as the case may be, until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with Section 8.01, 8.02 or 8.03, as the case may be; PROVIDED that, if the
Company has made any payment of principal of, premium, if any, or interest on
any Notes because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money or U.S. Government Obligations held by the Trustee or Paying
Agent.
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ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company, when
authorized by a resolution of its Board of Directors, and the Trustee may amend
or supplement this Indenture or the Notes without notice to or the consent of
any Holder:
(1) to cure any ambiguity, defect or inconsistency in this
Indenture; PROVIDED that such amendments or supplements shall not adversely
affect the interests of the Holders in any material respect;
(2) to comply with Article Five;
(3) to comply with any requirements of the Commission in
connection with the qualification of this Indenture under the TIA;
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee;
(5) to provide for uncertificated Notes in addition to or in place
of certificated Notes;
(6) to add one or more subsidiary guarantees on the terms required
by this Indenture; or
(7) to make any change that does not adversely affect the rights
of any Holder.
SECTION 9.02. WITH CONSENT OF HOLDERS. Subject to Sections 6.02,
6.04 and 6.07 and without prior notice to the Holders, the Company, when
authorized by its Board of Directors (as evidenced by a Board Resolution), and
the Trustee may amend this Indenture, the Notes and the Pledge Agreement with
the written consent of the Holders of not less than a majority in aggregate
principal amount of the Notes then outstanding, and the Holders of not less than
a majority in aggregate principal amount of the Notes then outstanding by
written notice to the Trustee may waive future compliance by the Company with
any provision of this Indenture, the Notes or the Pledge Agreement.
Notwithstanding the provisions of this Section 9.02, without the
consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not:
(i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note;
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78
(ii) reduce the principal amount of, or premium, if any, or
interest on, any Note;
(iii) change the [place or] currency of payment of principal of, or
premium, if any, or interest on, any Note or adversely affect any right of
repayment at the option of any Holder of any Note;
(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any Note;
(v) reduce the above-stated percentage of outstanding Notes the
consent of whose Holders is necessary to modify or amend this Indenture;
(vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes;
(vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of this Indenture or for waiver of
certain defaults;
(viii) modify any of the provisions of this Section 9.02, 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 Note affected thereby; or
(ix) modify Article Ten or the Pledge Agreement in a manner that
adversely affects the rights of any Holder in any material respect.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves
the substance thereof.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. The Company will
mail or cause to be mailed supplemental indentures to Holders upon request. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such supplemental
indenture or waiver.
SECTION 9.03. REVOCATION AND EFFECT OF CONSENT. Until an amendment,
supplement or waiver becomes effective, a consent to it by a Holder is a
continuing consent by
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79
the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the Note of the consenting Holder, even if notation
of the consent is not made on any Note. However, any such Holder or subsequent
Holder may revoke the consent as to its Note or portion of its Note. Such
revocation shall be effective only if the Trustee receives the notice of
revocation before the date the amendment, supplement or waiver becomes
effective. An amendment, supplement or waiver shall become effective on receipt
by the Trustee of written consents from the Holders of the requisite percentage
in principal amount of the outstanding Notes.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then, notwithstanding the last
two sentences of the immediately preceding paragraph, those persons who were
Holders at such record date (or their duly designated proxies) and only those
persons shall be entitled to consent to such amendment, supplement or waiver or
to revoke any consent previously given, whether or not such persons continue to
be Holders after such record date. No such consent shall be valid or effective
for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Holder unless it is of the type described in any of clauses (i)
through (ix) of Section 9.02. In case of an amendment or waiver of the type
described in clauses (i) through (ix) of Section 9.02, the amendment or waiver
shall bind each Holder who has consented to it and every subsequent Holder of a
Note that evidences the same indebtedness as the Note of the consenting Holder.
SECTION 9.04. NOTATION ON OR EXCHANGE OF NOTES. If an amendment,
supplement or waiver changes the terms of a Note, the Trustee may require the
Holder to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Note about the changed terms and return it to the Holder and the
Trustee may place an appropriate notation on any Note thereafter authenticated.
Alternatively, if the Company or the Trustee so determines, the Company in
exchange for the Note shall issue and the Trustee shall authenticate a new Note
that reflects the changed terms. Failure to make the appropriate notation or
issue a new Note shall not affect the validity and effect of such amendment,
supplement or waiver.
SECTION 9.05. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall be
entitled to receive, and shall be fully protected in relying upon, an Opinion of
Counsel stating that the execution of any amendment, supplement or waiver
authorized pursuant to this Article Nine is authorized or permitted by this
Indenture. Subject to the preceding sentence, the Trustee shall sign such
amendment, supplement or waiver if the same does not adversely affect the rights
of the Trustee. The Trustee may, but shall not be obligated to, execute any
such amendment, supplement or waiver that affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise.
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SECTION 9.06. CONFORMITY WITH TRUST INDENTURE ACT. Every
supplemental indenture executed pursuant to this Article Nine shall conform to
the requirements of the TIA as then in effect.
ARTICLE TEN
SECURITY
SECTION 10.01. SECURITY. (a) On the Closing Date, the Company shall
(i) enter into the Pledge Agreement and comply with the terms and provisions
thereof and (ii) purchase the Pledged Securities to be pledged to the Trustee
for the benefit of the Holders in such amount as will be sufficient upon receipt
of scheduled interest and/or principal payments of such Pledged Securities, in
the opinion of a nationally recognized firm of independent public accountants
selected by the Company, to provide for payment in full of the first six
scheduled interest payments due on the Notes. The Pledged Securities shall be
pledged by the Company to the Trustee for the benefit of the Holders and shall
be held by the Trustee in the Pledge Account pending disposition pursuant to the
Pledge Agreement.
In the event the Exchange Offer is not consummated and the Shelf
Registration Statement is not declared effective on or prior to January 15,
1998, and the interest rate on the Notes is increased by .5% per annum as
required by this Indenture and the Notes Registration Rights Agreement, the
Company shall purchase and deliver to the Trustee additional Pledged Securities
in such amount as will be sufficient upon receipt of scheduled interest and/or
principal payments of all Pledged Securities thereafter held in the Pledge
Account, in the opinion of a nationally recognized firm of independent public
accountants selected by the Company, to provide payment for the first six
scheduled interest payments due on the Notes (assuming the additional .5% per
annum remains in effect for the entire period). The additional Pledged
Securities shall be pledged by the Company to the Trustee for the benefit of the
Holders and shall be held by the Trustee in the Pledge Account.
(b) Each Holder, by its acceptance of a Note, consents and agrees
to the terms of the Pledge Agreement (including, without limitation, the
provisions providing for foreclosure and release of the Pledged Securities) as
the same may be in effect or may be amended from time to time in accordance with
its terms, and authorizes and directs the Trustee to enter into the Pledge
Agreement and to perform its respective obligations and exercise its respective
rights thereunder in accordance therewith. The Company will do or cause to be
done all such acts and things as may be necessary or reasonably requested by the
Trustee, or as may be required by the provisions of the Pledge Agreement, to
assure and confirm to the Trustee the security interest in the Pledged
Securities contemplated hereby, by the Pledge Agreement or any part thereof, as
from time to time constituted, so as to render the same available for the
security and benefit of this Indenture and of the Notes secured hereby,
according to the intent and purposes herein and therein expressed. The Company
shall take, or shall cause to be taken, upon request
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81
of the Trustee, any and all actions reasonably required to cause the Pledge
Agreement to create and maintain, as security for the obligations of the Company
under this Indenture and the Notes, valid and enforceable first priority liens
in and on all the Pledged Securities, in favor of the Trustee, superior to and
prior to the rights of third Persons and subject to no other Liens.
(c) The release of any Pledged Securities pursuant to the Pledge
Agreement will not be deemed to impair the security under this Indenture in
contravention of the provisions hereof if and to the extent the Pledged
Securities are released pursuant to this Indenture and the Pledge Agreement. To
the extent applicable, the Company shall cause TIA Section 314(d) relating to
the release of property or securities from the Lien and security interest of the
Pledge Agreement and relating to the substitution therefor of any property or
securities to be subjected to the Lien and security interest of the Pledge
Agreement to be complied with. Any certificate or opinion required by TIA
Section 314(d) may be made by an officer of the Company, except in cases where
TIA Section 314(d) requires that such certificate or opinion be made by an
independent Person, which Person shall be an independent engineer, appraiser or
other expert selected by the Company.
(d) The Company shall cause TIA Section 314(b), relating to
opinions of counsel regarding the Lien under the Pledge Agreement, to be
complied with. The Trustee may, to the extent permitted by Sections 7.01 through
7.03 hereof, accept as conclusive evidence of compliance with the foregoing
provisions the appropriate statements contained in such instruments.
(e) The Trustee may, in its sole discretion and without the
consent of the Holders, on behalf of the Holders, take all reasonable actions in
accordance with the Pledge Agreement necessary or appropriate in order to (i)
enforce any of the terms of the Pledge Agreement and (ii) collect and receive
any and all amounts payable in respect of the obligations of the Company
thereunder. The Trustee shall have power to institute and to maintain such suits
and proceedings as the Trustee may reasonably deem expedient to preserve or
protect its interests and the interests of the Holders in the Pledged Securities
(including power to institute and maintain suits or proceedings to restrain the
enforcement of or compliance with any legislative or other governmental
enactment, rule or order that may be unconstitutional or otherwise invalid if
the enforcement of, or compliance with, such enactment, rule or order would
impair the security interest hereunder or be prejudicial to the interests of the
Holders or of the Trustee).
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ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. TRUST INDENTURE ACT OF 1939. This Indenture is
subject to the provisions of the TIA that are required to be a part of this
Indenture and shall, to the extent applicable, be governed by such provisions.
SECTION 11.02. NOTICES. Any notice or communication shall be
sufficiently given if in writing and delivered in person or mailed by first
class mail (registered or certified, return receipt requested), telex,
telecopier or overnight air courier guaranteeing next day delivery addressed as
follows:
IF TO THE COMPANY:
Econophone, Inc.
60 Hudson Street
New York, New York 10013
Telecopier No.: (212) 964-4771
Attention: Chief Financial Officer
WITH A COPY TO: (which shall not constitute notice)
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Telecopier No.: (212) 593-5955
Attention: Michael R. Littenberg
IF TO THE TRUSTEE:
The Bank of New York
101 Barclay Street
21 West
New York, New York 10286
Telecopier No.: (212) 815-5915
Attention: Corporate Trust Administration
<PAGE>
83
WITH A COPY TO: (which shall not constitute notice)
Emmet, Marvin & Martin LLP
120 Broadway
32nd Floor
New York, New York 10271
Telecopier No.: (212) 238-3100
Attention: Irving C. Apar
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail to its address shown on the register kept by the Registrar and shall be
sufficiently given to such Holder if so mailed or delivered within the time
presented. Any notice or communication shall also be so mailed to any Person
described in TIA Section 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. Except for a
notice to the Trustee, which is deemed given only when received, and except as
otherwise provided in this Indenture, if a notice or communication is mailed in
the manner provided in this Section 11.02, it is duly given, whether or not the
addressee receives it.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA Section 312(c).
SECTION 11.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
<PAGE>
84
(ii) an Opinion of Counsel stating that, in the opinion of such
Counsel, all such conditions precedent have been complied with.
SECTION 11.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture shall include:
(i) a statement that each person signing such certificate or
opinion has read such covenant or condition;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statement or opinion contained
in such certificate or opinion is based;
(iii) a statement that, in the opinion of each such person, 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
(iv) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with, and such other
opinions as the
Trustee may reasonably request; PROVIDED, HOWEVER, that, with respect to
matters of fact, an Opinion of Counsel may rely on an Officers' Certificate
or certificates of public officials.
SECTION 11.05. ACTS OF HOLDERS. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Holders may be embodied in and evidenced
by one or more instruments of substantially similar tenor signed by such Holders
in person or by an agent duly appointed in writing; and, except as herein
otherwise expressly provided, such action shall become effective when such
instrument or instruments are delivered to the Trustee and, where it is hereby
expressly required, to the Company. 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 ownership of Notes shall be proved by the Note Register.
(c) Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of any Note shall bind every
future Holder of the same Note or the Holder of every Note issued upon the
transfer thereof or in exchange therefor or in lieu thereof, in respect of
anything done, suffered or omitted to be done by the Trustee, any Paying Agent
or the Company in reliance thereon, whether or not notation of such action is
made upon such Note.
<PAGE>
85
(d) If the Company shall solicit from the Holders any request,
demand, authorization, direction, notice, consent, waiver of other act, the
Company may, at its option, by or pursuant to a Board Resolution, fix in advance
a record date for the determination of such Holders entitled to give such
request, demand, authorization, direction, notice, consent, waiver or other act,
but the Company shall have no obligation to do so. Notwithstanding Trust
Indenture Act Section 316(c), any such record date shall be the record date
specified in or pursuant to such Board Resolution, which shall be a date not
more than 30 days prior to the first solicitation of Holders generally in
connection therewith and no later than the date such 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 purposes of determining
whether Holders of the requisite proportion of Notes then outstanding have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other act, and for this purpose the Notes
then outstanding shall be computed as of such record date; PROVIDED that no such
request, demand, authorization, direction, notice, consent, waiver or other act
by the Holders on such record date shall be deemed effective unless it shall
become effective pursuant to the provisions of this Indenture not later than six
months after the record date.
SECTION 11.06. RULES BY TRUSTEE, PAYING AGENT OR REGISTRAR. The
Trustee may make reasonable rules for action by or at a meeting of Holders. The
Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 11.07. PAYMENT DATE OTHER THAN A BUSINESS DAY. If an
Interest Payment Date, Redemption Date, Payment Date for an Offer to Purchase,
Stated Maturity or date of maturity of any Note shall not be a Business Day at
any place of payment, then payment of principal of, premium, if any, or interest
on such Note, as the case may be, need not be made on such date, but may be made
on the next succeeding Business Day at such place of payment with the same force
and effect as if made on the Interest Payment Date, Payment Date for an Offer to
Purchase, or Redemption Date, or at the Stated Maturity or date of maturity of
such Note; PROVIDED that no interest shall accrue for the period from and after
such Interest Payment Date, Payment Date for an Offer to Purchase, Redemption
Date, Stated Maturity or date of maturity, as the case may be.
SECTION 11.08. GOVERNING LAW. This Indenture and the Notes shall be
governed by the laws of the State of New York without regard to its conflicts of
law provisions. The Trustee, the Company and the Holders agree to submit to the
jurisdiction of the courts of the State of New York in any action or proceeding
arising out of or relating to this Indenture or the Notes.
<PAGE>
86
SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or any Subsidiary of the Company except the Pledge Agreement.
Any such indenture, loan or debt agreement may not be used to interpret this
Indenture.
SECTION 11.10. NO RECOURSE AGAINST OTHERS. No recourse for the
payment of the principal of, premium, if any, or interest on any of the Notes,
or for any claim based thereon or otherwise in respect thereof, and no recourse
under or upon any obligation, covenant or agreement of the Company contained in
this Indenture, the Pledge Agreement or in any of the Notes, or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator or against any past, present or future partner, shareholder, other
equityholder, officer, director, employee or controlling person, as such, of the
Company or of any successor Person, either directly or through the Company or
any successor Person, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise; it being
expressly understood that all such liability is hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of the Notes.
SECTION 11.11. SUCCESSORS. All agreements of the Company in this
Indenture and the Notes shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 11.12. DUPLICATE ORIGINALS. The parties may sign any number
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement.
SECTION 11.13. SEPARABILITY. In case any provision in this Indenture
or in the Notes 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 11.14. TABLE OF CONTENTS, HEADINGS, ETC. The Table of
Contents, Cross-Reference Table and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms and provisions hereof.
<PAGE>
87
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.
ECONOPHONE, INC.,
as Issuer
By: ___________________________________
Name:
Title:
THE BANK OF NEW YORK,
as Trustee
By: ___________________________________
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF NOTE
(See Exhibit 4.4)
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE
-------------------
______________, ____
The Bank of New York
101 Barclay Street
21 West
New York, New York 10286
Attention: Corporate Trust Administration
Econophone, Inc.
60 Hudson Street
New York, New York 10013
Attention: Chief Financial Officer
Re: Econophone, Inc. (the "Company")
13 1/2 % Senior Notes Due 2007 (the "Notes")
--------------------------------------------
Dear Sirs:
This letter relates to U.S. $_____ principal amount of Notes
represented by a Note (the "Legended Note") which bears a legend outlining
restrictions upon transfer of such Legended Note. Pursuant to Section 2.01 of
the Indenture dated as of July 1, 1997 (the "Indenture") relating to the Notes,
we hereby certify that we are (or we will hold such securities on behalf of) a
person outside the United States to whom the Notes could be transferred in
accordance with Rule 904 of Regulation S promulgated under the U.S. Securities
Act of 1933. Accordingly, you are hereby requested to exchange the legended
certificate for an unlegended certificate representing an identical principal
amount of Notes, all in the manner provided for in the Indenture.
You are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceedings or official inquiry with respect to the
matters covered hereby. Terms used in this certificate have the meanings set
forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
------------------------------
Authorized Signature
<PAGE>
EXHIBIT C
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-OIB Accredited Investors
-----------------------------------------
______________, ____
The Bank of New York
101 Barclay Street
21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: Econophone. Inc. (the "Company")
13 1/2% Senior Notes Due 2007 (the "Notes")
-------------------------------------------
Dear Sirs:
In connection with our proposed purchase of $_____ aggregate principal
amount of the Notes, we confirm that:
1. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the Indenture dated
as of July 1, 1997 (the "Indenture"), relating to the Notes, and the undersigned
agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes
except in compliance with, such restrictions and conditions and the Securities
Act of 1933, as amended (the "Securities Act").
2. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered or
sold except as permitted in the following sentence. We agree, on our own behalf
and on behalf of any accounts for which we are acting as hereinafter stated,
that if we should sell any Notes, we will do so only (A) to the Company or any
subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to
a "qualified institutional buyer" (as defined therein), (C) to an institutional
"accredited investor" (as defined below) that, prior to such transfer, furnishes
(or has furnished on its behalf by a U.S. broker-dealer) to you and to the
Company a signed letter substantially in the form of this letter, (D) outside
the United States in accordance with Rule 904 of Regulation S under the
Securities Act, (E) pursuant to the exemption from registration provided by Rule
144 under the Securities Act, or (F) pursuant to an effective registration
statement under the Securities Act, and we further agree to provide to any
person purchasing any of the Notes from us a notice advising such purchaser that
resales of the Notes are restricted as stated herein.
3. We understand that, on any proposed resale of any Notes, we will
be required to furnish to you and the Company such certifications, legal
opinions and other
<PAGE>
information as you and the Company may reasonably require to confirm that the
proposed sale complies with the foregoing restrictions. We further understand
that the Notes purchased by us will bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we and
any accounts for which we are acting are each able to bear the economic risk of
our or its investment.
5. We are acquiring the Notes purchased by us for our own account or
for one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
Very truly yours,
[Name of Holder]
By:
------------------------------
Authorized Signature
C-2
<PAGE>
EXHIBIT D
Form of Certificate to Be
Delivered in Connection with
Transfers Pursuant to Regulation S
----------------------------------
______________, ____
The Bank of New York
101 Barclay Street
21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: Econophone. Inc. (the "Company")
13 1/2% Senior Notes Due 2007 (the "Notes")
-------------------------------------------
Dear Sirs:
In connection with our proposed sale of U.S.$_____ aggregate principal
amount of the Notes, we confirm that such sale has been effected pursuant to and
in accordance with Regulation S under the Securities Act of 1933, as amended,
and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the United
States;
(2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf reasonably
believed that the transferee was outside the United States;
(3) no directed selling efforts have been made by us in the United
States in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the U.S. Securities Act of 1933, as amended.
D-1
<PAGE>
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Tansferor]
By:
------------------------------
D-2
<PAGE>
Exhibit 5.1
September 25, 1997
Econophone, Inc.
45 Broadway
New York, New York 10006
Ladies and Gentlemen:
We have acted as special counsel for Econophone, Inc., a New York
corporation (the "Company"), in connection with the preparation and filing by
the Company with the Securities and Exchange Commission (the "Commission") of a
Registration Statement on Form S-4, Commission file number 333-33117 (the
"Registration Statement"), relating to the 131/2% Senior Notes due 2007 of the
Company in the aggregate principal amount of $155,000,000 (the "Exchange
Notes"). The Exchange Notes are to be offered by the Company in exchange for
$155,000,000 in aggregate principal amount of its outstanding 131/2% Senior
Notes due 2007 (the "Initial Notes").
In this capacity, we have examined originals, telecopies or
copies certified or otherwise identified to our satisfaction of 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 this opinion. In such examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons signing or delivering any instrument, 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 this opinion that were not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Company.
Based on the foregoing, and having such regard for such legal
considerations as we deem relevant, we are of the opinion that, upon the
issuance of the Exchange Notes in the manner referred to in the Registration
Statement, and when the Exchange Notes are duly authorized and executed by the
Company and authenticated by The Bank of New York, in its capacity as trustee
under the Indenture, dated as of July 1, 1997 (the "Indenture"), between the
<PAGE>
Econophone, Inc.
September 25, 1997
Page 2
Company and The Bank of New York, the Exchange Notes will be legally issued and
will be binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, reorganization,
fraudulent conveyance, insolvency, moratorium or other laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity.
We have prepared the discussion contained under the heading
"Certain Federal Income Tax Considerations" in the Prospectus forming a part of
the Registration Statement. In our opinion, such discussion sets forth the
material U.S. federal income tax considerations applicable generally to the
holders of the Initial Notes that exchange Initial Notes for Exchange Notes and
to such holders' acquisition, ownership and disposition of the Exchange Notes.
We hereby consent to the filing of this opinion as an Exhibit to
the Registration Statement and to the reference to this firm under the headings
"Legal Matters" and "Certain Federal Income Tax Considerations" in the
Prospectus included in the Registration Statement. 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 of 1933, as amended, or the
rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/S/ SCHULTE ROTH & ZABEL LLP
<PAGE>
Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
dated as of
November 1, 1996
between
ECONOPHONE, INC.
and
PRINCES GATE INVESTORS II, L.P.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions.................................................... 1
ARTICLE II
PURCHASE AND SALE OF SECURITIES
SECTION 2.01. Commitment to Purchase........................................ 4
SECTION 2.02. The Closing................................................... 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE ISSUER
SECTION 3.01. Organization, Standing, etc................................... 5
SECTION 3.02. Authorization; Non-Contravention.............................. 5
SECTION 3.03. Binding Effect................................................ 6
SECTION 3.04. Capitalization and Voting Rights.............................. 6
SECTION 3.05. Subsidiaries.................................................. 7
SECTION 3.06. Related Party Transactions.................................... 7
SECTION 3.07. Registration Rights........................................... 7
SECTION 3.08. Litigation, Proceedings; No Defaults.......................... 7
SECTION 3.09. Disclosure.................................................... 8
SECTION 3.10. Offering...................................................... 8
SECTION 3.11. Investment Company............................................ 8
SECTION 3.12. Governmental Regulation....................................... 8
SECTION 3.13. Solicitation; Access to Information........................... 8
SECTION 3.14. Financial Information......................................... 9
SECTION 3.15. Compliance with ERISA......................................... 9
SECTION 3.16. Taxes......................................................... 10
SECTION 3.17. Authorization to do Business.................................. 11
SECTION 3.18. Absence of Certain Changes.................................... 11
SECTION 3.19. Properties.................................................... 13
SECTION 3.20. Internal Controls............................................. 13
SECTION 3.21. Employees; Employee Compensation.............................. 13
SECTION 3.22. No Undisclosed Material Liabilities........................... 14
<PAGE>
ii
SECTION 3.23. Material Contracts............................................ 14
SECTION 3.24. Intellectual Property......................................... 14
SECTION 3.25. Environmental Compliance...................................... 15
SECTION 3.26. Insurance..................................................... 16
SECTION 3.27. Shareholder Loans............................................. 16
SECTION 3.28. S-Corporation................................................. 16
SECTION 3.29. Currency Hedging.............................................. 16
SECTION 3.30. Significant Subsidiary........................................ 16
SECTION 3.31. Carrier Contracts............................................. 16
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 4.01. Organization.................................................. 16
SECTION 4.02. Authority; No Other Action.................................... 16
SECTION 4.03. Non-Contravention............................................. 17
SECTION 4.04. Binding Effect................................................ 17
SECTION 4.05. No Defaults................................................... 17
SECTION 4.06. Private Placement............................................. 17
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
SECTION 5.01. Conditions to the Purchaser's Obligations..................... 18
SECTION 5.02. Conditions to the Issuer's Obligations........................ 20
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Notices....................................................... 20
SECTION 6.02. No Waivers; Amendments........................................ 21
SECTION 6.03. Indemnification............................................... 21
SECTION 6.04. Survival of Provisions........................................ 22
SECTION 6.05. Expenses; Documentary Taxes................................... 22
SECTION 6.06. Successors and Assigns........................................ 22
SECTION 6.07. New York Law.................................................. 23
SECTION 6.08. Counterparts; Effectiveness................................... 23
SECTION 6.09. Entire Agreement.............................................. 23
<PAGE>
iii
SCHEDULES
Schedule 3.04(a) Authorized Capital Stock
Schedule 3.04(b) Voting Agreements
Schedule 3.05 Subsidiaries
Schedule 3.06 Related Party Transactions
Schedule 3.07 Registration Rights
Schedule 3.18 Material Changes
Schedule 3.19 Liens
Schedule 3.21 Employees; Employee Compensation
Schedule 3.22 Material Liabilities
Schedule 3.23 Material Contracts
Schedule 3.24 Intellectual Property Claims
Schedule 3.27 Shareholder Loans
EXHIBITS
Exhibit A - Form of Securityholders Agreement
Exhibit B-1 - Form of Opinion of Special Counsel to the Issuer
Exhibit B-2 - Form of Opinion of U.S. Regulatory Counsel to the Issuer
Exhibit B-3 - Form of Opinion of Foreign Regulatory Counsel to the Issuer
Exhibit C - Documentation not Relied Upon
Exhibit D - Charter
Exhibit E - Bylaws
<PAGE>
SECURITIES PURCHASE AGREEMENT
AGREEMENT dated as of November 1, 1996 between Econophone, Inc., a New
York corporation (the "Issuer"), and Princes Gate Investors II, L.P. (the
"Purchaser").
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS. (a) The following terms, as used herein,
have the following meanings:
"Balance Sheet" means the consolidated balance sheet of the Issuer and
its Consolidated Subsidiaries as of December 31, 1995.
"Balance Sheet Date" means December 31, 1995.
"Bylaws" means the Bylaws of the Issuer in the form attached as
Exhibit E hereto.
"Certificate of Amendment" means the certificate of amendment to the
Company's certificate of incorporation relating to, among other things, the
Series A Preferred, and filed with the Secretary of State of the State of New
York on the date hereof.
"Charter" means the Certificate of Incorporation of the Issuer, as in
effect as of the Closing Date, in the form attached as Exhibit D hereto.
"Common Stock" means the Common Stock, no par value per share, of the
Issuer.
"Consolidated Subsidiary" means, at any applicable date, any
subsidiary or other entity the accounts of which would be consolidated with
those of the Issuer in its consolidated financial statements if such statements
were prepared as of such date.
"Equipment Loan and Security Agreement" means the Equipment Loan and
Security Agreement dated May 28, 1996 between the Issuer and NTFC Corporation.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute.
<PAGE>
2
"Indebtedness" means, with respect to any Person, 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 representing the
balance deferred and unpaid of the purchase price of any property (including,
without limitation, pursuant to capital leases, but excluding the balance
deferred and unpaid of the purchase price of currency) or representing any
hedging obligations, except any such balance that constitutes an accrued expense
or trade payable, if and to the extent any of the foregoing indebtedness (other
than hedging obligations) would appear as a liability upon a balance sheet of
such Person prepared in accordance with generally accepted accounting
principles, and also includes, to the extent not otherwise included above, the
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, through letters of credit and reimbursement agreements in
respect thereof) of items that otherwise would be included within this
definition.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, any Person shall be deemed to own subject to
any Lien any asset that it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Material Adverse Change" means a material adverse change in the
business, business prospects, assets, financial condition or results of
operations of the Issuer and its Subsidiaries taken as a whole.
"Material Adverse Effect" means a material adverse effect on the
financial condition, business, business prospects, assets or results of
operations of the Issuer and its Subsidiaries taken as a whole.
"Permitted Liens" means any Lien consisting of any one or more of the
following:
(i) Liens securing Indebtedness outstanding under the Equipment
Loan and Security Agreement;
(ii) Liens for current taxes not yet delinquent;
(iii) Liens imposed by law and imposed in the ordinary course of
business for obligations not yet delinquent to carriers, warehousemen,
laborers, materialmen and the like;
<PAGE>
3
(iv) Liens in respect of pledges or deposits made pursuant to
workers compensation laws or similar legislation;
(v) minor defects in title, none of which, individually or in the
aggregate, materially and adversely affects the Issuer's ability to
Transfer or use the subject asset or property;
(vi) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds
and other obligations of a like nature incurred in the ordinary course of
business; or
(vii) Liens placed upon any assets or property to secure
Indebtedness financing the improvements of assets or property, capitalized
lease obligations, or sale/leaseback transactions, PROVIDED THAT the
aggregate principal amount outstanding under all such financing does not
exceed $3 million.
"Person" means an individual, general partnership, limited
partnership, corporation, trust, joint stock company, association, joint venture
or any other entity or organization, whether or not legal entities, including,
without limitation, a government or political subdivision or an agency or
instrumentality thereof.
"Regulation D" means Regulation D under the Securities Act, as
amended.
"Securities Act" means the Securities Act of 1933, as amended from
time to time, or any successor statute.
"Securityholders Agreement" means the Securityholders Agreement among
Mr. Alfred West, the Issuer and the Purchaser of even date herewith.
"Series A Preferred" shall have the meaning set forth in Section 2.01
of this Agreement.
"Subsidiary" has the meaning ascribed thereto in the Securityholders
Agreement.
"Transfer" means any transfer, in whole or in party, by sale, pledge
assignment or other means.
"Warrants" has the meaning ascribed thereto in the Securityholders
Agreement.
<PAGE>
4
(b) Each of the following terms is defined in the Section opposite
such term:
TERM SECTION
Benefit Arrangement 3.15
Closing 2.02
Closing Date 2.02
Code 3.15
Damages 6.03
ERISA 3.15
ERISA Group 3.15
Hazardous Substance 3.25
Indemnified Person 6.03
Intellectual Property Rights 3.24
Issuer Indemnified Person 6.03
Multiemployer Plan 3.15
Plan 3.15
Pre-Closing Tax Period 3.16
Purchase Price 2.01
Returns 3.16
Tax 3.16
Taxing Authority 3.16
ARTICLE II
PURCHASE AND SALE OF SECURITIES
SECTION 2.01. COMMITMENT TO PURCHASE. Subject to the terms and
conditions hereinafter stated, upon the basis of the representations and
warranties herein contained of the Purchaser, the Issuer agrees to issue and
sell to the Purchaser and, upon the basis of the representations and warranties
herein contained of the Issuer, the Purchaser agrees to purchase from the Issuer
140,000 shares of Redeemable Convertible Preferred Stock, Series A, of the
Issuer having an aggregate liquidation preference of $14 million (the "Series A
Preferred") at $96.00 per share, for an aggregate purchase price of $13.44
million (the "Purchase Price").
SECTION 2.02. THE CLOSING. (a) The purchase and sale of the Series
A Preferred (the "Closing") shall take place at the offices of Shearman &
Sterling at 10:00 a.m. on the date hereof or on such other date and at such
other location as the Issuer and the Purchaser shall agree. The date and time
of closing are referred to herein as the "Closing Date".
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5
(b) At the Closing, the Purchaser shall deliver to the Issuer, by
wire transfer (of immediately available funds in U.S. dollars) to an account
designated by the Issuer, the Purchase Price.
(c) At the Closing, the Issuer shall deliver to the Purchaser,
against payment of the Purchase Price, a certificate evidencing the Series A
Preferred in definitive form and registered in the name of the Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE ISSUER
The Issuer represents and warrants to the Purchaser as follows:
SECTION 3.01. ORGANIZATION, STANDING, ETC. (a) The Issuer is a
corporation duly incorporated and subsisting under the laws of the State of New
York and has all corporate powers necessary to carry on its business as
conducted on the date hereof. The Charter and Bylaws are true and complete
copies of the certificate of incorporation and bylaws of the Issuer that will be
in effect immediately following the Closing.
(b) Except for those Subsidiaries designated as inactive on
Schedule 3.05, each of the Issuer's Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers necessary to carry
on its business as now conducted. The Issuer has heretofore delivered to the
representative of the Purchaser true and complete copies of the certificate of
incorporation and bylaws of each of its Subsidiaries designated as active on
Schedule 3.05 as currently in effect.
SECTION 3.02. AUTHORIZATION; NON-CONTRAVENTION. The execution,
delivery and performance by the Issuer of each of this Agreement and the
Securityholders Agreement and the issuance and delivery by the Issuer of the
Series A Preferred and the performance by the Issuer of its obligations
contained in the Certificate of Amendment are within the Issuer's corporate
powers, have been duly authorized by all necessary corporate action, require no
action by or in respect of, or filing with, any governmental body, agency or
official (other than as may be required under federal or state securities laws
in connection with the registration obligations of the Issuer contained in the
Securityholders Agreement) and do not (i) contravene or constitute a default
under any provision of applicable law or regulation, judgment, injunction, order
or decree binding upon or applicable to the Issuer, (ii) contravene or
constitute a default under the Charter or Bylaws, (iii) except for such consent
or approval as has been obtained, require any consent, approval or other action
by any other
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6
Person (other than any securities regulatory authority or securities exchange or
inter-dealer quotation system in connection with the registration obligations of
the Issuer contained in the Securityholder Agreement) or constitute a default
under or contravene any material agreement, judgment, injunction, order, decree
or other instrument binding upon the Issuer or any of its Subsidiaries or (iv)
result in the creation or imposition of any Lien on any material asset of the
Issuer or any of its Subsidiaries.
SECTION 3.03. BINDING EFFECT. Each of this Agreement and the
Securityholders Agreement constitutes a valid and binding agreement of the
Issuer, and the Series A Preferred, when issued and delivered by the Issuer in
accordance with this Agreement, shall constitute a valid and binding obligation
of the Issuer.
SECTION 3.04. CAPITALIZATION AND VOTING RIGHTS. (a) As of the
Closing Date, the authorized capital stock of the Issuer and the issued and
outstanding shares of capital stock of the Issuer will each be as set forth on
Schedule 3.04(a)(i). All of the issued and outstanding shares of capital stock
of the Issuer will be validly issued, fully paid and nonassessable, and the
holders thereof will not be entitled to any preemptive or other similar rights.
As of the Closing Date, 4,012,000 shares of Common Stock have been reserved for
issuance in connection with the conversion of the Series A Preferred and
3,000,000 shares of Common Stock are issuable under the terms of the Issuer's
stock incentive plan (the "1996 Flexible Incentive Plan"). Copies of the 1996
Flexible Incentive Plan, which has been adopted by the Board of Directors of the
Issuer prior to the date hereof and, as in effect on the date hereof, has been
delivered to the Purchaser prior to the date hereof. Except as set forth on
Schedule 3.04(a)(ii), the Certificate of Amendment and the rights provided for
in the Securityholders Agreement, the 1996 Flexible Incentive Plan is the only
plan or arrangement in existence relating to the issuance of capital stock of
the Issuer. All shares of Common Stock to be issued upon conversion of the
Series A Preferred and upon the exercise of options granted pursuant to the
terms of any stock incentive plans adopted by the Issuer will be duly authorized
and validly issued, fully paid and nonassessable. Except as set forth in this
Section 3.04(a) or on Schedule 3.04(a)(iii), upon the consummation of the
Closing, there will be outstanding no securities of the Issuer and no securities
convertible into or exchangeable for, or options or other rights to acquire from
the Issuer, or other obligations of the Issuer to issue, directly or indirectly
any shares of capital stock of the Issuer.
(b) Except as set forth in Schedule 3.04(b), the Issuer is not a
party or subject to any agreement or understanding that affects or relates to
the voting or giving of written consents with respect to any security or the
voting by any director of the Issuer.
(c) The outstanding shares of Common Stock have been issued, and
all outstanding options, for the purchase or acquisition from the Issuer of any
shares of its capital stock have been granted, in accordance with the
registration or qualification
<PAGE>
7
provisions of the Securities Act and any relevant state securities laws or
pursuant to valid exemptions therefrom.
SECTION 3.05. SUBSIDIARIES. Except for the Subsidiaries set forth on
Schedule 3.05 and the joint ventures described on Schedule 3.05, the Issuer does
not own or control, directly or indirectly, any interest in any other
corporation, association, or other business entity, and the Issuer is not a
participant in any joint venture, partnership, or similar arrangement.
SECTION 3.06. RELATED PARTY TRANSACTIONS. (i) Except as set forth on
Schedule 3.06(i), no officer or director of the Issuer or member of the
immediate family of any officer or director is indebted to the Issuer, nor, is
the Issuer indebted (or committed to make loans or extend or guarantee credit)
to any of them; (ii) except as set forth on Schedule 3.06(ii), to the Issuer's
knowledge, none of such persons has any direct or indirect material ownership
interest (which shall consist of 1% or more of the ownership interests) in any
firm or corporation with which the Issuer is affiliated or with which the Issuer
has a business relationship, or any firm or corporation that competes with the
Issuer; and (iii) except as set forth on any Schedule hereto or in Mr. Alan
Levy's employment agreement, as amended, which has been delivered to the
Purchaser, no officer or director or any member of the family of any officer or
director directly or indirectly, has any financial interest in any material
contract of the Issuer.
SECTION 3.07. REGISTRATION RIGHTS. Except as set forth on Schedule
3.07 and except as may be required pursuant to the Securityholders Agreement and
pursuant to the 1996 Flexible Incentive Plan, the Issuer is not obligated to
register under the Securities Act any of its currently outstanding securities or
any of its securities that may subsequently be issued.
SECTION 3.08. LITIGATION, PROCEEDINGS; NO DEFAULTS. (a) There is
no action, suit or proceeding pending or, to the knowledge of the Issuer,
threatened against the Issuer or any of its Subsidiaries or reasonably expected
by the Issuer to have a Material Adverse Effect before any court or arbitrator
or any governmental body, agency or official in which there is a possibility of
an adverse decision, except which, individually or in the aggregate, is
reasonably not expected to result in a Material Adverse Effect or reasonably is
not expected to result in any material change in the current equity ownership of
the Issuer, or which in any manner draws into question the validity of this
Agreement, the Securityholders Agreement or any of the transactions contemplated
hereby or thereby. The foregoing includes, without limitation, any such action,
suit, proceeding, or investigation known to the Issuer pending or currently
threatened involving the prior employment of any of the Issuer's employees, such
employees' use in connection with the Issuer's business of any information or
techniques allegedly proprietary to any of such employees' former employers, the
obligations of any of the Issuer's employees under any agreements with the prior
employers
<PAGE>
8
of such employees, or negotiations by the Issuer with potential backers of, or
investors in, the Issuer or its proposed business.
(b) The Issuer is not in violation of the Charter or Bylaws nor in
violation or contravention of or default under any provision of applicable law
or regulation or of any agreement, judgment, injunction, order, decree or other
instrument binding upon it, to the extent that such violation, contravention or
default (i) would affect the validity of this Agreement, the Securityholders
Agreement or the Certificate of Amendment or (ii) would (individually or in the
aggregate) impair the ability of the Issuer to perform in any material respect
the obligations which it has under this Agreement, the Securityholders
Agreement, the Certificate of Amendment or any of the transactions contemplated
thereby.
SECTION 3.09. DISCLOSURE. (a) The Issuer has provided the Purchaser
with all the information available to it that the Purchaser has requested for
determining whether to purchase the Series A Preferred.
(b) The copy of the minute books of the Issuer provided to the
Purchaser's counsel prior to the Closing Date contains minutes of all meetings
of directors and stockholders and all actions by written consent without a
meeting by the directors and stockholders from February 9, 1992 to the date
hereof and accurately reflects in all material respects all actions by the
directors (and any committee of directors) and stockholders with respect to all
transactions referred to in such minutes and consents.
SECTION 3.10. OFFERING. Assuming the accuracy of the representations
set forth in Article IV hereof, the offer, sale and issuance of the Series A
Preferred to the Purchaser at the Closing as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act.
SECTION 3.11. INVESTMENT COMPANY. The Issuer is not, and after
giving effect to the sale and issuance of the Series A Preferred, will not be,
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
SECTION 3.12. GOVERNMENTAL REGULATION. Except as required pursuant
to the Securities Act, the Exchange Act, state securities laws and the Business
Corporation Law of the State of New York, the Issuer is not subject to any
Federal or state or foreign law or regulation limiting its ability to issue and
perform its obligations under the terms of the Series A Preferred or the
Certificate of Amendment.
SECTION 3.13. SOLICITATION; ACCESS TO INFORMATION. No form of
general solicitation or general advertising was used by the Issuer or, to its
knowledge, any other Person acting on its behalf, in respect of the Series A
Preferred or in connection with the offer and sale of the Series A Preferred.
Neither the Issuer nor any Person acting on behalf
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9
of the Issuer has, sold or, to the knowledge of the Issuer, directly or
indirectly offered for sale to any Person any of the Series A Preferred or any
other similar security of the Issuer except as contemplated by this Agreement.
SECTION 3.14. FINANCIAL INFORMATION. (a) The Balance Sheet and the
related consolidated statement of operations, changes in stockholders' equity
and cash flows for the fiscal year then ended reported on by Arthur Andersen
LLP, which have been delivered to the Issuer, fairly present in all material
respects, in conformity with generally accepted accounting principles, the
consolidated financial position of the Issuer and its Consolidated Subsidiaries
as of such date and their consolidated results of operations and cash flows for
such fiscal year.
(b) The unaudited consolidated balance sheet of the Issuer and
its Consolidated Subsidiaries as of June 30, 1996 and the related unaudited
consolidated statement of operations for the six months then ended, in each case
as delivered to the Purchaser, fairly present in all material respects, in
conformity with generally accepted accounting principles applied on a basis
consistent with the financial statements referred to in subsection (a) of this
Section, the consolidated financial position of the Issuer and its Consolidated
Subsidiaries as of such date and their consolidated results of operations for
the six months then ended (subject to normal year-end adjustments).
SECTION 3.15. COMPLIANCE WITH ERISA. (a) For the purposes of this
Section 3.15, the following terms shall have the following meanings:
"Benefit Arrangement" means at any time an employee benefit plan
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to
by any member of the ERISA Group.
"ERISA Group" means the Issuer and all members of a controlled
group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Issuer,
are treated as a single employer under Section 414 of the Code.
"Multiemployer Plan" means at any time an employee pension
benefit plan within the meaning of Section 4001(a)(3) of ERISA to
which any member of the ERISA Group is then making or accruing an
obligation to make contributions or has within the preceding five plan
years made contributions, including for these purposes any Person that
ceased to be a member of the ERISA Group during such five-year period.
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10
"Plan" means at any time an employee pension benefit plan (other
than a Multiemployer Plan) which is covered by Title IV of ERISA or
subject to the minimum funding standards under Section 412 of the Code
and either (i) is maintained, or contributed to, by any member of the
ERISA Group for employees of any member of the ERISA Group or (ii) has
at any time within the preceding five years been maintained, or
contributed to, by any Person which was at such time a member of the
ERISA Group for employees of any Person which was at such time a
member of the ERISA Group.
(b) Each member of the ERISA Group has fulfilled its obligations
under the minimum funding standards of the Employee Retirement Income Security
Act of 1974, as amended from time to time ("ERISA") and the Internal Revenue
Code (the "Code") with respect to each Plan and is in compliance in all material
respects with the presently applicable provisions of ERISA and the Code with
respect to each Plan. No member of the ERISA Group has (i) sought a waiver of
the minimum funding standard under Section 412 of the Code in respect of any
Plan, (ii) failed to make any contribution or payment to any Plan or
Multiemployer Plan or in respect of any Benefit Arrangement, or made any
amendment to any Plan or Benefit Arrangement, which has resulted or could result
in the imposition of a Lien or the posting of a bond or other security under
ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other
than a liability to the Pension Benefit Guaranty Corporation (or any entity
succeeding to any or all of its functions under ERISA) for premiums under
Section 4007 of ERISA. Neither the Issuer nor any of its Subsidiaries has made
any contributions to a Multiemployer Plan or a Plan. No member or former member
of the ERISA Group has within the last five years engaged in, or is a successor
or parent corporation to an entity that has engaged in, a transaction described
in Section 4069 of ERISA. The Issuer has filed for, but has not yet received, a
determination letter of the Internal Revenue Service with respect to each
Benefit Arrangement that is intended to qualify under Section 401(a) of the
Code, and the Issuer has no reason to believe that such determination letter
when issued will not be favorable. Each Benefit Arrangement has been maintained
in substantial compliance with its terms and with the requirements prescribed by
any and all applicable statutes, orders, rules and regulations, including,
without limitation, ERISA and the Code.
SECTION 3.16. TAXES. The Issuer and each of its Subsidiaries: (i)
has filed in accordance with all applicable laws, all material Tax (as defined
below) returns, statements, reports and forms (collectively, the "Returns")
required to be filed with any Taxing Authority (as defined below) on or before
the Closing Date (taking into account any extension of a required filing date)
with respect to any Tax period ending on or before the Closing Date
("Pre-Closing Tax Period"); (ii) has timely paid all material Taxes shown as due
and payable on the Returns that have been filed; (iii) has not been a member of
an affiliated, consolidated, combined or unitary group other than one of which
the Issuer was the common parent; and (iv) is not currently under any
contractual obligation to pay any
<PAGE>
11
amounts of the type described in clause (ii) or (iii) of the definition of Tax.
The Issuer represents further that (x) the charges, accruals and reserves for
Taxes reflected on its Balance Sheet are adequate to cover the Tax liabilities
accruing through the date thereof; and (y) there is no material action, suit,
proceeding, investigation, audit or claim pending or, to the knowledge of the
Issuer, threatened against it in respect of any Tax. "Tax" (and with
correlative meaning, "Taxes") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, value added,
transfer, franchise, profits, license, withholding on amounts paid to or by the
Issuer or any of its Subsidiaries, payroll, employment, excise, severance,
stamp, occupation, premium, property, environmental or windfall profit tax,
custom, duty or other tax, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest or any penalty, addition to
tax or additional amount due from the Issuer or any of its Subsidiaries, as the
case may be, imposed by any governmental authority (a "Taxing Authority")
responsible for the imposition of any such tax (domestic or foreign), (ii)
liability of the Issuer or any of its Subsidiaries for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group, or being a party to any
agreement or arrangement whereby liability of the Issuer or any of its
Subsidiaries for payment of such amounts was determined or taken into account
with reference to the liability of any other Person for any Pre-Closing Tax
Period, and (iii) liability of the Issuer or any of its Subsidiaries for the
payments of any amounts as a result of being party to any tax sharing agreement
or with respect to the payment of any amounts of the type described in (i) or
(ii) as a result of any express or implied obligation to indemnify any other
Person.
SECTION 3.17. AUTHORIZATION TO DO BUSINESS. The Issuer and its
Subsidiaries (i) possess all licenses, certificates, authorizations, approvals
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses in the manner being
conducted on the date hereof, excepting any certificate, authorization, approval
or permit, the failure to possess which is reasonably not expected to result in
a Material Adverse Change and (ii) have not received any notice of proceedings
relating to the revocation or modification of any such license, certificate,
authorization, approval or permit, nor is the Issuer or any of its Subsidiaries
in violation or contravention of, or in default under, any such license,
authorization, approval or permit or any decree, order or judgment applicable to
the Company or its Subsidiaries, except the effect of which, singly or in the
aggregate, is reasonably not expected to result in a Material Adverse Effect.
SECTION 3.18. ABSENCE OF CERTAIN CHANGES. Except as expressly
contemplated in this Agreement or as set forth on Schedule 3.18, since the
Balance Sheet Date, the Issuer and its Subsidiaries have conducted their
businesses in the ordinary course consistent with past practices and there has
not been:
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12
(a) any Material Adverse Change or any event, occurrence,
development or state of circumstances or facts, except such which is
reasonably not expected to result in a Material Adverse Change;
(b) any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital
stock of the Issuer, or any repurchase, redemption or other
acquisition by the Issuer or any of its Subsidiaries of any
outstanding shares of capital stock or other securities of, or other
ownership interests in, the Issuer or any of its Subsidiaries;
(c) any amendment of any material term of any outstanding
security of the Issuer or any of its Subsidiaries, other than as set
forth in the Charter;
(d) any incurrence, assumption or guarantee by the Issuer or
any of its Subsidiaries of any indebtedness for borrowed money, net of
indebtedness repaid during such period, in excess of $100,000, other
than indebtedness incurred pursuant to the Equipment Loan and Security
Agreement;
(e) any creation or assumption by the Issuer or any of its
Subsidiaries of any Lien on any material asset other than in the
ordinary course of business consistent with past practices;
(f) other than temporary investments of cash in the ordinary
course of business, any making by the Issuer or any of its
Subsidiaries of any loan, advance or capital contributions to or
investment in any Person other than the Issuer or any of its wholly
owned Subsidiaries, in excess of $100,000;
(g) any damage, destruction or other casualty loss (whether
or not covered by insurance) affecting the business or assets of the
Issuer or any of its Subsidiaries, except which, individually or in
the aggregate, has not had and is reasonably not expected to have a
Material Adverse Effect;
(h) any transaction or commitment made, or any contract or
agreement entered into, by the Issuer or any of its Subsidiaries
relating to its assets or business (including, without limitation, the
acquisition or disposition of any assets) or any relinquishment by the
Issuer or any of its Subsidiaries of any contract or other right, in
any such case, material to the Issuer and its Subsidiaries taken as a
whole, other than in the ordinary course of business; or
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13
(i) any change in any method of accounting or accounting
practice by the Issuer or any of its Subsidiaries, except for any such
change required by reason of a change in generally accepted accounting
principles.
SECTION 3.19. PROPERTIES. The Issuer and its Subsidiaries have good
and marketable title to, or in the case of leased property have valid leasehold
interests in, all property and assets (whether real or personal, tangible or
intangible) material to the business of the Issuer and its Subsidiaries taken
together as a whole reflected on the Balance Sheet or acquired after the Balance
Sheet Date. None of such properties or assets is subject to any Liens, except
(i) Liens disclosed or provided for on the Balance Sheet, (ii) Liens in
existence on the date hereof and listed in Schedule 3.19 hereto or (iii)
Permitted Liens.
SECTION 3.20. INTERNAL CONTROLS. The Issuer and its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(3) access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
SECTION 3.21. EMPLOYEES; EMPLOYEE COMPENSATION. Except as set forth
in Schedule 3.21, to the Issuer's knowledge, (i) there is no strike or labor
dispute or union organization activities pending or threatened between it or its
Subsidiaries and their respective employees; (ii) none of the Issuer's or its
Subsidiaries' employees belongs to any union or collective bargaining unit;
(iii) the Issuer and its Subsidiaries have complied in all material respects
with all applicable state and federal equal opportunity and other laws related
to employment, the failure to comply with which is material to the Issuer and
its Subsidiaries, taken together as a whole; (iv) no employee of the Issuer or
its Subsidiaries is or will be in violation in any material respect of any
judgment, decree, or order, or any term of any employment contract, patent
disclosure agreement, or other contract or agreement relating to the
relationship of any such employee with the Issuer or its Subsidiaries or any
other party because of the nature of the business conducted or contemplated to
be conducted as of the date hereof by the Issuer or its Subsidiaries; and (v) no
officer or key employee, or any group of key employees, intends to terminate
their employment with the Issuer or its Subsidiaries, nor does the Issuer or any
of its Subsidiaries have a present intention to terminate the employment of any
of the foregoing. Except as set forth in Schedule 3.21, the Issuer and its
Subsidiaries are not parties to or bound by any currently effective employment
contract, deferred compensation agreement, bonus plan, incentive plan, profit
sharing plan, retirement agreement, or other employee compensation agreement.
Subject to general principles related to wrongful termination of employees, the
employment of each officer and
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14
employee of the Issuer or its Subsidiaries not covered by an employment contract
is terminable at the will of the Issuer or its Subsidiaries.
SECTION 3.22. NO UNDISCLOSED MATERIAL LIABILITIES. Except as set
forth in the financial statements described in Section 3.14 or the notes thereto
or on Schedule 3.22, there are no liabilities of the Issuer or any of its
Subsidiaries in an amount exceeding $25,000 individually or $350,000 in the
aggregate of any kind whatsoever.
SECTION 3.23. MATERIAL CONTRACTS. (a) Except for agreements,
contracts, plans, leases, arrangements or commitments set forth in Schedule 3.23
or any other schedule hereto, neither the Issuer nor any of its Subsidiaries is
a party to or subject to any agreements, contracts, plans, leases, arrangements
or commitments that (i) are material to its business, assets, financial
condition or operations taken together as a whole, (ii) provide for the purchase
in excess of $100,000 of materials, supplies, goods, services, equipment or
other assets other than in the ordinary course of business, (iii) involve any
partnership, joint venture or other similar arrangement or (iv) restrict the
Issuer or any Subsidiary from engaging in or competing in any line of business
or with any Person or in any geographic area; provided that any such contract
containing obligations of the Issuer in excess of $100,000 is identified on such
Schedule with an asterisk.
(b) Each agreement, contract, plan, lease, arrangement and
commitment disclosed or required to be disclosed pursuant to clause (a) above is
a valid and binding agreement of the Issuer or a Subsidiary of the Issuer and is
in full force and effect, and neither the Issuer, any of its Subsidiaries nor,
to the knowledge of the Issuer, any other party thereto is in default in any
material respect under the terms of any such agreement, contract, plan, lease,
arrangement or commitment.
SECTION 3.24. INTELLECTUAL PROPERTY. (a) Except as set forth in
Schedule 3.24, the Issuer and its Subsidiaries own or have the right to use all
material trademarks, service marks, trade names, inventions, patents, trade
secrets, know-how, copyrights, or any other similar type of proprietary
intellectual property right material to the conduct of the business of the
Issuer and its Subsidiaries taken together as a whole as currently conducted
("Intellectual Property Rights").
(b) The consummation of the transactions contemplated hereby will
not alter or impair any of the Intellectual Property Rights or the Issuer's or
any Subsidiary's interests therein. Except as set forth in Schedule 3.24, there
are no pending claims against the Issuer by any Person relating to the use of
any such Intellectual Property Rights or challenging or questioning the validity
or effectiveness of any license or agreement relating to Intellectual Property
Rights to which the Issuer is a party, and the Issuer does not know of any valid
basis for any such claim; and the use of such Intellectual Property Rights by
the
<PAGE>
15
Issuer or any Subsidiary does not, to the knowledge of the Issuer, infringe on
the rights of any Person.
(c) To the knowledge of the Issuer, none of the Issuer's key
employees is obligated under any contract or other agreement (including, without
limitation, licenses, covenants, or commitments of any nature), with any Person
other than the Issuer or one of its Subsidiaries or subject to any judgment,
decree, or order of any court or administrative agency, that would interfere
with the use of such employee's best efforts to promote the interests of the
Issuer or that would conflict with such employee's involvement in the Issuer's
business as proposed to be conducted. To the knowledge of the Issuer, neither
the execution nor delivery of this Agreement, nor the involvement of any such
employee in the Issuer's business as now conducted will conflict with or result
in a breach of the terms, conditions, or provisions of, or constitute a default
under, any contract, covenant, or instrument with any Person other than the
Issuer or one of its Subsidiaries under which any of such key employees is now
obligated.
SECTION 3.25. ENVIRONMENTAL COMPLIANCE. (a) No notice or request
for information has been issued by, no complaint has been filed, no penalty has
been assessed and no investigation or review is pending, or to the Issuer's
knowledge, threatened by any governmental or other entity with respect to (i)
any alleged violation by the Issuer or any of its Subsidiaries of any
environmental law, regulation or order of any governmental entity in connection
with the conduct of their businesses or (ii) any alleged failure by the Issuer
or any of its Subsidiaries to have any environmental permit, license or approval
in connection with the conduct of their businesses.
(b) Other than in compliance in all material respects with all
applicable environmental laws, regulations or orders, (i) neither the Issuer nor
any of its Subsidiaries has generated, processed, treated, sold or transported
any material amount of any toxic, caustic or otherwise hazardous substance,
including, without limitation, petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics whether or not regulated under Federal, state or
local environmental laws, regulations or orders ("Hazardous Substance") and (ii)
no generation, treatment, storage, recycling, transportation, disposal or
Release (as defined in 42 U.S.C. Section 9601(22)) of any Hazardous Substance
has occurred at or on any property now or previously owned or leased by the
Issuer or any of its Subsidiaries.
(c) (i) Except as is reasonably not expected to have a Material
Adverse Effect, each of the Issuer and its Subsidiaries is in compliance in all
material respects with all Federal, state and local and foreign environmental
laws, regulations and orders and (ii) there are no liabilities of the Issuer or
any of its Subsidiaries, whether vested or unvested, contingent or fixed, actual
or potential, known or unknown, which (1) arise under or relate to matters
covered by Federal, state and local and foreign environmental laws, regulations
<PAGE>
16
and orders, (2) relate to actions occurring or conditions existing on or prior
to the Closing Date and (3) have had or are expected to have a Material Adverse
Effect.
SECTION 3.26. INSURANCE. The Issuer has in full force and effect
fire and casualty insurance policies, with extended coverage, sufficient in
amount (subject to reasonable deductibles) in the Issuer's opinion to allow it
to replace any of its material properties that might be damaged or destroyed.
SECTION 3.27. SHAREHOLDER LOANS. Except as set forth on Schedule
3.27, there is no outstanding indebtedness by the Issuer or any of its
Subsidiaries owed to any shareholder of the Issuer or any family member of any
shareholder or any affiliate of such a shareholder or family member.
SECTION 3.28. S-CORPORATION. The Issuer is not an S-corporation
within the meaning of the Code.
SECTION 3.29. CURRENCY HEDGING. The Issuer and its Subsidiaries
engage in currency hedging solely for purposes of hedging and not for
speculative purposes.
SECTION 3.30. SIGNIFICANT SUBSIDIARY. No Subsidiary of the Issuer is
a Significant Subsidiary of the Issuer within the meaning of Regulation S-X
under the Securities Act.
SECTION 3.31. CARRIER CONTRACTS. The aggregate commitment of the
Issuer and its Subsidiaries under the carrier contracts to which they are
parties does not exceed $400,000 per month.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Issuer as follows:
SECTION 4.01. ORGANIZATION. The Purchaser is duly organized, validly
existing and in good standing under the laws of the State of Delaware.
SECTION 4.02. AUTHORITY; NO OTHER ACTION. (a) The execution,
delivery and performance of this Agreement and the Securityholders Agreement are
within the Purchaser's powers and have been duly authorized on its part by all
requisite corporate or partnership action, as the case may be.
<PAGE>
17
(b) No action consent or approval by or in respect of, or filing
with, any governmental authority, agency or official or any other Person is
required for the execution, delivery and performance by the Purchaser of this
Agreement and the Securityholders Agreement.
SECTION 4.03. NON-CONTRAVENTION. The execution, delivery and
performance by the Purchaser of this Agreement and the Securityholders Agreement
and the consummation of the transactions contemplated hereby and thereby do not
and will not (i) violate its charter or bylaws or other constituent documents
(including, without limitation, any partnership agreement) or (ii) violate any
applicable law, rule, regulation, judgment, injunction, order or decree, which
violation would (a) affect the validity of this Agreement or the Securityholders
Agreement or (b) individually or in the aggregate impair the ability of the
Purchaser to perform in any material respect the obligations which it has under
this Agreement or the Securityholders Agreement.
SECTION 4.04. BINDING EFFECT. This Agreement and the Securityholders
Agreement have been duly executed by the Purchaser and constitute valid and
binding agreements of the Purchaser.
SECTION 4.05. NO DEFAULTS. The Purchaser is not in violation of its
charter or bylaws or in default under any provision of applicable law or
regulation or of any agreement, judgment, injunction, order, decree or other
instrument binding upon it, which violation or default (i) could reasonably be
expected to affect the validity of this Agreement or the Securityholders
Agreement or (ii) could reasonably be expected to (individually or in the
aggregate) impair the ability of the Purchaser to perform in any material
respect the obligations which it has under this Agreement or the Securityholders
Agreement. There is no action, suit or proceeding pending or, to the knowledge
of the Purchaser, threatened against the Purchaser before any court or
arbitrator or any government body, agency or official concerning this Agreement,
the Securityholders Agreement or any of the transactions contemplated hereby or
thereby.
SECTION 4.06. PRIVATE PLACEMENT. (a) The Purchaser understands that
(i) the offering and sale of the Series A Preferred is intended to be exempt
from registration under the Securities Act pursuant to Section 4(2) of the
Securities Act and (ii) there is no existing public or other market for the
Series A Preferred and there can be no assurance that the Purchaser will be able
to sell or dispose of such Series A Preferred purchased by the Purchaser
pursuant to this Agreement.
(b) The Series A Preferred to be acquired by the Purchaser
pursuant to this Agreement are being acquired for the Purchaser's own account
and without a view to the public distribution of such Series A Preferred or any
interest therein.
<PAGE>
18
(c) The Purchaser is an "Accredited Investor" as such term is
defined in Regulation D.
(d) The Purchaser has sufficient knowledge and experience in
financial and business matters so as to be capable of evaluating the merits and
risks of its investment in the Series A Preferred and the Purchaser is capable
of bearing the economic risks of such investment.
(e) The Purchaser has been furnished with and has carefully read a
copy of the Exhibits and Schedules to this Agreement and has been given the
opportunity to ask questions of, and receive answers from, the Issuer concerning
the Issuer and its Subsidiaries, the terms and conditions of the Series A
Preferred and other related matters.
(f) The Purchaser acknowledges that, in making its investment
decision with respect to the Series A Preferred, it has not relied on (i) any
drafts of the offering memorandum for the high yield offering contemplated by
the Issuer and an affiliate of the Purchaser received to date, (ii) the
1997-2001 Econophone business plan, (iii) Exhibit C hereto or (iv) the TELCO
Global Communications TGC business plan.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
SECTION 5.01. CONDITIONS TO THE PURCHASER'S OBLIGATIONS. The
obligation of the Purchaser to purchase the Series A Preferred to be purchased
by it hereunder is subject to the satisfaction, on or prior to the Closing Date,
of the following conditions:
(a) the representations and warranties of the Issuer
contained herein shall be true and correct in all material respects on
and as of the Closing Date;
(b) the Issuer shall have performed and complied in all
material respects with all covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to the
Closing Date;
(c) the Securityholders Agreement shall have been executed
and delivered by the parties thereto other than the Purchaser, the
conditions to effectiveness to the Securityholders Agreement of each
of the parties thereto other than the Purchaser shall have been
satisfied and, assuming due execution and delivery by the Purchaser,
the Securityholders Agreement shall be in full force and effect;
<PAGE>
19
(d) the Purchaser shall have received a certificate dated
the Closing Date signed by an executive officer of the Issuer to the
effect set forth in subsections (a), (b), (e), (g), (k) and (n) of
this Section 5.01;
(e) the Issuer shall have obtained any and all material
consents, waivers or permits necessary for the consummation of the
transactions contemplated hereby;
(f) the Purchaser's purchase of and payment for the Series A
Preferred shall not be prohibited by any applicable law, court order
or governmental regulation or any contract, agreement, document or
other instrument by which the Purchaser is bound;
(g) as of the date of the Closing, there shall not have
occurred and be continuing a Change of Control (as defined in the
Certificate of Amendment);
(h) the Purchaser shall have received, contemporaneously
with the Closing, a duly executed certificate representing the Series
A Preferred being purchased by the Purchaser pursuant hereto;
(i) the Purchaser shall have received an opinion from
Schulte, Roth & Zabel LLP, special counsel to the Issuer, dated the
Closing Date, substantially in the form of Exhibit B-1 hereto;
(j) the Purchaser shall have received opinions from U.S., U.K.
and Belgian regulatory counsel to the Issuer, dated the Closing Date,
substantially in the form of Exhibit B-2, B-3 and B-3, respectively,
hereto;
(k) to the knowledge of the Issuer, there shall not on the Closing
Date be any impediment to the contemplated relationship between the Issuer
and Telco Investments Limited, a United Kingdom corporation ("Telco U.K.");
(l) the Certificate of Amendment shall have been duly
adopted and filed with the Secretary of State of the State of New York
and shall be in full force and effect;
(m) the Purchaser shall have received all documents
reasonably requested by its counsel relating to the existence of the
Issuer, the corporate authority for entering into, and the validity
of, this Agreement and any other matters relevant hereto and thereto,
all in form and substance reasonably satisfactory to such counsel; and
<PAGE>
20
(n) all investments, loans and capital contributions by any Person
in the Issuer shall have been documented and such documentation shall have
been provided to the Purchaser.
SECTION 5.02. CONDITIONS TO THE ISSUER'S OBLIGATIONS. The
obligations of the Issuer to issue and sell the Series A Preferred to the
Purchaser pursuant to this Agreement are subject to the satisfaction, at or
prior to the Closing Date, of the following conditions:
(a) the representations and warranties of the Purchaser
contained herein shall be true and correct in all material respects on
and as of the Closing Date;
(b) the Purchaser shall have performed and complied in all
material respects with all agreements required by this Agreement to be
performed or complied with by the Purchaser on or prior to the Closing
Date;
(c) the Purchaser's purchase of and payment for the Series A
Preferred shall not be prohibited by any applicable law, court order
or governmental regulation or any contract, agreement, document or
other instrument by which the Purchaser is bound;
(d) the Securityholders Agreement shall have been executed and
delivered by the parties thereto other than the Issuer, the conditions to
effectiveness to the Securityholders Agreement of each of the parties
thereto other than the Issuer shall have been satisfied and, assuming due
execution and delivery by the Issuer, the Securityholders Agreement shall
be in full force and effect;
(e) the Purchaser shall have obtained any and all material
consents, waivers or permits necessary for the consummation of the
transactions contemplated hereby; and
(f) the Purchaser shall contemporaneously pay the Purchase Price
in full.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. NOTICES. All notices, requests and other
communications to either party hereunder shall be in writing (including, without
limitation, telecopier or similar writing) and shall be given to such party at
its address or telecopier number set forth on the
<PAGE>
21
signature page hereof, or such other address or telecopier number as such party
may hereinafter specify for the purpose to the party giving such notice. Each
such notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified on
the signature page hereof and the appropriate electronic confirmation is
received or, (ii) if given by mail, 72 hours after such communication is
deposited in the U.S. mails with first class postage prepaid, addressed as
aforesaid or, (iii) if given by any other means, when delivered at the address
specified on the signature page hereof.
SECTION 6.02. NO WAIVERS; AMENDMENTS. (a) No failure or delay on
the part of either party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
(b) Any provision of this Agreement may be amended or waived if,
but only if, such amendment or waiver is in writing and is signed by both
parties hereto.
SECTION 6.03. INDEMNIFICATION. (a) The Issuer hereby agrees to
indemnify and hold harmless the Purchaser and its Subsidiaries and each Person,
if any, who controls the Purchaser within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act, and their respective
directors, officers, agents and employees (each, an "Indemnified Person") from
and against and to pay any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) ("Damages") to which such Indemnified Person may
become subject as the result of any material breach of any representation or
warranty or covenant made or to be performed on the part of the Issuer under
this Agreement, the Securityholders Agreement or otherwise resulting from any
third-party action, claim or proceeding arising out of the matters or
transactions which are the subject of or contemplated by this Agreement or any
instrument or agreement referred to herein (including, without limitation, (i)
the execution, delivery and performance of this Agreement, the Securityholders
Agreement, the Certificate of Amendment and the Series A Preferred and (ii) any
use made or proposed to be made by the Issuer of the proceeds from the sale of
the Series A Preferred) and will reimburse any Indemnified Person for all
expenses (including, without limitation, reasonable counsel and expert fees) as
they are incurred by any such Indemnified Person in connection with any such
misrepresentation or breach of warranty or covenant or investigating, preparing
or defending any such action or proceeding, whether pending or threatened, and
whether or not such Indemnified Person is a party hereto. Notwithstanding the
foregoing, the Issuer will not be responsible for any Damages or expenses to the
extent that a court of competent jurisdiction shall have finally determined that
such Damages or expenses resulted primarily from such Indemnified Person's bad
faith or gross negligence or
<PAGE>
22
material breach of this Agreement or the Securityholders Agreement. The
agreement of the Issuer in this Section shall be in addition to any liability
the Issuer may otherwise have.
(b) The Purchaser hereby agrees to indemnify and hold harmless
the Issuer, its Subsidiaries and each Person, if any, who controls the Issuer
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, and their respective directors, officers, agents and employees
(each, an "Issuer Indemnified Person") from and to pay any Damages to which such
Issuer Indemnified Person may become subject as the result of any material
breach of any representation or warranty or covenant made or to be performed on
the part of the Purchaser under this Agreement or the Securityholders Agreement
and will reimburse any Issuer Indemnified Person for all expenses (including,
without limitation, reasonable counsel and expert fees) as they are incurred by
any such Issuer Indemnified Person in connection with any such misrepresentation
or breach of warranty or covenant. Notwithstanding the foregoing, the Purchaser
will not be responsible for any Damages or expenses to the extent that a court
of competent jurisdiction shall have finally determined that such Damages or
expenses resulted primarily from such Issuer Indemnified Person's bad faith or
gross negligence or material breach of this Agreement or the Securityholders
Agreement. The agreement of the Purchaser in this Section shall be in addition
to any liability the Purchaser may otherwise have.
SECTION 6.04. SURVIVAL OF PROVISIONS. The representations and
warranties, covenants and agreements contained in this Agreement shall survive
so long as any of the Series A Preferred remain outstanding.
SECTION 6.05. EXPENSES; DOCUMENTARY TAXES. Subject to a maximum
amount of $125,000, the Issuer shall upon submission of reasonably satisfactory
supporting documentation pay all reasonable out-of-pocket expenses of the
Purchaser, including, without limitation, fees and disbursements of the
Purchaser and its counsel, in connection with the preparation and negotiation of
this Agreement, the Securityholders Agreement, the Certificate of Amendment, the
physical securities and the transactions contemplated hereby and all matters
related thereto. In addition, the Issuer shall pay any and all stamp, transfer
and other similar taxes payable or determined to be payable in connection with
the execution and delivery of this Agreement, or the issuance of the Series A
Preferred or the shares of Common Stock issuable upon the conversion of the
Series A Preferred (other than any such taxes payable in connection with the
transfer of any outstanding securities and the issuance by the Issuer of new
certificates representing such securities in the name of the transferee at the
request of the transferor).
SECTION 6.06. SUCCESSORS AND ASSIGNS. The Purchaser may assign its
rights and obligations hereunder except to any direct or indirect competitor of
the Issuer or any of its Subsidiaries; provided that the Purchaser's rights
under Section 6.03 shall not be assignable except to Permitted Holders (as
defined in the Certificate of Amendment). This
<PAGE>
23
Agreement shall be binding upon the Issuer and the Purchaser and their
respective successors and assigns.
SECTION 6.07. NEW YORK LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York.
SECTION 6.08. COUNTERPARTS; EFFECTIVENESS. This Agreement may be
executed in any number of counterparts each of which shall be an original with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other hereto.
SECTION 6.09. ENTIRE AGREEMENT. This Agreement, the Securityholders
Agreement and the Certificate of Amendment, taken together as a whole,
constitute the entire agreement and understanding among the parties hereto with
respect to the subject matter hereof and supersede any and all prior agreements
and understandings, written or oral, relating to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
ECONOPHONE, INC.(1)
By: _________________________________________
Name:
Title:
PRINCES GATE INVESTORS II, L.P.(2)
By: _________________________________________
Name:
Title:
(1) Address: 60 Hudson Street, Room 319
New York, NY 10013
Telecopier Number: (212) 964-4771
(2) Address: 1585 Broadway, 36th Floor
New York, NY 10036
Attention: David R. Powers
Telecopier Number: (212) 761-0517
<PAGE>
DISCLOSURE SCHEDULES TO
SECURITIES PURCHASE AGREEMENT
DATED AS OF
NOVEMBER 1, 1996
BETWEEN
ECONOPHONE, INC.
AND
PRINCES GATE INVESTORS II, L.P.
NOTWITHSTANDING ANYTHING CONTAINED IN THE AGREEMENT TO THE CONTRARY, ANY
DISCLOSURE MADE ON ANY SCHEDULE TO THIS AGREEMENT SHALL BE DEEMED MADE ON ALL
OTHER SCHEDULES HEREOF TO WHICH SUCH DISCLOSURE MAY APPLY. NOTWITHSTANDING ANY
SPECIFIC CROSS-REFERENCE ON ANY SCHEDULE HEREOF, ALL DISCLOSURES ON EACH
SCHEDULE ARE HEREBY CROSS-REFERENCED IN EACH OTHER SCHEDULE.
<PAGE>
SCHEDULE 3.04(A)(i)
AUTHORIZED, ISSUED AND OUTSTANDING
CAPITAL STOCK
(1) 29,250,000 shares of voting Common Stock, par value $.0001 per share,
20,000,000 issued and outstanding.
(2) 500,000 shares of Non-Voting Common Stock, par value $.0001 per share,
none of which is issued and outstanding.
(3) 250,000 shares of Preferred Stock, par value $.01 per share, none of
which is issued and outstanding.
<PAGE>
SCHEDULE 3.04(A)(ii)
ARRANGEMENTS RELATING TO ISSUANCE OF CAPITAL STOCK
(1) Items 1, 3, 5, 7 and 8 on Schedule 3.21.
<PAGE>
SCHEDULE 3.04(A)(iii)
RIGHTS TO ACQUIRE CAPITAL STOCK
(1) 561,000 options designated for grant under the 1996 Flexible Incentive
Plan with an exercise price of $2.50 per share.
(2) Items 1, 3, 5, 7 and 8 on Schedule 3.21.
<PAGE>
SCHEDULE 3.04(B)
VOTING AGREEMENTS
(1) Stock Pledge Agreement, dated as of May 28, 1996, between Alfred West
and NTFC Capital Corporation. [Will be updated after November 1,
1996]
(2) Stock Pledge Agreement, dated as of May 28, 1996, between Steven West
and NTFC Capital Corporation. [Will be updated after November 1,
1996]
(3) Stock Pledge Agreement, dated as of May 28, 1996, between Gary Bondi
and NTFC Capital Corporation. [Will be updated after November 1,
1996]
(4) Letter Agreement, dated December 24, 1992, among Alfred West, Steven
West and Gary Bondi.
<PAGE>
SCHEDULE 3.05
SUBSIDIARIES
(1) American Telemedia, Inc. (Delaware).
(2) American Telemedia, Inc. (United Kingdom).
(3) Econophone Limited (Ireland).
(4) Econophone (Germany).
<PAGE>
SCHEDULE 3.06(i)
RELATED PARTY TRANSACTIONS
(1) $35,018 note, dated August 1, 1993, by Issuer in favor of Jack
Liebowitz that matures on August 1, 1998.
*(2) $200,000 note, dated December 9, 1992, by Issuer in favor of R. West
that matures on December 8, 1997.
*(3) $108,000 note, dated November 16, 1993, by Issuer in favor of R. West
that matures on November 15, 1998.
*(4) $100,000 non-interest bearing note, dated September 20, 1996, by
Issuer in favor of Gary Bondi that is payable on demand.
(5) $47,000 non-interest bearing loan to Alfred West, $10,000 of which was
borrowed in August 1996 and $37,000 of which was borrowed in October
1996.
<PAGE>
SCHEDULE 3.06(ii)
OWNERSHIP INTEREST IN COMPETITOR
OR AFFILIATE OF ISSUER
(1) Alan Levy has an ownership interest in Viatel, Inc. which may exceed
1%. Viatel, Inc. has a business relationship with, and is also a
competitor of, the Issuer.
(2) E-Gram, Inc., a related company of which Alfred West owns 100%.
<PAGE>
SCHEDULE 3.07
REGISTRATION RIGHTS
(1) Pursuant to Alan Levy's employment agreement dated as of August 1,
1996, as amended, the Issuer will be required to register under Form
S-8, within thirty days after any initial public offering of the
issuer, shares to be issued upon the exercise of Mr. Levy's options.
<PAGE>
SCHEDULE 3.18
ABSENCE OF CERTAIN CHANGES
*(1) $2,896,812.78 Promissory Note, dated October 22, 1996, by Issuer in
favor of IDT Corporation.
*(2) $1,877,022.07 Promissory Note, dated October 4, 1996, by Issuer in
favor Sprint Communications Company, L.P.
*(3) $250,000 Promissory Note, dated October 31, 1994, by Issuer in favor
of Israel Discount Bank, originating from the existing $300,000 line
of credit from Israel Discount Bank.
*(4) $100,000 non-interest bearing note, dated September 20, 1996, by
Issuer in favor of Gary Bondi that is payable on demand.
(5) $47,000 non-interest bearing loan to Alfred West, $10,000 of which was
borrowed in August 1996 and $37,000 of which was borrowed in October
1996.
<PAGE>
SCHEDULE 3.19
LIENS
1. Lien of Israel Discount Bank of New York on all of Issuer's property,
equipment, inventory, fixtures, goods, products of collateral and
accounts evidenced by financing statements filed at the Secretary of
State's Office and the City Register's Offices of New York and Kings
Counties on September 9, 1993, September 28, 1993 and September 10,
1993, respectively.
2. Lien of Primex Leasing Corporation on the Issuer's Quikcard Thermal
Transfer Printer evidenced by financing statements filed at the
Secretary of State's office and the City Register's Office of Kings
County on January 26, 1995 and January 18, 1995, respectively.
3. Lien of Sprint Communications L.P. on all accounts receivable and
proceeds of Issuer evidenced by a financing statement filed at the
Secretary of State's Office on January 12, 1993.
4. Lien of Master Lease Division of Tokai on Issuer's lease of computer
equipment evidenced by financing statements filed at the Secretary of
State's Office and the City Register's office of New York County on
April 1, 1996 and April 9, 1996, respectively.
5. Lien of FINOVA Capital Corporation on certain office equipment leased
by Issuer evidenced by financing statements filed at the Secretary of
State's Office and the City Register's Office of Kings County on
January 24, 1996 and January 26, 1996, respectively.
6. Lien of Canon Financial Services, Inc. on Issuer's lease of office
equipment evidenced by a financing statement filed at the Secretary of
State's Office and the City Register's Office of Kings County on March
20, 1996 and March 21, 1996, respectively.
7. Lien of Pitney Bowes Credit Corporation on Issuer's lease of
office-related equipment evidenced by a financing statement filed at
the Secretary of State's office on January 16, 1996.
8. Lien of NTFC Capital Corporation on Issuer's Collateral as defined in
Section 3.01 of the NTFC Capital Corporation Equipment Loan and
Security Agreement, dated May 28, 1996, between Issuer and NTFC
Capital Corporation.
9. Lien of NTFC Capital Corporation on Issuer's present and future
rights, titles and interests in, under, to or arising from the Basic
Supply Agreement between Issuer and Northern Telecom, Inc.
10. Lien of IDT Corporation on Issuer's Collateral pursuant to Promissory
Note, dated October 22, 1996.
<PAGE>
SCHEDULE 3.21
EMPLOYEES; EMPLOYEE COMPENSATION
1. Employment Agreement, dated August 1, 1996, between Issuer and Alan
Levy, as amended October 31, 1996.
2. Incentive Stock Option Agreement, dated October 31, 1996, between
Issuer and Alan Levy.
3. 1996 Flexible Incentive Plan.
4. Letter Agreement, dated October 3, 1996, between Issuer and Patrick
Attallah.
5. Letter Agreement, dated October 4, 1996, between Issuer and Jeremy
Kagan.
6. Letter Agreement dated December 24, 1996, among Alfred West, Steven
West and Gary Bondi.
7. Consulting Agreement, dated the last day of January 31, 1996 between
Issuer and DLM Communications.
8. Letter Agreement, dated September 13, 1996, between Issuer and Ira
Riesenberg.
<PAGE>
SCHEDULE 3.22
MATERIAL LIABILITIES
1. $2,896,812.78 Promissory Note, dated October 22, 1996, by Issuer in
favor of IDT Corporation.
2. $1,877,022.07 Promissory Note, dated October 4, 1996, by Issuer in
favor Sprint Communications Company, L.P.
3. $250,000 Promissory Note, dated October 31, 1994, by Issuer in favor
of Israel Discount Bank, originating from the existing $300,000 line
of credit from Israel Discount Bank.
4. $100,000 non-interest bearing note, dated September 20, 1996, by
Issuer in favor of Gary Bondi that is payable on demand.
5. $47,000 non-interest bearing loan to Alfred West, $10,000 of which was
borrowed in August 1996 and $37,000 of which was borrowed in October
1996.
<PAGE>
SCHEDULE 3.23
MATERIAL CONTRACTS
(1) Stock Pledge Agreement, dated May 28, 1996, between Alfred West and
NTFC Capital Corporation.
(2) Stock Pledge Agreement, dated May 28, 1996, between Steven West and
NTFC Capital Corporation.
(3) Stock Pledge Agreement, dated May 28, 1996, between Gary Bondi and
NTFC Capital Corporation.
*(4) NTFC Equipment Loan and Security Agreement, dated May 28, 1996,
between Issuer and NTFC Capital Corporation.
(5) Collateral Assignment of Contract, dated May 28, 1996, between Issuer
and NTFC Capital Corporation.
(6) Sublease, dated February 1, 1996, between Issuer and Amex, Inc.
*(7) Lease, dated May, 1996, between Eklam Realty Corp. and Issuer.
*(8) Lease, dated April 15, 1993, between Issuer and Hudson Telegraph
Associates.
*(9) Amendment of lease, dated June 28, 1996, between Issuer and Hudson
Telegraph Associates.
(10) Lease, dated March 8, 1996, between Issuer and R&S Leasing.
*(11) Lease, dated August 14, 1996, between Issuer and One Wilshire Arcade
Imperial, Ltd.
*(12) Employment Agreement, dated August 1, 1996, between Issuer and Alan
Levy, as amended October 31, 1996.
(13) Debit Card Resale Arrangement, between Issuer and Cardlink Services.
[Unexecuted contract, yet parties are operating according to draft
agreement that was supplied to Purchaser]
(14) Share Acquisition Agreement, dated February 5, 1996, between Issuer
and Mrs. Rachele Reichmann.
(15) Authorized Representative Agreement, dated March 17, 1996, between
Issuer and National Business Society Inc.
<PAGE>
(16) Carrier Transport Switched Services Agreement, dated June 2, 1994,
between Issuer and Sprint Communications Company L.P.
(17) Carrier Services SS7 Interconnection Agreement, dated October 21,
1994, between Issuer and Sprint Communications Company L.P.
(18) IDT/Econophone Agreement in regards to Debmar Project, dated June 27,
1996, between Issuer and IDT. [Terminated by letter agreement dated
October 22, 1996].
*(19) $2,896,812.78 Promissory Note, dated October 22, 1996, by Issuer in
favor of IDT Corporation.
(20) Security Agreement dated October 22, 1996, between Issuer and IDT
Corporation
*(21) Indefeasible Right of Use Agreement, dated December 15, 1994 ("PTAT-1
Agreement"), between Issuer and Private Trans-Atlantic
Telecommunications System, Inc., as amended January 18, 1995 and
December 27, 1995.
*(22) Indefeasible Right of Use Agreement, dated December 15, 1994
("Backhaul Agreement") between Issuer and Private Trans-Atlantic
Telecommunications System, Inc., as amended January 18, 1995 and
December 27, 1995.
*(23) Fiber Restoration Contract, dated April 1, 1996, between Issuer and
Private Trans-Atlantic Telecommunications System, Inc.
*(24) Interconnect Agreement, dated December 14, 1995, among Issuer, Colt
Telecommunications and Telelink Communications (USA) Limited.
(25) Agreement, dated February 27, 1996, between Issuer and Gerard Klauer
Mattison & Co.
*(26) Digital Services Agreement, dated March 17, 1996, between Issuer and
Worldcom Network Services, Inc. d/b/a Wiltel.
*(27) Reseller Agreement, dated March 27, 1996, between Issuer and Wiltel,
Inc.
*(28) Telecommunications Services Agreement, dated March 27, 1996, between
Issuer and Worldcom Network Services, Inc. d/b/a/ Wiltel.
(29) Carrier Service Agreement, dated June 16, 1996, between Issuer and
Viatel, Inc.
(30) Carrier Service Agreement, dated September 25, 1995, between Issuer
and Star Vending Inc. as amended by Rate Amendments.
*(31) Switched Services Agreement, dated July 2, 1996, between Issuer and
NACS Communications, Inc. d/b/a Texcom U.S.A.
(32) Carrier Service Agreement, dated June 28, 1996, between Issuer and
Startec, Inc.
-2-
<PAGE>
(33) Carrier Services Agreement, dated April 9, 1996, between Issuer and
Startec, Inc. as amended by Amendment 1, dated July 24, 1996.
(34) Telephone Services Agreement, dated June 23, 1996, between Issuer and
Alliance Telecommunications International, Ltd. with Addendum, dated
August 8, 1996.
(35) Carrier Terminating Switched Services Agreement, dated July 10, 1996,
between Issuer and Qwest Communications Corporation.
(36) Telecommunications Services Agreement, dated July 1, 1996, between
Issuer and Qwest Communications Corporation.
(37) SSI Service Agreement, dated September 5, 1996, between Issuer and
Switch Services, Inc.
(38) SSI Service Agreement, dated June 12, 1995, between Issuer and Switch
Services, Inc.
*(39) Telecommunications Services Agreement, dated March 18, 1996, between
Issuer and MFS Intelnet, Inc.
(40) International Carrier Voice Service Agreement, dated July 22, 1996,
between Issuer and Facilicom International, L.L.C.
(41) Carrier Agreement, dated July 7, 1995, between Issuer and Cherry
Communications Incorporated, amended by second amendment, dated April
1, 1996.
(42) Carrier Service Agreement, dated April 1, 1996, between Issuer and
Comtech International, Inc.
(43) Com Tech International Service Agreement, dated June 7, 1996, between
Issuer and ComTech International Corporation.
(44) Long Distance Service Agreement, dated March 21, 1996, between Issuer
and ACC Long Distance Corp.
*(45) Basic Supply Agreement, dated August 11, 1995, between Issuer and
Northern Telecom Inc.
(46) Agreement, dated June 5, 1996, between Issuer and Joshua V. Meisels.
(47) Agreement, dated July 25, 1995, between Issuer and Frontier
Communications International, Inc.
*(48) Employment Agreement, dated August 1, 1996, between Issuer and Alan
Levy, as amended October 31, 1996.
*(49) Agreement, dated August 29, 1996, between Issuer and Belgacom.
-3-
<PAGE>
*(50) Consulting Agreement, dated the last day of January, 1996, between
Issuer and DLM Communications.
(51) Letter Agreement, dated October 3, 1996, between Issuer and Patrick
Atallah.
(52) Letter Agreement, dated October 4, 1996, between Issuer and Jeremy
Kagan.
(53) Letter Agreement, dated December 24, 1994, among Alfred West, Steven
West and Gary Bondi.
(54) Letter Agreement, dated September 13, 1996, between Issuer and Ira
Riesenberg.
(55) Unilateral Confidentiality Agreement, dated November 8, 1995, between
Issuer and Colt Telecommunications Limited.
*(56) $350,000 Installment Note by Issuer in favor of Israel Discount Bank
of New York.
*(57) $300,000 line of credit made by Israel Discount Bank of New York in
favor of Issuer.
*(58) $1,877,022.07 Promissory Note, dated October 4, 1996, by Issuer in
favor of Sprint Communications Company, L.P.
-4-
<PAGE>
SCHEDULE 3.24
INTELLECTUAL PROPERTY CLAIMS
NONE
<PAGE>
SCHEDULE 3.27
SHAREHOLDER LOANS
*(1) $100,000 non-interest bearing note, dated September 20, 1996, by
Issuer in favor of Gary Bondi that is payable on demand.
(2) $47,000 non-interest bearing loan to Alfred West, $10,000 of which was
borrowed in August 1996 and $37,000 of which was borrowed in October
1996.
<PAGE>
EXHIBIT A
Form of Security Holders Agreement
(See Exhibit 4.1)
<PAGE>
Exhibit B-1
November 1, 1996
Princes Gate Investors II, L.P.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Re: ECONOPHONE, INC.
Dear Ladies and Gentlemen:
We have acted as special counsel to Econophone, Inc., a New York
corporation (the "Issuer"), in connection with the Securities Purchase
Agreement, dated as of November 1, 1996 (the "Securities Purchase Agreement"),
between the Issuer and the Purchaser and the transactions contemplated thereby.
This opinion is being delivered to you pursuant to Section 5.01(i) of the
Securities Purchase Agreement. All capitalized terms used and not defined
herein have the same respective meanings herein as set forth in the Securities
Purchase Agreement.
In connection with this opinion, we have examined executed copies of
each of the Securities Purchase Agreement and the Securityholders Agreement,
dated as of November 1, 1996, among the Issuer, Mr. Alfred West and the
Purchaser (the "Securityholders Agreement"), and a copy of the Certificate of
Amendment of the Certificate of Incorporation of the Issuer (the "Certificate of
Amendment") submitted for filing with the Secretary of State of New York on the
date hereof (collectively, the "Transaction Documents"). We have also examined
originals, telecopies or copies, certified or otherwise identified to our
satisfaction, of such other agreements, documents, instruments and such
certificates of public officials and officers of the Issuer as we have deemed
necessary as a basis for our opinions set forth herein. In this regard, we have
relied, without independent investigation, as to factual matters on the
representations and warranties contained in the Transaction Documents and on
certificates of public officials and of officers of the Issuer. In addition, we
have assumed the legal capacity of all natural persons signing or delivering any
instrument, the genuineness of signatures on original documents of all persons,
the authority of all persons signing the Transaction Documents on behalf of the
parties thereto other than officers of the Issuer, the authenticity of all
documents submitted to us as originals and the conformity to the original of all
copies submitted to us as telecopies, photocopies or conformed copies. In
rendering the opinion set forth in paragraph 3 hereof, we have assumed that the
parties to each Transaction Document other than the Issuer have the power,
corporate or other, to enter into and perform all actions thereunder, that each
such party has duly authorized by all requisite action, corporate or other,
execution and delivery of such
<PAGE>
Princes Gate Investors II, L.P.
November 1, 1996
Page 2
Transaction Document, that such Transaction Document has been duly executed and
delivered by such party and that such Transaction Document constitutes a legal,
valid and binding agreement of the parties to such Transaction Document other
than the Issuer, enforceable against such parties in accordance with its
respective terms. In rendering the opinions set forth in paragraphs 2 and 4
hereof, we have assumed that all filing fees and taxes required to be paid in
connection with the filing of the Certificate of Amendment have been paid. Any
reference in any opinion herein to "our knowledge" and any similar phrase means
the actual knowledge of the attorneys of this Firm with primary responsibility
for the review and negotiation of the Transaction Documents on behalf of the
Issuer.
Based upon and subject to the foregoing and upon such legal
considerations as we deem relevant, we are of the opinion that:
1. The Issuer is a corporation duly incorporated and, as of October
24, 1996, subsisting under the laws of the State of New York and has all
corporate powers required to carry on its business as described on Exhibit A.
2. The execution, delivery and performance by the Issuer of its
obligations under each of the Securities Purchase Agreement and the
Securityholders Agreement and the issuance and delivery by the Issuer of the
Series A Preferred and the performance by the Issuer of its obligations under
Article Fourth of the Certificate of Amendment are within the Issuer's corporate
powers, have been duly authorized by all necessary corporate action, require no
action by or in respect of, or filing with, any governmental body, agency or
official under any statute or regulation of general applicability known to us to
be applicable to the Issuer (other than the filing of the Certificate of
Amendment with the Secretary of State of the State of New York or as may be
required under federal or state securities laws or by any securities regulatory
authority or securities exchange or inter-dealer quotation system in connection
with the registration obligations of the Issuer under the Securityholders
Agreement) and do not (i) contravene any statute or regulation of general
applicability known to us to be applicable to the Issuer, or any judgment,
injunction, order or decree known to us of any court that names the Issuer and
is specifically directed to the Issuer, or to any of the property of the Issuer,
(ii) contravene the Charter or Bylaws, (iii) require any consent, approval or
other action by any other Person under any contract listed on Exhibit B hereto
(each, a "Contract") that has not been obtained or constitute a default under or
contravene any Contract or (iv) result in the creation or imposition of any Lien
on any material asset of the Issuer under any Contract.
3. Each of the Securities Purchase Agreement and the Securityholders
Agreement constitutes a valid and binding agreement of the Issuer, except as the
enforceability thereof may be limited by the effect of applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws
now or hereafter in effect relating to or affecting creditors' rights or
remedies generally, and general principles of equity, including, without
limitation, principles of reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in equity or at law).
<PAGE>
Princes Gate Investors II, L.P.
November 1, 1996
Page 3
We express no opinion regarding the validity, binding effect or
enforceability of any provision in any Transaction Document relating to
indemnification or contribution.
4. The Series A Preferred being purchased by the Purchaser under the
Securities Purchase Agreement have been duly authorized and, when issued to the
Purchaser in accordance with the Securities Purchase Agreement, will be validly
issued, fully paid and non-assessable. A total of 4,012,000 shares of Class A
Common Stock have been duly authorized and validly reserved for issuance upon
conversion of the Series A Preferred and, when issued in accordance with Article
Fourth of the Certificate of Amendment, will be validly issued, fully paid and
nonassessable. The Series A Preferred will be entitled to the benefits of
Article Fourth of the Certificate of Amendment.
5. To our knowledge, based solely on the representations of the
Issuer, there is no action, suit or proceeding pending or threatened in writing
against or affecting the Issuer before any court or arbitrator or any
governmental body, agency or official in which there is a possibility of an
adverse decision that could result in any material change in the current equity
ownership of the Issuer, or which in any manner draws into question the validity
of the Securities Purchase Agreement, the Securityholders Agreement, Article
Fourth of the Certificate of Amendment or any of the transactions contemplated
thereby.
6. The Issuer is not, and immediately after giving effect to the
sale and issuance of the Series A Preferred, will not be, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
7. Assuming the accuracy of the representations set forth in Article
IV of the Securities Purchase Agreement and the certificates attached hereto
from the Issuer and Morgan Stanley & Co. Incorporated, the offer, sale and
issuance of the Series A Preferred to the Purchaser at the Closing as
contemplated by the Securities Purchase Agreement are exempt from the
registration requirements of the Securities Act of 1933, as amended.
We are attorneys admitted to practice in the State of New York, and
the opinions expressed above are limited to the laws of the State of New York
and the Federal laws of the United States, and we do not express any opinion
herein concerning any other law. We express no opinion with respect to any
regulatory matters relating to the business of the Issuer and, in particular,
matters governed by or related to (i) the U.S. Communications Act of 1934, as
amended, or the rules, regulations or policies of the Federal Communications
Commission and (ii) the public utilities laws of the various states of the
United States of America, or the rules, regulations or policies of any state
public utilities regulatory authorities.
The opinions expressed herein have been rendered solely for your
benefit in connection with the transactions contemplated by the Securities
Purchase Agreement and may not be relied upon by you in any other manner or by
any other Person in any manner or for any purpose and may not be communicated or
published by you to any other Person for any purpose
<PAGE>
Princes Gate Investors II, L.P.
November 1, 1996
Page 4
without our prior written approval in each instance. We do not assume any
continuing obligation or responsibility to advise you of any changes in law, or
any change of circumstances of which we become aware, which may affect any of
the opinions contained herein or to update, revise or supplement any such
opinion herein for any reason whatsoever.
Very truly yours,
<PAGE>
EXHIBIT A
Econophone provides discount long distance telecommunications services
to small- and medium-sized businesses and high use residential customers in
selected European and North American markets. Econophone offers its customers
home- and office-based service, calling card services that can be used from over
40 countries and debit card services that can be used from eight countries.
With its services, Econophone offers its customers a variety of value added
features, most of which are not typically offered by the state-owned
telecommunications organizations (TOs) in Europe, including, speed dialing,
abbreviated dialing, redial and detailed billing, and intends to introduce
sophisticated voice mail, voice recognition and e-mail services for its
customers in 1997. Econophone's principal markets are the United Kingdom,
Belgium and the United States and, to a lesser extent, France and other European
markets. Econophone markets its services primarily to small- and medium-sized
businesses with between $150 and $4,000 per month of long distance calling, with
a significant international calling component, and to ethnic communities and
expatriates and small businesses in the jewelry, financial services and shipping
industries.
Econophone's first services were calling card services, which were
sold in Belgium. Econophone expanded into debit card services and home- and
office-based service, and expanded its sales into the United States, the United
Kingdom and, to a lesser extent, other Western European markets. Econophone has
concentrated its limited marketing resources on small businesses in selected
target industries and ethnic communities, which it believes to be underserved
market segments. However, Econophone has experienced substantial demand for its
services among other small- to medium-sized business and high-end residential
users in a number of countries.
Historically, Econophone has sold its services primarily through
independent sales representatives. In the United Kingdom and each of the
European countries in which Econophone installs a node, it intends to market its
services through a combination of direct sales organizations, which will consist
of Econophone employees, and independent sales representatives. Business users
will be sold services by the direct sales organizations, which management
believes will have a higher sell rate to these customers than independent sales
representatives due to the higher degree of technical knowledge required to make
such sales. The direct sales organizations also will manage local marketing
channels.
Econophone is a New York corporation. Its principal executive offices
are located at 60 Hudson Street, New York, New York 10013. Its telephone number
is (212) 444-6991.
<PAGE>
EXHIBIT B
(1) $2,896,812.78 Promissory Note, dated October 22, 1996, by Issuer in favor
of IDT Corporation.
(2) $1,877,022.07 Promissory Note, dated October 4, 1996, by Issuer in favor
Sprint Communications Company, L.P.
(3) Employment Agreement, dated August 1, 1996, between Issuer and Alan Levy,
as amended October 31, 1996.
(4) NTFC Equipment Loan and Security Agreement, dated May 28, 1996, between
Issuer and NTFC Capital Corporation.
<PAGE>
Exhibit B-2
November 1, 1996
Princes Gate Investors II, L.P.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Re: Econophone, Inc.
Dear Ladies and Gentlemen:
I have acted as special counsel to Econophone, Inc., a New York corporation
(the ''Issuer''), in connection with the Securities Purchase Agreement, dated as
of October 31, 1996 (the "Securities Purchase Agreement"), between the Issuer
and the Purchaser and the transactions contemplated thereby. This opinion is
being delivered to you pursuant to Section 5.01(j) of the Securities Purchase
Agreement. All capitalized terms used and not defined herein have the same
respective meanings herein as set forth in the Securities Purchase Agreement.
I am not general counsel to the Issuer and was not involved in the
development or negotiation of the Securities Purchase Agreement. The opinions
expressed herein, accordingly, are intended to encompass only matters of the
Issuer directly pertaining to the State regulatory authorities which regulate
the Issuer's provision of resold intrastate interexchange telecommunications
services (the "State Regulatory Authorities"). I offer no opinions as to any
other federal or state laws.
In connection with this opinion, I have reviewed my files for the State
Regulatory Authorities ("Files"). Whenever my opinions herein are qualified "to
my knowledge", it refers to my knowledge with regard to State Regulatory
Authorities matters and is intended to indicate that during the course of my
representation of the Issuer, no information has come to my attention that would
give me actual knowledge of the existence or non-existence of facts to the
contrary. I have not undertaken any independent investigation to determine the
existence or non-existence of such facts, other than my review of the Files. No
inferences as to my knowledge of the existence or non-existence of facts, other
than facts which I have obtained actual knowledge, should be drawn from the fact
of my representation of the Issuer.
I am of the opinion that:
1. To my knowledge, the Issuer has made all reports and filings, and paid
all fees, required by the State Regulatory Authorities to provide resold
intrastate interexchange telecommunications service, pursuant to certification,
registration, notification, tariff, or on an unregulated basis in the following
states: Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia,
Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine,
<PAGE>
Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oregon,
Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia,
Washington, West Virginia, Wisconsin and Wyoming.
2. To my knowledge, the Issuer has applications and/or tariffs pending
before the State Regulatory Authorities to provide resold intrastate
interexchange telecommunications service in the following states: Alaska,
Connecticut, Delaware, Nevada, New Hampshire, New Mexico, Oklahoma, South
Carolina, and Vermont.
3. To my knowledge, the Issuer has not received any notice from the State
Regulatory Authorities of proceedings relating to the revocation or modification
of any such certificates, orders, authorizations, consents or approvals, or the
qualification or rejection of any such filing or registration, the effect of
which, singly or in the aggregate, would have a material adverse effect on the
prospects, condition, financial or otherwise, or in the earnings, business or
operations of the Issuer, taken as a whole.
The opinions expressed herein have been rendered solely for your benefit in
connection with the transactions contemplated by the Securities Purchase
Agreement and may not be relied upon by you in any other manner or by any other
Person in any manner or for any purpose and may not be communicated or published
by you to any other Person for any purpose without my prior written approval in
each instance. The opinions expressed herein are given as of the date hereof,
and I disclaim any undertaking or obligation to advise you of any changes in
law, or any change of circumstances of which I become aware, which may affect
any of the opinions contained herein or to update, revise or supplement any such
opinion herein for any reason whatsoever.
Very truly yours,
Lance J.M. Steinhart
Attorney for Econophone, Inc.
cc: Mr. Alfred West
LJS/lmb
<PAGE>
October 31, 1996
James S. Scott, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Re: Econophone, Inc.
Dear Mr. Scott:
We have acted as regulatory counsel for Econophone, Inc. ("Econophone")
before the Federal Communications Commission ("FCC").
In furnishing our opinion we have considered the Communications Act of
1934, as amended, and the rules and regulations promulgated by the Federal
Communications Commission (the "FCC") thereunder (collectively, the
"Communications Act") as they relate to the regulation of Econophone as a
provider of telecommunications services within the jurisdiction of the FCC. We
have assumed without independent investigation (i) the genuineness of all
signatures on records, certificates, instruments, agreements and documents
submitted to us; (ii) the legal capacity of all individuals who have executed
any of the documents referred to above; (iii) the authenticity of all documents
submitted to us as originals; (iv) the conformity to originals of all documents
submitted to us as certified, photostatic, reproduced or conformed copies; and
(v) the authenticity of the originals of such latter documents.
Certain statements set forth in the numbered paragraphs below are stated to
be "to our knowledge." In basing our opinion and other matters set forth herein
on "to our knowledge," these words signify that, in the course of our
representation of Econophone in matters with respect to which we have been
engaged as counsel, no information has come to our attention that would give us
actual knowledge or actual notice that any such opinions or other matters are
not accurate or that any of the foregoing documents, certificates and
information on which we have relied are not accurate and complete. The
statement "to our knowledge" refers to the following individuals: Robert E.
Conn and Mary Ellen D. Lench.
1. Econophone has received all necessary certificates, permits, licenses,
authorizations, consents and approvals (collectively, "authorizations") from the
FCC to conduct its business as a common carrier for international and interstate
telecommunications services within the FCC's jurisdiction. To our knowledge,
Econophone has not received any notice of proceedings relating to the revocation
or modification of any such authorizations, the effect of which, singly or in
the aggregate would have a material adverse effect on the business of
Econophone. We have not received any notice of such proceedings directly from
the FCC as
<PAGE>
James S. Scott, Esq.
October 31, 1996
Page 2
Econophone's counsel. To our knowledge, Econophone has made all material
reports and filings with the FCC and has paid all material fees, as required by
the FCC.
2. To our knowledge, Econophone is conducting its business in accordance
with the FCC authorizations mentioned above in paragraph 1. To our knowledge,
Econophone is not in violation of, or in default under, the Communications Act,
the effect of which, singly or in the aggregate, would have a material adverse
effect on the business of Econophone.
3. We have not acted as regulatory counsel before the FCC for any
subsidiaries of Econophone. We have obtained FCC authority for American
Telemedia, Inc. ("ATI"), an affiliate of Econophone, to operate as an
international common carrier for the resale of international switched voice
services. To our knowledge, ATI has never been activated to provide the
services authorized by the FCC.
This opinion is rendered only for the benefit of your client, Morgan
Stanley & Co. and its successors and assigns, and may not be relied upon by
other parties without our prior written consent.
Sincerely,
Robert E. Conn
<PAGE>
October 31, 1996
Princes Gate Investors II, L.P.
1585 Broadway
New York, New York 10036
Dear Ladies and Gentlemen:
This letter is furnished to you pursuant to Section 3.17 of the Securities
Purchase Agreement (the "Purchase Agreement") between you and EconoPhone, Inc.
(the "Company") relating to the sale by the Company and the purchase by you of
140,000 shares of the Company's Redeemable Convertible Preferred Stock (the
"Shares").
This firm has acted only as special telecommunications counsel to the
Company and its subsidiary American Telemedia Ltd. ("ATL"). In such capacity,
we have been retained by the Company to review certain authorizations to provide
telecommunications services in the United Kingdom ("UK"). We have not been
retained or engaged by the Company to perform, nor have we performed, any review
of any information in the Purchase Agreement. Capitalized terms used herein
which are defined in the Purchase Agreement shall have the meanings set forth in
the Purchase Agreement unless otherwise defined herein.
For purposes of this opinion letter, we have made such examination of the
Telecommunication Act 1984 of the UK as we have deemed necessary for this
opinion letter. We have also examined copies of the following:
1. Draft, dated October 30, 1996, of the Purchase Agreement.
2. The license issued to ATL by the UK Secretary of State for Trade and
Industry, as signed by the UK Department of Trade and Industry
("DTI"), dated 9 October 1996 (the "ISR License") relating to the
provision of international simple resale service.
3. The application for the ISR License submitted by ATL on 15 August 1996
(the "Application").
4. The publicly available records of the Office of Telecommunications
("OFTEL") located in London, UK, as more fully described below.
5. A certificate of the President of the Company, dated the date hereof,
as to certain facts relating to the Company.
<PAGE>
Princes Gate Investors II, L.P.
October 31, 1996
Page 2
We have not, except as specifically identified above, made any independent
review or investigation of factual or other matters, including the organization,
existence, good standing, assets, business or affairs of the Company or ATL. We
have assumed the authenticity, accuracy and completeness, including the
conformity with the authentic originals of documents submitted to us as
reproduced copies, of the foregoing documents, certification and statements of
fact, on which we are relying, and have made no independent investigations
thereof. Further, we state that we have not independently verified nor do we
take any responsibility for nor are we addressing in any way any statements of
fact, any statements concerning foreign or English law, any legal conclusions or
any statements of belief, in each case attributable to the Company. In
rendering the following opinions we have relied as to factual matters, without
independent investigation, upon the representations, warranties and
certifications made by the Company or ATL in or pursuant to the Purchase
Agreement, in the Application and in the certificate identified in item 5 above.
This opinion letter is given, and all statements herein are made, in the context
of the foregoing.
We have also assumed and relied, without independent inquiry or
verification by us, upon the accuracy and completeness of all information
located in the publicly available files of OFTEL in London, UK, which we
examined on October 30, 1996. We have not examined or investigated the records
which may be available in any other office or branch of OFTEL or DTI.
Accordingly, we express no opinion regarding the completeness of the OFTEL files
at the time we reviewed them or of the contents of any files maintained by DTI.
Further, there may be records of matters pending at OFTEL that were not
available for inspection by the public as a matter of law or of administrative
practice and that we did not examine.
Pursuant to the Telecommunication Act 1984, DTI has issued a class license,
the Telecommunication Services License ("TSL"), which permits all persons except
any person in respect of whom the DTI has revoked the TSL to provide certain
telecommunications services without the need for an individual application. We
have not made any independent review of the business conducted by the Company or
by ATL to determine whether it is operating under the TSL or, in the event the
Company or ATL is operating under the TSL, whether it is operating, in
compliance with the conditions established by the TSL.
As used in this opinion letter, the phrase "to our knowledge" means the
actual knowledge (that is, the conscious awareness of facts or other
information) of lawyers in the firm who have given substantive legal attention
to representation of the Company and ATL in connection with the Agreement.
This opinion letter is based as to matters of English law solely on
applicable provisions of the Telecommunication Act 1984 and we express no
opinion as to any other directives, decisions, orders, statutory instruments,
laws, statutes, ordinances, rules or regulations (such as European Union,
national or local antitrust or unfair competition directives, decisions, orders,
statutory instruments, laws, statutes, ordinances, rules or regulations; or tax
directives, decisions, orders, statutory instruments, laws, statutes,
ordinances, rules or regulations).
<PAGE>
Princes Gate Investors II, L.P.
October 31, 1996
Page 3
Based upon, subject to and limited by the foregoing, we are of the opinion
that:
(a) ATL is the holder of the ISR License. The ISR License has been issued
by DTI under the Telecommunication Act 1984 to permit the holder to
provide telecommunication services by means of Applicable Systems,
defined in schedule 1 hereto, in the UK, except for certain services
related to the transmission of television broadcasting.
(b) To our knowledge, there is no proceeding or other administrative
action pending or threatened before OFTEL or DTI against the Company
or ATL to revoke, cancel, rescind, modify or refuse to renew in the
ordinary course the ISR License.
(c) The DTI has taken the position that no application, filing or
registration with, or approval, authorization, consent, adjudication
or order of, OFTEL or DTI is required under the Telecommunication Act
1984 for the provision of pre-paid or debit cards used for the advance
payment of local or international telephone calls.
(d) To our knowledge, there is no pending or existing notice of
proceedings relating to revocation or modification of the TSL with
respect to the Company or ATL.
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 your purchase of the Shares
under the Purchase Agreement on the date of this letter, and should not be
quoted in whole or in part or otherwise be referred to, nor be filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
Very truly yours,
HOGAN & HARTSON L.L.P.
Gerald E. Oberst, Jr.
Partner
Colin W. Craik
Solicitor Admitted in England and Wales
<PAGE>
Princes Gate Investors II, L.P.
October 31, 1996
Page 4
Schedule I to Opinion Letter re EconoPhone, Inc.
THE APPLICABLE SYSTEMS
1. The Applicable Systems are telecommunication systems of every description
within the United Kingdom provided that each such system satisfies each of the
following conditions:
(a) all of the Apparatus comprised in the systems:
(i) is situated within a single set of premises; or
(ii) if not so situated, consists of Apparatus situated in different
sets of premises together with any Apparatus run exclusively
for the purpose of enabling messages to be conveyed between
those premises, where none of the sets of premises in question
is more than 200 metres in lateral distance from any other; or
(iii) is situated within a single building; or
(iv) is run by the Licensee and is situated on premises which the
Secretary [of State for Trade and Industry] has specified for
the time being for the purposes of this Annex and are described
in a list kept for the purpose by the Director and made
available by him for inspection by the general public; and
(b) none of the Apparatus consists of Wireless Telegraphy Apparatus
designed or adapted for the purpose of transmitting or receiving
messages to or from Apparatus which is designed or adapted to be
capable of use whilst in motion.
<PAGE>
Exhibit B-3
October 31, 1996
Princes Gate Investors II, L.P.
1585 Broadway
New York, New York 10036
Dear Ladies and Gentlemen:
This letter is furnished to you pursuant to Section 3.17 of the Securities
Purchase Agreement (the "Purchase Agreement") between you and EconoPhone, Inc.
(the "Company") relating to the sale by the Company and the purchase by you of
140,000 shares of the Company's Redeemable Convertible Preferred Stock (the
"Shares").
This firm has acted only as special telecommunications counsel to the
Company and its subsidiary ECONO PHONE Ltd. (an Irish company). In such
capacity, we have been retained by the Company to review its authorization to
provide non-reserved telecommunications services in Belgium. We have not been
retained or engaged by the Company to perform, nor have we performed, any review
of any information in the Purchase Agreement. Capitalized terms used herein
which are defined in the Purchase Agreement shall have the meanings set forth in
the Purchase Agreement unless otherwise defined herein.
For purposes of this opinion letter, we have made such examination of the
Belgian Law of 21 March 1991 concerning the reform of certain economic public
enterprises ("wet betreffende de hervorming van sommige economische
overheidsbedrijven") as we have deemed necessary for this opinion letter. We
have also examined copies of the following:
1. Draft, dated October 30, 1996, of the Purchase Agreement.
2. The declaration of intent to provide certain non-reserved
telecommunications services filed by Mr. Arthur Flieger, on behalf of
the Company as its Belgian counsel, on February 23, 1996, as
supplemented by letters Mr. Flieger submitted on behalf of ECONO PHONE
Ltd. on May 24, 1996, and June 20, 1996, with the Belgisch Instituut
voor postdiensten en telecommunicatie ("BIPT") (the "Declaration").
3. The statement of no objection ("geen bezwaar") dated August 8, 1996
from the BIPT and bearing the registration number NRS/96/1345,
relating to the Declaration (the "Registration").
4. A certificate of the President of the Company, dated the date hereof,
as to certain facts relating to the Company and ECONO PHONE Ltd.
<PAGE>
Exhibit B-3
We have not, except as specifically identified above, made any independent
review or investigation of factual or other matters, including the organization,
existence, good standing, assets, business or affairs of the Company or ECONO
PHONE Ltd. We have assumed the authenticity, accuracy and completeness,
including the conformity with the authentic originals of documents submitted to
us as reproduced copies, of the foregoing documents, records, certification and
statements of fact, on which we are relying, and have made no independent
investigations thereof. Further, we state that we have not independently
verified nor do we take any responsibility for nor are we addressing in any way
any statements of fact, any statements concerning foreign or Belgian law, any
legal conclusions or any statements of belief, in each case attributable to the
Company. In rendering the following opinions we have relied as to factual
matters, without independent investigation, upon the representations,
warranties, statements and certifications made by the Company or ECONO PHONE
Ltd. in or pursuant to the Purchase Agreement, in the Declaration and in the
certificate identified in item 4 above. This opinion letter is given, and all
statements herein are made, in the context of the foregoing.
We have also assumed and relied, without independent inquiry or
verification by us, upon the accuracy and completeness of information given to
us by the BIPT, located in Brussels, Belgium, on October 29, 1996. We have not
examined or investigated records in any office or branch of the BIPT or of any
other level of the Belgian government. There may be records of matters pending
at the BIPT that were not available for inspection by the public as a matter of
law or of administrative practice and that we did not examine.
To our knowledge, the BIPT has not completed preparation of legally binding
rules and regulations, nor have such legally binding rules and regulations been
publicly issued, concerning requirements and conditions that might be applied to
entities that operate in or provide non-reserved telecommunications services in
Belgium. Accordingly, we express no opinion regarding the Company's or ECONO
PHONE Ltd.'s compliance with any existing or future such requirements and
conditions that have or may be applied by the BIPT or by any other agency or
level of the Belgian government with respect to the Company's or ECONO PHONE
Ltd.'s services.
The Registration issued by the BIPT and referenced in item 3 above
clarifies that the services that ECONO PHONE Ltd. is authorized to provide shall
be offered to users who constitute among themselves "closed user groups"
("gesloten gebruikersgroepen"), or that those services include certain "added
value" ("toegevoegde waarde") features, as those two terms in quotations are
interpreted by the BIPT. We express no opinion regarding compliance by the
Company or ECONO PHONE Ltd. with these conditions, or whether the services that
the Company or ECONO PHONE Ltd. does offer or will offer comply with the BIPT's
interpretation thereof.
As used in this opinion letter, the phrase "to our knowledge" means the
actual knowledge (that is, the conscious awareness of facts or other
information) of lawyers in the firm who have given substantive legal attention
to representation of the Company in connection with the Purchase Agreement.
<PAGE>
Exhibit B-3
This opinion letter is based as to matters of Belgian law solely on
applicable provisions of the Law of 21 March 1991 concerning the reform of
certain economic public enterprises ("wet betreffende de hervorming van sommige
economische overheidsbedrijven") and we express no opinion as to any other
directives, decisions, orders, laws, statutes, decrees, ordinances, rules or
regulations (such as European Union, national or local antitrust or unfair
competition directives, decisions, orders, laws, statutes, decrees, ordinances,
rules or regulations; or tax directives, decisions, orders, laws, statutes,
decrees, ordinances, rules or regulations).
Based upon, subject to and limited by the foregoing, we are of the opinion
that:
(a) ECONO PHONE Ltd. is the holder of the Registration of its declaration
of intent to provide certain non-reserved telecommunications services.
To our knowledge, the Registration constitutes the only license,
permit, approval or authorization issued by the BIPT to permit ECONO
PHONE Ltd. to provide:
(i) an international service for long distance transmission and
signal routing via the public telecommunications network
(through the switched network and leased lines), by way of
telecommunications processes (een dienst voor internationale
long distance overdracht en routering van signalen over het
openbare telecommunicatienetwerk (via het gecommuteerde netwerk
en gehuurde lijnen), via telecommunicatieprocedes");
(ii) a message service consisting of the storage and transmission of
voice messages (voice mail), e-mail for texts (e-mail) and fax
(econo fax) ("een berichtendienst bestaande uit de opslag en de
transmissie van vocale berichten (voice-mail), e-mail voor
tekst (e-gram) en fax (econo-fax)").
(b) To our knowledge, there is no proceeding or other administrative
action pending or threatened before the BIPT against the Company or
ECONO PHONE Ltd. to revoke, cancel, rescind, modify, annul, or refuse
to renew in the ordinary course the Registration.
<PAGE>
Exhibit B-3
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 your purchase of the Shares
under the Purchase Agreement on the date of this letter, and should not be
quoted in whole or in part or otherwise be referred to, nor be filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
Very truly yours,
HOGAN & HARTSON L.L.P.
Gerald E. Oberst, Jr.
Partner
Dirk Lonting
Member of the Brussels Bar
<PAGE>
Exhibit 10.2
EXECUTION COPY
ECONOPHONE, INC.
155,000 Units, each Unit consisting of
One 131/2% Senior Note Due 2007
and One Warrant to Purchase 8.167 Shares of Common Stock
PLACEMENT AGREEMENT
June 26, 1997
<PAGE>
Exhibit 10.2
June 26, 1997
Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036-8293
Dear Sirs:
ECONOPHONE, INC., a New York corporation (the "Company"), proposes to
issue and sell to you (the "Placement Agent") its Units (the "Units"). Each
Unit consists of one 131/2% Senior Note due 2007 (collectively, the "Notes") to
be issued pursuant to the provisions of an Indenture dated as of the Closing
Date (as defined below) (the "Indenture") between the Company and The Bank of
New York, a New York banking corporation, as Trustee (in such capacity, the
"Trustee") and one Warrant (collectively, the "Warrants") entitling the holder
thereof to purchase 8.167 shares (collectively, the "Warrant Shares") of Voting
Common Stock, par value $.0001 per share, of the Company (collectively, the
"Common Stock"), to be issued pursuant to the provisions of a Warrant Agreement
dated as of the Closing Date (the "Warrant Agreement") between the Company and
The Bank of New York, a New York banking corporation, as warrant agent (in such
capacity, the "Warrant Agent"). The Company will pledge pursuant to a
Collateral Pledge and Security Agreement to be dated as of the Closing Date (the
"Pledge Agreement") among the Company and the Trustee a portion of the net
proceeds from the issuance and sale of the Units as security for the payment of
the first six scheduled interest payments due on the Notes.
The Units will be offered without being registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on
exemptions therefrom.
The Placement Agent and its direct and indirect transferees will be
entitled to the benefits of (i) a registration rights agreement relating to the
Notes (the "Notes Registration Rights Agreement"), to be dated the Closing Date
and to be substantially in the form attached hereto as Exhibit A-1 and (ii) a
registration rights agreement relating to the Warrants (the "Warrants
Registration Rights Agreement"), to be dated the Closing Date and to be
substantially in the form attached hereto as Exhibit A-2.
In connection with the sale of the Units, the Company has prepared a
preliminary private placement memorandum (the "Preliminary Offering Memorandum")
and will prepare a final private placement memorandum (the "Final Offering
Memorandum" and, with the Preliminary Offering Memorandum, each an "Offering
Memorandum") setting forth or including a description of the terms of the Units,
the Notes, the Warrants and the Common Stock, the terms of the offering and a
description of the Company and its business.
<PAGE>
2
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, the Placement Agent that as of the date hereof:
(a) The Preliminary Offering Memorandum does not contain and the
Final Offering Memorandum, in the form used by the Placement Agent to
confirm sales and on the Closing Date, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this Section 1(a) do not apply to statements or
omissions in either Offering Memorandum based upon information relating to
the Placement Agent furnished to the Company in writing by the Placement
Agent expressly for use therein.
(b) The Company has been duly incorporated, is validly subsisting
under the laws of the State of New York, has the corporate power and
authority to own its property and to conduct its business as described in
each Offering Memorandum and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(c) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in each Offering
Memorandum and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(d) This Agreement has been duly authorized, executed and delivered
by the Company.
(e) Each of the Notes has been duly authorized and, when executed,
authenticated in accordance with the terms of the Indenture and delivered
to and paid for by the Placement Agent in accordance with the terms of this
Agreement, will (x) be a valid and binding obligation of the Company
enforceable in accordance with its terms, except (A) as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally,
(B) rights of acceleration, if applicable, and the availability of
equitable
<PAGE>
3
remedies may be limited by equitable principles of general applicability
and (C) that provisions of the Notes requiring any waiver of stay or
extension laws, diligent performance or other acts on the part of the
Trustee and payment of liquidated damages may be unenforceable under
principles of public policy and (y) be entitled to the benefits of the
Indenture and the Notes Registration Rights Agreement.
(f) Each of the Warrants has been duly authorized and, when executed,
countersigned by the Warrant Agent in accordance with the terms of the
Warrant Agreement and delivered to and paid for by the Placement Agent in
accordance with the terms of this Agreement, will (x) be a valid and
binding obligation of the Company enforceable in accordance with its terms,
except as (A) the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and (B) rights of acceleration, if applicable, and the
availability of equitable remedies may be limited by equitable principles
of general applicability and (y) be entitled to the benefits of the Warrant
Agreement and the Warrants Registration Rights Agreement.
(g) The Warrant Shares have been duly authorized and reserved for
issuance upon the exercise of the Warrants and, when issued and delivered
upon exercise of the Warrants in accordance with the terms of the Warrant
Agreement, will be validly issued, fully paid and non-assessable and will
not be subject to any preemptive or similar rights or taxes, liens, charges
and security interests.
(h) Each of the Indenture, the Pledge Agreement and the Notes
Registration Rights Agreement has been duly authorized and, when executed
and delivered by the Company and each other party thereto, will be a valid
and binding agreement of the Company, enforceable in accordance with its
terms except (w) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, (x) rights of acceleration, if
applicable, and the availability of equitable remedies may be limited by
equitable principles of general applicability, (y) that provisions of the
Indenture requiring any waiver of stay or extension laws, diligent
performance or other acts on the part of the Trustee and payment of
liquidated damages may be unenforceable under principles of public policy
and (z) rights to indemnification and contribution may be limited by public
policy.
(i) Each of the Warrant Agreement and the Warrants Registration
Rights Agreement has been duly authorized and, when executed and delivered
by the Company and each other party thereto, will be a valid and binding
agreement of the Company, enforceable in accordance with its terms except
(w) as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, (x) rights of acceleration, if
<PAGE>
4
applicable, and the availability of equitable remedies may be limited by
equitable principles of general applicability, (y) provisions of the
Warrant Agreement requiring any waiver of stay or extension laws, diligent
performance or other acts on the part of the Warrant Agent and payment of
liquidated damages may be unenforceable under principles of public policy
and (z) rights to indemnification and contribution may be limited by public
policy.
(j) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement, the Indenture, the
Warrant Agreement, the Pledge Agreement, the Notes Registration Rights
Agreement, the Warrants Registration Rights Agreement, the Notes and the
Warrants (collectively, the "Transaction Documents"), the issuance and sale
and delivery in the manner contemplated by the Offering Memorandum of the
Units, Notes and Warrants and the issuance of the Warrant Shares upon
exercise of the Warrants will not contravene any provision of applicable
law or the certificate of incorporation or by-laws of the Company or any
agreement or other instrument binding upon the Company or any of its
subsidiaries or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company or any subsidiary, and
no consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
of its obligations under the Transaction Documents, except, (x) such as may
be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Units, the Notes or the Warrants
or the issuance of the Warrant Shares upon exercise of the Warrants or (y)
such as may be required under any federal or state securities law in
connection with the performance by the Company of its obligations under the
Notes Registration Rights Agreement or the Warrants Registration Rights
Agreement.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Preliminary Offering Memorandum. Furthermore, (1) the
Company and its subsidiaries have not incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction
not in the ordinary course of business; (2) the Company has not purchased
any of its outstanding capital stock, nor declared, paid or otherwise made
any dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in or
contemplated by the Final Offering Memorandum in respect of the business of
the Company described therein.
<PAGE>
5
(l) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject other than proceedings accurately described in all material
respects in each Offering Memorandum and proceedings that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, or on the power or ability of the Company to perform its obligations
under any of the Transaction Documents or to consummate the transactions
contemplated by the Final Offering Memorandum.
(m) Neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D under the Securities Act, an "Affiliate") of the Company
has directly, or through any agent (except, in the case of clause (ii)
below in connection with the offering of the Units, the Notes and the
Warrants, the Placement Agent or any person acting on its behalf),
(i) sold, offered for sale, solicited offers to buy or otherwise negotiated
in respect of, any security (as defined in the Securities Act) which is or
will be integrated with the sale of the Units, the Notes or the Warrants in
a manner that would require the registration under the Securities Act of
the Units, the Notes or the Warrants or (ii) engaged in any form of general
solicitation or general advertising in connection with the offering of the
Units, the Notes or the Warrants (as those terms are used in Regulation D
under the Securities Act) in any manner involving a public offering within
the meaning of Section 4(2) of the Securities Act.
(n) 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, as amended (the "Investment Company Act").
(o) It is not necessary in connection with the offer, sale and
delivery of the Units to the Placement Agent in the manner contemplated by
this Agreement to register the Units, the Notes or the Warrants under the
Securities Act or to qualify the Indenture under the Trust Indenture Act of
1939, as amended.
(p) The Company and its subsidiaries (i) are in compliance with all
applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
<PAGE>
6
(q) None of the Company, its Affiliates or any person acting on its
or their behalf (other than the Placement Agent and any person acting on
its behalf) has engaged in any directed selling efforts (as that term is
defined in Regulation S under the Securities Act ("Regulation S")) with
respect to the Units, the Notes or the Warrants and the Company and its
Affiliates and any person acting on its or their behalf (other than the
Placement Agent and any person acting on its behalf) have complied with the
offering restrictions requirement of Regulation S with respect to the
offering of the Units, Notes and Warrants.
(r) The Company and its subsidiaries have good title to all
properties and assets owned by them and have good leasehold interest in
each property and asset leased by them, in each case free and clear of all
pledges, liens, encumbrances, security interests, charges, mortgages and
defects, except (i) such as are described or referred to in each Offering
Memorandum and the financial statements and notes thereto contained
therein, (ii) such as do not materially affect the value of such property
or asset, (iii) such as do not interfere with the use made and proposed to
be made of such properties or assets by the Company or its subsidiaries, as
the case may be or (iv) such as do not have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(s) The Company and its subsidiaries have filed all foreign and U.S.
federal and state income and franchise tax returns required to be filed and
have paid all taxes shown thereon as due, and there is no material tax
deficiency which has been asserted against the Company or any of its
subsidiaries; all material tax liabilities of the Company and its
subsidiaries are adequately provided for on the books of the Company or its
subsidiaries, as the case may be.
(t) The Company and its subsidiaries own or possess all material
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 and trade names currently employed by them in
connection with the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would reasonably be expected to
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in or contemplated by
each Memorandum, or, to the knowledge of the Company, is imminent; and the
Company is not aware of
<PAGE>
7
any existing, threatened or imminent labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that would
reasonably be expected to result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
(v) Except as set forth in each Offering Memorandum (including,
without limitation, in the section thereof entitled "Business -
Regulation"), the Company and its subsidiaries have all necessary permits,
licenses, authorizations, consents and approvals and have made all
necessary filings required under any federal, state, local or foreign
supranational, national or regional law, regulation or rule, and have
obtained all necessary authorizations, consents and approvals from other
persons, material to the present conduct of their respective businesses, in
each case except to the extent that the failure to obtain such permits,
licenses, authorizations, consents or approvals or to make such filings
would not, singly or in the aggregate, have a material adverse effect on
the properties, assets, prospects, condition, financial or otherwise,
business or operations of the Company and its subsidiaries, taken as a
whole; except as set forth in each Offering Memorandum, the Company and its
subsidiaries have not received any notice of proceedings which remain
unresolved relating to revocation or modification of any such permits,
licenses, authorizations, consents or approvals, nor is the Company or any
of its subsidiaries in violation of, or in default under, any such license,
authorization, consent or approval or any federal, state, local or foreign
supranational, national or regional law, regulation or rule or any decree,
order or judgment applicable to the Company or its subsidiaries the effect
of which could have a material adverse effect on the properties, assets,
prospects, condition, financial or otherwise, business or operations of the
Company and its subsidiaries, taken as a whole.
(w) The Company and its subsidiaries are insured against such losses
and risks and in such amounts as management of the Company reasonably
believes are prudent for the operation of their business; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the
earnings, business or operations of the company and its subsidiaries, taken
as a whole, except as described in or contemplated by each Offering
Memorandum.
(x) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or
specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in
<PAGE>
8
conformity with generally accepted accounting principles and to maintain
asset accountability; (3) access to assets is permitted only in accordance
with management's general or specific authorization; and (4) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(y) The terms of the Units, the Notes, the Warrants, the Common
Stock, the Indenture and the Warrant Agreement conform in all material
respects to the description thereof contained in the Final Offering
Memorandum under the headings "Description of the Units," "Description of
the Notes," Description of the Warrants," and "Description of the Capital
Stock," as applicable.
(z) The financial statements included in each Offering Memorandum
present fairly the consolidated financial position of the Company as of the
dates indicated and the results of operations and cash flows of the Company
for the periods specified. Such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved. The selected financial
data included in each Offering Memorandum present fairly the information
shown therein and have been compiled from data contained in the audited
financial statements of the Company, except as indicated in each Offering
Memorandum.
(aa) Upon the transfer to the Trustee of the Pledged Securities (as
defined in the Pledge Agreement) and the acquisition by the Trustee of a
security entitlement thereto, in accordance with the terms of the Pledge
Agreement, the pledge of and grant of a security interest in the Collateral
(as defined in the Pledge Agreement) securing the payment of the
Obligations (as defined in the Pledge Agreement) for the benefit of the
Trustee and holders of the Notes will constitute a first priority perfected
security interest in such Collateral, enforceable as such against all
creditors of the Company (and any persons purporting to purchase any of the
Collateral from the Company).
(ab) (A) The only telecommunications services provided by the Company
and its subsidiaries in France are prepaid card services and calling card
services utilizing international toll free access, telecommunications
services utilizing local dial up access offered to closed user groups, in
the latter case through duly authorized networks, and data services,
including voicemail, e-mail and facsimile services, utilizing the foregoing
methods of access and transmission, and (B) the only telecommunications
services provided by the Company and its subsidiaries in Belgium are
international long distance services, utilizing local dial up access and
international toll free access, and data services, including voicemail,
e-mail and facsimile services.
<PAGE>
9
2. OFFERING. You have advised the Company that the Placement Agent
will make an offering of the Units purchased by the Placement Agent hereunder on
the terms set forth in the Final Offering Memorandum as soon as practicable
after this Agreement is entered into as in your judgment is advisable.
3. PURCHASE AND DELIVERY. The Company hereby agrees to sell to the
Placement Agent, and the Placement Agent, upon the basis of the representations
and warranties herein contained, but subject to the conditions hereinafter
stated, agrees to purchase from the Company 155,000 Units at a purchase price of
$965 per Unit, for an aggregate purchase price of $149,575,000.
Payment for the Units shall be made against delivery of the Units at a
closing (the "Closing") to be held at the office of Shearman & Sterling, 599
Lexington Avenue, New York, New York, at 10:00 A.M., local time, on July 1,
1997, or at such other time on the same or such other date, not later than July
12, 1997, as shall be designated in writing by the Placement Agent. The time
and date of such payment are herein referred to as the Closing Date. Payment
for the Units shall be made by wire transfer payable to the order of the Company
in federal or other funds immediately available in New York City.
Certificates for the Notes and the Warrants shall be in definitive
form and registered in such names and in such denominations as you shall request
in writing not less than one full business day prior to the Closing Date. The
certificates evidencing the Notes and the Warrants shall be delivered to you on
the Closing Date for the account of the Placement Agent, with any transfer taxes
payable in connection with the transfer of the Units, the Notes or the Warrants
to the Placement Agent duly paid, against payment of the purchase price
therefor.
4. CONDITIONS TO CLOSING. The obligation of the Placement Agent
under this Agreement to purchase the Units will be subject to the following
conditions:
(a) Subsequent to the date of this Agreement and prior to the Closing
Date, there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise,
or in the earnings, business or operations, of the Company and its
subsidiaries, taken as a whole, from that set forth in the Preliminary
Offering Memorandum that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the Units on the
terms and in the manner contemplated in the Final Offering Memorandum.
(b) You shall have received on the Closing Date a certificate, dated
the Closing Date and signed by an executive officer of the Company, to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the
<PAGE>
10
agreements and satisfied all of the conditions on its part to be performed
or satisfied on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an opinion of Schulte
Roth & Zabel LLP, independent counsel for the Company, dated the Closing
Date, substantially to the effect set forth in Exhibit B.
(d) You shall have received on the Closing Date an opinion of
Shearman & Sterling, counsel for the Placement Agent, dated the Closing
Date, in form and substance satisfactory to you.
(e) You shall have received on the Closing Date opinions of (i) Shaw,
Pittman, Potts & Trowbridge, special U.S. federal regulatory counsel to the
Company, (ii) Lance J.M. Steinhart, special U.S. state regulatory counsel
to the Company, (iii) Bird & Bird, special U.K. and European Union
regulatory counsel to the Company, (iv) Arthur Flieger, special Belgian
regulatory counsel to the Company, (vi) Doser Amereller Noack, special
German regulatory counsel to the Company, and (vii) Salans, Hertzfeld &
Heilbronn, special French regulatory counsel to the Company, respectively,
dated the Closing Date, substantially in the form of Exhibits C-1, C-2,
C-3, C-4, C-5 and C-6, respectively.
(f) You shall have received on each of the date hereof and the
Closing Date a letter, dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Arthur
Andersen LLP, the Company's independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in or incorporated by reference
into the Final Offering Memorandum.
(g) Each of the Transaction Documents shall have been (or shall,
simultaneously with the Closing, be) executed and delivered by all parties
thereto other than the Placement Agent.
(h) Shearman & Sterling, counsel for the Placement Agent, shall have
received $100,000 from Morgan Stanley & Co. Incorporated, on behalf of the
Company, by wire transfer in federal or other funds immediately available.
(i) You shall have received such other documents as you and your
counsel shall reasonably request.
<PAGE>
11
5. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Placement Agent contained in this Agreement, the Company
covenants as follows:
(a) To furnish to you, without charge, during the period mentioned in
paragraph (c) below, as many copies of the Final Offering Memorandum, and
any supplements and amendments thereto, as you may reasonably request and
to use its best efforts to deliver such copies to you by 5:00 p.m. (New
York time) on the business day next following the execution of this
Agreement.
(b) Before amending or supplementing either Offering Memorandum, to
furnish to you a copy of each such proposed amendment or supplement and not
to use any such proposed amendment or supplement to which you reasonably
object without unreasonable delay.
(c) If, during such period after the date hereof and prior to the
date on which all of the Units shall have been sold by the Placement Agent,
any event shall occur or condition exist as a result of which it is
necessary in your judgment to amend or supplement the Final Offering
Memorandum in order to make the statements therein, in the light of the
circumstances when such Offering Memorandum is delivered to a purchaser,
not misleading, or if, in the opinion of counsel to the Placement Agent it
is necessary to amend or supplement such Offering Memorandum to comply with
applicable law, forthwith to prepare and furnish, at its own expense, to
the Placement Agent, either amendments or supplements to such Offering
Memorandum so that the statements in such Offering Memorandum as so amended
or supplemented will not, in light of the circumstances when such Offering
Memorandum is delivered to a purchaser, be misleading or so that such
Offering Memorandum, as so amended or supplemented, will comply with
applicable law.
(d) To endeavor to qualify the Units, the Notes and the Warrants for
offer and sale under the securities or Blue Sky laws of such jurisdictions
as you shall reasonably request; provided that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it
is not now so qualified or to take any action which would subject it to
taxation in any jurisdiction where it is not now so subject or to service
or process in suits, other than those arising out of the offering or sale
of the Units, Notes and Warrants, in any jurisdiction where it is not now
so subject.
(e) Whether or not any sale of such Units is consummated, to pay all
expenses incident to the performance of its obligations under this
Agreement, including: (i) the preparation of each Offering Memorandum and
all amendments and supplements thereto, (ii) the preparation, issuance and
delivery of the Notes and the Warrants, (iii) the fees and disbursements of
the Company's counsel and accountants
<PAGE>
12
and the Trustee and the Warrant Agent and their respective counsel,
(iv) the qualification of the Units, Notes and Warrants under securities or
Blue Sky laws in accordance with the provisions of Section 5(d), including
filing fees, (v) the printing and delivery to the Placement Agent in
quantities as hereinabove stated of copies of the Offering Memorandum and
any amendments or supplements thereto, (vi) up to $200,000 of the
reasonable fees and expenses (including fees for their professional
services) of counsel to the Placement Agent incurred in connection with the
transactions contemplated by this Agreement to the extent such fees and
expenses exceed $200,000, (vii) the fees and expenses, if any, incurred in
connection with the admission of the Units, Notes, Warrants or Warrant
Shares for trading on the Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") or any other appropriate market system agreed
upon by the Company and the Placement Agent, (viii) the costs and expenses
of the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the Units, including,
without limitation, expenses associated with the production of road show
slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expense of the representatives and officers of
the Company and any such consultants, and the cost of any aircraft
chartered in connection with the road show, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section.
(f) Neither the Company nor any Affiliate will sell, offer for sale
or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in the Securities Act) which could be integrated with the sale
of the Units, the Notes or the Warrants in a manner which would require the
registration under the Securities Act of the Units, the Notes or the
Warrants.
(g) Not to solicit any offer to buy or offer or sell the Units, the
Notes or the Warrants by means of any form of general solicitation or
general advertising (as those terms are used in Regulation D under the
Securities Act) or in any manner involving a public offering within the
meaning of Section 4(2) of the Securities Act.
(h) While any of the Units, the Notes or the Warrants remain
outstanding, to make available, upon request, to any seller of such Units,
Notes or Warrants, the information specified in Rule 144A(d)(4) under the
Securities Act, unless the Company is then subject to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(i) Except as contemplated by the Notes Registration Rights Agreement
or the Warrants Registration Rights Agreement, none of the Company, its
Affiliates or any person acting on its or their behalf (other than the
Placement Agent) will engage
<PAGE>
13
in any directed selling efforts (as that term is defined in Regulation S)
with respect to the Units, the Notes or the Warrants and the Company and
its Affiliates and each person acting on its or their behalf (other than
the Placement Agent) will comply with the offering restrictions of
Regulation S.
(j) To use its best efforts to permit the Units, the Notes and the
Warrants to be designated PORTAL securities in accordance with the rules
and regulations adopted by the National Association of Securities Dealers,
Inc. relating to trading in the PORTAL Market.
(k) The Company will, and will cause the Trustee to, refuse to
register any transfer of the Notes sold pursuant to Regulation S if such
transfer is not made in accordance with the provisions of Regulation S.
(l) The Company will, and will cause the Warrant Agent with respect
to the Warrants and cause the register for the Warrant Shares to, refuse
any transfer of Warrants or Warrant Shares, as applicable, sold pursuant to
Regulation S if such transfer is not made in accordance with the provisions
of Regulation S.
(m) To use the proceeds from the sale of the Units in the manner set
forth in the Final Offering Memorandum.
6. OFFERING OF UNITS; RESTRICTIONS ON TRANSFER. (a) The Placement
Agent represents and warrants that it is a qualified institutional buyer as
defined in Rule 144A under the Securities Act (a "QIB"). The Placement Agent
agrees with the Company that (i) it will not solicit offers for, or offer or
sell, Units, Notes or Warrants by any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Securities Act)
or in any manner involving a public offering within the meaning of Section 4(2)
of the Securities Act and (ii) it will solicit offers for Units, Notes or
Warrants only from, and will offer and sell Units, Notes or Warrants only to,
persons that it reasonably believes to be (A) in the case of offers inside the
United States, (x) QIBs or (y) other institutional accredited investors (as
defined in Rule 501(a) (1), (2), (3) or (7) under the Securities Act)
("institutional accredited investors") that, prior to their purchase of Units,
deliver to the Placement Agent a letter containing the representations and
agreements set forth in Appendix A to the Offering Memorandum and (B) in the
case of offers outside the United States, to persons other than U.S. persons
("foreign purchasers," which term shall include dealers or other professional
fiduciaries in the United States acting on a discretionary basis for foreign
beneficial owners (other than an estate or trust)) that, in each case, in
purchasing the Units are deemed to have represented and agreed as provided in
the Final Offering Memorandum under the caption "Transfer Restrictions."
<PAGE>
14
(b) The Placement Agent represents, warrants, and agrees with respect
to offers and sales outside the United States that:
(i) it understands that no action has been or will be taken in any
jurisdiction by the Company that would permit a public offering of the
Units, the Notes or the Warrants or possession or distribution of either
Offering Memorandum or any other offering or publicity material relating to
the Units, the Notes or the Warrants in any country or jurisdiction where
action for that purpose is required;
(ii) it will comply with all applicable laws and regulations in each
jurisdiction in which it acquires, offers, solicits offers to buy, sells or
delivers Units, Notes or Warrants or has in its possession or distributes
either Offering Memorandum or any such other material, in all cases at its
own expense;
(iii) the Units, the Notes and the Warrants have not been and will
not be registered under the Securities Act and may not be offered or sold
within the United States or to, or for the account or benefit of, U.S.
persons except in accordance with Regulation S or pursuant to an exemption
from the registration requirements of the Securities Act;
(iv) it has offered the Units, the Notes or the Warrants and will
offer and sell the Units, the Notes or the Warrants (A) as part of its
distribution at any time and (B) otherwise until 40 days after the Closing
Date with respect to the Notes, and one year after the Closing Date with
respect to the Units and the Warrants, only in accordance with Rule 903 of
Regulation S or another exemption from the registration requirements of the
Securities Act. Accordingly, neither the Placement Agent, its Affiliates
nor any persons acting on its or their behalf have engaged or will engage
in any directed selling efforts (within the meaning of Regulation S) with
respect to the Units, the Notes or the Warrants and the Placement Agent,
its Affiliates and any such persons have complied and will comply with the
offering restrictions requirements of Regulation S;
(v) it has (A) not offered or sold and, during the period of six
months from the Closing Date, will not offer or sell any Units, Notes or
Warrants to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in
an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "Regulations"); (B)
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it
in relation to the Units, the Notes or the Warrants in, from or otherwise
involving the United Kingdom; and (C) only
<PAGE>
15
issued or passed on and will only issue or pass on to any person in the
United Kingdom any document received by it in connection with the issue of
the Units, the Notes or the Warrants if that person is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on;
(vi) it understands that the Units, the Notes and the Warrants have
not been and will not be registered under the Securities and Exchange Law
of Japan, and represents that it has not offered or sold, and agrees that
it will not offer or sell, any Units, Notes or Warrants directly or
indirectly in Japan or to any resident of Japan except (A) pursuant to an
exemption from the registration requirements of the Securities and Exchange
Law of Japan and (B) in compliance with any other applicable requirements
of Japanese law; and
(vii) the Placement Agent agrees that, at or prior to confirmation
of sales of the Units, the Notes or the Warrants, it will have sent to each
distributor, dealer or person receiving a selling concession, fee or other
remuneration that purchases such Units, Notes or Warrants from it during
the restricted period a confirmation or notice to substantially the
following effect:
"The Units, the Notes or the Warrants covered hereby have not
been registered under the U.S. Securities Act of 1933, as amended (the
"Securities Act"), and may not be offered and sold within the United
States or to, or for the account or benefit of, U.S. persons (i) as
part of their distribution at any time or (ii) otherwise until 40 days
after the closing date with respect to the Notes and one year after
the closing date with respect to the Units and the Warrants, except in
either case in accordance with Regulation S (or Rule 144A if
available) under the Securities Act. Terms used above have the
meanings given to them by Regulation S."
Terms used in this Section 6 and not otherwise defined in this Agreement have
the meanings given to them by Regulation S.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless the Placement Agent, and each person, if any, who
controls the Placement Agent within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, or is under common control
with, or is controlled by, the Placement Agent, from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred by the Placement Agent or any such
controlling of affiliated person in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in either Offering Memorandum (as amended
or supplemented if the
<PAGE>
16
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact necessary
to make the statements therein in light of the circumstances under which they
were made not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to the Placement
Agent furnished to the Company in writing by the Placement Agent expressly for
use therein.
(b) The Placement Agent agrees to indemnify and hold harmless the
Company, its directors, its officers and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to the Placement Agent, but only with reference to information
relating to the Placement Agent furnished to the Company in writing by the
Placement Agent expressly for use in either Offering Memorandum or any
amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to either paragraph (a) or (b) above, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified parties and that all
such fees and expenses shall be reimbursed as they are incurred. Such firm
shall be designated in writing by Morgan Stanley & Co. Incorporated in the case
of parties indemnified pursuant to paragraph (a) above and by the Company in the
case of parties indemnified pursuant to paragraph (b) above. The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified
<PAGE>
17
party for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement, unless such fees and expenses of counsel
are disputed by the indemnifying party in good faith. 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 includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in paragraph (a)
or (b) of this Section 7 is unavailable to an indemnified party or insufficient
in respect of any losses, claims, damages or liabilities, then each indemnifying
party under such paragraph, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Placement Agent, on the other hand, from the
offering of such Units 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 on the one hand and the Placement Agent on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Placement Agent on the other hand in connection with the offering of
such Units shall be deemed to be in the same respective proportions as the net
proceeds from the offering of such Units (before deducting expenses) received by
the Company and the total discounts and commissions received by the Placement
Agent in respect thereof bear to the aggregate offering price of such Units.
The relative fault of the Company on the one hand and of the Placement Agent on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Placement Agent and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(e) The Company and the Placement Agent agree that it would not be
just or equitable if contribution pursuant to this Section 7 were determined by
PRO RATA allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in
<PAGE>
18
paragraph (d) above 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, the Placement Agent shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Units resold by it in the initial placement of such Units
were offered to investors exceeds the amount of any damages that the Placement
Agent 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
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The indemnity and contribution
provisions contained in this Section 7 and the representations and warranties of
the Company contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of the Placement Agent or any person
controlling the Placement Agent or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Units. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
8. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iii) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses (a)(i) through (iii), such
event singly or together with any other such event makes it, in your judgment,
impracticable to market the Units on the terms and in the manner contemplated in
the Final Offering Memorandum.
9. MISCELLANEOUS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
If this Agreement shall be terminated by the Placement Agent, 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, or if for any reason the
Company shall be unable to perform its obligations under this Agreement (other
than as a result of a breach of this Agreement by the Placement Agent), the
Company will reimburse the Placement Agent for all out-of-pocket
<PAGE>
19
expenses (including the fees and disbursements of its counsel) reasonably
incurred by the Placement Agent in connection with this Agreement or the
offering contemplated hereunder.
This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York.
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed a part of this Agreement.
<PAGE>
20
Please confirm your agreement to the foregoing by signing in the space
provided below for that purpose and returning to us a copy hereof, whereupon
this Agreement shall constitute a binding agreement between us.
Very truly yours,
ECONOPHONE, INC.
By
--------------------------
Name:
Title:
Agreed, June 26, 1997
MORGAN STANLEY & CO.
INCORPORATED
By
-------------------------
Name:
Title:
<PAGE>
EXHIBIT A-1
-----------
Form of Notes Registration Rights Agreement
(See Exhibit 4.6)
A-1-1
<PAGE>
EXHIBIT A-2
-----------
Form of Warrants Registration Rights Agreement
(See Exhibit 4.8)
A-2-1
<PAGE>
EXHIBIT B
---------
July 1, 1997
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
We have acted as counsel for Econophone, Inc., a New York corporation
(the "Company"), in connection with the issuance and sale by the Company of
155,000 Units (the "Units"), each of which consists of (i) one 131/2% Senior
Note due 2007 (collectively, the "Notes") and (ii) one warrant to purchase
8.167 shares of Voting Common Stock, par value $.0001 per share, of the Company
(the "Common Stock") (collectively, the "Warrants"). This opinion is furnished
to you pursuant to Section 4(c) of the Placement Agreement, dated June 26, 1997
(the "Placement Agreement"), between the Company and Morgan Stanley & Co.
Incorporated (the "Placement Agent"), relating to the issuance and sale of the
Units. Terms defined in the Placement Agreement and not otherwise defined
herein are used herein with the meanings so defined.
In connection with the opinions set forth below, we have examined
originals, telecopies or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and all such agreements,
certificates of public officials and certificates of officers of the Company and
others, and such documents, certificates and corporate and other records, as we
have deemed necessary or appropriate as a basis for the opinions set forth
below.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons signing or delivering any instrument, 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
<PAGE>
Morgan Stanley & Co. Incorporated
July 1, 1997
Page 2
copies. We have also assumed, in our examination of documents executed by the
Company, that each of the other parties thereto is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, has the power, corporate or other, to execute and deliver such
documents and to perform such party's obligations thereunder, that each such
document has been duly authorized, executed and delivered by such party, and
that each such document constitutes the legal, valid and binding obligation of
each such party, enforceable against such party in accordance with its terms.
As to questions of fact not independently verified by us, we have relied, to the
extent we deemed appropriate, upon written representations and certificates of
officers of the Company, rendered to you (including in the Placement Agreement)
and/or to us on the date hereof, of public officials and other appropriate
persons. Any reference in any opinion herein to "our knowledge" and any similar
phrase means the actual knowledge of the attorneys of this Firm with primary
responsibility for the preparation of the Final Offering Memorandum and the
Placement Agreement, the Indenture, the Pledge Agreement, the Notes Registration
Rights Agreement, the Warrant Agreement, the Warrant Registration Rights
Agreement, the Notes and the Warrants (collectively, the "Transaction
Documents").
We are attorneys admitted to practice in the State of New York, and
the opinions set forth below and any reference to statutes, rules or regulations
herein are limited to the laws of the United States of America and the State of
New York and the General Corporation Law of the State of Delaware. We express
no opinion with respect to any regulatory or non-U.S. legal matters relating to
the business of the Company, including, without limitation, the matters referred
to under the Risk Factors "Competition," "Risks Associated with the Imposition
of VAT" and "Regulatory Restrictions" and under "Business--Regulation" in the
Final Offering Memorandum and the matters referred to in the opinions furnished
to you pursuant to Section 4(e) of the Placement Agreement.
Based on the foregoing, and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. the Company is duly incorporated and subsisting under the laws of
the State of New York and has the corporate power and authority to own its
property and to conduct its business as described in the Final Offering
Memorandum;
2. American Telemedia, Inc. is validly existing and in good standing
under the laws of the State of Delaware;
3. the Placement Agreement has been duly authorized, executed and
delivered by the Company;
4. the Warrant Shares have been duly authorized and reserved for
issuance by the Company and, when issued and delivered upon exercise of the
Warrants in accordance with the terms of the Warrants and the Warrant Agreement,
will be validly issued, fully paid and non-
<PAGE>
Morgan Stanley & Co. Incorporated
July 1, 1997
Page 3
assessable and will not be subject to any preemptive or similar rights under the
New York Business Corporation Law;
5. the Notes have been duly authorized and executed by the Company,
and when authenticated by the Trustee as provided in the Indenture, and
delivered to and paid for by the Placement Agent in accordance with the terms of
the Placement Agreement, (x) will be valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms, except
(i) as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws now or
hereafter in effect relating to or affecting creditors' rights generally and by
general principles of equity (regardless of whether enforceability is considered
in a proceeding at law or in equity), (ii) that rights of acceleration may be
limited and (iii) that provisions of the Notes requiring any waiver of stay or
extension laws, diligent performance or other acts on the part of the Trustee
and payment of liquidated damages may be unenforceable and (y) will be entitled
to the benefits of the Indenture and the Notes Registration Rights Agreement,
except to the extent that enforceability of the Indenture and the Notes
Registration Rights Agreement may be limited as provided in Paragraphs 6 and 8
below, respectively;
6. the Indenture has been duly authorized, executed and delivered
by, and is a valid and binding agreement of, the Company, enforceable against
the Company in accordance with its terms, except (i) as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or similar laws now or hereafter in effect relating to or
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity), (ii) that rights of acceleration may be limited and (iii) that
provisions of the Indenture requiring any waiver of stay or extension laws,
diligent performance or other acts on the part of the Trustee and payment of
liquidated damages may be unenforceable;
7. the Pledge Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company, enforceable
against the Company in accordance with its terms, except (i) as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and by general principles
of equity (regardless of whether enforceability is considered in a proceeding at
law or in equity) and (ii) that certain remedial provisions of the Pledge
Agreement may be unenforceable in whole or in part, but the inclusion of such
provisions does not affect the validity of the Pledge Agreement as a whole, and
the Pledge Agreement, taken as a whole, contains, in our judgment, adequate
provisions for the practical realization of the principal benefits afforded
thereby, except for the economic consequences resulting from any delay imposed
by, or any procedure required by, applicable law;
8. the Notes Registration Rights Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable
<PAGE>
Morgan Stanley & Co. Incorporated
July 1, 1997
Page 4
against the Company in accordance with its terms, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and by general principles
of equity (regardless of whether enforceability is considered in a proceeding at
law or in equity) and (ii) any liquidated damages provisions contained therein
may be unenforceable;
9. the Warrants have been duly authorized and executed by the
Company, and when countersigned by the Warrant Agent as provided in the Warrant
Agreement, and delivered to and paid for by the Placement Agent in accordance
with the terms of the Placement Agreement, (x) will be valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
now or hereafter in effect relating to or affecting creditors' rights generally
and by general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity) and (y) will be entitled to the
benefits of the Warrant Agreement and the Warrant Registration Rights Agreement,
except to the extent that enforceability of the Warrant Agreement and the
Warrant Registration Rights Agreement may be limited as provided in
Paragraphs 10 and 11 below, respectively;
10. the Warrant Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company, enforceable
against the Company in accordance with its terms, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws now or hereafter in effect
relating to or affecting creditor's rights generally and by general principles
of equity (regardless of whether enforceability is considered in a proceeding at
law or in equity) and (ii) any liquidated damages provisions contained therein
may be unenforceable;
11. the Warrant Registration Rights Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws now or
hereafter in effect relating to or affecting creditors' rights generally and by
general principles of equity (regardless of whether enforcement is considered in
a proceeding at law or in equity);
12. the execution and delivery by the Company of, and the performance
by the Company of its obligations under, the Placement Agreement, the Indenture,
the Pledge Agreement, the Notes Registration Rights Agreement, the Warrant
Agreement and the Warrant Registration Rights Agreement, and the execution,
issuance, sale and delivery of the Notes and the Warrants and the issuance of
the Warrant Shares upon exercise of the Warrants in accordance with the Warrants
and the Warrant Agreement, in each case by the Company, will not contravene (i)
any provision of applicable law believed by us to be normally applicable to
transactions of the type contemplated by the foregoing documents (other than
under the United States securities
<PAGE>
Morgan Stanley & Co. Incorporated
July 1, 1997
Page 5
laws or state securities or blue sky laws, as to which no opinion is expressed
in this paragraph) (collectively, "Applicable Laws"), (ii) the certificate of
incorporation or by-laws of the Company, (iii) any agreement set forth on Annex
A hereto, except that we do not express any opinion as to whether the execution
and delivery by the Company of, or performance under, any of the agreements
listed above will constitute a violation of or a default under any covenant,
restriction or provision of any agreement set forth on Annex A with respect to
financial ratios or tests or any aspect of the financial condition or results of
operations of the Company and/or its subsidiaries, or (iv) to our knowledge, any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary thereof, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency under any Applicable Law is required for the performance by the
Company of its obligations under the Placement Agreement, the Indenture, the
Pledge Agreement, the Notes Registration Rights Agreement, the Warrant
Agreement, the Warrant Registration Rights Agreement, the Notes, the Warrants or
the Warrant Shares (other than under the United States securities laws or state
securities or blue sky laws, as to which no opinion is expressed in this
paragraph);
13. the Company is not, and immediately after giving effect to the
offering (including receipt of the net proceeds thereof) and sale of the Units,
Notes and Warrants and the purchase of the Pledged Securities, in each case as
contemplated in the Final Offering Memorandum, will not be, an "investment
company," as such term is defined in the Investment Company Act of 1940, as
amended;
14. the statements in the Final Offering Memorandum under the
captions "Description of the Units," "Description of the Notes," "Description of
the Warrants," "Description of the Capital Stock," "Private Placement,"
"Transfer Restrictions" and "Legal Matters," insofar as such statements
constitute a summary of legal matters, documents or proceedings referred to
therein, fairly summarize the matters referred to therein;
15. the statements in the Final Offering Memorandum under the caption
"Certain Federal Income Tax Considerations," to the extent that they relate to
matters of U.S. federal income tax law, are accurate in all material respects
and fairly summarize the matters referred to therein;
16. based upon the representations, warranties, and agreements of the
Company in Sections 1(m), 1(r), 5(f), 5(g) and 5(i) of the Placement Agreement
and of the Placement Agent in Section 6 of the Placement Agreement, and assuming
the accuracy of such representations and warranties and compliance with such
agreements, it is not necessary in connection with the offer, sale and delivery
of the Units, Notes and Warrants to the Placement Agent under the Placement
Agreement, or in connection with the initial resale of such Units, Notes and
Warrants by the Placement Agent in accordance with Section 6 of the Placement
Agreement, to register the Units, the Notes or the Warrants under the Securities
Act of 1933, as amended (however, no opinion is expressed by us as to any
subsequent resale of any Units, Notes, Warrants or Warrant Shares); and
<PAGE>
Morgan Stanley & Co. Incorporated
July 1, 1997
Page 6
17. The provisions of the Pledge Agreement, together with (i) the
Federal Reserve Bank of New York ("FRBNY") making appropriate entries crediting
the Pledged Securities (as defined in the Pledge Agreement) on its records to
the account of the Custodian at the FRBNY, (ii) the Custodian (A) sending to the
Trustee a confirmation of purchase (within the meaning of Section 8-313 of the
Uniform Commercial Code currently in effect in the State of New York (the "New
York UCC"), of the Pledged Securities and (B) identifying, by crediting the
Pledged Securities to the Pledge Account, the Pledged Securities as being
subject to the security interest created in favor of the Trustee by the Pledge
Agreement, and (iii) the Custodian in its capacity as a Securities Intermediary
(as defined in 31 C.F.R. Section 357.2 (1997)) and as a securities intermediary
(as defined in Revised Article 8, as defined in 31 C.F.R. Section 357.2 (1997))
with respect to the Pledged Securities, agreeing in the Pledge Agreement that it
will comply with entitlement orders (as defined in Revised Article 8) originated
by the Trustee without further consent by the Pledgor (as defined in the Pledge
Agreement), are effective to create in favor of the Trustee for its benefit and
the benefit of the Holders (as defined in the Pledge Agreement) of the Notes, a
perfected security interest in the rights and property interest of the Company
with respect to the Pledged Securities, as security for the Obligations (as
defined in the Pledge Agreement), subject to the following:
(a) we assume that the Custodian in the ordinary cause of its
business maintains securities accounts for its customers and is acting in such
capacity with respect to the maintenance of the Pledge Account and the crediting
of interests in the Pledged Securities;
(b) we assume that the Custodian is not a clearing corporation (as
defined in Section 8-102(3) of the New York UCC);
(c) we assume that the Pledged Securities constitute a quantity of
securities which constitute or are part of a fungible bulk of Book-entry
Securities (as defined in 31 C.F.R. Section 357.2 (1997)) credited to the
account of the Custodian on the records of the FRBNY;
(d) we assume that the Custodian is a Securities Intermediary (as
defined in 31 C.F.R. Section 357.2 (1997)) and a securities intermediary (as
defined in Revised Article 8) with respect to the Pledged Securities;
(e) we assume that the account of the Custodian at the FRBNY to which
the Pledged Securities are credited is the Participant's Securities Account (as
defined in 31 C.F.R. Section 357.2 (1997)) of the Custodian;
(f) we assume that the Pledged Securities are Book-entry Securities
(as defined in 31 C.F.R. Section 357.2 (1997));
(g) we assume that the jurisdiction of the Trustee as Securities
Intermediary with respect to the Pledged Securities pursuant to 31 C.F.R.
Section 357.11(b) (1997) is the State of New York;
<PAGE>
Morgan Stanley & Co. Incorporated
July 1, 1997
Page 7
(h) we assume that the Pledged Securities exist and that the Company
has sufficient rights therein for the security interest created in favor of the
Trustee by the Pledge Agreement to attach, and we express no opinion as to the
Company's rights or interests in or to any Pledged Securities; and
(i) we express no opinion, and have made no investigation, as to
whether any Pledged Securities have been delivered in the manner set forth in
the Pledge Agreement or in this paragraph.
We express no opinion regarding the validity, binding effect or
enforceability of any provision in any Transaction Document relating to
indemnification or contribution.
In addition, we have acted as special counsel to the Company in
connection with the preparation of the Final Offering Memorandum, and, although
we do not pass upon and do not assume responsibility for the accuracy,
completeness or fairness of the statements in the Final Offering Memorandum
except to the limited extent set forth in paragraphs (14) and (15) above, based
upon the foregoing, and without any independent check or verification on our
part, no facts have come to our attention that have caused us to believe that
the Final Offering Memorandum (except for the financial statements and schedules
and statistical and other financial data included therein or omitted therefrom,
as to which we make no statement), at the time the Final Offering Memorandum was
issued and as of the date of this opinion, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The opinions and the statement set forth above are being furnished
only to you and solely for your benefit in connection with the Placement
Agreement. Except as expressly set forth herein, such opinions and statement
may not be relied upon by you for any other purpose, or furnished to, quoted to,
or relied upon by any other person, firm or corporation for any purpose, without
our prior written consent. We have no obligation to modify, amend or update the
opinions or statement set forth herein for any reason.
Very truly yours,
<PAGE>
EXHIBIT C
---------
EXHIBIT C-1: Form of Opinion of U.S. Federal Regulatory Counsel to the Company
EXHIBIT C-2: Form of Opinion of U.S. State Regulatory Counsel to the Company
EXHIBIT C-3: Form of Opinion of U.K and European Union Regulatory Counsel to
the Company
EXHIBIT C-4: Form of Opinion of Belgian Regulatory Counsel to the Company
EXHIBIT C-5: Form of Opinion of German Regulatory Counsel to the Company
EXHIBIT C-6: Form of Opinion of French Regulatory Counsel to the Company
C-1
<PAGE>
EXHIBIT C-1
-----------
DRAFT
June __ 1996
Econophone, Inc.
60 Hudson Street
New York, NY 10013
and
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Re: ECONOPHONE, INC.
Gentlemen:
We are counsel to Econophone, Inc., a New York corporation
("Econophone"), with respect to international and interstate telecommunications
regulatory matters before the Federal Communications Commission ("FCC"). Unless
otherwise defined herein, capitalized terms used herein have the meanings
assigned to such terms in Econophone's Offering Memorandum issued June 26, 1997
("Offering Memorandum").
In furnishing our opinion we have considered the Communications Act of
1934, as amended, the Telecommunications Act of 1996, and the rules and
regulations promulgated pursuant to such Acts by the FCC (collectively, the
"Federal Communications Law") as it relates to the regulation of Econophone.
Additionally, we have examined the Offering Memorandum. We have not examined
the Units, Notes, Warrants, Indenture, Warrant Agreement, The Registration
Rights Agreement, and any other agreement referred to in the Offering
<PAGE>
Econophone Inc.
Morgan Stanley & Co. Incorporated
July __, 1997
Page 2
Memorandum (collectively, the "Instruments"). Accordingly, we are rendering no
opinion regarding the Instruments, or the consequence of their execution or
implementation, except as expressly indicated below.
Certain statements set forth in the numbered paragraphs below are
stated to be "to our knowledge." Basing our opinion on "to our knowledge,"
signifies that, in the course of our representation of Econophone in matters for
which we have been engaged as counsel, no information has come to our attention
that would give us actual knowledge or actual notice that any such opinions are
not accurate. The statement "to our knowledge" refers to the knowledge of
Robert E. Conn.
On the basis of the foregoing, we are of the opinion that:
1. The descriptions in the Offering Memorandum of the Federal
Communications Law, and the statements in the Offering Memorandum discussing
matters relating to the Federal Communications Law under the captions "Risk
Factors -- Competition," "Risk Factors -- Regulatory Restrictions" and "Business
- -- Regulation -- United States," are accurate in all material respects and
fairly summarize all matters described therein.
2. Subject to the qualifications in this paragraph following the
instant sentence, (A) the consummation of the transactions contemplated by the
Offering Memorandum do not violate the Federal Communications Law; and (B) no
authorization or filing with the FCC is necessary for the consummation of the
transactions contemplated by the Offering Memorandum. Prior approval by the FCC
would be required if (i) the exercise of the Warrants
<PAGE>
Econophone Inc.
Morgan Stanley & Co. Incorporated
July __, 1997
Page 3
were to result in the de jure or de facto transfer of control of Econophone; or
(ii) the exercise of the Warrants were to result in the ownership of record or
voting by aliens or their representatives of more than twenty-five percent of
the capital stock of Econophone.
3. To our knowledge and after due inquiry of Econophone, (A)(i)
Econophone is a nondominant carrier authorized by the FCC to provide
international and interstate interexchange telecommunications services, (ii)
Econophone has been granted Section 214 authority by the FCC to provide
international message telecommunications services through the resale of
international switched voice services to most countries, through the resale of
private line services to four countries, and as a facilities-based carrier to
most countries; (iii) Econophone has been authorized by FCC general rule to
provide interstate interexchange message telecommunications services; and (iv)
in accordance with (i), (ii), and (iii) above, Econophone has on file with the
FCC tariffs applicable to its international and interstate exchange message
telecommunications services; (B) Econophone has all of the certificates, orders,
permits, licenses, authorizations, consents and approvals, including those
specified in subparagraph (A) above, of the FCC necessary to own, lease, or use
its transmission lines and to conduct its business in the manner described in
the Offering Memorandum; and (C) Econophone has not received any notice from the
FCC of any proceedings relating to the revocation of any of such certificates,
orders, permits, licenses, authorizations, consents or approvals, or the
qualification or rejection of any such filing, the effect of which, singly or in
the aggregate, would
<PAGE>
Econophone Inc.
Morgan Stanley & Co. Incorporated
July __, 1997
Page 4
have a material adverse effect on the prospects, conditions (financial or
otherwise), earnings, business or operations of Econophone.
4. To our knowledge and after due inquiry of Econophone, (A)
Econophone is conducting its business in accordance with the FCC authorizations
mentioned in Paragraph 3 above; and (B) Econophone is not in violation of or in
default under the Federal Communications Law, the effect of which would have a
material adverse effect on the prospects, conditions (financial or otherwise),
earnings, business or operations of Econophone.
5. To our knowledge and after due inquiry of Econophone, (A) no
decree or order of the FCC has been issued against Econophone; (B) no
litigation, proceeding, inquiry or investigation has been commenced or
threatened, and no notice of violation or order to show cause has been issued
against Econophone before or by the FCC; and (C) there are no rulemakings or
other administrative proceedings pending before the FCC (i) which are generally
applicable to telecommunications services or the resale thereof, and (ii) which,
if decided adversely to the interest of Econophone, would have a material
adverse effect on Econophone.
This opinion is rendered only for the benefit of Econophone and of
Morgan Stanley & Co. Incorporated and its successors and assigns; and may not be
relied upon by other parties without prior written consent.
Very truly yours,
Robert E. Conn
<PAGE>
EXHIBIT C-2
-----------
Lance J.M. Steinhart
Attorney at Law
6455 East Johns Crossing
Suite 285
Duluth, Georgia 30155
Also admitted in New York Telephone: (770) 232-9200
and Maryland Facsimile: (770) 232-9208
June 26, 1997
Morgan Stanley & Co., Incorporated
1585 Broadway
New York, NY 10036
Econophone, Inc.
1450 37th Street
Brooklyn, NY 11218
Re: ECONOPHONE, INC.
Dear Ladies and Gentlemen:
I have acted as State regulatory counsel to Econophone, Inc., a New
York corporation (the "Issuer"), in connection with the Issuer's Offering
Memorandum dated June , 1997 (the "Offering Memorandum") relating to its
issuance and sale of 155,000 Units. This opinion is being delivered to you
pursuant to the Placement Agreement, dated , 1997 (the "Placement
Agreement"), between the Issuer and Morgan Stanley & Co., Incorporated. All
capitalized terms used and not defined herein have the same respective meanings
herein have the same respective meanings herein as set forth in the Placement
Agreement.
I am not general counsel to the Issuer. The opinions expressed
herein, accordingly, are intended to encompass only matters of the Issuer
directly pertaining to the State regulatory authorities (the "Regulatory
Authorities") which regulate, and applicable State laws which govern, the
Issuer's provision of resold long distance, intrastate interexchange
telecommunications services. I offer no opinions as to any other federal or
state laws.
In connection with this opinion, I have reviewed the Offering
Memorandum, my files for the Regulatory Authorities ("Files") and have made
examinations of relevant laws as deemed appropriate to render the opinion set
forth herein. In addition, I have relied as to factual matters upon a
certificate of certain officers of the Issuer. Whenever my opinions herein are
qualified "to my knowledge," it is intended to indicate that during the course
of my representation of the Issuer, no information has come to my attention that
would give me actual
<PAGE>
Morgan Stanley & Co., Incorporated
Econophone, Inc.
June 26, 1997
Page 2
knowledge of the existence or non-existence of facts to the contrary. I have
not undertaken any independent investigation to determine the existence or
non-existence of such facts, other than my review of the Offering Memorandum,
the Files and relevant law and my reasonable inquiry of Issuer officials having
responsibility for the Issuer's regulatory affairs. No inferences as to my
knowledge of the existence or non-existence of facts, other than the facts which
I have obtained actual knowledge, should be drawn from the fact of my
representation of the Issuer.
I am of the opinion that:
1. To my knowledge, the Issuer has made all reports and filings, and
paid all fees, required by the Regulatory Authorities to provide resold long
distance intrastate interexchange telecommunications service, pursuant to
certification, registration, notification, tariff, or on an unregulated basis in
the following states: Alabama, Arizona, California, Colorado, Connecticut,
Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nevada, New Mexico, Nebraska, New Hampshire, New
Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas,
Utah, Virginia, Washington, Wisconsin, West Virginia and Wyoming. The Issuer
cannot market or provide service in South Carolina until it files a
surety/performance bond as required by the South Carolina Public Service
Commission. Furthermore, the Issuer cannot provide prepaid calling card service
in the State of Louisiana. Issuer's authority to provide resold intrastate
interexchange service in the State of Arkansas was revoked on June 13, 1997 and
Issuer has a petition pending with the Arkansas Public Service Commission to
reinstate such revoked certificate.
2. To my knowledge, the Issuer has applications and/or tariffs
pending to provide resold intrastate interexchange telecommunications service in
the following state: Vermont.
3. To my knowledge, other than as disclosed in paragraph 1. above,
the Issuer has not received any notice from any Regulatory Authority of
proceedings relating to the revocation or modification of any such certificates,
orders, authorizations, consents or approvals, or the qualification or rejection
of any such filing or registration, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects or condition
(financial or otherwise), or in the earnings, business or operations of the
Issuer, taken as a whole.
4. To my knowledge, insofar as the statements in the Offering
Memorandum under Risk Factors-Regulatory Restrictions,
Business-Regulation-United States-State, refer to statements of law,
descriptions of statutes, rules of regulations or legal conclusions, they are
accurate in all material respects.
<PAGE>
Morgan Stanley & Co., Incorporated
Econophone, Inc.
June 26, 1997
Page 3
The opinions expressed herein have been rendered solely for your
benefit in connection with the transactions contemplated by the Placement
Agreement and may not be relied upon by you in any other manner or by any other
person in any manner or for any purpose whatsoever and may not be communicated
or published by you to any other person for any purpose without my prior written
approval in each instance. The opinions expressed herein are given as of the
date hereof, and I disclaim any undertaking or obligation to advise you of any
changes in law, or any change of circumstances of which I become aware, which
may affect any of the opinions contained herein or to update, revise or
supplement any such opinion herein for any reason whatsoever.
Very truly yours,
Lance J.M. Steinhart
State Regulatory Counsel for Econophone, Inc.
LJS/mb
<PAGE>
EXHIBIT C-3
-----------
FINAL DRAFT
[1 July 1997]
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Econophone, Inc.
60 Hudson Street
New York, New York 10013
Dear Sirs,
UK AND EC TELECOMMUNICATIONS REGULATORY AND VAT OPINION
This Opinion Letter is written at the request of Econophone, Inc. ("the
Company") in connection with its proposed offering of [ ]% Senior Notes due
2007 of the Company and Warrants to purchase [ ] shares of the Company's common
stock, par value $0.0001 per share ("the Common Stock"). We have been asked to
give an opinion on whether the current telecommunications services being
provided by the Company and its wholly owned subsidiary, American Telemedia
Limited (the "Subsidiary") in or through the United Kingdom ("UK") and the
European Union ("EU") comply with current applicable telecommunications law in
the UK and the EU. We have also been asked to provide an opinion on certain
changes to the laws of the UK and the EU relating to value added tax ("VAT").
1. DOCUMENTS REVIEWED
We have been provided with copies of the following documents:
(a) the Offering Memorandum, dated 26 June 1997 (hereinafter referred to as the
"Memorandum");
(b) the Placement Agreement, dated 26 June 1997 between the Company and Morgan
Stanley & Co. Incorporated (hereafter referred to as the "Placement
Agreement");
(c) the Indenture, dated 1 July 1997 between the Company and the Bank of New
York, as Trustee (hereinafter referred to as "the Indenture");
(d) the Warrant Agreement, dated 1 July 1997 between the Company and the Bank
of New York as Warrant Agent (hereinafter referred to as the "Warrant
Agreement");
(e) the Registration Rights Agreement, dated 1 July 1997 between the Company
and Morgan Stanley & Co. Incorporated (hereinafter referred to as the
"Rights Agreement");
<PAGE>
(f) A Warrant Registration Rights Agreement dated 1 July 1997 between the
Company and the Bank of New York, as Warrant Agent (hereinafter referred to
as the "Warrants Registration Rights Agreement"); and
(g) A Pledge Agreement dated 1 July 1997 made between the Company and the Bank
of New York, as Trustee (hereinafter referred to as the "Pledge
Agreement").
Collectively, the agreements referred to in paragraphs 1(a) to (g) above are
hereinafter known as the "Agreements".
We have also seen a copy of the International Simple Resale Licence ("the ISR
Licence") and the International Facilities Licence (the "IFL") granted to the
Subsidiary under section 7 of the Telecommunications Act 1984 ("the 1984 Act")
on 20th June 1995 and 28 April 1997 respectively.
On 25 June 1997, we also carried out a search of the public file of the
Subsidiary at the Companies Registration Office (the "Companies Registry").
In addition, on [30 June 1997] we telephoned the Office of Telecommunications
("OFTEL") to enquire whether OFTEL has taken or intends to take any action
against the Subsidiary pursuant to the Conditions contained in the ISR Licence
and/or the IFL.
This Opinion is based solely on the documents examined and the searches and
telephone enquiries carried out as referred to above and we have made no other
enquiry for the purposes of giving the same.
In our examination of the documents referred to above, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to originals of copies and the authenticity of the
originals of such copies. We have also assumed, with your consent and without
undertaking, or having any duty to undertake an independent investigation, that
the representations, warranties and statements as to factual matters made in the
Agreements by the Company are true and correct. We have not independently
verified the manner in which telecommunications services are provided within the
UK by the Company or the Subsidiary. Moreover, we are not qualified to render
any opinion concerning the engineering or technical aspects of the provision of
telecommunications services. When, in this Opinion, we have used the phrase "to
the best of our knowledge," we have not made any independent investigation of
the applicable facts, but have relied, to the extent we deemed proper, on the
representations, warranties and statements as to factual matters made by the
Company in the Agreements and are not aware of any facts inconsistent therewith.
Based upon the foregoing, it is our opinion that:
1. The Subsidiary is the holder of both the ISR License and the IFL (together
known as "the Licenses") in the UK. The ISR Licence relates to the
provision of international simple resale services by means of the
Applicable Systems as defined in Annex A thereto. The
<PAGE>
IFL relates to the provision of international services (other than
international simple resale services) by means of the Applicable Systems as
defined therein. The Licences are in full force and effect and no
proceedings to revoke or restrict such Licences are pending or threatened
and to the best of our knowledge, the Company and the Subsidiary are not in
violation of any telecommunications law, rule or regulation of the UK or of
any judgement, injunction, order or decree of OFTEL which has jurisdiction
over the Company and the Subsidiary in the UK, or over their properties.
2. The descriptions in the Memorandum of current UK statutes relating to
telecommunications, and the respective rules and regulations promulgated
thereunder (collectively the "UK Communications Law"), including, without
limitation, the 1984 Act, and the statements in the Memorandum discussing
matters relating to the UK Communications Law, including, without
limitation, those under the captions "Risk Factors - Regulatory
Restrictions" and "Business - Regulation - United Kingdom" ("the
Sections"), are accurate in all material respects and fairly summarize all
matters described therein. We expressly exclude from our opinion any
statements made in the Sections concerning the permissibility of the
Company's or the Subsidiary's services under the local laws of any country
other than the UK.
3. Except as stated below in this Paragraph 3, the descriptions in the
Memorandum of current law of the EU relating to telecommunications, in the
form of Directives promulgated by European Commission (the "Commission") or
otherwise (collectively the "EC Directives"), including, without
limitation, European Commission Directive 90/388/EEC of 28 June 1990, and
the statements in the Memorandum discussing matters related to the EC
Directives, including, without limitation, those under the captions "Risk
Factors - Regulatory Restrictions" and "Business - Regulation - European
Union" ("the EU Sections"), are accurate in all material respects and
fairly summarize all matters described therein. We expressly exclude from
our opinion any statements made in the EU Sections concerning the
permissibility of the Company's or the Subsidiary's services under the
local laws of any country other than the UK.
4. The execution and delivery of the Placement Agreement by the Company, and
the consummation of the transactions (including, without limitation
issuance of the Units and the underlying Notes and Warrants and execution
of the Indenture, the Warrant Agreement, the Rights Agreement, the pledge
Agreement and the Warrant Registration Rights Agreement) contemplated
thereby do not violate (1) the UK Communications Law, (2) any
telecommunications related rules or "regulations of the DTI and OFTEL
applicable to the Company and the Subsidiary and (3) to the best of our
knowledge any telecommunications related decree from any English court.
However, the Subsidiary may be required under the Licences to notify the
change in shareholding in the Company occasioned by the consummation of the
transactions referred to above.
5. (A) to the best of our knowledge, each of the Company and the Subsidiary
has all certificates, orders, permits, licenses, authorisations, consents
and approvals of and from the DTI necessary to own, lease, license and use
its properties and assets and to conduct
<PAGE>
its business in the manner described in the Offering Memorandum, it being
recognised that the Subsidiary and not the Company holds the necessary
licences to run any telecommunication systems owned or leased by the
Company in the UK; and (B) to the best of our knowledge and having made a
telephone enquiry of OFTEL (but no further enquiry), neither the Company
nor the Subsidiary has received any notice or proceedings relating to the
revocation or modification of any such DTI granted certificates, orders,
permits, licenses, authorisations, consents or approvals, or the
qualification or rejection of any such filing or registration, the effect
of which, singly or in the aggregate, would have a material adverse effect
on the prospects, condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole.
6. To the best of our knowledge and having made a telephone enquiry of OFTEL
(but no further enquiry), (A) no decree or order of OFTEL has been issued
against the Company or the Subsidiary and (B) no litigation, proceeding,
inquiry or investigation has been commenced or threatened, and no notice of
violation or order to show cause has been issued, against the Company or
the Subsidiary before or by OFTEL.
7. To the best of our knowledge, there are no rulemakings or other
administrative proceedings pending before OFTEL which are in the public
domain (1) which are generally applicable to telecommunications services or
the resale thereof and (2) which, if decided adversely to the interests of
the Company or the Subsidiary, would have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
8. The description in the Memorandum of the application of the Sixth VAT
Directive of the Council of the EU adopted in l977 (the "VAT Directive") to
the provision of telecommunications services within the EU (under the
captions "Risks Associated with Imposition of VAT" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview - Revenues; Price Declines" ("the VAT Sections")) and the
derogations from the VAT Directive issued to each Member State of the EU
made by decisions of the Council of the EU on 17 March 1997 ("the
Derogations") in relation to such services are accurate in all material
respects. We expressly exclude from our opinion any statements made in the
VAT Sections concerning the implementation of the VAT Directive and the
Derogations under the local laws of any country other than the UK.
This Opinion is subject to the following limitations and qualifications:
1. Save for Paragraph 3 above, we have not examined and we do not express any
opinion herein concerning any laws other than laws of the UK.
2. This Opinion is based upon applicable law and facts as of the date hereof.
We assume no obligation to update or supplement this Opinion to reflect any
facts or circumstances which may hereafter come to our attention.
<PAGE>
This Opinion is being furnished to you at the request of the Company by us as
special UK and EU telecommunications counsel to the Company and the Subsidiary
in connection with the transactions occurring today. This Opinion is solely for
your benefit and is not to be used, circulated, quoted or otherwise referred to
or relied upon by any other person without our express, written permission. The
opinions expressed in this letter are limited to the matters set forth herein
and no other opinions should be inferred beyond the matters expressed as stated.
Yours faithfully
BIRD & BIRD
<PAGE>
EXHIBIT C-4
-----------
ECONOPHONE Inc.
60 Hudson Street
NEW YORK, NY 10013
U.S.A.
MORGAN STANLEY & Co. Inc.
1585 Broadway
NEW YORK, NY 10036
U.S.A.
DRAFT
We have acted as Belgian regulatory counsel to Econophone Inc. And Econophone
Limited.....
We have acted as Belgian regulatory counsel to Econophone, Inc. and Econophone
Ltd. This opinion is being delivered pursuant to the Placement Agreement dated
June *, 1997 (the "Placement Agreement") between Econophone, Inc. And Morgan
Stanley & Co. Incorporated.
For purposes of this opinion letter, we have made such examination of the
Belgian Law of 21 March 1991 concerning the reform of certain economic public
enterprises ("wet betreffende de hervorming van sommige economische
overheidshedrijven"), the Royal Decree of October 28,1996 and the Ministerial
Decree of November 25, 1996, as we have deemed necessary for this opinion
letter. We have also examined copies of the following:
1. The declaration of intent to provide certain non-reserved
telecommunications services filed by Mr. Arthur FLIEGER, on behalf of
ECONOPHONE Inc. (the "company") as its Belgian counsel, on February
23, 1996, as supplemented by letters Mr. A. FLIEGER submitted on
behalf of ECONOPHONE Limited on May 24, 1996, and June 20, 1996, with
the Belgisch Instituut voor Postdiensten en Telecommunicatie
("B.I.P.T.") (the "Declaration").
2. The statement of no objection ("geen bezwaar") dated August 8, 1996,
from the B.I.P.T. and bearing the registration number NRS/96/1315
relating to the Declaration (the "Registration").
We have not examined or investigated records in any office or branch of the
B.I.P.T. or of any other level of the Belgian government. There may be records
of matters pending at the B.I.P.T. that were not available for inspection by the
public as a matter of law or of administrative practice and that we did not
examine.
<PAGE>
The Registration issued by the B.I.P.T. and referenced in clause 2 above
clarifies that the services that ECONOPHONE Limited is authorized to provide
shall be offered to users who constitute among themselves "closed user groups"
("gesloten gebruikersgroepen"), or that those services include certain "added
value" ("toegevoegde waarde") features, as those two terms in quotations are
interpreted by the B.I.P.T. On basis of the information received from
ECONOPHONE Limited's offices we can state that to our knowledge ECONOPHONE
Limited offers their service in compliance with the statement of no objection
mentioned in clause 2 above.
As used in this opinion letter, the phrase "to our knowledge" means the actual
knowledge (that is, the conscious awareness of facts or other information of the
offices in the firm who have given substantive attention to representation of
the Company in connection with the exploitation of the service.
Based upon, subject to and limited by the foregoing, we are of the opinion that:
(a) ECONOPHONE Limited is the holder of the Registration of its
declaration of intent to provide certain non-reserved
telecomunications services. The Registration constitutes the only
licence, permit, approval or authorization required to be issued by
the B.I.P.T. to permit ECONOPHONE Limited to provide:
(i) an international service for long distance transmission
and signal routing via the public telecommunications
network (through the switched network and leased lines),
by way of telecommunications processes ("een dienst voor
internationale long distance overdracht en routering van
signalen over het openbare telecommunicatienetwerk (via
het gecommuteerde netwerk en gebuurde hjnen), via
telecommunicatieprocedes");
(ii) a message service consisting of the storage and
transmission of voice messages (voice mail), e-mail for
texts (e-mail) and fax (econo fax) ("een herichtendienst
bestaande uit de opslag en de transmissie van vocale
berichten (voice mail), e mail voor tekst (e-gram) en fax
(econo fax)");
(iii) ECONOPHONE Limited - therefore to our knowledge has all
licenses required to carry out its business in Belgium as
it now operates.
(b) To our knowledge, there is no proceeding or other administrative
action pending or threatened before the B.I.P.T. against the Company
or ECONOPHONE Limited to revoke, cancel, rescind, modify, annul, or
refuse to renew in the ordinary course the Registration.
<PAGE>
(c) The statements in Econophone, Inc.'s Offering Memorandum dated june
26, 1997 under the caption "Business -- Regulation Belgium", to the
extent they summarize or discuss matters of Belgian law, are correct
in all material respects.
(d) The execution and delivery of the Placement Agreement by Econophone,
Inc. and the consummation of the transactions contemplated thereby
will not violate the Belgian Law of 21 March 1991, the Royal Decree of
October 28, 1996, the Ministerial Decree of November 25, 1996, the
Declaration or the Registration.
(e) We confirm herewith that Econophone Limited is a company duly
incorporated under Irish law on May 1, 1996 and registered under
number 248383. To our knowledge the Econophone Limited complies with
all laws and regulations and is a valid and lawfully acting legal
entity. Econophone, Inc. Is the owner of Econophone, Inc.
We have not, except as specifically identified above, made any independent
review or investigation of factual or other matters, including the organization,
existence, good standing, assets, business or affairs of ECONOPHONE Limited. We
have assumed the authenticity, accuracy and completeness, including the
conformity with the authentic originals of documents submitted to us as
reproduced copies, of the foregoing documents, records, certification and
statements of fact, on which we are relying, and have made no independent
investigations thereof.
Antwerpen, June 26, 1997
ARTHUR FLIEGER
<PAGE>
EXHIBIT C-5
-----------
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
U.S.A.
Econophone Inc.
60 Hudson Street
New York, New York 16013
U.S.A.
Ladies and Gentlemen:
We have acted as special German regulatory counsel to Econophone Inc.
("Econophone" or the "Company") in connection with its issuance and sale of
155,000 units pursuant to a Placement Agreement dated June 26, 1997 (the
"Placement Agreement") between Econophone and Morgan Stanley & Co. Incorporated.
Capitalized teens used herein without definition are used as defined in the
Placement Agreement.
I.
1. In connection with this opinion, we have examined and relied upon (i) the
description attached hereto as Annex of the telecommunications services
being provided in Germany by the Company; (ii) a copy of the Company's
notification to the Federal Office of Posts and Telecommunications dated
June 12 1997; (iii) Econophone's Offering Memorandum
<PAGE>
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
dated June 26, 1997 related to the offering of the Units and (iv) the
Placement Agreement.
2. In our examination of the documents referred to above, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to originals of copies and the
authenticity of the originals of such copies. We have also assumed, with
your consent and without undertaking, or having any duty to undertake, an
independent investigation, that the representations, warranties and
statements as to factual matters made in the Placement Agreement by the
Company are true and correct. We have not independently verified the
manner in which telecommunications services are provided within Germany by
the Company and by Econophone GmbH (the "Subsidiary"), NOR HAVE WE
INDEPENDENTLY VERIFIED THAT THE DESCRIPTIONS IN THE OFFERING MEMORANDUM OF
THE MANNER IN WHICH TELECOMMUNICATIONS SERVICES ARE PROVIDED IN GERMANY BY
THE COMPANY AND BY THE SUBSIDIARY IS TRUE AND CORRECT, but have assumed the
accuracy of the description thereof attached hereto as Annex. Moreover, we
are not qualified to render any opinion concerning the engineering or
technical aspects of the provision of telecommunications services. When,
in this opinion, we have used the phrase "to the best of our knowledge", we
have not made any independent investigation of the applicable facts, but
have relied, to the extent we deemed proper, on the representations,
warranties and statements as to factual matters made by the Company in the
Placement Agreement or in certificates of officers or other
<PAGE>
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
representatives of the Company and the Subsidiary and on inquires of
appropriate officers of the Company and are not aware of any facts
inconsistent therewith.
3. This opinion is given with respect to the laws of Germany as currently in
force and effect and we do not pass upon nor do we express any opinion in
respect of those matters governed by or construed in accordance with any
laws other than those of Germany. Based upon the foregoing, it is our
opinion that:
II.
1. The description in the Offering Memorandum of matters in
connection with the German Telecommunications Act of 25 July 1996
(the "German Telecommunications Act") and the statements in the
Offering Memorandum discussing matters related to the German
Telecommuncations Act, including, without limitation, those under
the caption "Business-Regulation-Germany", are accurate in all
material respects regarding the German Telecommunications Act and
fairly summarize all matters described therein;
2. The Company has duly filed a notification as a telecommunications
service provider to the Bundesamt fur Post und Telekommunikation
on June 12, 1997;
<PAGE>
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
3. (A) The execution and delivery of the Placement Agreement by the
Company, and the consummation of the transactions (including,
without limitation, issuance of the Units and the underlying
Notes and Warrants and execution of the Indenture, the Warrant
Agreement and the Registration Rights Agreement) contemplated
thereby do not violate (1) the German Telecommunications Act, (2)
any rules or regulations promulgated under the German
Telecommunications Act applicable to the Company and its
subsidiaries and (3) to the best of our knowledge after due
inquiry, any telecommunications related decree from any German
court, and (B) no authorization of or filing with the Federal
Ministry of Posts and Telecommunications is necessary for the
execution and delivery of the Placement Agreement by the Company
and the consummation of the transactions (including, without
limitation, issuance of the Units and the underlying Notes and
Warrants and execution of the Indenture, the Warrant Agreement
and the Registration Rights Agreement) contemplated thereby in
accordance with the terms thereof;
4. (A) To the best of our knowledge, each of the Company and its
subsidiaries has all certificates, orders, permits, licenses,
authorizations, consents and approvals of and from the Federal
Ministry of Posts and Telecommunications necessary under the
German Telecomunications Act
<PAGE>
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
to own, lease, license and use its properties and assets and to
conduct its business in the manner described in the Offering
Memorandum; and (B) to the best of our knowledge after due
inquiry, neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certicates, orders, permits, licenses,
authorizations, consents or approvals, or the qualification or
rejection of any such filing or registration, the effect of
which, singly or in the aggregate, would have a material adverse
effect on the prospects, condition, financial or otherwise, or in
the earnings, business or operations of the Company and its
subsidiaries, taken as a whole;
5. To the best of our knowledge after due inquiry, (A) each of the
Company and its subsidiaries is conducting its business in
accordance with the notification filed with the Federal Office of
Posts and Telecommunications on June 12, 1997 listed in Paragraph
I.1. above and (B) neither the Company nor any of its
subsidiaries is in violation of or in default under the German
Telecommunications Act or the rules or regulations of the Federal
Ministry of Posts and Telecommunications, the effect of which,
singly or in the aggregate, would have a material adverse effect
on the prospects, condition, financial or otherwise, or in the
earnings, business or operations of the Company and its
subsidiaries, taken as a whole; and
<PAGE>
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
6. To the best of our knowledge after due inquiry, (A) no decree or
order of the Federal Ministry of Posts and Telecommunications has
been issued against the Company or any of its subsidiaries; (B)
no litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no notice of violation or order to
show casue has been issued, against the Company or any of its
subsidiaries before or by the Federal Ministry of Posts and
Telecommunication and (C) there are no rulemakings or other
administrative proceedings pending before the Federal Ministry of
Posts and Telecommunications, (i) which are generally applicable
to telecommunications services or the resale thereof and (ii)
which, if decided adversely to the interest of the Company or its
subsidiaries, would have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
This opinion is addressed to you solely. This opinion is solely
for your own benefit, and except with our prior written
permission, it is not to be transmitted to or discussed with or
used or relied upon by any other person.
[Signature]
<PAGE>
DRAFT
ANNEX TO LEGAL OPINION
GERMANY
1 JULY 1997
CUSTOMER SERVICES PROVIDED BY ECONOPHONE INC. IN GERMANY
Econophone's customers in Germany currently subscribe to one or three services:
I. CALLING CARD
This service allows a subscriber to dial an international toll free number in
Germany. The call is routed to an Econophone switch in the United States or the
United Kingdom where the caller is prompted to enter an account number. When
the account number is verified by the computer, the caller is prompted to enter
a destination number anywhere in the world. This travel card service is
currently available from over 40 countries worldwide, including Germany.
II. DEBIT CARD
This service is offered to tourists or people who do not have an account with
Econophone. The card can be purchased in various nominations, such as DM 20.00,
DM 50.00, DM 100.00. The caller dials the international toll free number from
the back of the card. The call is routed to a switch in the United States or
the United Kingdom. The caller is prompted to enter the code from the back of
the card. After the code and the destination numbers are entered, the computer
checks the balance left on the card for that destination (because different
countries will have different tariffs) and then notifies the caller how long he
can talk to this particular destination. When the time limit is reached, the
caller is notified that 30 seconds are remaining on the card, after which the
call is disconnected by the computer.
<PAGE>
DRAFT
LEGAL OPINION
GERMANY
1 JULY 1997
III. VOICE TRANSPORT
Econophone has also deployed a transport node in Hamburg.
This node acts as a transfer point for calls out of Hamburg. Econophone has not
deployed a switch in Germany and does not perform any switching functions in
Germany. Rather, when a customer dials a local number in Hamburg, the call is
transported via leased line to the Econophone switching center in London,
England. The caller then enters an identification code after a prompt and once
the code is verified, the customer will be allowed to terminate the call on the
Econophone network.
Currently all of Econophone's voice traffic generated in Germany is transported
to Econo-phone switching centres in London and New York and switch from there.
<PAGE>
DRAFT
Joachim Scherer
Doser Amereller Noack/
Baker & McKenzie
BethmannstraBe 50-54
60311 Frankfurt am Main July 1, 1997
JS/TB/gb
ECONOPHONE SERVICES IN GERMANY
Dear Mr. Scherer:
In conjunction with the legal opinion to be provided by Doser Amereller
Noack/Baker & McKenzie on regulatory aspects, under German telecommunications
law, of the services provided by Econophone Inc. in Germany we hereby confirm
the following:
1. (A) Each of the Company and its subsidiaries has all certificates, orders,
permits, licenses, authorizations, consents and approvals of and from the
Federal Ministry of Posts and Telecommunications necessary under the German
Telecommunications Act to own, lease, license and use its properties and
assets and to conduct its business in the manner described in the Offering
Memorandum; and (B) neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any certificates, orders, permits, licenses,
authorizations, consents or approvals, or the qualification or rejection or
any such filing or registration, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects,
condition, financial or otherwise, or on the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
<PAGE>
DRAFT
2. (A) Each of the Company and its subsidiaries is conducting its business in
accordance with the notification filed to the Federal Office of Posts and
Telecommunications on June 12, 1997 and (B) neither the Company nor any of
its subsidiaries is in violation of or in default under the German
Telecommunications Act or the rules or regulations of the Federal Ministry
of Posts and Telecommunications, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects,
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
3. (A) No decree or order of the Federal Ministry of Posts and
Telecommunications has been issued against the Company or any of its
subsidiaries; (B) no litigation, proceeding, inquiry or investigation has
been commenced or threatened, and no notice of violation or order to show
cause has been issued, against the Company or any of its subsidiaries
before or by the Federal Ministry of Posts and Telecommunications and (C)
there are no rulemakings or other administrative proceedings pending before
the Federal Ministry of Posts and Telecommunications, (i) which are
generally applicable to telecommunications services or the resale thereof
and (ii) which, if decided adversely to the interest of the Company or its
subsidiaries, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
4. The services described in the Annex to the Legal Opinion dated 19 June 1997
correctly describe all the services which Econophone Inc. is currently
offering in Germany.
(Signature)
(Econophone Inc.)
<PAGE>
EXHIBIT C-6
-----------
July 1, 1997
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
U.S.A.
Econophone, Inc.
60 Hudson Street
New York, NY 10013
U.S.A.
RE: ECONOPHONE, INC.
Ladies and Gentlemen,
We have acted as special French legal counsel to Econophone, Inc. (the
"Company"), a New York corporation, in connection with the Placement Agreement
between the Company and Morgan Stanley & Co. Incorporated, dated June 16, 1997
(the "Placement Agreement") and the Company's Offering Memorandum, dated June
26, 1997 (the "Offering Memorandum"), concerning the private placement of Units
by the Company.
This opinion is rendered to you pursuant to Section 4 (e) of the
Placement Agreement. Capitalized terms used and not otherwise defined herein
shall have the respective meanings assigned to them in the Placement Agreement.
In connection with this opinion, we have assumed without investigation
or inquiry the conformity with originals of all documents submitted to us as
copies and the genuineness of all signatures.
We do not act as regular counsel to the Company, nor have we
participated in the negotiations related to the above-described transactions,
except for general advice to the Company only for the purposes of rendering this
opinion, and w have no independent knowledge of facts related thereto. As to
questions of fact material to our opinion, we have relied exclusively upon the
representations and warranties contained in the Placement Agreement and the
description of the properties, assets and business of the Company contained in
the Offering Memorandum.
We have investigated such questions of French law for the purposes of
rendering this opinion as we have deemed necessary. In addition, we have
received oral advice from the competent French regulatory authorities concerning
their interpretation and application of the law. We are members of the Bar of
Paris, and, accordingly, do not express any opinion herein concerning any laws
other than the laws of the French Republic in effect on the date hereof as
interpreted and applied by competent judicial and administrative authorities.
<PAGE>
On the basis of the foregoing, and in reliance thereon, and subject to
the limitations, qualifications and exceptions set forth herein, we are of the
opinion that:
1. the descriptions in the Offering Memorandum under the caption
"Business - Regulation - France" of current French regulatory
practices and current French statutes relating to telecommunications,
and the respective rules and regulations promulgated thereunder
(collectively, the "French Communications Law"), including, without
limitation, the CODE DES POSTES ET TELECOMMUNICATIONS (the "Code") are
accurate in all material respects;
2. the Company has not yet applied for any licenses to provide
telecommunications services in France; however, the Company may apply
to the French Ministry of Industry, Post and Telecommunications (the
"Ministry") for an authorization under Article L. 34-1 of the Code
relating to the supply of telecommunications services in France;
3. the private placement of the Units pursuant to the Placement Agreement
does not create a right on the part of the Ministry under the Code to
withdraw or deny licenses or authorizations required under such Code;
4. no authorization of or filing with the Ministry is necessary for the
execution and delivery of the Placement Agreement by the Company and
the consummation of the transactions contemplated thereby in
accordance with the terms thereof;
5. the Company does not require any license or authorizations form the
Ministry to provide the following services in France: prepaid calling
card services utilizing international toll free access, data
transmission services offered to the public and telecommunications
services utilizing local dial-up access offered to closed user groups
through duly authorized networks.
This opinion is rendered only to you and is solely for your benefit in
connection with the placement of the Units. This opinion may not be relied upon
by you for any other purpose, or relied upon by any other person, firm or
corporation for any purpose without our prior written consent.
Very truly yours,
Salans, Hertzfeld & Heilbronn
<PAGE>
Exhibit 10.3
AMENDED AND RESTATED
EQUIPMENT LOAN AND SECURITY AGREEMENT
-------------------------------------
This AMENDED AND RESTATED EQUIPMENT LOAN AND SECURITY AGREEMENT
("AGREEMENT"), is originally dated as of May 28, 1996, as first amended by that
certain letter agreement dated November 18, 1996 and as now amended and restated
as of March 27, 1997 by and between the following parties:
LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation
with offices at 220 Athens Way, Nashville,
Tennessee 37228 ("LENDER")
BORROWER/DEBTOR: ECONOPHONE, INC., a New York corporation with its
principal place of business at 45 Broadway, New
York, New York 10006 ("BORROWER"), and such
successors and assigns as may be permitted
hereunder.
This Amended and Restated Equipment Loan and Security Agreement includes the
general terms and conditions contained herein and all the exhibits and schedules
attached hereto, all of which are incorporated herein. In the event of a
conflict between the general terms and conditions and any schedule, the
additional terms and conditions stated in the schedule shall control.
By executing this Equipment Loan and Security Agreement, Lender agrees to make
loans to Borrower, and Borrower agrees to borrow from Lender and to provide
collateral to secure such loans, all on the terms and conditions set forth
herein.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Equipment Loan and Security
Agreement by their duly authorized representatives:
LENDER: BORROWER:
NTFC CAPITAL CORPORATION ECONOPHONE, INC.
BY: BY:
TITLE: TITLE:
DATE: DATE:
AMERICAN TELEMEDIA, LTD, an English
corporation and wholly owned subsidiary of
Borrower, with its principal place of
business at 2 Exchange Tower, Harbour
Exchange Square, London E1496B, joins in
executing this Agreement to evidence its
liability, jointly and severally for all
obligations of Borrower hereunder.
BY:
TITLE:
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TABLE OF CONTENTS
-----------------
ARTICLE 1: DEFINITIONS.......................................................
1.01. Certain Definitions...........................................
1.02. Accounting Principles; Subsidiaries...........................
1.03. UCC Terms....................................................
1.04. General Construction; Captions...............................
1.05. References to Documents and Laws.............................
ARTICLE 2: LOANS............................................................
2.01. Commitment...................................................
2.02. Note and Payment Terms.......................................
2.03. Procedures for Borrowing.....................................
2.04. Prepayments..................................................
2.05. Computation of Interest......................................
2.06. Payments.....................................................
2.07. Indemnity....................................................
2.08. Use of Proceeds..............................................
2.09. Fees.........................................................
2.10. Lender's Expenses............................................
2.11. Stock Pledge Agreement.......................................
ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT................................
3.01. Grant of Security Interest...................................
3.02. Priority of Security Interests...............................
3.03. Further Documentation; Pledge of Instruments.................
3.04. Further Identification of Collateral.........................
3.05. Remedies.....................................................
3.06. Standard of Care.............................................
3.07. Advances to Protect Collateral...............................
3.08. License to Use...............................................
3.09 Priority of Security Interests and/or Liens on Equipment
located outside of the United States.........................
ARTICLE 4: REPRESENTATIONS AND WARRANTIES..................................
4.01. Organization and Qualification...............................
4.02. Authority and Authorization..................................
4.03. Execution and Binding Effect.................................
4.04. Governmental Authorizations..................................
4.05. Regulatory Authorizations....................................
4.06. Material Agreement; Absence of Conflicts.....................
4.07. No Restrictions..............................................
4.08. Financial Statements.........................................
4.09. Financial Accounting Practices...............................
4.10. Accurate and Complete Disclosure.............................
4.11. No Event of Default; Compliance with Material Agreements.....
4.12. Litigation...................................................
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4.13. Rights to Property...........................................
4.14. Financial Condition..........................................
4.15. Taxes........................................................
4.16. No Material Adverse Change...................................
4.17. No Regulatory Event..........................................
4.18. Trade Relations..............................................
4.19. No Brokerage Fees............................................
4.20. Margin Stock; Regulation U...................................
4.21. Investment Company; Public Utility Holding Company...........
4.22. Personal Holding Company.....................................
4.23. ERISA........................................................
4.24. Environmental Warranties.....................................
4.25. Security Interests...........................................
4.26. Place of Business............................................
4.27. Location of Collateral.......................................
4.28. Clear Title To Collateral....................................
4.29. Assumed Names................................................
4.30. [INTENTIONALLY OMITTED]......................................
4.31. NTI Purchase Agreement.......................................
ARTICLE 5: CONDITIONS OF CLOSING...........................................
5.01 Initial Closing..............................................
5.02 Amendment Closing............................................
ARTICLE 6: CONDITIONS OF LENDING............................................
6.01. Conditions for Initial Advance...............................
6.02. Conditions for All Advances..................................
6.03. Affirmation of Representations and Warranties................
6.04. Deadline for Funding Conditions..............................
ARTICLE 7: AFFIRMATIVE COVENANTS...........................................
7.01. Reporting and Information Requirements.......................
7.02 Other Notices................................................
7.03. Notice of Pension-Related Events.............................
7.04. Inspection Rights............................................
7.05. Preservation of Corporate Existence and Qualification........
7.06. Continuation of Business.....................................
7.07. Insurance....................................................
7.08. Payment of Taxes, Charges, Claims and Current Liabilities....
7.09. Financial Accounting Practices...............................
7.10. Compliance with Laws.........................................
7.11. Use of Proceeds..............................................
7.12. Government Authorizations; Regulatory Authorizations, Etc....
7.13. Contracts and Franchises.....................................
7.14. Consents.....................................................
7.15. Financial Covenants..........................................
7.16. Construction and Storage.....................................
7.17. Upgrade NTI Equipment........................................
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ARTICLE 8: NEGATIVE COVENANTS...............................................
8.01. Additional Indebtedness......................................
8.02. Restrictions on Liens and Sale of Collateral.................
8.03. Limitation on Contingent Obligations.........................
8.04. Fees and Commissions.........................................
8.05. Prohibition of Mergers, Acquisitions, Name, Office or Business
Changes......................................................
8.06. Limitation on Equity Payments................................
8.07. Limitation on Investments, Advances and Loans................
8.08. Capital Expenditures.........................................
8.09. Limitation on Leases.........................................
8.10. Transactions with Affiliates.................................
8.11. Termination of NTI Purchase Agreement........................
8.12. Removal of Collateral........................................
8.13. Assumed Names................................................
ARTICLE 9: EVENTS OF DEFAULT................................................
9.01. Events of Default............................................
9.02. Consequences of an Event of Default..........................
9.03. Exercise of Rights...........................................
9.04. Rights of Secured Party.......................................
9.05. Notices, Etc. Waived.........................................
9.06. Additional Remedies..........................................
9.07. Application of Proceeds......................................
9.08. Discontinuance of Proceedings................................
9.09. Power of Attorney............................................
9.10. Regulatory Matters...........................................
ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS................................
10.01. Modifications and Waivers.....................................
10.02. Advances Not Implied Waivers.................................
10.03. Deviation from Covenants......................................
10.04. Holidays.....................................................
10.05. Records......................................................
10.06. Notices......................................................
10.07. FCC and PUC Approval.........................................
10.08. Lender Sole Beneficiary......................................
10.09. Lender's Review of Information...............................
10.10. No Joint Venture.............................................
10.11. Severability.................................................
10.12. Rights Cumulative............................................
10.13. Duration; Survival...........................................
10.14. Governing Law................................................
10.15. Counterparts.................................................
10.16. Successors and Assigns.......................................
10.17. Participation................................................
10.18. Time of Essence..............................................
10.19. Disclosures and Confidentiality..............................
10.20. Jurisdiction and Venue.......................................
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10.21. Jury Waiver..................................................
10.22. Limitation on Liability......................................
10.23. Borrower Waivers.............................................
10.24. Schedules....................................................
10.25. Agreement to Govern..........................................
10.26. Entire Agreement.............................................
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SCHEDULES TO EQUIPMENT LOAN AND SECURITY AGREEMENT
--------------------------------------------------
Schedule 1 Borrower Information and Defined Terms
Schedule 2.01 Maximum Loan Amount
Schedule 2.02 Payment Terms and Governing Law
Schedule 2.09 Fees
Schedule 4.04 Required Consents
Schedule 4.05 Regulatory Authorizations
Schedule 4.07 Restrictions on Loans
Schedule 4.08 Financial Statements
Schedule 4.12 Pending Litigation
Schedule 4.25 UCC Filing Offices
Schedule 4.26 Principal Offices and Location of Collateral
Schedule 4.29 Assumed Names
Schedule 4.31 NTI Purchase Agreement
Schedule 6.02 Post-Closing Items
Schedule 7.07 Insurance
Schedule 7.15 Financial Covenants
Schedule 8.01 Permitted Specific Indebtedness
Schedule 8.02 Permitted Specific Encumbrances
Schedule 8.06 Permitted Equity Payments
EXHIBITS TO EQUIPMENT LOAN AND SECURITY AGREEMENT
-------------------------------------------------
Exhibit A Form of Note
Exhibit B Form of Borrowing Certificate
Exhibit C Form of Opinion of Counsel for Borrower
Exhibit D [INTENTIONALLY OMITTED]
Exhibit E Form of Landlord's Consent
Exhibit E-1 Form of Mortgagee's Consent
Exhibit F Certificate of Financial Condition
Exhibit G Form of Stock Pledge Agreement
Exhibit H Form of Memorandum Draft
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AMENDED AND RESTATED
EQUIPMENT LOAN AND SECURITY AGREEMENT
-------------------------------------
THIS AMENDED AND RESTATED EQUIPMENT LOAN AND SECURITY AGREEMENT
("AGREEMENT") is dated as of the "AMENDMENT CLOSING DATE" set forth on SCHEDULE
1 hereto, by and between the entity or entities described on SCHEDULE 1 hereto
(collectively, "BORROWER") and NTFC CAPITAL CORPORATION, a Delaware corporation
("LENDER"), with offices at 220 Athens Way, Nashville, Tennessee 37228.
B A C K G R O U N D:
--------------------
A. Borrower has entered into a certain purchase agreement with Northern
Telecom Inc., as described on SCHEDULE 1 hereto, providing for Borrower's
purchase of certain telecommunications equipment and the license of associated
software, all as described therein, and has requested Lender to extend credit to
Borrower to finance such purchase and license, as described on SCHEDULE 1
hereto.
B. WHEREAS, Borrower and Lender previously entered into an Equipment Loan
and Security Agreement dated as of May 28, 1996 (the "Original Agreement"),
pursuant to which the Lender agreed to loan Borrower up to Two Million Dollars
($2,000,000) subject to the terms and conditions stated in the Original
Agreement, and
C. WHEREAS, Borrower and Lender executed that certain Letter Agreement
dated as of November 18, 1996 extending the funding date.
D. Borrower has requested Lender to extend additional credit subject to
the terms and conditions set forth in this Agreement, and Lender is willing to
extend such credit upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto agree as follows:
ARTICLE 1: DEFINITIONS
----------------------
1.01. CERTAIN DEFINITIONS. Certain terms are defined on SCHEDULE 1
hereto. In addition to other words and terms defined in the preamble hereof or
elsewhere in this Agreement, or on the Schedules hereto, the following words and
terms shall have the following meanings unless the context otherwise clearly
requires:
"ADDITIONAL EQUIPMENT": any equipment purchased by the Borrower in
furtherance of or in connection with the Description of Business set forth on
SCHEDULE 1, other than the purchase of the Equipment with the Advances.
"ADVANCE(S)": any advance or loan of funds made by Lender to Borrower
pursuant to this Agreement.
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"AFFILIATE": as applied to any Person, any second Person directly or
indirectly controlling, controlled by, or under common control with that Person,
or related to such Person by blood, marriage or adoption. For purposes of this
definition and the definition of "Subsidiary", a Person shall be deemed to
control another Person if such first Person possesses, directly or indirectly,
the power to direct, or to cause the direction of, the management and policies
of such other Person, whether through ownership of voting securities, by
contract or otherwise.
"AFFILIATE TRANSACTION": the merger of the Borrower with an Affiliate,
whether the Borrower, Affiliate, or another entity is the surviving entity, or
other combination involving the Borrower and Affiliate, provided that (i) such
Affiliate Transaction does not cause a Change of Control of the Borrower (or in
the event that the surviving entity of such merger is not the Borrower, the
Owners of the Borrower immediately prior to such transaction continue to have
the direct or indirect control of, or the ability or right to control, a
majority of the voting shares of each class of securities or ownership rights in
the successor to the Borrower and the right and/or power to control the election
of the Board of Directors of the successor to the Borrower); (ii) the surviving
corporation assumes the obligations of the Borrower hereunder in writing
reasonably satisfactory to Lender; (iii) on or before the consummation of such
transaction, Lender receives an opinion of counsel to the surviving company with
respect to such matters as Lender deems reasonably necessary (including, but not
limited to, the validity and enforceability of the written assumption by such
successor and the continued priority and perfection of the security interests on
the Collateral in favor of the Lender); and (iv) immediately prior to, and after
giving effect to, such merger or consolidation and the assumption by such
successor of Borrower's obligations hereunder, there shall not exist a Default
or Event of Default.
"AMENDMENT CLOSING DATE": as defined in SCHEDULE 1 hereto.
"BASIC AGREEMENTS": a collective reference to this Agreement, the Original
Loan Agreement, each Note, and the Security Documents.
"BORROWING CERTIFICATE": a certificate substantially in the form of
EXHIBIT B hereto.
"BORROWING DATE": any Business Day on which an Advance is made to Borrower
hereunder.
"BUSINESS DAY": a day other than a Saturday, Sunday or other day on which
commercial banks in Nashville, Tennessee are authorized or required by law to
close.
"BUSINESS PLAN": the Borrower's business plan, including pro forma
projections, as described in, and attached to, SCHEDULE 1.
"CALENDAR QUARTER": each three month period starting on each January 1,
April 1, July 1, and October 1, during the term of this Agreement.
"CASH": at any time, the cash, cash equivalents or marketable investment
grade securities held by Borrower free of any claims or encumbrances.
"CASH FLOW": during any fiscal period of Borrower, the sum of (i) net
income (or loss) (which may be a positive or negative number) for such period,
plus (ii) all non-cash items deducted in determining such net income (or loss),
minus (iii) all non-cash items added in determining such net income (or loss)
during such period, less (iv) any Equity Payments pursuant to SECTION 8.06
hereof or
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payments on Subordinated Indebtedness made during such period.
"CERTIFICATE OF FINANCIAL CONDITION": a certificate in the form of EXHIBIT
F hereto, executed by Borrower.
"CHANGE IN CONTROL": any change in the direct or indirect control of, or
the ability or right to control, a majority of the voting shares of any class of
securities or ownership rights in the Borrower (other than the Preferred Stock)
or in the right and/or the power to control the election of the board of
directors of the Borrower.
"CLOSING DATE": as defined on SCHEDULE 1 hereto.
"CODE": the Internal Revenue Code of 1986, as amended from time to time.
"COLLATERAL": as defined in Section 3.01 hereof.
"COMMITMENT": as defined in Section 2.01 hereof.
"COMMUNICATIONS LAW": any and all of (i) the Communications Act of 1934, as
amended, and any similar or successor federal statute, and the rules and
regulations of the FCC thereunder, (ii) any state law governing the provision of
telecommunications services, and the rules and regulations of the PUC, all as
the same may be in effect from time to time.
"CONSENT": a consent to a collateral assignment of the NTI Purchase
Agreement, a Landlord Consent and/or a Mortgagee's Consent.
"CONTINGENT OBLIGATION": as to any Person, any obligation of such Person
guaranteeing, directly or indirectly, any Indebtedness, leases, dividends or
other obligations ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent, (a) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (d) otherwise to assure or hold harmless the owner of such primary
obligation against loss in respect thereof.
"DEBT SERVICE": for any fiscal period of Borrower, the sum of all principal
and interest payments that Borrower is required to make during such period on
account of all of its Indebtedness including, without limitation, (a) amounts
due during such period on account of capitalized leases, (b) the then current
portion of any long-term Indebtedness, (c) amounts due on short-term
Indebtedness, and (d) amounts due under this Agreement and each Note.
"DEBT SERVICE COVERAGE RATIO": at the end of any fiscal period, the ratio
of Borrower's Cash Flow for such fiscal period to Borrower's Debt Service for
such fiscal period.
"DEFAULT": any of the conditions or occurrences specified in SECTION 9.01,
whether or not any
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requirement for the giving of notice, the lapse of time, or both, or any other
condition has been satisfied.
"DEFAULT RATE": a rate of interest equal to the lesser of (i) three percent
(3%) over the Interest Rate, or (ii) the maximum permissible rate under
applicable law in effect at any time.
"EBITDA": for any fiscal period, the Borrower's actual operating earnings
from ongoing operations and before interest, taxes, depreciation and debt
amortization for such fiscal period.
"ENVIRONMENTAL LAW": any current or future federal, state and local law
(including common law), statute, regulation, ordinance, rulings, codes, judicial
order, administrative order or terms of licenses or permits applicable to
environmental conditions (including without limitation conditions relating to
ambient air, surface water, groundwater, land surface or subsurface strata),
including without limitation all such laws governing employment, the generation,
use, storage, disposal or transportation of toxic or hazardous substances or
wastes (including, without limitation, asbestos and petroleum products), the
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Superfund Amendment and
Reauthorization Act of 1986, the Toxic Substances Control Act, the Clean Air
Act, the Water Pollution Control Act, the Hazardous Waste Management Act, the
Mineral Lands and Leasing Act, the Surface Mining Control and Reclamation Act,
U.S. Department of Transportation Regulations, and all similar state and local
laws, regulations, all as now or hereafter amended.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
from time to time, and any successor statute.
"EQUIPMENT": as defined in SECTION 3.01 hereof.
"EQUITY PAYMENT": any distribution of earnings or capital to any Owner, or
any redemption of stock or other ownership interests, either directly or
indirectly, whether in cash or property or in obligations of the Borrower.
"EVENT OF DEFAULT": any of the events specified in SECTION 9.01 hereof,
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, under SECTION 9.01 or otherwise, has been
satisfied.
"FINANCING TERMINATION DATE": as defined on SCHEDULE 2.02 hereto.
"FCC": the Federal Communications Commission of the United States of
America, and any successor, in whole or in part, to its jurisdiction.
"FOREIGN TRANSACTION": the establishment by Borrower of foreign Affiliates,
Subsidiaries, or joint venture operations outside the United States.
"GAAP": subject to SECTION 1.02 hereof, generally accepted accounting
principles in the United States of America (as such principles may change from
time to time) applied on a consistent basis (except for changes in application
in which Borrower's independent certified public accountants concur), applied
both to classification of items and amounts.
"GENERAL INTANGIBLES": as defined in SECTION 3.01 hereof.
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"GOVERNMENTAL ACTIONS": actions by any Governmental Authority.
"GOVERNMENTAL AUTHORITY": the federal government, any state or political
subdivision thereof, any city or municipal entity, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"HIGH YIELD NOTES": unsecured unsubordinated obligations of Borrower, for
which it shall have received on the issuance thereof gross proceeds of not less
than seventy-five million dollars ($75,000,000), with a maturity date not
earlier than 2007, on which no interest will be payable prior to 2002, and which
are issued pursuant to documents containing substantially the same terms and
conditions as those described in the Memorandum Draft.
"HIGH YIELD PERIOD": the time during which Borrower has issued and has
outstanding High Yield Notes.
"INDEBTEDNESS": as to any Person, at a particular time, (a) indebtedness
for borrowed money or for the deferred purchase price of property or services in
respect of which such Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which such Person otherwise assures a
creditor against loss, (b) obligations under leases which shall have been or
should be, in accordance with GAAP, recorded as capital leases in respect of
which obligations such Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which obligations such Person assures a
creditor against loss, (c) obligations of such Person to purchase or repurchase
accounts receivable, chattel paper or other payment rights sold or assigned by
such Person, and (d) indebtedness or obligations of such Person under or with
respect to letters of credit, notes, bonds or other debt instruments, but (e)
excluding trade payables incurred by Borrower in the ordinary course of
business.
"INITIAL PAYMENT DATE": either a Tranche 1 or Tranche 2 Initial Payment
Date.
"INTEREST PAYMENT DATE": either a Tranche 1 or Tranche 2 Interest Payment
Date.
"INTEREST RATE": as defined on SCHEDULE 2.02 hereto.
"LANDLORD CONSENT": a consent substantially in the form of EXHIBIT E hereto
or in other form acceptable to Lender, to be executed by the owner/landlord,
sublessor and/or licensor (including carriers) of any real property where any of
the Collateral is to be located.
"LAW": any law (including common law), constitution, statute, regulation,
rule, ordinance, order, injunction, writ, decree or award of any governmental
body or court of competent jurisdiction or of any arbitrator (including but not
limited to ERISA, the Code, the UCC, any applicable tax law, product safety law,
occupational safety or health law, Communications Law, Environmental Law and/or
securities laws).
"LENDER'S EXPENSES": as defined in SECTION 2.10 hereof.
"LIEN": any mortgage, pledge, hypothecation, lien (statutory or other),
judgment lien, security interest, security agreement, charge or other
encumbrance, or other security arrangement of any nature whatsoever, including,
without limitation, any installment contract, conditional sale or other title
retention arrangement, any sale of accounts receivable or chattel paper, and any
assignment, deposit arrangement or lease intended as, or having the effect of,
security and the filing of any financing statement under the
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UCC or comparable law of any jurisdiction.
"LOAN DOCUMENTS": a collective reference to this Agreement, each Note, the
Original Agreement, the Security Documents, and all other documents,
instruments, agreements and certificates evidencing or securing any advance
hereunder or any obligation for the payment or performance thereof and/or
executed and delivered in connection with any of the foregoing.
"MANDATORY PREPAYMENTS: as defined in SECTION 2.04(b) hereof.
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE": a material adverse
effect on, or material adverse change in, (i) the business, operations or
financial condition of Borrower, (ii) the ability of Borrower to perform its
obligations under this Loan Agreement, any Note, or the other Loan Documents, or
(iii) the Lender's ability to enforce the rights and remedies granted under this
Agreement or the other Loan Documents, in all cases whether attributable to a
single circumstance or event or an aggregation of circumstances or events.
"MEMORANDUM DRAFT": the draft of the Offering Memorandum dated March 17,
1997, pertaining to the High Yield Notes, a copy of which is attached hereto as
EXHIBIT H.
"MORTGAGEE'S CONSENT": a consent substantially in the form of EXHIBIT E-1
hereto, to be executed by any Person holding a lien on real property leased or
otherwise provided to Borrower, on which any of the Equipment is located.
"NOTE": collectively, the Tranche 1 Note, the Tranche 2 Note and any other
promissory notes issued by Borrower to Lender pursuant to this Agreement, and
all extensions, renewals, modifications, replacements, amendments, restatements
and refinancings thereof.
"NTI": Northern Telecom Inc., a Delaware corporation.
"NTI EQUIPMENT": the equipment and licensed or sub-licensed software
manufactured or supplied by NTI to Borrower at any time pursuant to the NTI
Purchase Agreement or any purchase order issued by Borrower to NTI, including
installation and construction services provided by NTI pursuant thereto.
"NTI PURCHASE AGREEMENT": the NTI Purchase Agreement identified on SCHEDULE
4.31 hereto, together with any amendments or supplements thereto, and any other
purchase agreement between NTI and Borrower and all purchase orders and invoices
issued pursuant thereto, all as approved by Lender.
"OBLIGATIONS": all indebtedness, liabilities and obligations of Borrower to
Lender of any class or nature, whether arising under or in connection with this
Agreement and/or the other Loan Documents or otherwise, whether now existing or
hereafter incurred, direct or indirect, absolute or contingent, secured or
unsecured, matured or unmatured, joint or several, whether for principal,
interest, fees, expenses, lease obligations, indemnities or otherwise,
including, without limitation, future advances of any sort, all future advances
made by Lender for taxes, levies, insurance and/or repairs to or maintenance of
the Collateral, the unpaid principal amount of, and accrued interest on, each
Note, and any expenses of collection or protection of Lender's rights, including
reasonable attorneys' fees.
"ORGANIZATIONAL DOCUMENTS": with respect to a corporation, the articles of
incorporation and by-laws of such corporation; with respect to a partnership,
the certificate of partnership (or limited
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partnership, as applicable) and partnership agreement, together with the
analogous documents for any corporate or partnership general partner; with
respect to a limited liability company, the articles of organization and
operating agreement of such limited liability company; and in any case, any
other document governing the formation and conduct of business by such entity.
"ORIGINAL LOAN AGREEMENT": that certain Equipment Loan and Security
Agreement, dated as of May 28, 1996, as amended by that certain Letter Agreement
dated as of November 18, 1996 extending the funding date each between Borrower
and Lender.
"ORIGINAL STOCK PLEDGE AGREEMENT": the Stock Pledge Agreement, dated as of
May 28, 1996, executed by each of Alfred West, Steve West and Gary Bondi as
Owners in connection with the execution of the Original Loan Agreement by
Borrower and Lender.
"OWNERS": all presently existing and future shareholders of Borrower and
all other Persons with ownership interests in Borrower.
"PAYMENT DATE": as defined on SCHEDULE 2.02 hereto.
"PAYMENT SCHEDULE": either the Tranche 1 or Tranche 2 Payment Schedule.
"PBGC": the Pension Benefit Guaranty Corporation established under Title IV
of ERISA or any other governmental agency, department or instrumentality
succeeding to its functions.
"PERMITS": all consents, licenses, notices, approvals, authorizations,
filings, orders, registrations, and permits required by any Governmental
Authority for the construction and operation of the Equipment (excluding
Regulatory Authorizations), issued or obtained as and when required in
accordance with all Requirements of Law.
"PERMITTED ENCUMBRANCES": the Liens permitted under SECTION 8.02 hereof.
"PERMITTED INVESTMENTS": (a) direct obligations of, or obligations for
the timely payment of the principal of and interest of which is fully and
unconditionally guaranteed by, the United States of America, (b) certificates of
deposits of national or state banks, certificates of deposit of federal savings
and loan associations and state building and loan associations which deposits
are fully insured by the Federal Deposit Insurance Corporation; (c) bankers
acceptances drawn on and accepted by commercial banks having a combined capital
and surplus of not less than $100,000,000 and rated "Aa" or higher by Moody's
Investor Service, and "AA" or higher by Standard & Poors Corporation; (d)
obligations of any agency or instrumentality of the United States of America
that are backed by the full faith and credit of the United States of America;
(e) notes or commercial paper (of entities other than Borrower or related
entities) rated in either of the two highest rating categories by Moody's
Investors Services and Standard & Poors Corporation; (f) repurchase agreements
with banking or financial institutions having a combined capital and surplus of
not less than $100,000,000, with respect to and fully secured by obligations
described in (a) or (d) above, and rated "Aa" or higher by Moody's Investors
Service and "AA" or higher by Standard & Poors Corporation; and (g) money market
mutual funds which invest solely in investments meeting the criteria of
Permitted Investments.
"PERSON": an individual, corporation, limited liability company,
partnership, business or other trust, unincorporated association, joint venture,
joint-stock company, Governmental Authority or any
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other entity.
"PLAN": any employee pension benefit plan to which Section 4021 of ERISA
applies and (i) which is maintained for employees of Borrower or (ii) to which
Borrower made, or was required to make, contributions at any time within the
preceding five (5) years.
"PREFERRED STOCK": the Twelve Percent (12%) Redeemable Convertible
Preferred Stock of Borrower issued initially to Princes Gate Investors II, L.P.
(the "Investor"), pursuant to the Securities Purchase Agreement dated as of
November 1, 1996, between Borrower and Investor, the Securityholders Agreement
dated as of November 1, 1996, among Borrower, Investor and Mr. Alfred West, and
the Amendment of the Certificate of Incorporation dated as of November 1, 1996
amending Borrower's Certificate of Incorporation (as amended, the "Amended
Certificate of Incorporation") relating to the authorization and issuance of the
Preferred Stock to Investor.
"PROCEEDS": as defined in SECTION 3.01 hereof.
"PUC": the public utilities commission for the state or any other
jurisdiction in which the Borrower operates its telecommunications business or
any portion of the Equipment is located, or any successor agency, and any
successor, in whole or in part, to its functions or jurisdictions, and any other
Persons specified as such on SCHEDULE 1 hereto.
"REGULATORY AUTHORIZATIONS": all approvals, authorizations, licenses,
filings, notices, registrations, consents, permits, exemptions, registrations,
qualifications, designations, declarations, or other actions or undertakings now
or hereafter made by, to or in respect of any telecommunications governmental or
other regulatory authority, including, without limitation, any certificates of
public convenience and all grants, approvals, licenses, filings and
registrations from or to the FCC or PUC or under any Communications Law
necessary in order to enable the Borrower to own, construct, maintain and
operate the Equipment, and any authorizations specified on SCHEDULE 1 hereto.
"REGULATORY EVENT": any of the following events: (i) Lender becomes subject
to regulation as a "carrier," a "telephone company," a "common carrier," a
"public utility" or otherwise under any applicable law or governmental
regulation, federal, state or local, solely as a result of the transactions
contemplated by this Agreement and the other Loan Documents, or (ii) Borrower
becomes subject to regulation by any Governmental Authority in any way that is
materially different from the regulation existing at the Closing Date and that
could materially adversely affect Borrower's ability to perform its material
obligations under the Loan Documents or Lender's rights thereunder, or (iii) the
FCC or PUC issues an order revoking, denying or refusing to renew, or
recommending the revocation, denial or non-renewal of, any Regulatory
Authorization.
"REPORTABLE EVENT": (i) a reportable event described in Section 4043 of
ERISA and regulations thereunder, (ii) a withdrawal by a substantial employer
from a Plan to which more than one employer contributes, as referred to in
Section 4063(b) of ERISA, or (iii) a cessation of operations at a facility
causing more than twenty percent (20%) of Plan participants to be separated from
employment, as referred to in Section 4062(f) of ERISA.
"REQUIRED CONSENTS": the Governmental Authority approvals or consents of
other Persons required with respect to the Borrower's execution, delivery and
performance of this Agreement and the other Loan Documents, as described in
SECTION 4.04 hereto.
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"REQUIREMENT OF LAW": as to any Person, the Organizational Documents of
such Person, and any law, treaty, rule or regulation, or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its properties or transactions or to
which such Person or any of its property or transactions is subject, including
without limitation, all applicable common law and equitable principles, all
provisions of all applicable state and federal constitutions, statutes, rules,
regulations and orders of governmental bodies, all Permits or Regulatory
Authorizations issued to Borrower, all Communications Laws, and all
Environmental Laws.
"RESPONSIBLE OFFICER": with respect to a corporation, its President or any
Vice President or Treasurer; with respect to a partnership, its general partner
(or the President, any Vice President or Treasurer of any corporate general
partner, as applicable); with respect to a limited liability company, a member
or manager (or the President, any Vice President or Treasurer of any corporate
member or manager), or the President or any Vice President of any other Person.
"RESTRICTED SUBSIDIARY": means any Subsidiary of the Borrower other than an
Unrestricted Subsidiary.
"SECURITY DOCUMENTS": this Agreement, the Consents, the Stock Pledge
Agreements, the Original Stock Pledge Agreements, all financing statements, all
documents and instruments executed and/or delivered by or on behalf of Borrower
in favor of Lender granting and perfecting liens and security interests on NTI
Equipment and related Software to be installed in London, England, Brussels,
Belgium, and Paris, France and any other documents granting, evidencing, or
perfecting any security interest or Lien with respect to or securing any of the
Obligations.
"SITE(S)": any of the sites where Equipment is or is to be located.
"SOFTWARE" AND "SOFTWARE LICENSES": any software now or hereafter owned by,
or licensed to, Borrower or with respect to which Borrower has or may have
license or use rights.
"STOCK PLEDGE AGREEMENT": the Amended and Restated Stock Pledge Agreement
executed by each of Alfred West, Steve West and Gary Bondi as Owners of Borrower
(as of the date hereof) pursuant to Section 2.11 hereof, substantially in the
form of EXHIBIT G hereto.
"SUBORDINATED EQUIPMENT": such pieces of Equipment with respect to which
Israel Discount Bank subordinates its lien and security interest to the lien and
security interest of Lender pursuant to the terms of that Inter-Creditor
Agreement dated as of June 3, 1996, as amended from time to time as a condition
to all Advances as provided for in Section 6.02(l).
"SUBSIDIARY": as to any Person, any corporation or other entity that is an
Affiliate of such Person and of which shares of stock or equity interests having
ordinary voting power with respect to the election of one or more directors or
other managers of such corporation are at the time directly or indirectly owned
or controlled by such Person (regardless of any contingency which does or may
suspend or dilute the voting rights of such class).
"SYSTEM": the Borrower's complete telecommunications network or system
constructed and/or operated by Borrower, of which the Equipment forms a part in
connection with the Borrower's business, as described on SCHEDULE 1 hereto.
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"TOTAL DEBT": at any time, the total outstanding liabilities of the
Borrower, including, without limitation, current liabilities, long term
Indebtedness, all lease obligations under finance leases, operating leases
and/or capital leases, all Contingent Obligations, and all the Obligations, but
excluding the Preferred Stock.
"TRANCHE 1 FIRST BORROWING DATE": the date of the first borrowing by
Borrower hereunder for Advances made prior to the Amendment Closing Date.
"TRANCHE 2 FIRST BORROWING DATE": the date of the first borrowing by
Borrower hereunder for Advances made on or after the Amendment Closing Date.
"TRANCHE 1 INITIAL PAYMENT DATE": as defined on SCHEDULE 2.02 hereto.
"TRANCHE 2 INITIAL PAYMENT DATE": as defined on SCHEDULE 2.02 hereto.
"TRANCHE 1 INTEREST PAYMENT DATE": as defined on SCHEDULE 2.02 hereto.
"TRANCHE 2 INTEREST PAYMENT DATE": as defined on SCHEDULE 2.02 hereto.
"TRANCHE 1 MATURITY DATE": the date defined on SCHEDULE 2.02 hereto, on
which all principal, interest, premium, expenses, fees, penalties and other
amounts due under the Tranche 1 Note shall be finally due and payable.
"TRANCHE 2 MATURITY DATE": the date defined on SCHEDULE 2.02 hereto, on
which all principal, interest, premium, expenses, fees, penalties and other
amounts due under the Tranche 2 Note shall be finally due and payable.
"TRANCHE 1 NOTE": that certain promissory note dated as of May 28, 1996 in
the original principal amount of $2,000,000 executed by Borrower in favor of
Lender pursuant to the Original Loan Agreement, and all extensions, renewals,
modifications, replacements, amendments, restatements and refinancings thereof.
"TRANCHE 2 NOTE": that certain promissory note dated as of March 27, 1997
in the original principal amount of $3,000,000 executed by Borrower and joined
in by American Telemedia, Ltd. in favor of Lender and any other promissory notes
issued by Borrower to Lender pursuant to this Agreement, and all extensions,
renewals, modifications, replacements, amendments, restatements and refinancings
thereof.
"TRANCHE 1 PAYMENT SCHEDULE": as defined on SCHEDULE 2.02 hereto.
"TRANCHE 2 PAYMENT SCHEDULE": as defined on SCHEDULE 2.02 hereto.
"UCC": the Uniform Commercial Code as the same may from time to time be in
effect in the State of New York, or the Uniform Commercial Code of another
jurisdiction, to the extent it may be required to apply to any item or items of
Collateral.
"UNRESTRICTED SUBSIDIARY": (i) any Subsidiary of the Borrower that at the
time of determination shall be designated an Unrestricted Subsidiary by the
board of directors of the Borrower in the manner
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provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The board
of directors of the Borrower may designate any Restricted Subsidiary (including
any newly acquired or newly formed Subsidiary of the Borrower) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, the Borrower or any Restricted
Subsidiary; provided that (A) any Guarantee by the Borrower or any Restricted
Subsidiary of any Indebtedness of the Subsidiary being so designated shall be
deemed an "Incurrence" of such Indebtedness and an "Investment" by the Borrower
or such Restricted Subsidiary (or both, if applicable) at the time of such
designation; (B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant described on page 22-24 of the Memorandum Draft and (C) if
applicable, the Incurrence of Indebtedness and the Investment referred to in
clause (A) of this proviso would be permitted under the "Limitation on
Indebtedness" and "Limitation on Restricted Payments" covenants described on
pages 20-24 of the Memorandum Draft. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that immediately
after giving effect to such designation (x) all Liens and Indebtedness of such
Unrestricted Subsidiary outstanding immediately after such designation would, if
Incurred at such time, have been permitted to be incurred for all purposes of
the Indenture and (y) no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
Capitalized terms used in this definition which are defined in the Memorandum
Draft shall have the meanings assigned to them in the Memorandum Draft.
"WHOLLY OWNED": with respect to any Subsidiary of any Person, the ownership
of all of the outstanding Capital Stock of such Subsidiary (other than any
director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person. Capitalized terms used in this definition which are defined in the
Memorandum Draft shall have the meanings assigned to them in the Memorandum
Draft.
"WORKING CAPITAL": unencumbered and unrestricted capital of Borrower
available for general operational purposes after provision for all current
liabilities.
1.02. ACCOUNTING PRINCIPLES; SUBSIDIARIES. Except as otherwise provided
in this Agreement, all computations and determinations as to accounting or
financial matters and all financial statements to be delivered pursuant to this
Agreement shall be made and prepared in accordance with GAAP (including
principles of consolidation where appropriate), consistently applied, and all
accounting or financial terms shall have the meanings ascribed to such terms by
GAAP. If at any time Borrower has any Subsidiaries, all accounting and financial
terms herein shall be deemed to include references to consolidated and
consolidating principles, and covenants, representations and agreements with
respect to the Borrower and its properties and activities shall be deemed to
refer to the Borrower and its consolidated Subsidiaries collectively.
1.03. UCC TERMS. Except as otherwise provided or amplified (but not
limited) herein, terms used in this Agreement that are defined in the UCC shall
have the same meanings herein.
1.04. GENERAL CONSTRUCTION; CAPTIONS. All definitions and other terms
used in this Agreement shall be equally applicable to the singular and plural
forms thereof, and all references to any gender shall include all other genders.
The words "hereof", "herein" and "hereunder" and words of similar import
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when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement, and Section, subsection, schedule
and exhibit references are to this Agreement unless otherwise specified. The
captions and table of contents in this Agreement and the other Loan Documents
are for convenience only, and in no way limit or amplify the provisions hereof.
1.05. REFERENCES TO DOCUMENTS AND LAWS. All defined terms and
references in this Agreement or the other Loan Documents with respect to any
agreements, notes, instruments, certificates or other documents shall be deemed
to refer to such documents and to any amendments, modifications, renewals,
extensions, replacements, restatements, substitutions and supplements of and to
such documents. All references to statutes and related regulations shall include
any amendments thereof and any successor statutes and regulations.
ARTICLE 2: LOANS
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2.01. COMMITMENT. Subject to the terms and conditions herein provided,
and so long as no Event of Default has occurred and is continuing hereunder,
Lender agrees to lend to Borrower from time to time before the Financing
Termination Date, an aggregate principal amount not to exceed the amount set
forth on SCHEDULE 2.01 hereto as the maximum principal amount (the
"COMMITMENT"). If Borrower or NTI should terminate the NTI Purchase Agreement at
any time prior to the Initial Payment Date, then the Commitment shall
automatically terminate, subject to Lender's right to make further Advances
hereunder, including, but not limited to, Advances under Section 2.03 hereof.
All amounts advanced hereunder shall be used solely for the purchase of NTI
Equipment and related services (exclusive of sales tax) from NTI, and amounts
not exceeding the amount (if any) specified on Schedule 2.01 hereto may be used
for the purchase of network related third party equipment and the preparation of
a switch room for such NTI Equipment, legal fees, charges, expenses and closing
costs and other expenses incurred by Borrower or incurred by Lender and payable
by Borrower under Section 2.10 hereof. From and after the Amendment Closing
Date through and to the Financing Termination Date, up to, but not exceeding,
Three Million Dollars ($3,000,000) of the Commitment may be used to acquire NTI
Equipment and related Software to be located in London, England, Brussels,
Belgium, or Paris, France, in each case subject to the requirements of this
Agreement, including but not limited to the requirements of Section 3.09.
2.02. NOTE AND PAYMENT TERMS.
(a) PROMISSORY NOTE. The Loans shall be evidenced by one or more
Notes substantially in the form of EXHIBIT A hereto, with appropriate
insertions. Each Note shall be executed by Borrower, payable to the order
of Lender, and shall evidence the obligation of Borrower to repay all
principal amounts advanced under or pursuant to this Agreement, together
with interest and all other amounts due thereunder. The Tranche 1 Note
shall be originally dated May 28, 1996, have a stated maturity that is the
Tranche 1 Maturity Date, and bear interest at the Interest Rate from the
Tranche 1 First Borrowing Date until the Tranche 1 Note or any amount
thereunder is paid in full (whether on the Tranche 1 Maturity Date, by
acceleration or otherwise). The Tranche 2 Note shall be originally dated
March 27, 1997, have a stated maturity that is the Tranche 2 Maturity Date,
and bear interest at the Interest Rate from the Tranche 2 First Borrowing
Date until the Tranche 2 Note or any amount thereunder is paid in full
(whether on the Tranche 2 Maturity Date, by acceleration or otherwise).
All schedules attached to any Note shall be deemed a part thereof. Any such
schedule may be amended by Lender from time
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to time to reflect changes in the amounts includable thereon, but the
failure to attach or amend any schedule shall not diminish the obligation
of Borrower to repay all amounts due hereunder or on any Note.
(b) INTEREST PAYMENTS. Interest shall continue to accrue on the
principal amount outstanding on any Note at the Interest Rate and shall be
payable, in arrears, on each Interest Payment Date. All accrued interest
shall be payable, in arrears, with the principal payments described below.
(c) PRINCIPAL PAYMENTS. (i) The Tranche 1 Note is a term note, and
all principal amounts due with respect to the Tranche 1 Note shall be
payable in installments in accordance with the Tranche 1 Payment Schedule
set forth on SCHEDULE 2.02 hereto, commencing on the Tranche 1 Initial
Payment Date and on each Payment Date thereafter until the Tranche 1
Maturity Date. The amount of each such principal installment payment shall
be calculated, at the outset, by taking the applicable percentage (as
described on SCHEDULE 2.02 hereto) of the amount of all principal amounts
outstanding on the Tranche 1 First Borrowing Date; PROVIDED, HOWEVER, that
the principal payment amounts shall be recalculated by Lender each time
Advances are made hereunder after the Tranche 1 First Borrowing Date but
prior to the Amendment Closing Date, based on the aggregate amount of all
Advances made at any time. Borrower and Lender understand that this payment
schedule is intended to amortize fully the principal amount advanced under
the Tranche 1 Note in equal monthly payments from the date of such Advance
to the Tranche 1 Maturity Date and any other principal and interest amounts
outstanding representing amounts owed under Advances made prior to the
Amendment Closing Date will be added to the final payment on the Tranche 1
Maturity Date. In any event, the entire outstanding principal amount of the
Tranche 1 Note and all accrued but unpaid interest and all other
outstanding amounts due thereunder shall be paid on the Tranche 1 Maturity
Date.
(ii) The Tranche 2 Note is a term note, and all principal amounts due with
respect to the Tranche 2 Note shall be payable in installments in
accordance with the Tranche 2 Payment Schedule set forth on SCHEDULE 2.02
hereto, commencing on the Tranche 2 Initial Payment Date and on each
Payment Date thereafter until the Tranche 2 Maturity Date. The amount of
each such principal installment payment shall be calculated, at the outset,
by taking the applicable percentage (as described on SCHEDULE 2.02 hereto)
of the amount of all principal amounts outstanding on the Tranche 2 First
Borrowing Date; PROVIDED, HOWEVER, that the principal payment amounts shall
be recalculated by Lender each time Advances are made hereunder after the
Amendment Closing Date, based on the aggregate amount of all Advances made
at any time. Borrower and Lender understand that this payment schedule is
intended to amortize fully the principal amount advanced under the Tranche
2 Note in equal monthly payments from the date of such Advance to the
Tranche 2 Maturity Date and any other principal and interest amounts
outstanding representing amounts owed under Advances after the Amendment
Closing Date will be added to the final payment on the Tranche 2 Maturity
Date. In any event, the entire outstanding principal amount of the Tranche
2 Note and all accrued but unpaid interest and all other outstanding
amounts due thereunder shall be paid on the Tranche 2 Maturity Date.
(d) LATE PAYMENTS AND DEFAULT RATE. Notwithstanding the foregoing, if
Borrower shall fail to pay within ten (10) days after the due date any
principal amount or interest or other amount payable under this Agreement
or under any Note, Borrower shall pay to Lender, to defray the
administrative costs of handling such late payments, an amount equal to
interest on the
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amount unpaid, to the extent permitted under applicable law, at the Default
Rate (instead of the Interest Rate), from the due date until such overdue
principal amount, interest or other unpaid amount is paid in full (both
before and after judgment) whether or not any notice of default in the
payment thereof has been delivered under SECTION 9.01 hereof. In addition,
but without duplication, upon the occurrence and during the continuance of
an Event of Default, all outstanding amounts hereunder shall bear interest
at the Default Rate (instead of the Interest Rate) until such amounts are
paid in full or such Event of Default is waived in writing by Lender.
(e) EXCESS INTEREST. Notwithstanding any provision of any Note, this
Agreement or any other Loan Document to the contrary, it is the intent of
Lender and Borrower that Lender or any subsequent holder of any Note shall
never be entitled to receive, collect, reserve or apply, as interest, any
amount in excess of the maximum rate of interest permitted to be charged by
applicable Law, as amended or enacted from time to time. In the event
Lender, or any subsequent holder of any Note, ever receives, collects,
reserves or applies, as interest, any such excess, such amount which would
be excessive interest shall be deemed a partial prepayment of principal and
treated as such, or, if the principal indebtedness and all other amounts
due are paid in full, any remaining excess funds shall immediately be
applied to any other outstanding indebtedness of Borrower due to Lender,
and if none is outstanding, shall be paid to Borrower. In determining
whether or not the interest paid or payable, under any specific
contingency, exceeds the highest lawful rate, Borrower and Lender shall, to
the maximum extent permitted under applicable law, (a) exclude voluntary
prepayments and the effects thereof as it may relate to any fees charged by
Lender, and (b) amortize, prorate, allocate, and spread, in equal parts,
the total amount of interest throughout the entire term of the
indebtedness; provided that if the indebtedness is paid and performed in
full prior to the end of the full contemplated term hereof, and if the
interest received for the actual period of existence hereof exceeds the
maximum lawful rate, Lender or any subsequent holder of any Note shall
refund to Borrower the amount of such excess or credit the amount of such
excess against the principal portion of the indebtedness, as of the date it
was received, and, in such event, Lender shall not be subject to any
penalties provided by any laws for contracting for, charging, reserving or
receiving interest in excess of the maximum lawful rate.
2.03. PROCEDURES FOR BORROWING.
(a) TIMING OF ADVANCES. Advances shall not be made more than once per
calendar month, and all Advances in any calendar month shall be made on the
same Borrowing Date. Each Advance (other than the last Advance) shall be in
an aggregate principal amount of not less than $25,000. No amounts may be
borrowed hereunder on or after the Financing Termination Date. Lender is
hereby authorized to retain from each Advance all amounts of Lender's
Expenses accrued and unpaid by Borrower, for which invoices have been sent
to Borrower at least five (5) Business Days before such Advance. In any
event, all outstanding legal fees, charges and expenses not paid by
Borrower prior to any Borrowing Date shall be paid before any Advance is
made or concurrently with such Advance.
(b) BORROWING CERTIFICATES. To request an Advance hereunder, Borrower
shall send to Lender, at least ten (10) Business Days prior to the
requested Borrowing Date, a completed Borrowing Certificate, along with
invoices and such other supporting documentation as Lender may reasonably
request. Lender is hereby authorized to add to any Borrowing Certificate
all amounts payable by Borrower to Lender in respect of legal fees, charges
and expenses arising
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or incurred by Lender, to the extent such fees, charges and expenses have
then been incurred or charged and may be paid from proceeds of the Loan.
(c) TRANSMISSION OF ADVANCES. Advances shall be made by wire transfer
to the account(s) specified in the applicable Borrowing Certificate, except
that (i) proceeds of the Loans may be transmitted, at Lender's option,
directly to an NTI account for payment of any unpaid NTI invoices, and (ii)
Advances shall be transmitted to Borrower only to the extent that Borrower
provides Lender with satisfactory evidence that the amount of such Advance
has been paid to NTI or such other payee for a purpose permitted under
SECTION 2.01. No further authorization shall be necessary for any such
direct disbursements, and each such Advance shall satisfy PRO TANTO the
obligations of the Lender under this Agreement.
(d) BORROWING DATES. Advances shall be made by Lender on the
Borrowing Date specified in the applicable Borrowing Certificate if all
conditions for such Advance have been satisfied, or on such later Business
Date as all conditions for such Advance shall have been satisfied, as
determined by Lender.
(e) ADVANCES AFTER DEFAULT. At its option, after the occurrence and
continuance of a Default, Lender may but shall not be obligated to make
advances of portions of the Loan proceeds to any Person (including without
limitation NTI, suppliers, sub-contractors and materialmen) to whom Lender
in good faith determines payment is due with respect to the Equipment, and
any proceeds so disbursed by Lender shall be deemed disbursed as of the
date on which the Person to whom payment is made receives the same. No
further authorization from Borrower shall be necessary to warrant such
direct advances, and the execution of this Loan Agreement by Borrower
shall, and hereby does, constitute an irrevocable authorization and power
of attorney so to advance proceeds hereunder. All such Advances shall
satisfy PRO TANTO the obligations of Lender hereunder and shall be secured
by the Security Documents as fully as if made directly to Borrower.
2.04. PREPAYMENTS.
(a) VOLUNTARY PREPAYMENTS. (i) TRANCHE 1 NOTE. On or after one year
from the Tranche 1 Initial Payment Date, the Borrower may, at its option,
at any time and from time to time, prepay the Advances under the Tranche 1
Note, in whole or in part, upon at least thirty (30) Business Days prior
written notice to the Lender specifying the date and amount of prepayment,
in a minimum amount of $50,000, plus the premium described below, and all
accrued but unpaid interest thereon. Such notice shall be irrevocable and
the principal amount specified in such notice shall be due and payable on
the date specified together with accrued interest on the amount prepaid.
Any such prepayment shall be subject to a prepayment premium equal to a
percentage of the amount prepaid as follows: one percent (1%) if the
prepayment is made during the second or third year following the Tranche 1
Initial Payment Date, and zero percent (0%) if prepayment is made
thereafter. Amounts under the Tranche 1 Note prepaid may not be reborrowed
and shall be applied as provided in Section 2.04(c). No voluntary
prepayments under the Tranche 1 Note shall be permitted prior to the
Tranche 1 Initial Payment Date.
(ii) TRANCHE 2 NOTE. On or after one year from the Tranche 2 Initial
Payment Date, the Borrower may, at its option, at any time and from time to
time, prepay the Advances under the
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Tranche 2 Note, in whole (but not in part), upon at least thirty (30)
Business Days prior written notice to the Lender specifying the date of
prepayment, plus the premium described below, and all accrued but unpaid
interest thereon. Such notice shall be irrevocable and the principal amount
shall be due and payable on the date specified together with accrued
interest on the amount prepaid. Any such prepayment shall be subject to a
prepayment premium equal to a percentage of the amount prepaid as follows:
three percent (3%) if the prepayment is made during the first full year
following the Amendment Closing Date, two percent (2%) if the prepayment is
made during the second full year following the Amendment Closing Date, one
percent (1%) if the prepayment is made during the third full year following
the Amendment Closing Date, and zero percent (0%) if prepayment is made
thereafter. Amounts prepaid may not be reborrowed and shall be applied as
provided in SECTION 2.04(c). No voluntary prepayments under the Tranche 2
Note shall be permitted prior to the Tranche 2 Initial Payment Date.
(iii) GENERAL. Mandatory Prepayments, excess interest payments under
SECTION 2.02(g) or prepayments made from insurance proceeds pursuant to
SECTION 6.03 or with any condemnation proceeds shall not be subject to a
prepayment premium.
(b) MANDATORY PREPAYMENT. Upon Lender's demand, (i) if the NTI
Purchase Agreement is terminated prior to the Financing Termination Date,
or (ii) if Borrower fails to complete all the required purchases thereunder
by the Financing Termination Date, or (iii) upon the occurrence of any
event pursuant to which the Preferred Stock may be redeemed (other than any
special optional redemption of the Preferred Stock under Section 7(a) of
Article Fourth of the Amended Certificate of Incorporation), Borrower shall
immediately prepay the loans in full, including all principal, accrued
interest and expenses (the "MANDATORY PREPAYMENTS").
(c) APPLICATION OF PREPAYMENTS. Any prepayments shall be applied
first to interest, then to premium, then to expenses, and then to the
installments of principal in reverse chronological order.
2.05. COMPUTATION OF INTEREST. Interest shall be calculated daily on
the basis of a 360-day year for the actual days elapsed in the period during
which it accrues.
2.06. PAYMENTS. All payments and prepayments to be made in respect of
principal, interest, prepayment premiums or other amounts due from Borrower
hereunder or under any Note shall be payable on or before 1:00 p.m., Nashville
time, on the day when due, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived, and an action therefor shall
immediately accrue. Such payments shall be made to Lender at Lender's office at
220 Athens Way, Nashville, Tennessee 37228-1399, or such other location
specified in writing by Lender, in immediately available funds, without setoff,
recoupment, counterclaims or any other deduction of any nature.
2.07. INDEMNITY. Borrower hereby indemnifies Lender against any losses,
claims, penalties, expenses, actions, suits, obligations, liabilities and Liens
(and all costs and expenses, including reasonable attorneys' fees incurred in
connection therewith), that Lender has sustained or incurred or may sustain or
incur in connection with any of the Collateral, or the enforcement, performance
or administration of the Loan Documents, or as a consequence of any default by
Borrower in the performance or observance of any covenant or condition contained
in this Agreement or the Loan Documents, including without limitation, the
breach of any representation or warranty, any failure of Borrower to pay when
due (by
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acceleration or otherwise) any principal, interest, fee or any other amount due
hereunder or under any Note, and any failure of Borrower to comply with all
applicable Requirements of Law (collectively, "CLAIMS") except to the extent of
any Claims caused solely by Lender's gross negligence or willful misconduct.
Borrower's obligations under this Section 2.07 shall be part of the Obligations
and shall be secured by the Collateral. Borrower agrees that upon written notice
by Lender of the assertion of any Claims, Borrower shall, at Lender's option,
either assume full responsibility for, or reimburse Lender for the reasonable
costs and expenses of, the defense thereof. Lender shall have no liability for
consequential or incidental damages of any nature. The provisions of this
Section 2.07 shall survive the termination of this Agreement and payment of the
Obligations.
2.08. USE OF PROCEEDS. The proceeds of the Advances hereunder shall be
used by Borrower only for the purposes and in the amounts described in Section
2.01 hereof, and no amounts repaid may be reborrowed.
2.09. FEES. Borrower shall pay Lender the fees described on SCHEDULE
2.09 hereto in connection with this Agreement.
2.10. LENDER'S EXPENSES. Borrower agrees (a) to pay or reimburse Lender
for all its reasonable costs, fees, charges and expenses incurred or arising in
connection with the negotiation, review, preparation and execution of this
Agreement, the Loan Documents, any commitment or proposal letter, or any
amendment, supplement, waiver, modification to, or restructuring of this
Agreement, the Obligations or the other Loan Documents, including, without
limitation, reasonable outside counsel legal fees and disbursements, expenses,
document charges and other charges and expenses of Lender, (b) to pay or
reimburse Lender for all its reasonable costs, fees, charges and expenses
incurred in connection with the administration of the Loans or the enforcement,
protection or preservation of any rights under or in connection with this
Agreement or any other Loan Documents, including, without limitation, reasonable
outside counsel legal fees and disbursements, audit fees and charges, and all
out-of-pocket expenses, (c) to pay, indemnify, and to hold Lender harmless from,
any and all recording and filing fees and taxes and any and all liabilities with
respect to, or resulting from any delay in paying, stamp, excise and other taxes
(excluding income and franchise taxes and taxes of similar nature), if any,
which may be payable or determined to be payable in connection with the
execution and delivery or recordation or filing of, or consummation of any of
the transactions contemplated by, or any amendment, supplement or modification
of, or any waiver or consent under or in respect of, this Agreement and the
other Loan Documents. Lender expects that its attorneys' fee and disbursements
payble by the Borrower under clause (a) of the preceding sentence in connection
with the negotiation, preparation and execution of this amendment and
restatement to the Original Loan Agreement shall not exceed twenty thousand
dollars ($20,000), and Lender will notify Borrower if it appears to Lender that
the fees of its counsel will exceed that amount. All of the amounts described
in this Section are referred to collectively as the "LENDER'S EXPENSES", shall
be payable upon Lender's demand, and shall accrue interest at the Interest Rate
in effect when such demand is made from five (5) days after the date of demand
until paid in full. All Lender's Expenses, and interest thereon, shall be part
of the Obligations and shall be secured by the Collateral. The agreements in
this SECTION 2.10 shall survive repayment of the Obligations. All Lender's
Expenses that are outstanding on any Borrowing Date shall be paid before or with
such advance. If Borrower has not paid to Lender the amount of all Lender's
Expenses billed to Borrower at least five (5) Business Days before such
Borrowing Date, Lender shall be authorized to retain from any Advance on such
Borrowing Date the amount of such Lender's Expenses that remain unpaid.
Borrower's obligation to pay Lender's Expenses shall not be limited by any
limitation on the amount of the Commitment that may be designated as available
for such purposes, and any amounts so designated shall be used to pay Lender's
Expenses
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accrued at the time of any Advance before any of Borrower's legal fees or
similar expenses.
2.11. STOCK PLEDGE AGREEMENT. Each of Alfred West, Gary Bondi, and
Steven West shall pledge; or cause the pledge of, stock and any other ownership
interest in Borrower to Lender as security for the Obligations pursuant to the
Stock Pledge Agreement, so that at all times Lender shall have a first priority,
perfected Lien on a majority of the voting shares of each class of such
securities or ownership interests in Borrower (other than the Preferred Stock,
but including in such calculation shares or ownership interests which Borrower
has agreed, or otherwise becomes committed, to issue, whether pursuant to
options, warrants, conversion rights or other agreements and including common
stock issuable upon conversion of the Preferred Stock).
ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT
--------------------------------------------
3.01. GRANT OF SECURITY INTEREST. Borrower (as debtor) hereby assigns
to Lender as collateral, and grants to Lender (as secured party), a continuing
security interest in and to, all of the Borrower's right, title and interest in
and to the following kinds and types of property, whether now owned or hereafter
acquired or arising, wherever located, together with all substitutions therefor
and all accessions, replacements and renewals thereof, and in all proceeds and
products thereof (collectively, the "COLLATERAL"):
(a) All the NTI Equipment, all third party equipment, including all
replacements and expansions, financed by Lender and any and all additions,
substitutions, and replacements to or of any of the foregoing, together
with all attachments, components, parts, improvements, upgrades, and
accessions installed thereon or affixed thereto (collectively, "EQUIPMENT")
and Borrower's rights under the NTI Purchase Agreement;
(b) All general intangibles and intangible property constituting part
of, or provided by or through NTI in connection with, the Equipment, or
associated with the System which is necessary for the proper operation of
the Equipment, including without limitation, insurance proceeds and amounts
due under insurance policies, licenses, license rights, rights in
intellectual property, software, software licenses, computer programming
(including source codes, object codes and all other embodiments of computer
programming or information), refunds, warranties and indemnification
rights, and all amounts owed at any time to Borrower by Lender or NTI
(collectively, "GENERAL INTANGIBLES"); and
(c) All proceeds and products of any of the foregoing, including
without limitation (i) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to the Borrower from time to time with respect
to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable to the Borrower from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental
Authority (or any Person acting under color of governmental authority), and
(iii) any and all cash proceeds and non-cash proceeds in the form of
equipment, inventory, contracts, accounts, general intangibles, chattel
paper, documents, instruments, securities, or other proceeds (collectively,
"PROCEEDS").
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3.02. PRIORITY OF SECURITY INTERESTS. The security interests granted by
Borrower to Lender are and shall be continuing and indefeasible security
interests in the Collateral, subject to no Liens except for Liens permitted
under Section 8.02 hereof. The security interests in the Collateral in favor of
Lender shall be first-priority, provided, however, the Lien of Israel Discount
Bank on the Equipment located in the United States need only be subordinated to
the lien of Lender on the Collateral pursuant to the Inter-Creditor Agreement
dated as of June 3, 1996 (or an amendment thereto) on or before the presentation
of a Borrowing Certificate, the proceeds of which are to be used to acquire such
Equipment (either directly or indirectly by reimbursement of Borrower).
3.03. FURTHER DOCUMENTATION; PLEDGE OF INSTRUMENTS. At any time and
from time to time, upon the written request of the Lender, and at the sole
expense of the Borrower, the Borrower shall promptly execute, deliver and record
any documents, instruments, agreements and amendments, and take all such further
action, as the Lender may reasonably deem desirable in obtaining the full
benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing statements or
amendments under the UCC. The Borrower also hereby authorizes the Lender to file
any such financing statement or amendment thereto, without the signature of the
Borrower, or with a copy or telecopy of the Borrower's signature, to the extent
permitted by applicable law, or to execute any financing statement or amendment
thereof on behalf of the Borrower as Borrower's attorney-in-fact. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any promissory note or other instrument or any certificated
securities, such note, instrument or certificate shall be immediately pledged
and delivered to the Lender hereunder, duly endorsed in a manner satisfactory to
the Lender.
3.04. FURTHER IDENTIFICATION OF COLLATERAL. Borrower shall furnish to
the Lender from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Lender may reasonably request, all in reasonable detail.
3.05. REMEDIES. Lender shall have all the rights and remedies of a
secured party under the UCC, and shall be entitled to exercise any and all
remedies available under Article 9 hereof or otherwise available at law or in
equity upon the occurrence of an Event of Default.
3.06. STANDARD OF CARE. Lender shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral in its
possession if it takes such action for that purpose as Borrower requests in
writing, but Lender's failure to comply with any such request shall not of
itself be deemed a failure to exercise reasonable care, and no failure of Lender
to preserve or protect any rights with respect to such Collateral against prior
parties, or to do any act with respect to the preservation of such Collateral
not so requested by Borrower, shall be deemed a failure to exercise reasonable
care in the custody or preservation of such Collateral.
3.07. ADVANCES TO PROTECT COLLATERAL. All insurance expense and all
expenses of protecting, storing, warehousing, insuring, handling, maintaining
and shipping the Collateral (including, without limitation, all rent payable by
Borrower to any landlord of any premises where any of the Collateral may be
located), and, any and all taxes shall be borne and paid by Borrower. Lender may
(but shall not be obligated to) make advances to preserve, protect or obtain any
of the Collateral, including advances to cure defaults under any of the System
Agreements or advances to pay taxes, insurance and the like, and
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all such advances shall become part of the Obligations owing to Lender hereunder
and shall be payable to Lender on demand, with interest thereon from the date of
such advance until paid at the Default Rate in effect on the date of such
advance.
3.08. LICENSE TO USE. Lender is hereby granted a license or other right
to use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, tradenames, trademarks and advertising matter, or any
tangible or intangible property or rights of a similar nature, as it pertains to
the Collateral, in advertising for sale and selling any Collateral, and
Borrower's rights under all licenses and franchise agreements with respect to
the Collateral shall inure to Lender's benefit.
3.09 PRIORITY OF SECURITY INTERESTS AND/OR LIENS ON EQUIPMENT LOCATED
OUTSIDE OF THE UNITED STATES. Lender and Borrower acknowledge that on or after
the Amendment Closing Date and prior to the Financing Termination Date, up to
Three Million Dollars ($3,000,000) of Advances drawn may be used by Borrower to
acquire NTI Equipment and related Software which will be installed in London,
England, Brussels, Belgium and/or Paris, France. As a condition to any Advance
by Lender to Borrower which Borrower uses to acquire NTI Equipment to be located
in London, England, Brussels, Belgium, or Paris, France, Borrower, at the time
it delivers a Borrowing Certificate requesting such Advance, shall (i) deliver a
list identifying all NIT Equipment and specifying where in such country such NTI
Equipment will be located, (ii) at the sole expense of Borrower, execute,
deliver and record any documents, instruments, agreements and amendments, and
take all such further action as Lender may reasonably deem desirable, to grant
and perfect a security interest and/or lien on the Collateral in favor of Lender
under the laws of such country where such NTI Equipment will be located, which
security interest and/or lien will be subject to no other liens or security
interest, and (iii) deliver an opinion of counsel in favor of Lender, in form
and substance to the satisfaction of the Lender, confirming that (x) all steps
have been taken to grant and perfect the security interest and/or lien in such
Collateral in favor of Lender, subject to no other liens or security interests,
and (y) compliance with all regulatory requirements in such jurisdiction for the
installation and operation of the Collateral in such jurisdiction and the right
of Lender to exercise foreclosure or repossession remedies without the necessity
of regulatory approval or licensing.
ARTICLE 4: REPRESENTATIONS AND WARRANTIES
-----------------------------------------
Borrower hereby represents and warrants to Lender as follows:
4.01. ORGANIZATION AND QUALIFICATION. The Borrower is duly organized,
validly existing and in good standing as a corporation under the laws of its
state of organization. Borrower is duly qualified to do business and in good
standing in each jurisdiction in which the failure to receive or retain such
qualification would have a Material Adverse Effect.
4.02. AUTHORITY AND AUTHORIZATION. Borrower has all requisite corporate
right, power, authority and legal right to execute and deliver and perform its
obligations under this Agreement, to make the borrowings provided for herein,
and to execute and deliver and to perform its obligations under each Note.
Borrower's execution, delivery and performance of the Basic Agreements have been
duly and validly authorized by all necessary corporate proceedings on the part
of Borrower.
4.03. EXECUTION AND BINDING EFFECT. This Agreement, each Note and all
other Basic Agreements have been or will be duly and validly executed and
delivered by the Borrower, and constitute or, when executed and delivered will
constitute, the legal, valid and binding obligations of Borrower enforceable
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in accordance with their respective terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, receivership, moratorium or
other laws affecting creditors' rights generally.
4.04. GOVERNMENTAL AUTHORIZATIONS. Except for the consents identified
on SCHEDULE 4.04 hereto (the "REQUIRED CONSENTS"), no authorization, consent,
approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any Governmental
Authority (other than the filing of financing statements and continuation
statements) is or will be necessary in connection with execution and delivery of
this Agreement, each Note or any other Loan Documents by Borrower, consummation
of the transactions herein or therein contemplated, performance of or compliance
by Borrower with the terms and conditions hereof or thereof or the legality,
validity and enforceability hereof or thereof.
4.05. REGULATORY AUTHORIZATIONS. Borrower holds all authorizations,
permits and licenses required by the FCC or the PUC or any Communications Law
for the construction and operation of the System, and all such Regulatory
Authorizations are in full force and effect, are subject to no further
administrative or judicial review and are therefore final. Lender will not by
reason of the execution, delivery and performance (other than the enforcement of
remedies) of any of the Loan Documents, be subject to the regulation or control
of either the FCC or the PUC. The Regulatory Authorizations are described on
SCHEDULE 4.05.
4.06. MATERIAL AGREEMENT; ABSENCE OF CONFLICTS. The execution and
delivery of this Agreement, each Note and the other Loan Documents, the
consummation of the transactions herein or therein contemplated and the
performance of or compliance with the terms and conditions hereof or thereof by
Borrower will not (a) materially violate any applicable Law; (b) conflict with
or result in a material breach of or a default under the Organizational
Documents of the Borrower or any agreement or instrument to which Borrower is a
party or by which Borrower or its properties is bound; or (c) result in the
creation or imposition of any Lien upon any property (now owned or hereafter
acquired) of Borrower except as otherwise contemplated by this Agreement.
4.07. NO RESTRICTIONS. Borrower is not a party or subject to any
contract, agreement, or restriction in its Organizational Documents that
materially and adversely affects its business or the use or ownership of any of
its properties or operation of its business. Borrower is not a party or subject
to any contract or agreement which restricts its right or ability to incur
Indebtedness, other than as set forth on SCHEDULE 4.07, none of which prohibit
the Borrower's execution of or compliance with this Agreement. Borrower has not
agreed or consented to cause or permit in the future (upon the happening of a
contingency or otherwise) any of the Collateral, whether now owned or hereafter
acquired, to be subject to a Lien that is not a Permitted Encumbrance.
4.08. FINANCIAL STATEMENTS. Borrower has furnished to Lender the most
recent annual or quarterly financial statements of the Borrower, certified by a
Responsible Officer of the Borrower, including balance sheets and related
statements of income, retained earnings and general ledger cash accounts, as
described on SCHEDULE 4.08 hereof. Such financial statements (including the
notes thereto) present fairly the financial condition of Borrower on a
consolidated basis as of the end of such fiscal period and the results of its
operations and the changes in its financial position for the fiscal period then
ended, all in conformity with GAAP applied on a basis consistent with that of
the preceding fiscal period.
4.09. FINANCIAL ACCOUNTING PRACTICES. Borrower has made and kept books,
records and accounts
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which, in reasonable detail, accurately and fairly reflect its respective
transactions and dispositions of its assets, and Borrower shall maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (a) transactions are executed in accordance with management's
general or specific authorization, (b) transactions are recorded as necessary
(i) to permit preparation of financial statements in conformity with GAAP and
(ii) to maintain accountability for assets, (c) access to assets is permitted
only in accordance with management's general or specific authorization and (d)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
4.10. ACCURATE AND COMPLETE DISCLOSURE. No representation or warranty
made by Borrower under this Agreement and no statement made by Borrower or by
any Owner in any financial statement, certificate, report, exhibit or document
furnished by Borrower or any Owner to Lender pursuant to or in connection with
this Agreement (including without limitation any filings with the Securities
Exchange Commission, the FCC or the PUC) is or was false or misleading as of the
date made in any material respect (including by omission of material information
necessary to make such representation, warranty or statement not misleading).
There are no facts that evidence or create a Material Adverse Effect, or, so far
as the Borrower can now foresee, will evidence or create a Material Adverse
Effect, which has not been set forth in the financial statements referred to in
Section 4.08 hereof or otherwise disclosed in writing to the Lender prior to the
First Borrowing Date.
4.11. NO EVENT OF DEFAULT; COMPLIANCE WITH MATERIAL AGREEMENTS. No
event has occurred and is continuing and no condition exists which constitutes a
Default or an Event of Default after giving effect to the Advance to be made on
the First Borrowing Date and the Advance to be made immediately after the
Amendment Closing Date. As of the date hereof, Borrower is not in violation of
any term of its material agreements or instruments to which it is a party or by
which it or its properties is bound.
4.12. LITIGATION. Except as set forth in SCHEDULE 4.12, there is no
pending action, suit or threatened proceeding by or before any Governmental
Authority against or affecting Borrower or any of its properties, rights or
licenses which if adversely decided would have a Material Adverse Effect.
4.13. RIGHTS TO PROPERTY; INTELLECTUAL PROPERTY. Borrower has good and
marketable title, subject only to the Permitted Encumbrances, to the Collateral
and to all personal and real property purported to be owned by it as reflected
in the most recent balance sheet referred to in Section 4.08 hereof (except as
sold or otherwise disposed of in the ordinary course of business or as no longer
used or useful in the conduct of the business which sales or other disposals in
the aggregate do not have a Material Adverse Effect on such financial
statements). Borrower owns or possesses the right to use all patents,
trademarks, service marks, trade names, copyrights, know-how, franchises,
software and software licenses necessary for the operation of its business, free
from burdensome restrictions.
4.14. FINANCIAL CONDITION. The Borrower's financial condition is
accurately described in the Certificate of Financial Condition executed by
Borrower pursuant hereto.
4.15. TAXES. Borrower's federal tax identification number is set forth
on SCHEDULE 1 hereto. With respect to the United States (whether federal, state
or local), (i) all tax returns required to be filed by Borrower have been
properly prepared, executed and filed, and (ii) all taxes, assessments, fees and
other governmental charges upon Borrower or upon any of its respective
properties, incomes, sales or franchises which are shown to be due and payable
thereon have been paid, other than taxes or assessments the validity or amount
of which Borrower is contesting in good faith. The reserves and
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provisions for taxes on the books of Borrower are adequate for all open years
and for its current fiscal period. With respect to obligations outside the
United States, all tax returns required to be filed by Borrower have been
properly prepared, executed and filed and all taxes, assessments, fees and other
governmental charges upon Borrower or upon any of its respective properties,
incomes, sales or franchises which would be due and payable thereon have been
paid, other than taxes or assessments the validity or amount of which Borrower
is contesting in good faith and other than taxes, assessments or returns, with
respect to which the failure to pay or prepare, execute and file, as the case
may be, do not and will not have, in the aggregate, a Material Adverse Effect on
Borrower.
4.16. NO MATERIAL ADVERSE CHANGE. Since the date of the financial
statements referenced in Section 4.08, there has been no Material Adverse
Change.
4.17. NO REGULATORY EVENT. No Regulatory Event has occurred and is
continuing.
4.18. TRADE RELATIONS. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any carrier, any labor
organizations, any customer or any group thereof whose agreements with Borrower
or use of the Equipment individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no present
condition or state of facts or circumstances which would have a Material Adverse
Effect or prevent Borrower from conducting its business after the consummation
of the transaction contemplated by this Agreement.
4.19. NO BROKERAGE FEES. No brokerage or other fee, commission or
compensation is to be paid by Borrower to any Person other than Lender in
connection with the loans to be made hereunder. Borrower hereby indemnifies
Lender against any claims brought against Lender for brokerage fees or
commissions of any Person based on an agreement with Borrower and agrees to pay
all expenses incurred by Lender in connection with the defense of any action or
proceeding brought to collect any such brokerage fees or commissions.
4.20. MARGIN STOCK; REGULATION U. Borrower is not engaged principally,
or as one of its important activities, in the business of extending credit for
the purpose of purchasing or carrying margin stock. The making of the Advances
and the use of the proceeds thereof will not violate Regulations G, U or X of
the Board of Governors of the Federal Reserve System.
4.21. INVESTMENT COMPANY; PUBLIC UTILITY HOLDING COMPANY. Borrower is
not an "investment company" or a "company controlled by an investment company"
within the meaning of the Investment Company Act of 1940, as amended, or a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
4.22. PERSONAL HOLDING COMPANY. Borrower is not a "personal holding
company" as defined in Section 542 of the Code.
4.23. ERISA. (i) With respect to any Plan, there is no Reportable Event
currently under consideration by the PBGC which may reasonably result in any
material liability to the PBGC with respect to any Plan, (ii) no Plan has been
terminated, (iii) no trustee has been appointed by any United States District
Court to administer any Plan, (iv) the PBGC has not instituted proceedings to
terminate
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any Plan or to appoint a trustee to administer any such Plan, (v) neither the
Borrower nor any Affiliate has withdrawn, completely or partially, from any Plan
and (vi) neither the Borrower nor any Affiliate has incurred secondary liability
for withdrawal liability payments under any Plan.
4.24. ENVIRONMENTAL WARRANTIES. Borrower is in compliance with all
Environmental Laws applicable to Borrower or its business or to the real or
personal property owned, leased or operated by Borrower. Borrower has not
received notice of, and is not aware of, any violations or alleged violations,
or any liability or asserted liability, under any such Environmental Laws, with
respect to Borrower or its business or its properties.
4.25. SECURITY INTERESTS. The provisions of Article 3 hereof are
effective to create in favor of Lender a legal, valid and enforceable Lien on or
security interest in all of the Collateral, and, when the recordings and filings
described on SCHEDULE 4.25 hereto have been effected in the public offices
listed on said SCHEDULE 4.25, this Agreement will create a perfected security
interest in all right, title, estate and interest of Borrower in the Collateral,
subject to no Liens except for Permitted Encumbrances. The security interests in
the Collateral in favor of Lender shall be first-priority, provided, however,
the Lien of Israel Discount Bank on the Equipment need only be subordinated to
the lien of Lender on the Collateral pursuant to the Inter-Creditor Agreement
dated as of June 3, 1996 (or an amendment thereto) on or before the presentation
of a Borrowing Certificate, the proceeds of which are to be used to acquire such
Equipment (either directly or indirectly by reimbursement of Borrower). All
action necessary or desirable to protect and perfect such security interest in
each item of the Collateral will have been duly taken prior to the First
Borrowing Date. The recordings and filings shown on said SCHEDULE 4.25 are all
the actions necessary or advisable in order to establish, protect and perfect
the interest of Lender in the Collateral.
4.26. PLACE OF BUSINESS. The chief executive offices of Borrower are
identified on SCHEDULE 4.26 hereto. The Borrower's principal place of business
in the state(s) where the Equipment is located is identified on SCHEDULE 4.26
hereto. The Borrower's records concerning the Collateral are kept at one or both
of these addresses.
4.27. LOCATION OF COLLATERAL. The Collateral is and will be kept at the
locations identified on SCHEDULE 4.26 hereto or such other locations as may be
permitted under Section 8.12. Notwithstanding any other provision of this
Agreement, Equipment may not be relocated from any location identified on
SCHEDULE 4.26 (or such other location as may be permitted after compliance with
Section 8.12) to any other location identified on SCHEDULE 4.26 (or such other
location to which Collateral has been relocated after compliance with Section
8.12) without first complying again with the requirements of Section 8.12 in
connection with each relocation.
4.28. CLEAR TITLE TO COLLATERAL. The Borrower is, or will be, upon
purchase pursuant to the NTI Purchase Agreement and this Agreement the sole
owner of each item of the Collateral, having good and marketable title thereto,
free and clear of any and all Liens, claims, or rights of others, except for the
security interest granted herein to the Lender and the other Permitted
Encumbrances.
4.29. ASSUMED NAMES. Except as set forth on SCHEDULE 4.29 hereto,
Borrower does not conduct business under any assumed names or trade names, and
has not conducted business under any other names, or any assumed names or trade
names, at any time prior to the date hereof.
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4.30. [INTENTIONALLY OMITTED].
4.31. NTI PURCHASE AGREEMENT. The NTI Purchase Agreement has been duly
executed and delivered by the Borrower and NTI, is in full force and effect, and
a true, correct and complete copy thereof (including all annexes, attachments
and amendments thereto) has been delivered to Lender, and there are no other
side letters, waivers or other agreements affecting the terms thereof.
ARTICLE 5: CONDITIONS OF CLOSING
5.01. INITIAL CLOSING. On or before the Closing Date, the conditions
set forth in Section 5.01 of the Original Loan Agreement shall have been
satisfied.
5.02. AMENDMENT CLOSING. On or before the Amendment Closing Date, the
following conditions shall have been satisfied:
(a) A certificate of Borrower signed by a duly authorized Responsible
Officer, certifying as to (i) true copies of Organizational Documents of
Borrower in effect on such date; (ii) true copies of all corporate action taken
by Borrower relative to this Agreement, each Note and the other Loan Documents;
(iii) the names, true signatures and incumbency of the Responsible Officers of
Borrower authorized to execute and deliver this Agreement, each Note and the
other Loan Documents; (iv) a Certificate of Good Standing (or equivalent
certificate) for the Borrower, duly issued by the Secretary of State of each
state in which the Borrower intends to do business; and (v) such other matters
as Lender shall request.
(b) OPINIONS OF COUNSEL. Lender shall have received the following
opinions, all dated as of the Closing Date and all in form and substance
satisfactory to Lender:
(i) A written opinion of counsel to Borrower and each of Gary Bondi,
Alfred West and Steven West, substantially in the form of EXHIBIT C-2
hereto; and
(ii) [INTENTIONALLY OMITTED]
(c) CLOSING DOCUMENTS. Lender shall have received the following documents,
all in form and substance satisfactory to Lender:
(i) AGREEMENT. This Agreement, duly executed by Borrower and American
Telemedia, Ltd.;
(ii) NOTE. The Tranche 1 and Tranche 2 Notes, duly executed by
Borrower and, with respect to the Tranche 2 Note, American Telemedia, Ltd.;
(iii) FINANCING STATEMENTS. All UCC-1 financing statements
necessary to perfect the Liens granted hereby, each duly executed by
Borrower, and duly recorded in all the offices identified on SCHEDULE 4.25
hereto;
(iv) NTI PURCHASE AGREEMENT. A copy of the executed NTI Purchase
Agreement;
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(v) INSURANCE. Policies and certificates of insurance required by
Section 7.07, accompanied by evidence of the payment of the premiums
therefor;
(vi) FINANCIAL STATEMENTS. The financial statements described in
Section 4.08 hereto;
(vii) BALANCE SHEET. A balance sheet of the Borrower, dated as of
December 31, 1996, certified by a Responsible Officer as fairly presenting
the financial condition of the Borrower.
(viii) CERTIFICATE OF FINANCIAL CONDITION. A Certificate of
Financial Condition, duly executed by a Responsible Officer of the
Borrower.
(ix) PRE-CLOSING LIEN SEARCHES. Lien searches from all jurisdictions
reasonably determined by Lender to be appropriate, effective as of a date
reasonably close to the Closing Date, reflecting no other Liens (other than
Permitted Encumbrances) on any of the Collateral.
(x) STOCK PLEDGE AGREEMENT. The Stock Pledge Agreements, duly
executed by each of Gary Bondi, Alfred West and Steven West.
(xi) INTER-CREDITOR AGREEMENT. An Inter-Creditor Agreement dated as
of June 3, 1996 in form satisfactory to Lender, duly executed by each of
Lender and Israel Discount Bank subordinating the lien of Israel Discount
Bank on the Subordinated Equipment.
ARTICLE 6: CONDITIONS OF LENDING
--------------------------------
6.01. CONDITIONS FOR INITIAL ADVANCE. On or before the Tranche 1 First
Borrowing Date, the conditions set forth in Section 6.01 of the Original Loan
Agreement shall have been met to Lender's satisfaction. On or before the Tranche
2 First Borrowing Date, the following conditions shall have been met to Lender's
satisfaction:
(a) POST-CLOSING LIEN SEARCHES. Lender shall have received
satisfactory results of Lien searches in all jurisdictions reasonably
determined by Lender to be appropriate, reflecting the filing of financing
statements in favor of Lender pursuant hereto and no other Liens other than
Permitted Encumbrances.
(b) REQUIRED CONSENTS. Lender shall have received satisfactory
evidence of the Borrower's obtaining the Required Consents.
(c) FEES. Lender shall have received the fee(s) described in Section
2.09 hereof.
(d) MAINTENANCE AGREEMENT. [INTENTIONALLY OMITTED]
6.02. CONDITIONS FOR ALL ADVANCES. The obligation of Lender to make any
Advance hereunder is subject to the Borrower's performance of its obligations
hereunder on or before the date of such Advance, and to the satisfaction of the
following further conditions on or before the Borrowing Date for any Advance,
including the first Advance:
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(a) FILINGS, REGISTRATIONS AND RECORDINGS. Any financing statements
or other recordings required hereunder shall have been properly filed,
registered or recorded in each office in each jurisdiction required in
order to create in favor of the Lender a perfected first-priority Lien on
the Collateral, subject to no other Lien (other than Permitted
Encumbrances); the Lender shall have received acknowledgment copies of all
such filings, registrations and recordations stamped by the appropriate
filing officer; and Lender shall have received results of searches of such
filing offices, and satisfactory evidence that any other Liens (other than
Permitted Encumbrances) on the Collateral have been duly released, that all
necessary filing fees, recording fees, taxes and other expenses related to
such filings, registrations and recordings have been paid in full.
(b) BORROWING CERTIFICATE. Lender shall have received a duly executed
Borrowing Certificate in the form of EXHIBIT B, including a detailed
itemization of all costs of goods and services to be paid with the proceeds
of the Advance and accompanied by supporting documentation satisfactory to
Lender.
(c) REPORTING REQUIREMENTS. Borrower shall have provided Lender with
all relevant reports and information required under Article 7 hereof.
(d) NO REGULATORY EVENT. No Regulatory Event (in either Borrower's or
Lender's reasonable determination) shall have occurred and be continuing or
would exist upon the consummation of transactions to occur on such
Borrowing Date.
(e) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default
shall have occurred and be continuing or would exist upon the consummation
of transactions to occur on such Borrowing Date.
(f) NO MATERIAL ADVERSE CHANGE. No Material Adverse Change shall have
occurred, or would occur after giving effect to such Advance, since the
date of the last financial statements delivered to Lender pursuant to
Section 4.08 or 7.01 hereof.
(g) REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Article 4 hereof shall be true on and as of the
date of each such Advance hereunder,
(h) LENDER'S EXPENSES. All closing costs, and other Lender's Expenses
shall have been paid in full, (or shall be paid first from such Advance as
provided in Section 2.03 hereof).
(i) OPINIONS. Lender shall have received from Borrower (if requested)
such opinions of counsel for the Borrower as may be reasonably acceptable
to Lender in form and substance with respect to the perfection and priority
of the Liens created by the Security Documents in each such jurisdictional
location.
(j) DETAILS, PROCEEDINGS AND DOCUMENTS. All legal details and
proceedings in connection with the transactions contemplated by this
Agreement shall be reasonably satisfactory to Lender and Lender shall have
received all such counterpart originals or certified or other copies of
such documents and proceedings in connection with such transactions, in
form and substance reasonably satisfactory to Lender, as Lender may from
time to time request.
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(k) POST-CLOSING ITEMS. The post-closing items described on SCHEDULE
6.02 hereto, if any, shall have been completed in the time permitted, and
Borrower shall have provided Lender with satisfactory evidence thereof.
(l) AMENDMENT TO INTER-CREDITOR AGREEMENT. Delivery of an amendment
to the Inter-Creditor Agreement dated as of June 3, 1996, between Israel
Discount Bank and Lender in form acceptable to Lender subordinating the
Lien of Israel Discount Bank on the Equipment which is to be acquired
directly (or indirectly by way of reimbursement of the Borrower) with the
proceeds of such requested Advance.
(m) ADVANCES FOR NTI EQUIPMENT AND RELATED SOFTWARE TO BE LOCATED IN
THE LONDON, ENGLAND, BRUSSELS, BELGIUM, OR PARIS, FRANCE. In the event the
proceeds of an Advance are to be used for the purchase of NTI Equipment and
related Software to be located in the London, England, Brussels, Belgium,
or Paris, France, the Borrower shall have complied with the requirements of
Section 3.09 of this Agreement.
(n) CONSENTS. Lender shall have received Consents duly executed by
all necessary parties and in form satisfactory to Lender.
6.03. AFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Any Borrowing
Certificate or other request for any Advance hereunder shall constitute a
representation and warranty that (a) the representations and warranties
contained in Article 4 hereof are true and correct on and as of the date of such
request with the same effect as though made on and as of the date of such
request, and (b) on the date of such request no Default or Event of Default has
occurred and is continuing or exists or will occur or exist after giving effect
to such Advance (for this purpose such Advance being deemed to have been made on
the date of such request). Failure of Lender to receive notice from Borrower to
the contrary before such Advance is made shall constitute a further
representation and warranty by Borrower that (x) the representations and
warranties of Borrower contained in the first sentence of this Section 6.03 are
true and correct on and as of the date of such Advance with the same effect as
though made on and as of the date of such Advance, and (y) on the date of the
Advance no Default or Event of Default has occurred and is continuing or exists
or will occur or exist after giving effect to such Advance.
6.04. DEADLINE FOR FUNDING CONDITIONS. Lender shall have no obligation
to make any Advances hereunder if all of the conditions set forth in Article 5
and in Sections 6.01 and 6.02 hereof have not been fully satisfied and in any
event after the Financing Termination Date.
ARTICLE 7: AFFIRMATIVE COVENANTS
--------------------------------
Borrower hereby agrees that as long as the commitment hereunder remains in
effect, any Note remains outstanding or unpaid or any other amount is owing to
Lender hereunder or under any of the Loan Documents, Borrower shall keep and
perform fully each and all of the following covenants:
7.01. REPORTING AND INFORMATION REQUIREMENTS.
(a) ANNUAL AUDIT REPORTS. As soon as practicable, and in any event
before July 12, 1996 for fiscal year 1995 and within three (3) months after
the close of each fiscal year of Borrower thereafter, Borrower shall
furnish or cause to be furnished to Lender audited statements
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of income, retained earnings and statements of cash flows for such fiscal
year and the Borrower's balance sheet as of the close of such fiscal year,
and notes to each, all in reasonable detail, and beginning with Borrower's
second full fiscal year setting forth in comparative form the corresponding
figures for the preceding fiscal year, with such statements and balance
sheet to be certified without qualification by independent certified public
accountants of recognized regional or national standing selected by
Borrower and reasonably satisfactory to Lender.
(b) QUARTERLY REPORTS. Within forty-five (45) days after the end of
each fiscal quarter, Borrower shall furnish to Lender (i) unaudited
consolidated statements of income and retained earnings and general ledger
cash accounts for Borrower for such quarter and for the period from the
beginning of Borrower's then current fiscal year to the end of such
quarter, and an unaudited consolidated balance sheet of Borrower as of the
end of such month, all in reasonable detail and certified by a Responsible
Officer of Borrower as presenting fairly the financial position of Borrower
as of the end of such quarter and the results of its operations and the
changes in its financial position for such quarter, in conformity with GAAP
(except for accompanying notes thereto), subject to year-end audit
adjustments, and (ii) upon Lender's request, an aging of accounts payable
and accounts receivable.
(c) COMPLIANCE CERTIFICATES. Within sixty (60) days after the end of
each Calendar Quarter, Borrower shall deliver to Lender a certificate dated
as of the end of such Calendar Quarter, signed on behalf of Borrower by a
Responsible Officer of Borrower: (i) stating that as of the date thereof no
Event of Default has occurred and is continuing or exists, or if an Event
of Default has occurred and is continuing or exists, specifying in detail
the nature and period of existence thereof and any action with respect
thereto taken or contemplated to be taken by Borrower; (ii) stating that
the signer has personally reviewed this Agreement and that such certificate
is based on an examination made by or under the supervision of the signer
sufficient to assure that such certificate is accurate; (iii) calculating
and certifying Borrower's compliance with the financial covenants set forth
in SECTION 7.15 hereof and (iv) (x) listing the name of each Owner of the
Borrower and the number of shares or other indicia of ownership held by
such Owner (including in such list the name and amount of options,
warrants, rights of conversion or other ownership right), provided that the
Borrower need not identify by name Owners whose ownership positions is less
than five percent (5%) of the voting shares of any class of securities or
the beneficial owners of Investor and (y) calculating and certifying that
Lender continues to have a first priority, perfected lien on a majority of
the voting shares of each class (other than the Preferred Stock) of such
outstanding securities or other ownership rights in Borrower (including in
such calculation shares or other ownership rights which Borrower has agreed
or otherwise has become committed to issue, whether by possible exercise at
a future date of an option, warrant, right of conversion or otherwise).
(d) [INTENTIONALLY DELETED].
(e) [INTENTIONALLY OMITTED]
(f) OTHER REPORTS AND INFORMATION. Promptly upon their becoming
available to Borrower, Borrower shall deliver to Lender copies of (i) all
regular or special reports or effective registration statements which
Borrower shall file with the Securities and Exchange Commission (or any
successor thereto) or any securities exchange, (ii) financial statements,
material reports, and other information distributed by Borrower to its
creditors or the financial community in
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general, (iii) all press releases issued by or concerning Borrower or the
System, and (iv) during the High Yield Period, all material reports and
other information distributed to the trustee for the High Yield Notes
pursuant to the Indenture (as defined in the Memorandum Draft).
(g) FURTHER INFORMATION. Borrower will promptly furnish to Lender
such other information (including any report by independent auditors) in
such form as Lender may reasonably request.
7.02 OTHER NOTICES. Promptly upon a Responsible Officer of Borrower
becoming aware of any of the following, Borrower shall give Lender notice
thereof, together with a written statement of a Responsible Officer of Borrower
setting forth the details thereof and any action with respect thereto taken or
contemplated to be taken by Borrower:
(a) a Default or Event of Default;
(b) any Material Adverse Change;
(c) a material default or breach by Borrower under any other
Contractual Obligation to which it is a party or by which it or its
properties is bound, if the consequences of such breach of default are
material to the business, operations or financial condition of Borrower;
(d) any event that the Borrower reasonably determines would
constitute a Regulatory Event;
(e) the commencement, existence or threat of any proceeding by or
before any Governmental Authority against Borrower which, if adversely
decided, would have a Material Adverse Effect;
(f) Borrower's receipt of any notice of violation of, or liability
under, any Environmental Laws affecting Borrower or any of its properties;
or
(g) any Change in Control or any material change in the management of
Borrower.
7.03. NOTICE OF PENSION-RELATED EVENTS. The Borrower shall promptly
furnish Lender with written notice upon the receipt by the Borrower or the
administrator of any Plan of any notice, correspondence or other communication
from the PBGC, the IRS, the Secretary of Treasury, the Department of Labor, or
any other Person, as the case may be, relating to (i) any Reportable Event, (ii)
any funding deficiency in excess of $50,000 (or $250,000 during any High Yield
Period) with respect to any Plan, (iii) any liability, either primary or
secondary, with respect to complete or partial withdrawal from any Plan, (iv)
proceedings to terminate any Plan or (v) the appointment of a trustee for any
Plan. Such notice shall be accompanied by any pertinent documents including, but
not limited to, the relevant notice, correspondence or other communication and a
statement of a Responsible Officer of the Borrower describing the event or the
action taken and the reasons therefor.
7.04. INSPECTION RIGHTS. Borrower shall upon reasonable notice permit
such persons as Lender may designate to visit and inspect the Collateral or any
other properties of Borrower, to examine its books and records and take copies
and extracts therefrom and discuss its respective affairs with its officers,
employees and independent engineers at such times and as often as Lender may
reasonably
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request. Borrower hereby authorizes such officers, employees, and independent
engineers to discuss with Lender the affairs of Borrower. Lender agrees that it
will not, directly or indirectly, disclose to any third party confidential
information of Borrower obtained by it pursuant to the exercise of such
inspection rights, provided, however, this SECTION 7.04 shall not restrict the
disclosure by Lender of information if such disclosure is required by law, by
order of any court or by the order, rule or regulation of any administrative
agency, including without limitation any requirements of the FCC, any PUC, or
any state or federal securities commissions. Further, the disclosure of
information will not be restricted hereunder if such information (i) has been or
becomes published or is now, or in the future, in the public domain through (A)
no fault of Lender, (B) disclosure other than unauthorized disclosure by Lender
or (C) disclosure to third parties by Borrower without similar restrictions;
(ii) subsequent to disclosure to Lender, is lawfully received from a third party
having rights therein without restriction of the third party's or Lender's
rights to disseminate the information and without notice of any restriction
against its further disclosure; (iii) is disclosed with the written approval of
Borrower; or (iv) is or becomes publicly available free of any obligation to
keep it confidential.
7.05. PRESERVATION OF CORPORATE EXISTENCE AND QUALIFICATION. Borrower
shall maintain its existence, good standing and rights in full force and effect
in its jurisdiction of organization and shall qualify to do business and remain
qualified and in good standing and shall obtain all necessary authorizations to
do business in each jurisdiction in which failure to receive or retain such
would have a Material Adverse Effect, provided however, that nothing in this
Section 7.05 shall prohibit the Borrower from entering into an Affiliate
Transaction.
7.06. CONTINUATION OF BUSINESS. Borrower shall continue to engage
solely in the business described on SCHEDULE 1 hereto, and shall acquire and
maintain in full force and effect all rights, privileges, franchises and
licenses necessary for the operation and maintenance of the System (including,
without limitation any license or authorization required by the FCC or any PUC).
7.07. INSURANCE.
(a) Borrower shall provide and maintain or cause to be maintained at
all times insurance in such forms and covering such risks and hazards and
in such amounts and with an insurance corporation with a Best rating of "A"
or above, licensed to do business in the states where the Equipment and the
Borrower are located, as may be reasonably satisfactory to Lender, as shown
on SCHEDULE 7.07 hereto, and otherwise as may be required by the Security
Documents.
(b) Borrower shall cause (i) all liability insurance policies
covering any premises in which Collateral is located and all policies
insuring against liability arising from Borrower's operation of the
Collateral to name Lender as an additional insured, (ii) all physical
damage insurance policies to contain a lender's or mortgagee's loss payable
provision acceptable to Lender with respect to the Collateral, (iii) all
liability and physical damage insurance policies described in clauses (i)
and (ii) to provide that no assignment, cancellation, modification,
reduction in amount or adverse change in coverage thereof shall be
effective until at least thirty (30) days after receipt by Lender of
written notice thereof, (iv) all insurance policies to insure the interests
of Lender with respect to the Collateral regardless of any breach of or
violation by Borrower of any warranties, declarations or conditions
contained therein and (v) all liability and physical damage insurance
policies described in clauses (i) and (ii) to provide that Lender shall
have no obligation or liability for premiums, commissions, assessments or
calls in connection with such insurance. Lender shall be under no
obligation to verify the adequacy or existence of
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any insurance coverage. Borrower shall furnish Lender copies of, or
acceptable certificates with respect to, all such policies prior to the
Closing Date, and shall provide to Lender, at least thirty days prior to
each policy expiration date, evidence of the insurance being maintained by
Borrower in compliance with this Section 7.07(b). Certificates for
insurance required under subsection (i) above shall be in ACORD Form 27
(attached hereto at SCHEDULE 7.07), and all certificates shall be
satisfactory in form and substance to Lender.
(c) If the Collateral is partially or totally damaged or destroyed,
Borrower shall give prompt notice to Lender, and all insurance proceeds,
less the costs of collection thereof, shall be paid to or retained by
Lender. Settlements, adjustments or compromises of any claims for loss,
damage or destruction to the Collateral shall be made by Borrower and
Lender as long as no Event of Default has occurred and is continuing, and
otherwise shall be made solely by Lender. Borrower hereby authorizes and
directs any affected insurance company to pay such proceeds directly to
Lender, and to rely on Lender's statement as to whether an Event of Default
has occurred. Borrower shall pay all costs of collection of insurance
proceeds payable on account of such damage or destruction. If no Default or
Event of Default has occurred and is continuing on the date the Collateral
is partially or totally damaged or destroyed, Lender shall make available
to Borrower the proceeds of any physical damage insurance actually paid to
Lender in respect of such damage or destruction of the Collateral (after
deducting therefrom any sums retained by Lender in reimbursement for costs
of collection) to pay the cost of restoration, and Borrower shall proceed
promptly with the work of restoration of the Collateral and shall pursue
the work of restoration diligently to completion. If any Default or Event
of Default has occurred and is continuing either on the date of such damage
or destruction or on the date such insurance proceeds are paid, or if any
Default or Event of Default shall occur prior to completion of such work of
restoration, then Lender, at its option, may apply such insurance proceeds
in payment of any of the Obligations, in such order as Lender may elect in
its sole discretion. Any insurance proceeds remaining after completion of
work or restoration shall, at Lender's election, be applied in accordance
with SECTION 2.04(c) hereof (but without prepayment premium), or paid over
to Borrower. Upon completion of any restoration, Borrower shall deliver to
Lender a certificate stating that the restoration has been duly completed
and accounting for the use of any insurance proceeds in such restoration.
7.08. PAYMENT OF TAXES, CHARGES, CLAIMS AND CURRENT LIABILITIES.
Borrower shall pay or discharge:
(a) on or prior to the date on which penalties thereto accrue, all
taxes, assessments and other government charges or levies imposed upon it
or any of its properties or income (including such as may arise under
Section 4062, Section 4063 or Section 4064 of ERISA, or any similar
provision of law);
(b) on or prior to the date when due, all lawful claims of
materialmen, mechanics, carriers, warehousemen, and other like persons
which could result in creation of a Lien upon any such property;
(c) on or prior to the date when due, all other lawful claims which,
if unpaid, might result in the creation of a Lien upon any such property
(other than Permitted Encumbrances) or which, if unpaid, might give rise to
a claim entitled to priority over general creditors of Borrower in a case
under Title 11 (Bankruptcy) of the United States Code, as amended, or in
any
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insolvency proceeding or dissolution or winding-up involving Borrower; and
(d) all other current liabilities so that no amount, individually or
in the aggregate greater than $100,000, is overdue more than ninety (90)
days.
Notwithstanding the foregoing, Borrower shall be entitled to contest or
appeal the requirements of any Law or Governmental Authority or the payment of
any tax, assessment, charge, levy or claim, or any judgment entered against the
Borrower (collectively, in this Section 7.08, the "REQUIREMENTS"), as long as
(i) such requirements are being contested in good faith by appropriate
proceedings diligently conducted; (ii) for any such requirement with which the
failure to comply may have a Material Adverse Effect on Borrower, Borrower has
given Lender written notice of such requirements and its intent to contest them,
with supporting reasons for such contest, before the addition of any interest or
penalties that may accrue on such requirements; (iii) Borrower maintains
adequate cash reserves and makes other appropriate provisions as may be required
by GAAP to provide for any liability arising from such requirements; (iv) the
contesting of, or failure to comply with, such requirements does not in any way
jeopardize the Borrower's ability or authority to operate all or any part of the
Collateral or the continuing priority of Lender's security interests in the
Collateral; (v) the contesting of, or failure to comply with, such requirements
does not have a Material Adverse Effect; and (vi) any foreclosure, attachment,
execution, sale or similar proceeding against the Borrower or any of its
properties in connection with any such requirements is duly stayed by posting of
a bond or security deposit or by other action sufficient under applicable law to
stay such foreclosure, attachment, execution, sale or other proceedings.
7.09. FINANCIAL ACCOUNTING PRACTICES. Borrower shall make and keep
books, records and accounts which, in reasonable detail, accurately and fairly
reflect its transactions and dispositions of its assets and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(a) transactions are executed in accordance with management's general or
specific authorization, (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with GAAP and (ii) to maintain
accountability for assets, (c) access to assets is permitted only in accordance
with management's general or specific authorization and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
7.10. COMPLIANCE WITH LAWS. Borrower shall comply in all respects with
all Laws applicable to Borrower, provided that Borrower shall not be deemed to
be in violation of this SECTION 7.10 as a result of any failure to comply which
would not result in any liability or exposure to Lender or any fines, penalties,
injunctive relief or other civil or criminal liabilities which, in the
aggregate, would materially affect the business, operations or financial
condition of Borrower or the ability of Borrower to perform its obligations
under this Agreement or any Note.
7.11. USE OF PROCEEDS. Borrower shall use the proceeds of Advances
hereunder only as set forth in SECTION 2.01 hereof.
7.12. GOVERNMENT AUTHORIZATIONS; REGULATORY AUTHORIZATIONS, ETC.
Borrower shall at all times obtain and maintain in force all Regulatory
Authorizations and all other authorizations, permits, consents, approvals,
licenses, exemptions and other actions by, and all registrations,
qualifications, designations, declarations and other filings with, any
Governmental Authority necessary in connection with execution and delivery of
this Agreement or any Note, consummation of the transactions herein or therein
contemplated, performance of or compliance with the terms and conditions hereof
or thereof or to ensure
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the legality, validity and enforceability hereof or thereof.
7.13. CONTRACTS AND FRANCHISES. Borrower shall comply with all
agreements or instruments to which it is a party or by which it or any of its
properties (now owned or hereafter acquired) may be subject or bound and shall
maintain any and all franchises it may have or hereafter acquire, provided that
Borrower shall not be deemed to be in violation of this SECTION 7.13 as a result
of any failure to comply with any agreement if such failure would not have
Material Adverse Effect.
7.14. CONSENTS. Borrower shall obtain such Landlord's Consents,
Mortgagee's Consents and other third party consents as Lender shall reasonably
request to protect its Liens and its access to the Collateral.
7.15. FINANCIAL COVENANTS. Borrower shall comply with the financial
covenants set forth on SCHEDULE 7.15 hereto.
7.16. CONSTRUCTION AND STORAGE. The Collateral shall be installed and
equipped in full compliance with the Requirements of Law affecting the
Collateral except to the extent a failure to so comply would not have a Material
Adverse Effect on the construction or operation of the Collateral. All Equipment
financed with the proceeds of the Loan shall be safeguarded and stored until
installed in appropriate storage facilities owned or leased by Borrower. In the
event of any cessation of construction for more than fifteen (15) successive
calendar days, Borrower shall make adequate provision, reasonably acceptable to
Lender, for the protection of all materials stored on site against
deterioration, loss or damage.
7.17. UPGRADE NTI EQUIPMENT. Borrower shall update the software
customarily used in equipment of the same type as the NTI Equipment within two
releases of the most current batch change supplement release. Borrower shall
maintain the NTI Equipment in good working order and shall upgrade its
functionality to include batch change supplements releases generally available
to NTI customers and batch change supplements upgrades included in the original
purchase price of the NTI Purchase Agreement in the form in effect on the
Amendment Closing Date.
ARTICLE 8: NEGATIVE COVENANTS
-----------------------------
Borrower hereby agrees that so long as the Commitment hereunder remains in
effect or any Note remains outstanding and unpaid or any other amount is owing
to Lender hereunder or under any of the Loan Documents, Borrower shall not
directly or indirectly without prior written consent of Lender, do or permit to
exist any of the following:
8.01. ADDITIONAL INDEBTEDNESS. Create, incur, assume or suffer to exist
at any one time any Indebtedness in excess of $100,000 in the aggregate except
for (a) trade payables incurred in the ordinary course of business, and (b) any
Indebtedness described on SCHEDULE 8.01 hereto.
8.02. RESTRICTIONS ON LIENS AND SALE OF COLLATERAL. Create or suffer to
exist any Lien on the Collateral or on any other property of Borrower, or any
part thereof, whether superior or subordinate to the Lien of the Security
Documents, or assign, convey, sell or otherwise dispose of or encumber its
interest in the Collateral, or any part thereof (including, without limitation,
execution of any lease), nor permit any such action to be taken, except for the
following permitted dispositions and encumbrances (the
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"PERMITTED ENCUMBRANCES"): (i) the Lien created hereby and any purchase money
Liens in favor of NTI created by the NTI Purchase Agreement; (ii) Liens for
taxes not yet due, or which are being contested in good faith and by appropriate
proceedings in accordance with SECTION 7.08 hereof; (iii) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business which are overdue for a period not
longer than thirty (30) days or which are being contested in good faith and by
appropriate proceedings in accordance with SECTION 7.08 hereof; (iv) pledges or
liens in connection with workers' compensation, unemployment insurance and other
social security legislation; (v) deposits to secure the performance of bids,
trade contracts (other than for borrowed money), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature incurred in the ordinary course of business; (vi) easements,
rights-of-way, restrictions and other similar encumbrances that are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of Borrower; (vii) judgment liens with respect to which execution
has been stayed within ten (10) days by appropriate judicial proceedings and the
posting of adequate security which may not be any of the Collateral; and (viii)
specific liens, if any, identified on SCHEDULE 8.02 hereto. Any of the Liens
described in the second clause of subparagraph (ii), the second clause of
subparagraph (iii), and subparagraph (vii) above shall remain "Permitted
Encumbrances" as long as they are being contested by Borrower in compliance with
SECTION 7.08 hereof.
8.03. LIMITATION ON CONTINGENT OBLIGATIONS. Agree to, or assume,
guarantee, endorse or otherwise in any way be or become responsible or liable
for, directly or indirectly, any Contingent Obligation except for those created
or contemplated by the Loan Documents, except for (i) Indebtedness permitted
under SECTION 8.01 or (ii) Indebtedness of any Subsidiary of which Borrower
beneficially owns a majority of the outstanding capital stock engaged
principally in the business of Borrower as currently being conducted or as
contemplated in the Business Plan.
8.04. [INTENTIONALLY OMITTED]
8.05. PROHIBITION OF MERGERS, ACQUISITIONS, NAME, OFFICE OR BUSINESS
CHANGES, ETC. Except in connection with an Affiliate Transaction,
(a) Enter into or become the subject of, any transaction of merger,
acquisition or consolidation or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, transfer or
otherwise dispose of, in one transaction or a series of transactions, all
or any substantial part of Borrower's business or assets, whether now owned
or hereafter acquired.
(b) Change its name or corporate structure without giving Lender at
least thirty (30) days advance written notice of such change, and ensuring
that any steps that Lender may deem necessary to continue the perfection
and priority of Lender's security interests in the Collateral shall have
been taken.
(c) Change the fiscal year end of Borrower from December 31, except
with the prior written consent of Lender, which consent shall not be
unreasonably withheld.
(d) Other than in connection with the issuance of preferred or common
stock in a private placement that does not result in a Change of Control of
Borrower, amend, restate or otherwise modify, or violate any terms of, its
Organizational Documents without the prior written
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consent of Lender, which consent will not be unreasonably withheld.
(e) Become or agree to become a general or limited partner in any
general or limited partnership, or a member in a limited liability company
or a joint venturer in any joint venture not engaged principally in the
business of Borrower as currently conducted or related to the
telecommunications industry.
(f) Acquire or purchase substantially all of the stock, partnership,
membership or other ownership interests in, or substantially all of the
business, assets, customers or operations of, any other entity not engaged
principally in the business of Borrower as currently conducted or related
to the telecommunications industry.
(g) Enter into any new business or make any material change in any of
Borrower's business objectives, purposes and operations from those related
to the telecommunications industry.
8.06. LIMITATION ON EQUITY PAYMENTS. Make any Equity Payment, except
that, as long as no Default or Event of Default has occurred and is continuing,
or would be caused thereby, and if no other provision contained herein will be
violated by the disbursement of such Equity Payment, Borrower may make Equity
Payments described on SCHEDULE 8.06 hereto. Before making any Equity Payment in
accordance with this SECTION 8.06, Borrower shall deliver to Lender a
certificate of a Responsible Officer of Borrower, setting forth in detail the
calculation supporting the Borrower's compliance with the financial covenants,
stating that no Material Adverse Change has occurred since the date of the
latest financial statement delivered pursuant to SECTION 7.01(a), and stating
that no Default or Event of Default has occurred and is continuing or will be
caused by such Equity Payment.
8.07. LIMITATION ON INVESTMENTS, ADVANCES AND LOANS. (i) Organize,
create, acquire, capitalize or own any Subsidiaries not engaged principally in
the business of Borrower as currently conducted or as contemplated under
Borrower's Business Plan without Lender's prior written consent, or (ii) make or
commit to make any advance, loan, guarantee of any Indebtedness, extension of
credit or capital contribution to, or hold or invest in or purchase or otherwise
acquire any stock, bonds, notes, debentures or other securities of, or make any
other investment in, any Person (x) not engaged principally in the business of
Borrower as currently conducted or as contemplated under Borrower's Business
Plan (other than Permitted Investments) without Lender's prior written consent,
and (y) other than on terms no more onerous to Borrower than if negotiated on an
arms-length basis with an unrelated person.
8.08. CAPITAL EXPENDITURES. Except during the High Yield Period,
directly or indirectly make or commit to make any expenditure in excess of
$100,000 in the aggregate in any fiscal year in respect of the purchase or other
acquisition (including installment purchases or capital leases) of fixed or
capital assets, except for capital expenditures in accordance with the business
of Borrower as currently conducted or as contemplated under Borrower's Business
Plan and normal replacements and maintenance which are properly charged to
current operations.
8.09. LIMITATION ON LEASES. Except during the High Yield Period, enter
into any agreement, or be or become liable under any agreement, not in existence
as of the date hereof and reflected on Borrower's financial statements, for the
lease, hire or use of any real or personal property in excess of $100,000 in the
aggregate, including, without limitation, capital or operating leases, except
that Borrower may, in the ordinary course of business and on term standard in
the industry, enter into leases or
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agreements (i) for the use of real property for the System or sales offices,
(ii) for office space, office equipment, vehicles or tools, (iii) for the
location and storage of the Collateral, and (iv) for the use of capacity in
communication transmission facilities, such as but not limited to cables and
satellites.
8.10. TRANSACTIONS WITH AFFILIATES. Directly or indirectly, enter into,
renew or extend any transaction (including, without limitation, the purchase,
sale, lease or exchange of property or assets, or the rendering of any service)
with any holder (or any Affiliate of such holder) of 5% or more of any class of
capital stock of the Borrower or with any Affiliate of the Borrower or any
Restricted Subsidiary, except upon fair and reasonable terms no less favorable
to the Borrower or such Restricted Subsidiary than could be obtained, at the
time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
board of directors of Borrower or (B) for which the Borrower or a Restricted
Subsidiary delivers to the Lender a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to the Borrower or
such Restricted Subsidiary from a financial point of view, (ii) any transaction
solely between the Borrower and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries, (iii) the payment of
reasonable and customary regular fees to directors of the Borrower who are not
employees of the Borrower, (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Borrower and any other Person with which
the Borrower files a consolidated tax return or with which the Borrower is part
of a consolidated group for tax purpose, (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant in the Memorandum
Draft, or (vi) those matters listed on SCHEDULE 8.10 hereto. Notwithstanding
the foregoing, during the High Yield Period, any transaction covered by the
first paragraph of this Section 8.10 and not covered by clauses (ii) through (v)
of this paragraph, the aggregate amount of which exceeds $5,000,000 in value,
must be approved or determined to be fair in the manner provided for in clause
(i)(A) or (B) above.
8.11. TERMINATION OF NTI PURCHASE AGREEMENT. Fail to satisfy its
purchase obligations under the NTI Purchase Agreement, or terminate the NTI
Purchase Agreement prior to the earlier of (i) completion of and acceptance of
the NTI Equipment to be acquired thereunder, or (ii) the Financing Termination
Date.
8.12. REMOVAL OF COLLATERAL. Remove any material part of the Collateral
(except for sales or leases of Inventory in the ordinary course of business)
from the locations identified on SCHEDULE 4.26, without giving Lender thirty
(30) days prior written notice of such move and ensuring that any steps the
Lender may deem necessary to continue the perfection and priority of Lender's
security interest in the Collateral shall have been taken. Notwithstanding the
terms of any other section of this Agreement, no part of any Collateral may be
removed from locations identified on SCHEDULE 4.26 (or such other location as
may be permitted after compliance with SECTION 8.12), to any other location
identified on SCHEDULE 4.26 (or such other location to which such Collateral has
been relocated after compliance with SECTION 8.12) without first complying again
with the requirements of SECTION 8.12 in connection with each relocation.
8.13. ASSUMED NAMES. Transact or engage in business under any assumed
name, fictitious name, tradestyle or "d/b/a" except those identified on
SCHEDULE 4.29.
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8.14. EMPLOYMENT OF, OR COMPETITION BY, KEY EMPLOYEES. (i) Cease to
employ Alfred West or (ii) suffer to exist any competition by any of Gary Bondi,
Alfred West or Steven West with the business conducted now or hereafter by
Borrower.
8.15. ISSUANCE OF ADDITIONAL CAPITAL STOCK. After the date hereof
issue, or agree or otherwise become committed to issue (whether by possible
exercise at a future date of an option, warrant, rights of conversion or
otherwise), shares of any securities or other ownership rights in the Borrower
if immediately after the date of issuance, or the date on which Borrower agrees
or otherwise becomes committed to issue such shares, Lender does not have a
first priority, perfected Lien pursuant to one or more agreements substantially
in the form of the Stock Pledge Agreement on a majority of the voting shares of
each class of such securities or ownership rights in the Borrower (other than
the Preferred Stock, but including in such calculation shares which Borrower has
agreed or otherwise has become committed to issue whether pursuant to options,
warrants, conversion rights or other agreements and including common stock
issuable upon conversion of the Preferred Stock).
ARTICLE 9: EVENTS OF DEFAULT AND REMEDIES
9.01. EVENTS OF DEFAULT. An Event of Default shall mean the occurrence
or existence of one or more of the following events or conditions (whatever the
reason for such Event of Default and whether voluntary, involuntary or effected
by operation of Law):
(a) PAYMENT DEFAULT. If Borrower fails to pay any sum, whether of
principal or interest on any Note or any prepayment premiums, or any other
amount due hereunder or under any Note within ten (10) calendar days after
such amount becomes due; or
(b) FALSE STATEMENT. If any statement, representation or warranty
made by Borrower or any of Gary Bondi, Alfred West or Steven West in any
Loan Document or made in any financial statement, certificate, report,
exhibit or document furnished to Lender pursuant to any Loan Document,
proves to have been untrue, incomplete, false or misleading in any material
respect as of the time when made (including by omission of material
information necessary to make such representation, warranty or statement
not misleading) and such untruth, falsity, misleading statement or omission
shall not have been corrected or remedied to the satisfaction of Lender
within twenty (20) calendar days after the earlier of Borrower's (or Gary
Bondi's, Alfred West's or Steven West's) knowledge thereof or receipt of
written notice thereof from Lender; or
(c) COVENANT DEFAULTS. If Borrower defaults in the performance or
observance of any covenant or agreement in this Agreement, and such default
continues for a period of twenty (20) calendar days after the earlier of
Borrower's knowledge thereof or receipt of written notice from Lender
thereof, except for violations of SECTION 7.08(d), which shall become an
Event of Default at the end of the sixty (60) day period stated therein and
except for specific Defaults listed elsewhere in this SECTION 9.01, as to
which no notice or cure period shall apply unless specified; or
(d) [INTENTIONALLY OMITTED]
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(e) UNDISCHARGED JUDGMENTS. If one or more judgments for the payment
of money has been entered against Borrower or American Telemedia, Ltd. in
an amount in excess of $100,000 (or $1,000,000 during the High Yield
Period), and such judgment or judgments have remained undischarged and
unstayed for a period of thirty (30) calendar days, unless the validity
thereof is contested in compliance with SECTION 7.08 hereof; or
(f) ATTACHMENTS, ETC. If one or more writs or warrants of attachment,
garnishment, execution, distraint or similar process with respect to
obligations of Borrower in excess of $25,000 (or $250,000 during the High
Yield Period) individually or in the aggregate have been issued against
Borrower or American Telemedia, Ltd. or any of their respective properties
which have remained undischarged and unstayed for a period of thirty (30)
consecutive days and are not being contested in compliance with SECTION
7.08 hereof; or
(g) DEFAULT UNDER THIRD PARTY AGREEMENTS. If one or more defaults, or
events or conditions which with notice or lapse of time or both would
become a default, occur that give(s) the creditor the right to accelerate
in respect of any other obligation(s) of Borrower or American Telemedia,
Ltd. for borrowed money (including lease obligations) in the amount of
$100,000 (or $1,000,000 during the High Yield Period) individually or in
the aggregate; or
(h) DISSOLUTION; DISCONTINUANCE OF BUSINESS, ETC. If Borrower or
American Telemedia, Ltd. discontinues its usual business, dissolves, has
its Organizational Document revoked, winds up or liquidates itself or its
business, except as such acts may occur in connection with an Affiliate
Transaction; or
(i) INVOLUNTARY BANKRUPTCY OR RECEIVERSHIP PROCEEDINGS. If a
receiver, custodian, liquidator, or trustee of Borrower, American
Telemedia, Ltd., Alfred West, Steven West or Gary Bondi, or of any of its
or his property is appointed by the order or decree of any court or agency
or supervisory authority having jurisdiction; or an order is entered
adjudicating Borrower, American Telemedia, Ltd., Alfred West, Steven West
or Gary Bondi as bankrupt or insolvent; or any of the property of Borrower,
American Telemedia, Ltd., Alfred West, Steven West or Gary Bondi is
sequestered by court order; or a petition is filed against Borrower,
American Telemedia, Ltd. or Alfred West, Steven West or Gary Bondi under
any state or federal bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution, liquidation, or receivership law of any
jurisdiction, whether now or hereafter in effect; or
(j) VOLUNTARY BANKRUPTCY. If Borrower, American Telemedia, Ltd.,
Alfred West, Steven West or Gary Bondi takes affirmative steps to prepare
to file, or files, a petition in voluntary bankruptcy or to seek relief
under any provision of any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution, or liquidation law of any
jurisdiction, whether now or hereafter in effect, or consents to the filing
of any petition against it or him under any such law; or
(k) ASSIGNMENTS FOR BENEFIT OF CREDITORS, ETC. If Borrower, American
Telemedia Ltd., Alfred West, Steven West or Gary Bondi makes an assignment
for the benefit of creditors, or admits in writing its or his inability to
pay its or his debts generally as they become due, or consents to the
appointment of a receiver, trustee, or liquidator of itself or of all or
any part of its or his properties; or
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(l) NON-COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. If Borrower or
American Telemedia, Ltd. fails to comply with any requirement of any
Governmental Authority within twenty (20) calendar days after notice in
writing of such requirement shall have been given to Borrower by such
Governmental Authority, or such longer period of time permitted Borrower by
such Governmental Authority; or
(m) REGULATORY AUTHORIZATIONS. If any Regulatory Authorization in
connection with this Agreement or any other Loan Document or any such
Regulatory Authorization now or hereafter necessary or advisable to make
this Agreement or the other Loan Documents legal, valid, enforceable and
admissible in evidence or to permit Borrower or American Telemedia, Ltd. to
conduct its business is not obtained or has ceased to be in full force and
effect or has been modified or amended or has been held to be illegal or
invalid or is revoked or terminated and, after notice from Lender, is not
being contested by Borrower or American Telemedia, Ltd. in compliance with
SECTION 7.08 hereof and Lender has reasonably determined in good faith
(which determination shall be conclusive) that such event or occurrence may
have a Material Adverse Effect or a material adverse effect on Lender's
rights under this Agreement or any other Loan Documents; or
(n) DAMAGE OR DESTRUCTION. If the proceeds of any physical damage
insurance actually paid in respect of the partial or total damage or
destruction of the Collateral, together with any other cash or other
readily available funds, are insufficient to cover the cost of the
restoration thereof or such damage or destruction is so extensive that
repair or restoration cannot be expected within a time period short enough
to prevent a Material Adverse Effect;
(o) LANDLORD WAIVERS. If Borrower or American Telemedia, Ltd. fails
to provide the Landlord Waivers and Mortgagee Waivers required hereunder
and Lender determines in its sole discretion that such failure results in a
material impairment of Lender's security for the Loans; or
(p) CHANGE IN CONTROL. If any Change in Control should occur without
Lender's prior written consent, which may be withheld in Lender's sole and
absolute discretion; or
(q) ERISA DEFAULTS. If, with respect to any Plan, (i) there has
occurred a Reportable Event being considered by the PBGC which may
reasonably result in any material liability to the PBGC with respect to any
Plan, (ii) a Plan has been terminated not in compliance with ERISA, (iii) a
trustee has been appointed by a United States District Court to administer
a Plan, (iv) a PBGC or any other person has instituted proceedings to
terminate a Plan or to appoint a trustee to administer any such Plan, (v)
either the Borrower or any Affiliate has withdrawn, completely or
partially, from any Plan, (vi) either the Borrower or any Affiliate has
incurred secondary liability for withdrawal liability payments under any
Plan or (vii) a Plan has failed to meet the minimum funding standards
established under the Code or ERISA; or
(r) DEFAULTS UNDER OTHER LOAN DOCUMENTS. If any default,
misrepresentation or breach should occur under any Security Document or
other Loan Document and is not cured or waived within the time permitted
therein, or any such Loan Documents should cease to be in full force and
effect, or any party thereto should assert any unenforceability of, or deny
liability on, or admit inability to perform under, any such Loan Document.
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9.02. CONSEQUENCES OF AN EVENT OF DEFAULT. If any Event of Default
shall occur and be continuing or shall exist, Lender shall be under no further
obligation to make Advances hereunder, any remaining commitment hereunder shall
immediately terminate, with no further notice, and Lender may, by notice to
Borrower, declare the unpaid principal amount of each Note, interest accrued
thereon and all other amounts owing by Borrower hereunder or under each Note to
be immediately due and payable without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived, and an action
therefor shall immediately accrue. Such consequences shall occur automatically
upon the occurrence of an Event of Default under SECTION 9.01 (h), (i), (j) OR
(k), without any notice or demand. Upon the occurrence of an Event of Default,
Lender may, in its sole discretion, exercise any and all remedies available to
it under this ARTICLE 9 or under any of the Loan Documents or under applicable
law without further notice or period of grace or opportunity to cure.
9.03. EXERCISE OF RIGHTS. Subject to any requirements for FCC or other
governmental approval upon the occurrence of any Event of Default, the rights,
powers and privileges provided in this Section and all other remedies available
to Lender under this Agreement or by statute or by rule of law may be exercised
by Lender at any time from time to time whether or not the Obligations shall be
due and payable, and whether or not Lender shall have instituted any foreclosure
or other action for the enforcement of this Agreement or any Note. No failure to
exercise nor any delay in exercising on the part of Lender, any right, remedy,
power or privilege hereunder or under any of the other Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder or thereunder preclude any other or future
exercise thereof or the exercise of any other right, remedy, power or privilege.
9.04. RIGHTS OF SECURED PARTY; POSSESSION OR SALE OF COLLATERAL.
Without limiting the generality of the foregoing, Lender shall have all the
rights and remedies of a secured party under the UCC, and Lender may, without
demand and without advertisement or notice, except as may be required by Section
9-504(3) of the UCC, all of which Borrower waives, except as may be required by
Section 9-504(3) of the UCC, at any time or times, sell and deliver any or all
Collateral held by or for it at public or private sale, for cash, upon credit or
otherwise, at such prices and upon such terms as Lender deems advisable, in its
sole discretion, and/or collect, or enforce the collection of, the Collateral.
Lender may be the purchaser at any such sale. Upon the occurrence of an Event of
Default and upon Lender's request, Borrower shall assemble, at its own expense,
any or all Equipment and other Collateral at a convenient place acceptable to
Lender and shall pay to Lender or reimburse Lender for, on demand, all costs of
collection of all amounts due, and enforcement of all rights hereunder,
including reasonable attorneys' fees and legal expenses, and expenses of any
repairs to any realty or other property to which any of such Collateral may be
affixed. Upon an Event of Default Lender may, to the fullest extent permitted by
applicable law, without notice, advertisement, hearing or process of law of any
kind, enter upon any premises where any of the Collateral may be located and
take possession of and remove such Collateral.
9.05. NOTICES, ETC. WAIVED. Except as expressly provided in this
ARTICLE 9, Borrower hereby expressly waives, to the fullest extent permitted by
applicable law, presentment, demand, protest, any and all notices of any kind,
advertisements, hearing or process of law in connection with the exercise by
Lender of any of its rights and remedies upon the occurrence of an Event of
Default. If any notification of intended disposition of any of the Collateral is
required by law, such notification shall be deemed reasonably and properly given
if given in accordance with SECTION 10.06 hereto at least ten (10) days before
such disposition.
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9.06. ADDITIONAL REMEDIES. Lender's remedies upon the occurrence
and during the continuance of an Event of Default shall include, in addition to,
and not in lieu of, such remedies as are available at law or in equity or
provided for in any of the Loan Documents, the following:
(a) FORECLOSURE; RECEIVERSHIP. Lender shall be entitled to file one
or more suits at law or in equity to collect the Obligations and/or to
foreclose on Lender's Liens on and security interests created by this
Agreement or the Security Documents. Lender may apply or require Borrower
to apply for any necessary transfers, assignments, orders, consents or
licenses in connection with the operation or abandonment of the Collateral
or any part thereof, and the Lender shall also be entitled as a matter of
right and without notice and without requiring bond (notice and bond being
hereby waived), without regard to the solvency or insolvency of the
Borrower at the time of application and without regard to the value of the
Collateral at that time, to have a receiver appointed by a court of
competent jurisdiction in order to manage, protect, and preserve the
Collateral and to continue the operation of the business of Borrower, and
to collect all revenues and profits thereof and apply the same to the
payment of all expenses and other charges of such receivership until the
sale or other final disposition of the Collateral. Borrower hereby consents
to the appointment of such receiver.
(b) RIGHT TO CURE. If Borrower fails in any material respect to
perform or comply with any of its agreements contained herein or in any of
the other Loan Documents, Lender may take whatever actions it may deem
appropriate to perform or comply or otherwise cause performance or
compliance with such agreement, all at the risk, cost and expense of
Borrower.
(c) SETOFF. If the unpaid principal amount of any Note, interest
accrued thereon or any other amount owing by Borrower hereunder or under
any Note shall have become due and payable (by acceleration or otherwise),
Lender shall have the right, in addition to all other rights and remedies
available to it, without notice to Borrower, to setoff against and to
appropriate and apply to such due and payable amounts any debt owing to,
and any other funds held in any manner for the account of, Borrower by
Lender. Such right shall exist whether or not Lender shall have given
notice or made any demand hereunder or under such Note, whether or not such
debt owing to or funds held for the account of Borrower is or are matured
or unmatured, and regardless of the existence or adequacy of any
collateral, guaranty or any other security, right or remedy available to
Lender. Borrower hereby consents to and confirms the foregoing arrangements
and confirms Lender's rights of setoff.
9.07. APPLICATION OF PROCEEDS. Any proceeds of any of the Collateral,
received by Lender through sale or disposition of the Collateral or otherwise,
may be applied by Lender toward the payment of the Obligations, including
expenses in connection with the Collateral (including reasonable fees and legal
expenses) in such order of application as Lender may from time to time elect.
9.08. DISCONTINUANCE OF PROCEEDINGS. If Lender should proceed to
enforce any right or remedy under this Agreement or any other Loan Document, and
then discontinue or abandon such proceeding for any reason, all rights, powers
and remedies of Lender hereunder shall continue as if no such proceeding had
been taken.
9.09. POWER OF ATTORNEY. For the purpose of carrying out the provisions
and exercising the rights, powers and privileges granted by the Loan Documents,
including, without limitation, this ARTICLE
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9, Borrower hereby irrevocably constitutes and appoints Lender its true and
lawful attorney-in-fact to execute, acknowledge and deliver any instruments and
do and perform any acts such as are referred to in the Loan Documents,
including, without limitation, this ARTICLE 9, in the name and on behalf of
Borrower, from time to time in Lender's reasonable discretion after the
occurrence and during the continuance of an Event of Default, in accordance with
the Loan Documents and any statute or rule of law. This power of attorney is a
power coupled with an interest and cannot be revoked. Borrower hereby ratifies
all that said attorney-in-fact shall lawfully do or cause to be done by virtue
and in accordance with the terms hereof.
Without limiting the generality of the foregoing, Lender may after the
occurrence and during the continuance of an Event of Default do the following
without notice to or assent by Borrower to accomplish the purposes of this
Agreement:
(a) upon failure of Borrower to timely pay or discharge taxes or Liens
levied or placed on or threatened against the Collateral or maintain
insurance on the Collateral, pay and discharge such taxes or Liens, effect
any repairs on the Collateral and/or pay the premiums for any insurance
called for by the terms of this Loan Agreement or any other Loan Document;
(b) (i) direct any party liable for any payment on any Collateral to make
payment of any and all monies due and to become due thereunder directly to
Lender or as Lender shall direct; (ii) in the name of Borrower or its own
name or otherwise, take possession of and endorse and collect any checks,
drafts, notes, acceptances, or other instruments for the payment of monies
due under, or otherwise receive payment of and receipt for any and all
monies, claims and other amounts due and to become due at any time in
respect of or arising out of any Collateral; (iii) sign and endorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications and notices in
connection with the Collateral; (iv) commence and prosecute any suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction to collect all or any of the Collateral and to enforce any
other right in respect of any Collateral; (v) defend any suit, action or
proceeding brought against Borrower with respect to any Collateral; (vi)
settle, compromise or adjust any suit, action or proceeding described above
upon commercially reasonable terms under the circumstances and, in
connection therewith, give such discharges or releases as Lender may
reasonably deem appropriate; and (vii) generally sell, use, operate,
transfer, pledge, make any agreement with respect to or otherwise deal with
any of the Collateral as fully and completely as though Lender were the
absolute owner thereof for all purposes, and, at Lender's option and
Borrower's expense, at any time or from time to time after the occurrence
and during the continuance of an Event of Default, all other acts and
things that Lender reasonably deems necessary to protect, preserve or
realize upon the Collateral and Lender's security interest therein, in
order to effect the intent of this Agreement and the other Loan Documents
all as fully and effectively as Borrower might do.
9.10. REGULATORY MATTERS. Notwithstanding any provision to the contrary
contained herein, Lender will not exercise any right or remedy under this
Agreement that requires prior FCC or PUC approval without first obtaining such
approval. If counsel to Lender reasonably determines that the consent of the FCC
or PUC is required in connection with any of the actions that may be taken by
Lender in the exercise of its rights hereunder or under any of the other Loan
Documents, then Borrower, at its sole cost and expense, agrees to use its best
efforts to secure such consent and to cooperate with Lender in any action
commenced by Lender to secure such consent. Upon the occurrence and during the
continuation of an Event of Default Borrower shall promptly execute and/or cause
the execution of all
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applications, certificates, instruments and other documents and papers that may
be required in order to obtain any necessary governmental consent, approval or
authorization, and if Borrower fails or refuses to execute such documents, the
clerk of the court with jurisdiction may execute such documents on behalf of
Borrower.
ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS
--------------------------------------------
The following conditions shall be applicable throughout the term of this
Agreement:
10.01. MODIFICATIONS AND WAIVERS. This Agreement, the other Loan
Documents, or any provision thereof may not be changed, waived or terminated
orally, but only by an instrument in writing signed by the party against whom
enforcement of the change, waiver or termination is sought. No action or course
of dealing on the part of Lender, its officers, employees, consultants, or
agents, nor any failure or delay by Lender with respect to exercising any right,
power, or privilege of Lender under any Note, this Agreement, or any other Loan
Document shall operate as a waiver thereof, except as otherwise provided in this
Agreement. Any waiver shall be effective only to the extent and for the instance
specifically identified in such writing, and shall not be deemed to imply any
future waivers or other waivers. No amendment to the Loan Documents shall be
effective without written agreement signed by both Borrower and Lender.
10.02. ADVANCES NOT IMPLIED WAIVERS. No waiver of the requirements
contained in any Loan Document shall be effective unless in writing duly signed
by Lender. No Advance hereunder shall constitute a waiver of any of the
conditions of Lender's obligation to make further Advances nor, in the event
Borrower is unable to satisfy any such condition, shall any waiver of such
condition have the effect of precluding Lender from thereafter declaring such
inability to be an Event of Default as herein provided. Any Advance made by
Lender and any sums expended by Lender pursuant to the Loan Documents shall be
deemed to have been made pursuant to this Agreement, notwithstanding the
existence of an uncured Default or Event of Default. No Advance at a time when
an Event of Default exists shall constitute a waiver of any right or remedy of
Lender existing by reason of such Event of Default, including, without
limitation, the right to accelerate the maturity of the Indebtedness evidenced
by each Note or to foreclose the Lien on the Collateral or to refuse to make
further advances hereunder.
10.03. DEVIATION FROM COVENANTS. The procedure to be followed by
Borrower to obtain the consent of Lender to any deviation from the covenants
contained in this Agreement or any other Loan Document shall be as follows:
(a) Borrower shall send a written notice to Lender setting forth (i)
the covenant(s) relevant to the matter, (ii) the requested deviation from
the covenant(s) involved, and (iii) the reason for the requested deviation
from the covenant(s); and
(b) Lender, within a reasonable time, will send a written notice to
Borrower, permitting or refusing the request, but in no event will any
deviation from the covenants of this Agreement or any other Loan Document
be effective without the express prior written consent of Lender. Lender's
failure to provide such written notice shall be deemed a refusal of such
request.
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10.04. HOLIDAYS. Except as otherwise provided herein, whenever any
payment or action to be made or taken hereunder or under any Note shall be
stated to be due on a day which is not a Business Day, such payment or action
shall be made or taken on the next following Business Day and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment or action.
10.05. RECORDS. From time to time Lender may send Borrower statements of
the unpaid principal amount of the a Note, the unpaid interest accrued thereon,
the Interest Rate or rates applicable to such unpaid principal amount, the
duration of such applicability, and the amount remaining available on any Loan,
and each statement shall be deemed correct and conclusively binding on Borrower
(absent manifest error) unless Borrower notifies Lender of an error in the
statement in writing within thirty (30) days of the date of any such statement
is provided to Borrower.
10.06. NOTICES. All notices, requests, demands, directions and other
communications (collectively, "notices") required under the provisions of this
Agreement or any other Loan Document shall be in writing (including
communication by facsimile transmission) unless otherwise expressly permitted
hereunder and shall be sent by hand, by registered or certified mail return
receipt requested, by overnight courier service maintaining records of receipt,
or by facsimile transmission with confirmation in writing mailed first-class, in
all cases with charges prepaid, and any such properly given notice shall be
effective upon the earlier of receipt or (i) when delivered by hand, or (ii) the
third Business Day after being mailed, or (iii) the following Business Day if
sent by overnight courier service, or (iv) when sent by facsimile, answer back
received. All notices shall be addressed as follows:
If to Borrower, to the Notice Address set forth on SCHEDULE 1, with
copies, if any, as set forth on SCHEDULE 1.
If to Lender: NTFC Capital Corporation
220 Athens Way
Nashville, Tennessee 37228
Attention: Legal Department
Telecopy: (615) 734-5283
With a copy to: NTFC Capital Corporation
220 Athens Way
Nashville, Tennessee 37228
Attention: Manager, Credit
Telecopy: (615) 734-5283
All notices shall be sent to the applicable party at the address stated
above or in accordance with the last unrevoked written direction from such party
to the other party hereto, given in accordance with the terms hereof.
10.07. FCC AND PUC APPROVAL. The exercise of any rights or remedies
hereunder or under any other Loan Document by Lender that may require FCC or PUC
approval shall be subject to obtaining such approval. Pending the receipt of any
PUC or FCC approval, Borrower shall not do anything to delay, hinder, interfere
with or obstruct the exercise of Lender's rights or remedies hereunder or the
obtaining of such approvals.
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10.08. LENDER SOLE BENEFICIARY. All conditions of the obligation of
Lender to make any Advances hereunder are imposed solely and exclusively for the
benefit of Lender and its assigns and no other Person shall have standing to
require satisfaction of such conditions in accordance with their terms or be
entitled to assume that Lender will refuse to make any Advances in the absence
of strict compliance with any or all such conditions, and no Person shall under
any circumstances be deemed to be a beneficiary of such conditions, any or all
of which may be freely waived in whole or in part by Lender at any time if in
its sole discretion it deems it advisable to do so. Inspections and approvals of
the System, and the workmanship and materials used therein impose no
responsibility or liability of any nature whatsoever on Lender, and no Person
shall, under any circumstances, be entitled to rely upon such inspections and
approvals by Lender for any reason. Lender's sole obligation hereunder is to
make the Advances if and to the extent required by this Agreement or any Note.
10.09. LENDER'S REVIEW OF INFORMATION. Borrower acknowledges and agrees
that any review or analysis by Lender of financial information, operating
information, marketing data or other information provided to Lender by or on
behalf of Borrower at any time is and shall be conducted solely for Lender's
benefit and internal use and that Lender is under no duty or obligation to make
the results of such review or analysis available to Borrower. Borrower is not
relying, and will not rely, on Lender for financial or business advice.
10.10. NO JOINT VENTURE. Nothing in any of the Loan Documents or in this
Agreement shall be deemed to constitute any kind of partnership, joint venture
or fiduciary relationship between the Lender and the Borrower or between the
Lender and any Owners.
10.11. SEVERABILITY. The provisions of this Agreement are intended to be
severable. If any provision of this Agreement or the other Loan Documents shall
be held invalid or unenforceable in whole or in part in any jurisdiction such
provision shall, as to such jurisdiction, be ineffective to the extent of such
invalidity or unenforceability without in any manner affecting the validity or
enforceability thereof in any other jurisdiction or the remaining provisions
hereof or thereof in any jurisdiction.
10.12. RIGHTS CUMULATIVE. All rights, powers and remedies herein given
to Lender are cumulative and not alternative, and are in addition to all
statutes or rules of law.
10.13. DURATION; SURVIVAL. All representations and warranties of
Borrower contained herein or made in connection herewith shall survive the
making of and shall not be waived by the execution and delivery of this
Agreement and the other Loan Documents, any investigation by Lender, or the
making of any Advances hereunder. All covenants and agreements of Borrower
contained herein shall continue in full force and effect from and after the date
hereof so long as it may borrow hereunder and until payment in full of each
Note, interest thereon, all fees and all other Obligations of Borrower. Without
limitation, it is understood that all obligations of Borrower to make payments
to or indemnify Lender shall survive the payment in full of each Note and of all
other Obligations.
10.14. GOVERNING LAW. This Agreement and each Note and each of the other
Loan Documents shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, except to the extent, if any,
set forth on SCHEDULE 2.02 hereto, and except to the extent that the laws of
jurisdictions where the Collateral is located may be required to apply to the
Collateral.
10.15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts (by facsimile transmission or otherwise) and by the different
parties hereto on separate counterparts, each of
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which, when so executed, shall be deemed an original, but all such counterparts
shall constitute but one and the same instrument.
10.16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of Lender and Borrower and their respective successors and
assigns; PROVIDED, HOWEVER, that Borrower may not assign or transfer any of its
rights or obligations hereunder or under the other Loan Documents (in whole or
in part), except to its successor in an Affiliate Transaction, without the prior
written consent of Lender. Lender may assign, transfer or pledge any of its
respective rights or obligations hereunder or under the other Loan Documents
without notice to or the prior written consent of Borrower. Upon receipt of
written notice from Lender of such assignment, Borrower shall promptly
acknowledge receipt thereof in writing. If Borrower is given written notice of
any assignment, it shall perform its obligations with respect to this Agreement
for the ratable benefit of the applicable assignee(s), and, if so directed,
shall pay all amounts due or to become due hereunder directly to the applicable
assignee(s) or to any other party designated by such assignee(s). Borrower shall
not assert against any such assignee any set-off, defense or counterclaim that
Borrower may have against Lender or any person other than such assignee.
Borrower shall also execute and deliver to Lender such documentation as any such
assignee may reasonably require, including but not limited to amended promissory
notes and acknowledgment of or consent to the assignment which may require
Borrower to make certain representations or reaffirmations as to some of the
basic terms and covenants contained herein. Lender shall not be relieved of its
obligations hereunder as a result of any such sale, assignment, transfer, grant
or pledge, unless such assignee specifically assumes all or part of Lender's
future obligations hereunder in a writing, a copy of which shall be delivered to
Borrower, in which event after the date of such assignment, Borrower's
obligations to any such assignee shall be proportionately as set forth herein
with respect to Lender, and Borrower shall not look to Lender to perform any of
such assignee's obligations hereunder which arise after the date thereof. Any
assignee shall be entitled to rely on Borrower's agreements as stated herein, as
applicable, and shall be considered a third party beneficiary thereof. Except to
the extent otherwise required by the context of this Agreement, the word
"Lender" where used in this Agreement shall mean and include any holder of any
Note originally issued to Lender hereunder, and any such holder of any Note
shall be bound by and have the benefits of this Agreement the same as if such
holder had been a signatory hereto.
10.17. PARTICIPATION. Lender shall have the right to enter into one or
more participation agreements, syndication agreements or similar agreements with
one or more participating lenders or other parties approved by Lender on such
terms and conditions as Lender shall deem advisable. Borrower shall furnish a
sufficient number of copies of reports and certificates to Lender so that Lender
and each participating lender shall receive a copy of each such document.
10.18. TIME OF ESSENCE. Time is of the essence of this Agreement and
each Note and the other Loan Documents.
10.19. DISCLOSURES AND CONFIDENTIALITY.
(a) Borrower agrees that it will obtain Lender's written consent
before using or generating any press release, advertisement, publicity
materials or other publication in which the name (except as permitted by
SECTION 10.19(b)) or logo of Lender or any of its Affiliates is used or may
be reasonably inferred, and will not distribute any such materials in the
absence of such prior written approval.
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(b) Borrower agrees that it will not, directly or indirectly,
disclose to any third party the terms of this Agreement or the other Loan
Documents or prior or future correspondence relating thereto, or the
transactions contemplated hereby, or any other information regarding Lender
or its Affiliates learned by Borrower during the course of negotiation
thereof. The term "third party" shall exclude only the Borrower, its
Affiliates, underwriters, prospective investors in Borrower, and
prospective lenders, and their respective attorney(s) and certified public
accountant(s). This SECTION 10.19(b) shall not restrict the disclosure of
information if such disclosure is required by law, by order of any court or
by the order, rule or regulation of any administrative agency, including
without limitation any requirements of the FCC, any PUC, or any state or
federal securities commissions (the "COMMISSIONS"); PROVIDED, HOWEVER,
that, except for disclosures required by the FCC, PUC or Commissions,
Borrower shall provide Lender with advance notice of any such required
disclosure of information so that Lender may seek an appropriate protective
order and/or waive compliance with this Section. Borrower shall not oppose
any action taken by Lender to obtain an appropriate protective order or
other reliable assurance that the information will be accorded confidential
treatment. The obligations set forth in this SECTION 10.19(b) shall survive
the termination of this Agreement.
(c) The disclosure of information by either Lender or Borrower will
not be restricted under this Agreement if such information (i) has been or
becomes published or is now, or in the future, in the public domain through
(A) no fault of the parties, (B) disclosure other than unauthorized
disclosure by the party to whom the information is disclosed, or (C)
disclosure to third parties by the disclosing party without similar
restriction; (ii) is property (other than proposal letters, commitment
letters or other correspondence between Lender and Borrower) within the
legitimate possession of the receiving party prior to disclosure hereunder;
(iii) subsequent to disclosure hereunder, is lawfully received from a third
party having rights therein without restriction of the third party's or
receiving party's rights to disseminate the information and without notice
of any restriction against its further disclosure; (iv) is disclosed with
the written approval of the other party; or (v) is or becomes publicly
available free of any obligation to keep it confidential.
(d) Borrower authorizes Lender to discuss with and furnish to any
Affiliate of the Lender, to any government or self-regulatory agency with
jurisdiction over the Lender, to any other Governmental Authority or to any
assignee, successor, participant, successor, or prospective assignee,
successor or participant, all financial statements, audit reports and other
information pertaining to the Borrower and/or its Subsidiaries whether such
information was provided by Borrower or prepared or obtained by the Lender
or third parties. Neither the Lender nor any of its employees, officers,
directors or agents makes any representation or warranty to any existing or
prospective assignee, successor or participant regarding any audit reports
or other analyses of Borrower that the Lender may distribute, whether such
information was provided by Borrower or prepared or obtained by the Lender
or third parties, nor shall the Lender or any of its employees, officers,
directors or agents be liable to any Person receiving a copy of such
reports or analyses for any inaccuracy or omission contained in such
reports or analyses or relating thereto.
(e) Every reference in this Agreement to disclosures of Borrower to
Lender (except the financial statements), to the extent that such
references refer or are intended to refer to disclosures at or prior to the
execution of this Agreement, shall be deemed strictly to refer only to
written disclosures delivered to Lender concurrently with the execution of
this Agreement and
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referred to specifically in the Loan Documents. The parties intend that
such disclosures are to be limited to those presented in an orderly manner
at the time of executing this Agreement and are not to be deemed to include
expressly or impliedly any disclosures that previously may have been
delivered from time to time to Lender, except to the extent that such
previous disclosures are again presented to Lender in writing concurrently
with the execution of this Agreement.
10.20. JURISDICTION AND VENUE. BORROWER HEREBY IRREVOCABLY CONSENTS TO
THE JURISDICTION OF THE COURTS LOCATED IN DAVIDSON COUNTY, TENNESSEE, INCLUDING
WITHOUT LIMITATION FEDERAL COURTS SITTING IN THE MIDDLE DISTRICT OF TENNESSEE
AND THE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE, FOR ANY SUIT BROUGHT OR
ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR
THE OBLIGATIONS, AND AGREES NOT TO CONTEST VENUE IN ANY SUCH COURTS. In any such
litigation, Borrower waives personal service of any summons, complaint or other
process, and agrees that the service thereof may be made by certified or
registered mail direct to Borrower at its address set forth in Section 10.06
hereof. Within thirty (30) days after such mailing, Borrower shall appear and
answer to such summons, complaint or other process. Should Borrower fail to
appear or answer within the said 30-day period, then such party shall be deemed
in default and judgment may be entered against Borrower for the amount or other
relief as demanded in any summons, complaint or other process so served. In the
alternative, in its sole discretion, Lender may effect service upon Borrower in
any other form or manner permitted by law. The choice of forum set forth herein
shall not be deemed to preclude the enforcement of any judgment obtained in such
forum or the taking of any action under this Agreement to enforce the same in
any appropriate jurisdiction.
10.21. JURY WAIVER. BORROWER AND LENDER HEREBY KNOWINGLY AND WILLINGLY
WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING
THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE OBLIGATIONS, OR ANY RELATIONSHIP
BETWEEN THE LENDER AND BORROWER. THE BORROWER WARRANTS AND REPRESENTS THAT IT
HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND
VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
10.22. LIMITATION ON LIABILITY. LENDER SHALL HAVE NO LIABILITY UNDER OR
IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS FOR
SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF
ANY SORT IN ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND, EXCEPT TO THE
EXTENT PROHIBITED BY LAW, EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH ACTION ANY SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT OTHER THAN ACTUAL DAMAGES.
10.23. BORROWER WAIVERS. To the fullest extent permitted by law, the
Borrower hereby waives (i) presentment, demand and protest and notice of
presentment, protest, default, non payment, maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts,
contract rights, documents, instruments, chattel paper and guaranties at any
time held by Lender on which the Borrower may in any way be liable and hereby
ratifies and confirms whatever Lender may do in this
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regard; (ii) notice prior to taking possession or control of the Collateral or
any bond or security which might be required by any court prior to allowing
Lender to exercise any of Lender's remedies, including the issuance of an
immediate writ of possession, except as expressly required in any of the Loan
Documents; (iii) any marshalling of assets, or any right to compel Lender to
resort first to any Collateral or other Persons before pursuing the Borrower for
payment of the Obligations and any defenses based on suretyship or impairment of
Collateral; (iv) the benefit of all valuation, appraisement and exemption laws;
(v) any right to require Lender to terminate its security interest in the
Collateral or in any other property of the Borrower until termination of this
Agreement and the execution by the Borrower and by any person whose loans to the
Borrower are used in whole or in part to satisfy the Obligations, of an
agreement indemnifying Lender from any loss or damage Lender may incur as the
result of dishonored or unsatisfied items of any account debtor applied to the
Obligations; and (vi) notice of acceptance hereof. The Borrower acknowledges
that the foregoing waivers are a material inducement to Lender's entering into
this Agreement and that Lender is relying upon the foregoing waivers in its
future dealings with the Borrower.
10.24. SCHEDULES. The Schedules and Exhibits attached to this Agreement
are an integral part hereof, and are hereby made a part of this Agreement.
10.25. AGREEMENT TO GOVERN. In case of any conflict between the terms of
this Agreement and any of the other Loan Documents, the terms of this Agreement
shall govern.
10.26. ENTIRE AGREEMENT. This Agreement, the other Loan Documents and
other documents, agreements and certificates executed by the parties
contemporaneously herewith or subsequent hereto constitute the entire agreement
of the parties and supersede all prior understandings and agreements, written or
oral, between the parties hereto relating to the subject matter hereof. Borrower
is not entering into this Agreement in reliance on statements or representations
made by any Person other than as set forth herein.
[END OF GENERAL TERMS AND CONDITIONS. NEXT PAGE IS SCHEDULE 1.]
[SIGNATURES ARE ON COVER PAGE. ]
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BORROWER INFORMATION AND DEFINED TERMS
--------------------------------------
"CLOSING DATE": May 28, 1996.
"AMENDMENT CLOSING DATE": March 27, 1997
"BORROWER": Econophone, Inc., a New York corporation.
BORROWER'S FEDERAL EMPLOYER/
TAX IDENTIFICATION NUMBER: 11-3132722
BORROWER'S CHIEF EXECUTIVE OFFICES (INCLUDING COUNTY):
45 Broadway
New York, New York County,
New York 10006
Telephone No.: (212) 444-6991
Telecopy No.: (212) 964-4771
BORROWER'S NOTICE ADDRESS:
45 Broadway
New York, New York County,
New York 10006
Telephone No.: (212) 444-6991
Telecopy No.: (212) 964-4771
WITH COPIES TO:
Gary Bondi
160 Grandview Avenue
Monsey, New York 10952
Telephone No.: (914) 354-8888
Telecopy No.: (914) 354-8919
THE EQUIPMENT IS LOCATED AT: 60 Hudson Street
New York, New York 10013
2 Exchange Tower
Harbour Exchange Sq.
London E1496B
BORROWER'S INITIALS:
LENDER'S INITIALS:
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16-22, Rue de Comediens
1000 Bruxelles
(Brussels, Belgium)
Le Clemenceau 11
Avenue Georges Clemenceau
92021 Nanterre Cedex
NTI EQUIPMENT: See Exhibits 1 and 2 attached hereto.
"PUC": the term "PUC" shall include, without limitation, the New York Public
Service Commission.
"REGULATORY AUTHORIZATIONS": the term "Regulatory Authorizations" shall include,
without limitation, the authorizations described on Schedule 4.05 hereto.
"DESCRIPTION OF BUSINESS": Borrower provides long-distance U.S. domestic and
international telephone service by means of the resale of the message telephone
services of other telephone carriers and also as a network provider, as further
described in the Business Plan of Borrower dated September 1996. In addition,
Borrower provides other telecommunications equipment to its domestic and
international customers, including, but not limited to, telephone calling card
services. Borrower also owns and leases its own submarine cable circuits
between the U.S. and the U.K. Borrower provides international telephone service
in the U.K. through affiliated companies. Borrower intends to expand its New
York-based operations both domestically and internationally. Borrower also
intends to expand its U.K. operations into the European continent and other
international points. The Borrower expects that the foregoing expansions will
require Borrower's acquisition of additional equipment and circuit facilities.
BORROWER'S INITIALS:
LENDER'S INITIALS:
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SCHEDULE 2.01 TO
LOAN AND SECURITY AGREEMENT
MAXIMUM LOAN AMOUNT
Maximum principal amount of all Loans: (i) Before the Amendment Closing Date,
Two Million Dollars ($2,000,000), One Million Four Hundred Thousand Dollars
($1,400,000) of which may be used to acquire NTI Equipment and related services
and Six Hundred Thousand Dollars ($600,000) of which may be used for the
purchase of network related third party equipment, the preparation of a switch
room for such NTI Equipment, and the payment of closing costs and Lender's fees
and expenses, including Lender's attorneys' fees pursuant to Section 2.10 and
the Origination Fee listed on Schedule 2.09, and (ii) from and after the
Amendment Closing Date to and through the Financing Termination Date, an
additional Three Million Dollars ($3,000,000) which may be used to acquire NTI
Equipment and related Software to be located in London, England, Brussels,
Belgium and/or Paris, France.
BORROWER'S INITIALS:
LENDER'S INITIALS:
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SCHEDULE 2.02 TO
LOAN AND SECURITY AGREEMENT
PAYMENT TERMS AND GOVERNING LAW
"FINANCING TERMINATION DATE": March 31, 1997
"FIRST BORROWING DATE": either a Tranche 1 or Tranche 2 First Borrowing
Date.
"INITIAL PAYMENT DATE": a Tranche 1 or a Tranche 2 Initial Payment Date.
"INTEREST PAYMENT DATE": the Initial Payment Date and the first (1st)
Business Day of each calendar month thereafter.
"INTEREST RATE": the variable interest rate per annum announced from time
to time as the ninety (90) day "Commercial Paper" rate (being defined as the
rate paid on high grade unsecured notes sold through major dealers by major
corporations in multiples of One Thousand Dollars ($1,000) for repurchase within
90 days) as reported in THE WALL STREET JOURNAL, plus three hundred and
ninety-five (395) basis points. The Interest Rate shall be automatically
adjusted prospectively on the last Business Day of each Calendar Quarter based
upon the rate quoted in THE WALL STREET JOURNAL on the immediately preceding
Business Day. If THE WALL STREET JOURNAL should cease publication or cease
publishing such rate, the Lender shall designate a comparable reference rate for
use in determining the Interest Rate hereunder.
"TRANCHE 1 FIRST BORROWING DATE": the first day an Advance is made under
the Tranche 1 Note.
"TRANCHE 2 FIRST BORROWING DATE": the first day an Advance is made under
the Tranche 2 Note.
"TRANCHE 1 INITIAL PAYMENT DATE": the first (1st) Business Day of the first
(1st) month to commence after the Tranche 1 First Borrowing Date.
"TRANCHE 2 INITIAL PAYMENT DATE": the first (1st) Business Day of the first
(1st) month to commence after the Tranche 2 First Borrowing Date.
"TRANCHE 1 MATURITY DATE": the earlier of (i) July 1, 2001, and (ii) the
first (1st) Business Day of the sixtieth (60th) month after the Tranche 1 First
Borrowing Date, on which date all then-outstanding principal, interest, premium,
expenses, fees, penalties and other amounts due under the Tranche 1 Note shall
be finally due and payable.
"TRANCHE 2 MATURITY DATE": the earlier of (i) April 1, 2002, and (ii) the
first (1st) Business Day of the sixtieth (60th) month after the Tranche 2 First
Borrowing Date, on which date all then-outstanding principal, interest, premium,
expenses, fees, penalties and other amounts due under the Tranche 2 Note
BORROWER'S INITIALS:
LENDER'S INITIALS:
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shall be finally due and payable.
"PAYMENT DATE": the Initial Payment Date and the first (1st) Business Day
of each month thereafter.
"TRANCHE 1 PAYMENT SCHEDULE: principal shall be paid in sixty (60) equal
consecutive monthly installments equal initially to 1.667% of the amount of the
Advances made hereunder on the Tranche 1 First Borrowing Date; PROVIDED,
HOWEVER, that the principal payment amounts payable hereunder shall be
recalculated by Lender each time subsequent Advances are made hereunder after
the Tranche 1 First Borrowing Date but prior to the Amendment Closing Date,
based on the aggregate amount of all Advances then outstanding so that the
payment schedule, as recalculated, will fully amortize the aggregate amount of
all Advances then outstanding in equal monthly payments of principal to the
Tranche 1 Maturity Date. Borrower and Lender understand that this payment
schedule is intended to amortize fully the principal amount advanced under the
Tranche 1 Note in equal monthly payments from the date of such Advance to the
Tranche 1 Maturity Date and any other principal and interest amounts advanced
prior to the Amendment Closing Date still outstanding will be added to the final
payment on the Tranche 1 Maturity Date. In any event, the entire outstanding
principal amount of the Tranche 1 Note and all accrued but unpaid interest and
all other outstanding amounts due thereunder shall be paid on the Tranche 1
Maturity Date.
"TRANCHE 2 PAYMENT SCHEDULE: principal shall be paid in sixty (60) equal
consecutive monthly installments equal initially to 1.667% of the amount of the
Advances made on the Tranche 2 First Borrowing Date; PROVIDED, HOWEVER, that the
principal payment amounts payable hereunder shall be recalculated by Lender each
time subsequent Advances are made hereunder after the Amendment Closing Date,
based on the aggregate amount of all Advances then outstanding under the Tranche
2 Note so that the payment schedule, as recalculated, will fully amortize the
aggregate amount of all Advances made after the Amendment Closing Date then
outstanding in equal monthly payments of principal to the Tranche 2 Maturity
Date. Borrower and Lender understand that this payment schedule is intended to
amortize fully the principal amount advanced under the Tranche 2 Note in equal
monthly payments from the date of such Advance to the Tranche 2 Maturity Date
and any other principal and interest amounts outstanding will be added to the
final payment on the Tranche 2 Maturity Date. In any event, the entire
outstanding principal amount of the Tranche 2 Note and all accrued but unpaid
interest and all other outstanding amounts due thereunder shall be paid on the
Tranche 2 Maturity Date.
Pursuant to SECTION 10.14 of the Agreement, the internal laws of the State
of New York shall govern the parties rights and duties with respect to interest,
loan charges, commitment fees and brokerage commissions.
BORROWER'S INITIALS:
LENDER'S INITIALS:
-55-
<PAGE>
SCHEDULE 2.09 TO
LOAN AND SECURITY AGREEMENT
FEES
1. ORIGINATION FEE. The Borrower has paid to Lender, on the Tranche 1
First Borrowing Date, a non-refundable Origination Fee of Ten Thousand
Dollars ($10,000), in consideration of Lender's structuring, preparing and
offering of the commitment to provide the Loan hereunder.
2. COMMITMENT FEE. The Borrower shall pay Lender, on the Amendment
Closing Date, a nonrefundable commitment fee of Thirty Thousand Dollars
($30,000).
BORROWER'S INITIALS:
LENDER'S INITIALS:
-56-
<PAGE>
SCHEDULE 4.04 TO
LOAN AND SECURITY AGREEMENT
REQUIRED CONSENTS
None, other than the financing statements to be filed as set forth in Schedule
4.25 hereto.
BORROWER'S INITIALS:
LENDER'S INITIALS:
-57-
<PAGE>
SCHEDULE 4.05 TO
LOAN AND SECURITY AGREEMENT
REGULATORY AUTHORIZATIONS
Authority to resell public switched services to all international points, FCC
Public Notice Report No. I-7017, August 10, 1994.
Authority to acquire and operate facilities in the PTAT-1 cable for service
between the U.S. and various international points, including the U.K., FCC
Order, File No. ITC-94-353, September 26, 1994.
Authority to acquire and operate additional facilities in the PTAT-1 cable for
service between the U.S. and various international points, including the U.K.,
FCC Order, File No. ITC-95-433, October 25, 1995.
Authority to resell private lines interconnected with the public switched
network, FCC Order, File No. ITC-95-479, November 3, 1995.
Authority to resell all forms of telephone service within New York State, New
York Public Service Commission Order, Case 94-C-0922, January 30, 1995.
Authority to acquire and operate facilities in various international submarine
cables and communications satellites for service between the U.S. and nearly all
foreign countries, FCC Order, File No. ITC-95-625, March 5, 1996.
BORROWER'S INITIALS:
LENDER'S INITIALS:
-58-
<PAGE>
SCHEDULE 4.07 TO
LOAN AND SECURITY AGREEMENT
RESTRICTIONS ON LOANS
None.
BORROWER'S INITIALS:
LENDER'S INITIALS:
-59-
<PAGE>
SCHEDULE 4.08 TO
LOAN AND SECURITY AGREEMENT
FINANCIAL STATEMENTS
Financial Statements for the Quarter Ended December 31, 1996
BORROWER'S INITIALS:
LENDER'S INITIALS:
-60-
<PAGE>
SCHEDULE 4.12 TO
LOAN AND SECURITY AGREEMENT
PENDING LITIGATION
NONE
BORROWER'S INITIALS:
LENDER'S INITIALS:
-61-
<PAGE>
SCHEDULE 4.25 TO
LOAN AND SECURITY AGREEMENT
UCC FILING OFFICES
(1) New York County:
New York City Register's Office
UCC Section
31 Chambers Street, Room 202
New York, NY 10007
(212) 788-8529
(2) Kings County:
Brooklyn City Register's Office
Municipal Building
210 Joralemon Street
Brooklyn, NY 11201
(718) 802-3589
(3) New York Department of State:
Secretary of State's Office
UCC Section
162 Washington Avenue, Third Floor
Albany, NY 12231
(518) 474-4763
FILING OR RECORDATION OFFICES IN LONDON, ENGLAND, BRUSSELS,
BELGIUM, OR PARIS, FRANCE
LONDON, ENGLAND: Prescribed particulars in respect of that certain
Security Agreement dated as of March 27, 1997 from
American Telemedia, Ltd. in favor of Lender, together
with such Security Agreement must be delivered to the
Registrar of Companies within 21 days of the date
thereof.
Brussels, Belgium: TO BE DETERMINED AND COMPLETED TO LENDER'S SATISFACTION
WITHIN THIRTY DAYS OF ANY FUNDING OF EQUIPMENT
PURCHASES TO BE INSTALLED THERE
Paris, France: TO BE DETERMINED AND COMPLETED TO LENDER'S SATISFACTION
WITHIN THIRTY DAYS OF ANY FUNDING OF EQUIPMENT
PURCHASES TO BE INSTALLED THERE
BORROWER'S INITIALS:
LENDER'S INITIALS:
-62-
<PAGE>
SCHEDULE 4.26 TO
LOAN AND SECURITY AGREEMENT
PRINCIPAL OFFICES AND LOCATION OF COLLATERAL
BORROWER'S CHIEF EXECUTIVE OFFICES (INCLUDING COUNTY):
45 Broadway
New York, New York County, New York 10006
BORROWER'S INITIALS:
LENDER'S INITIALS:
-63-
<PAGE>
EXHIBIT A
---------
Form of Note
(See Exhibit 10.7 and 10.8)
<PAGE>
EXHIBIT B
---------
FORM OF
BORROWING CERTIFICATE
Pursuant to SECTION 2.03(B) of the Amended and Restated Loan and Security
Agreement dated as of March 27, 1997, between ECONOPHONE, INC., a New York
corporation (the "BORROWER"), its wholly owned subsidiary American Telemedia,
Ltd., and NTFC CAPITAL CORPORATION (the "LENDER"), (as amended, modified or
supplemented from time to time, the "LOAN AGREEMENT"), the undersigned
Responsible Officer of the Borrower hereby certifies as set forth below.
Capitalized terms used herein which are defined in the Loan Agreement shall have
their defined meanings when used herein (unless otherwise indicated).
1. The Borrower hereby represents and warrants that its representations
and warranties contained in Article 4 of the Loan Agreement are true and correct
on and as of the date of this Certificate.
2. Immediately prior to and immediately after the making of the Advance
requested hereunder, no Default or Event of Default has or will have occurred
and will be continuing under the Loan Agreement.
3. All other applicable conditions of Article 6 of the Loan Agreement
have been satisfied; all applicable covenants contained in Article 7 of the Loan
Agreement have been met; and no violations of Article 8 have occurred and remain
uncured.
4. The Borrowing Date on which the Advance is requested is __________,
199____.
5. Check the Box
[ ] Attached is an itemized list of NTI Equipment to be
purchased from NTI. Israel Discount Bank has previously
subordinated its security interest in this listed equipment
and attached is a copy of the Inter-Creditor Agreement,
amended as of ________, 19_, executed by Israel Discount
Bank and Lender evidencing such subordination.
6. The total amount of the Advance requested hereunder is $_________, to
be disbursed and allocated as follows:
(a) *$___________, to be paid directly to NTI for the purchase by the
Borrower of Equipment provided in accordance with the Purchase Agreement
(evidenced by the copies of unpaid NTI invoices attached to this
Certificate); and
(b) *$_________, to be paid to the Borrower as reimbursement for
amounts paid to NTI under the Purchase Agreement by Borrower, as evidenced
by the attached invoices and copies of Borrower's cancelled checks in
payment thereof.
_________________
* Disbursements for any amounts listed here must be accompanied by evidence
that Israel Discount Bank has subordinated any security interest in the
Equipment purchase with any Advance.
<PAGE>
(c) $_________, to be paid to Lender for closing costs, fees and
expenses.
(d) $_________, to be paid to Borrower as reimbursement for amounts
for closing costs, fees and expenses.
7. The amount of the Advance described in 6(a) above (if any) is equal to
the amount due and owing on the date hereof under the Purchase Agreement.
8. The Advance requested on the date hereof is for a proper purpose as
set forth in Section and Schedule 2.01 of the Loan Agreement.
9. Wire instructions for Advances to be disbursed to Borrower are as
follows:
Account Number: _________________________
Account Name: ___________________________
Bank: ___________________________________
ABA routing number: _____________________
IN WITNESS WHEREOF, the undersigned has duly executed this Borrowing
Certificate in the name of the Borrower as of the ____ day of ____________,
199___.
ECONOPHONE, INC.
By: _______________________________
Title: ____________________________
2
<PAGE>
EXHIBIT C
---------
FORM OF OPINION OF COUNSEL FOR BORROWER AND OWNERS
[CLOSING DATE]
NTFC Capital Corporation
220 Athens Way
Nashville, Tennessee 37228
Re: Amended and Restated Loan and Security Agreement between NTFC Capital
Corporation and ECONOPHONE, INC.
Ladies and Gentlemen:
We have acted as counsel to ECONOPHONE, INC., a New York corporation
("BORROWER"), and _______________, _________, and __________ (individually an
"Owner" and collectively the "Owners") in connection with the preparation,
execution and delivery of the Amended and Restated Loan and Security Agreement
dated as of March __, 1997 between the Borrower and NTFC Capital Corporation
("LENDER") (the "LOAN AGREEMENT") and the Amended and Restated Stock Pledge
Agreements dated as of March __, 1997 (collectively the "STOCK PLEDGE
AGREEMENTS"), between Lender and each Owner, respectively, and the transactions
contemplated by the Loan Agreement. This opinion is being furnished to you
pursuant to Section 5.02 of the Loan Agreement. Capitalized terms used herein
without definition have the same meanings as in the Loan Agreement.
In furnishing our opinion, we have examined such agreements, certificates
and other documents as we have deemed relevant and necessary as the basis for
our opinion, including the Certificate of Incorporation and the By-laws of the
Borrower, each as amended to date. We have also examined executed counterparts
of the Loan Agreement, the Note, the Security Documents, the NTI Purchase
Agreement and all other Basic Agreements and other Loan Documents to which the
Borrower is a party (collectively, the "Agreements") and of the Stock Pledge
Agreements. We have relied as to factual matters on the representations and
warranties of the Borrower set forth in the Loan Agreement and of the Owners set
forth in the Stock Pledge Agreements. We have assumed the genuineness of all
signatures (except those of the Borrower and those of the Owners) and conformity
to original documents of all documents furnished to us as originals or
photostatic copies.
In addition, we attended and participated in the closing held today at
___________.
We are licensed to practice in the state of New York (the "STATE"), which
is the state in which (i) the Borrower was formed, (ii) the Borrower's chief
executive offices are located, and (iii) certain of the Equipment to be acquired
with proceeds of the Advances is or is to be located. We express no opinion as
to any laws other than the State laws and federal law.
On the basis of the foregoing, and having regard to such legal
considerations as we have deemed relevant, we are of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State, with full corporate power and
authority to carry on its business, to own or hold under lease its properties,
and to enter into the Agreements and to carry out the terms thereof. The
<PAGE>
capital stock of the Borrower presently outstanding, including all stock and
other interests pledged pursuant to the Stock Pledge Agreements, has been duly
authorized, is fully paid and is nonassessable.
2. The Borrower is duly qualified as a foreign corporation to do business
in each of the other states in which the character of the properties owned by it
or the nature of the business transacted by it makes such qualification
necessary, and is in good standing in each of such states, except where the
failure to be so qualified would not have a material adverse effect upon the
business of the Borrower taken as a whole.
3. Each of the Agreements has been duly authorized, executed and
delivered by the Borrower. Each of the Agreements constitutes a legal, valid
and binding obligation of the Borrower enforceable in accordance with its
respective terms except that such enforceability is subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, receivership or other
similar laws relating to or affecting creditors' rights generally and the
application of equitable principles (whether enforcement is sought in equity or
at law), and except that certain of the remedial provisions contained in the
Loan Agreement may be further limited or rendered unenforceable by other
applicable laws (but we do not believe that such other laws and equitable
principles make the remedies or procedures afforded by the Agreements inadequate
for the practical realization of the benefits intended to be provided thereby).
4. All consents and authorizations of, filings with and other acts by or
in respect of, any federal or state Governmental Authority required for the due
execution, delivery and performance by the Borrower of the Agreements or the
legality, validity or enforceability thereof or the formation or operation of
the Borrower and its business have been obtained or performed and are in full
force and effect.
5. The execution, delivery and performance of each of the Agreements and
the taking of actions contemplated thereby (i) do not and will not result in any
violation of, or conflict with or .constitute a default under, any term of the
Borrower's Certificate of Incorporation or By-laws, each as amended to date,
(ii) to the best of our knowledge, based on due inquiry, do not and will not
conflict with or constitute a default under any agreement, instrument, order,
judgment or decree to which the Borrower or its properties is a party or
subject, or (iii) do not and will not, except as contemplated by the Loan
Documents, result in the creation of any lien, charge or encumbrance upon any of
the capital stock or assets of the Borrower. The Borrower's execution,
delivery, performance of and compliance with the terms of the Agreements do not
violate any provision of any applicable federal, state or local law, rule or
regulation.
6. There is no action, suit, proceeding or arbitration (whether or not
purportedly on behalf of the Borrower) pending or, to our knowledge, threatened
against the Borrower, before any court, arbitrator or grand jury or any
governmental body, agency or official or at law of any jurisdiction in which
there is a reasonable possibility of an adverse decision which would materially
and adversely affect the business, financial condition or properties of the
Borrower taken as a whole, or the ability of the Borrower to perform its
obligations under the Agreement. To our knowledge after due inquiry, the
Borrower is not in default with respect to any judgment, order, writ,
injunction, decree, rule or regulation of any court or governmental agency or
instrumentality of any jurisdiction, a default under which would materially and
adversely affect the business, financial condition or properties of the Borrower
taken as a whole.
7. The Borrower is not an "investment company" or a company "controlled"
by an "investment company," within the meaning of the Investment Company Act of
1940, as amended, or a
2
<PAGE>
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
8. The making of the Advances and the use of the proceeds thereof will
not violate Regulations G, U or X of the Board of Governors of the Federal
Reserve System.
9. The Note is not required to be registered under the Securities Act of
1933, as amended, or under the securities laws of any state.
10. To the best of our knowledge based on due inquiry, the Borrower has no
Subsidiaries at the date hereof.
11. The Borrower owns or has been granted all of the patents, trademarks,
permits (construction or otherwise), service marks, trade names, copyrights,
licenses and franchises, or rights with respect to the foregoing, necessary for
the conduct of its business as presently contemplated, without any known
conflict with the rights of others other than such patents, trademarks, permits,
service marks, trade names, copyrights, licenses and franchises, or rights with
respect thereto, which, taken in the aggregate, could not materially and
adversely affect (i) the business, operations, assets (taken as a whole) or
financial condition of the Borrower or (ii) the ability of the Borrower to
perform its obligations under the Agreements.
12. Under the laws of the State, the Interest Rate, Default Rate, fees,
premiums and other amounts that the Borrower will be required to pay under the
terms of the Agreements do not violate any usury laws or laws limiting the
lawfully chargeable amounts of such interest, fees, premiums or other charges,
either individually or in the aggregate.
13. The Loan Agreement is effective to create in favor of Lender a legal,
valid and enforceable security interest in all right, title and interest of the
Borrower in the Collateral in which a security interest may be treated under
Article 9 of the Uniform Commercial Code as adopted in the State (the "STATE
CODE"). The Borrower's financing statements, copies of which are attached
hereto as EXHIBIT A, are in the appropriate form for filing pursuant to the
State Code. Upon the filing of the Financing Statements in the offices listed
on SCHEDULE 4.25 to the Loan Agreement, the Loan Agreement will constitute a
fully perfected first priority lien on, and security interest in, all rights,
title and interest of the Borrower in all of the Collateral described in the
Loan Agreement in which a security interest may be perfected under Article 9 of
the State Code, subject to no other liens. No other filing is necessary in
order to perfect the priority of the Collateral described in the Loan Agreement
over subsequently recorded liens or security interests, including interests of
owners and encumbrancers of any real property where any of the Collateral may be
located. [THE BORROWER QUALIFIES AS A "TRANSMITTING UTILITY" WITHIN THE MEANING
OF SECTION 9-105(N) OF THE STATE CODE.]
14. The first-priority security interest of the Lender in and to the
Collateral will not be affected or impaired by the terms of any loan agreement
or indenture or any other contract, agreement or instrument to which the
Borrower is a party, or under which it is bound.
15. Under the laws of the State, there is no requirement that Lender
qualify to do business in the State, comply with the provisions of any foreign
lender statute or pay any state or local tax in the State in its capacity as
secured party in order to carry out the transactions contemplated by, receive
the benefits provided by, or enforce the provisions of, the Security Documents.
Except for nominal
3
<PAGE>
recording and filing fees, no recording, filing, stamp, transfer, privilege,
intangibles or other tax must be paid in connection with the execution,
delivery, filing, recordation or enforcement of the Financing Statements or the
other Agreements.
16. Each Owner is an individual, with his/her residence in the state of
New York, at the address set forth on Schedule I to the Stock Pledge Agreement
for such Owner, with full right, power and authority to enter into the Stock
Pledge Agreement to which the Owner is a party and to carry out the terms
thereof.
17. Each of the Stock Pledge Agreements has been duly authorized, executed
and delivered by the Owner who is a party to it and constitutes a legal, valid
and binding obligation of such Owner, enforceable in accordance with its
respective terms except that such enforceability is subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, receivership or other
similar laws relating to or affecting creditors' rights generally and the
application of equitable principles (whether enforcement is sought in equity or
at law), and except that certain of the remedial provisions contained in the
Stock Pledge Agreements may be further limited or rendered unenforceable by
other applicable laws (but we do not believe that such other laws and equitable
principles make the remedies or procedures afforded by the Stock Pledge
Agreements inadequate for the practical realization of the benefits intended to
be provided thereby).
18. All consents and authorizations of, filings with and other acts by or
in respect of, any federal or state Governmental Authority (including without
limitation any public service commission) required for the due execution,
delivery and performance by the Owners of the Stock Pledge Agreements or the
legality, validity or enforceability thereof have been obtained or performed and
are in full force and effect.
19. The execution, delivery and performance of each of the Stock Pledge
Agreements and the taking of actions contemplated thereby, (i) to the best of
our knowledge, based on due inquiry, do not and will not conflict with or
constitute a default under, any agreement, instrument, order, judgment or decree
to which any Owner or its properties a party or subject, or (iii) do not and
will not, except as contemplated by the Loan Documents, result in the creation
of any lien, charge or encumbrance upon any of the assets of such Owner. The
Owners' execution, delivery, performance and compliance with the terms of the
Stock Pledge Agreements do not violate any provision of any applicable federal,
state or local law, rule or regulation.
20. There is no action, suit, proceeding or arbitration (whether or not
purportedly on behalf of any Owner) pending or, to our knowledge, threatened
against any Owner, before any court, arbitrator or grand jury or any
governmental body, agency or official or at law in any jurisdiction in which
there is a reasonable possibility of an adverse decision which would materially
and adversely affect the ability of any Owner to perform its obligations under
the Stock Pledge Agreements. To our knowledge after due inquiry, no Owner is
not in default with respect to any judgment, order, writ, injunction, decree,
rule or regulation of any court or Governmental Authority or instrumentality of
any jurisdiction, a default under which would materially and adversely affect
the ability of any Owner to perform its obligations under the Stock Pledge
Agreements.
21. The provisions of each Stock Pledge Agreement and the delivery to
Lender by each Owner of the certificates of Stock, copies of which are attached
as EXHIBIT B, on the date hereof create in favor of Lender a legal, valid and
enforceable perfected, first priority security interest in such Owner's Stock
and the other collateral described in the Stock Pledge Agreement (the "PLEDGE
COLLATERAL"), to the
4
<PAGE>
extent that a security interest therein can be created under Article 8 or 9 of
the State Code. Lender's security interest in the Pledge Collateral has been
duly registered on the books of the Borrower. No filing or other action is
necessary in order to protect or perfect the Lender's first-priority security
interest in the Pledge Collateral over all other interests and liens.
22. The Lender's first-priority security interest in and to the Pledge
Collateral will not be affected or impaired by the terms of any loan agreement
or indenture or any other contract, agreement or instrument to which any Owner
is a party, or under which it is bound. Each Owner is the legal record and
beneficial owner of the Pledge Collateral, free and clear of any pledge,
mortgage, hypothecation, lien, charge, encumbrance or security interest other
than the security interest granted to Lender under the Stock Pledge Agreement to
which such Owner is a party. Each Owner owns the respective percentage of the
ownership interests in the Borrower set forth on SCHEDULE 1 to the Stock Pledge
Agreement to which such Owner is a party, and there are no agreements or
understanding as to the future creation, issuance, sale or transfer of any
ownership interests in the Borrower.
23. The transfer of the Pledge Collateral to Lender pursuant to the Stock
Pledge Agreements, and Lender's transfer thereof to third parties in the
exercise of its remedies thereunder, are not subject to any restriction
contained in any agreement or administrative or judicial order (other than
restrictions under the Federal Communications Act of 1934 or FCC regulations, as
to which we express no opinion).
24. Under the laws of the State, there is no requirement that Lender
qualify to do business in the State, comply with the provisions of any foreign
lender statute or pay any state or local tax in the State in its capacity as
secured party in order to carry out the transactions contemplated by, receive
the benefits provided by, or enforce the provisions of, the Stock Pledge
Agreements. Except for nominal recording and filing fees, no recording, filing,
stamp, transfer, privilege, intangibles or other tax must be paid in connection
with the execution, delivery, filing, recordation or enforcement of the
Financing Statements or the other Stock Pledge Agreements.
This opinion is rendered only for the benefit of the Lender and its
successors and assigns, and may not be relied upon by other parties without our
prior written consent.
Very truly yours,
5
<PAGE>
EXHIBIT A TO
OPINION OF COUNSEL FOR BORROWER
COPIES OF BORROWER'S FINANCING STATEMENTS
-----------------------------------------
SEE ATTACHED.
6
<PAGE>
EXHIBIT D
---------
(INTENTIONALLY OMITTED)
<PAGE>
EXHIBIT E
---------
FORM OF
LANDLORD'S WAIVER AND CONSENT
THIS LANDLORD'S WAIVER AND CONSENT ("CONSENT"), made and entered into this
____ day of November, 1995, by ____________________, ("LANDLORD") in favor of
NTFC CAPITAL CORPORATION, a Delaware corporation ("LENDER").
BACKGROUND:
A. Landlord is the owner of certain real property located in ________
County, New York, being more particularly described on EXHIBIT A attached hereto
(the "PREMISES").
B. The Premises have been leased to SwitchTel, Inc. ("LESSEE") by Lease
Agreement dated ___________ (the "LEASE") a memorandum of which is attached
hereto as EXHIBIT B and is of record at Book ____, Page ____, in the Office of
the [Recorder of Deeds] for ________ County, New York.
C. Lender will be extending loans and other financial accommodations to
Lessee for the purpose of financing Lessee's acquisition, certain
telecommunications equipment (the "EQUIPMENT"), part of which may be located on
the Premises.
D. As a condition to extending such loans and other financial
accommodations, Lender has required, among other things, that Lessee grant to
Lender security interests in the Equipment and in certain of Lessee's property,
whether now owned or hereafter acquired ("COLLATERAL"), a portion of which
Collateral is and may hereafter be located on or about the Premises.
NOW, THEREFORE, in order to induce Lender to continue to extend financial
accommodations to Lessee, which will aid Lessee in meeting its obligations to
Landlord, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord hereby agrees with Lender
as follows:
1. Landlord consents to Lessee's granting Lender a security interest in
the Collateral. Lender's security interests and liens in the Collateral shall
be superior to any title or interest which the Landlord may at any time have
therein, and, during the term of this Agreement, Landlord will not assert
against any of the Collateral any title or any statutory, common law,
contractual or possessory lien, including, without limitation, rights of levy or
distraint for rent, all of which Landlord hereby subordinates in favor of
Lender.
2. Landlord hereby agrees that none of the Collateral is subject to the
Lease and hereby disclaims any and all right, title interest or claim in or to
the Collateral and any cash or non-cash proceeds of the Collateral (except with
respect to the subordinated landlord lien referred to in Section I above). The
Collateral may be affixed to or used in conjunction with the Premises, but shall
remain the Lessee's personal property, subject to Lender's lien, at all times.
Landlord agrees not to impound or remove any of the Collateral from the Premises
as long as this Consent is in effect, except as set forth herein.
3. Landlord agrees that Lender may enter upon the Premises at any time or
times, during normal business hours with reasonable advance notice to Landlord,
to inspect or to remove the Collateral therefrom, without charge, except for
reimbursement for any physical damage to the Premises caused by
<PAGE>
such removal. Landlord will not hinder Lender's actions in enforcing its liens
and remedies with respect to the Collateral. Landlord agrees that Lender may
conduct public or private sales of the Collateral at the Premises and that
interested parties will be permitted access to the Premises during normal
business hours, with reasonable advance notice to Landlord, for the purpose of
inspecting the Collateral prior to any such sale.
4. Landlord agrees that as long as Landlord receives in a timely fashion
all rental payments as and when due, and as long as the obligations of the
Lessee to maintain the Premises are being fulfilled (whether by Lessee or, at
Lender's option, by Lender or any designee of Lender), Landlord will not
terminate the Lease or take any action to impound or remove the Collateral or to
require Lessee, Lender or Lender's designee to surrender possession of the
Premises until termination of the Lease.
5. In the event that Lessee defaults in its obligations under the Lease,
Landlord hereby agrees to give Lender written notice of default under the Lease,
at the same time and in the same manner as such notice is given to Lessee and
further agrees to allow the Collateral to remain on the Premises for a
reasonable time not less than ninety (90) days, during which time Lender may, at
its discretion, remove, sell or otherwise dispose of such Lender's Collateral as
Lender may elect, as long as Landlord receives the rental payments due under the
Lease, and as long as Lessee's obligations to maintain the Premises are being
fulfilled.
6. Landlord states that the Lease is presently in full force and effect,
that all rentals have been paid up to date, and that the Lease is not in
default.
7. This Consent shall remain in full force and effect until all
obligations of Lessee to Lender have been paid and satisfied in full and Lender
has terminated its financing agreements with Lessee.
8. The provisions of this Consent may not be modified or terminated
orally, and shall be binding upon the successors and assigns of the Landlord,
and upon any successor owner or transferee of the Premises and shall inure to
the benefit of the Lender and its successors and assigns. Notwithstanding any
other provision of this Consent or the Lease to the contrary, all of Lender's
right, title and interest in and to the Lease and any obligations thereunder may
be assigned and transferred to an affiliate or successor of Lender without
notice to Landlord, and to other parties with notice to Landlord.
9. All notices shall be in writing and shall be mailed by first class
registered or certified mail, postage prepaid, as follows:
(a) If to Lender:
NTFC Capital Corporation
220 Athens Way
Nashville, Tennessee 37228
Attention: Vice President, Marketing
2
<PAGE>
(b) If to Landlord:
___________________________________
___________________________________
___________________________________
Attention: ________________________
10. This Landlord's Consent may be recorded in any appropriate locations.
11. This document shall in all respects be governed by and construed in
accordance with the laws of the State in which the Premises are located.
IN WITNESS WHEREOF, Landlord has executed this Landlord's Waiver and
Consent on the date first above written.
LANDLORD:
___________________________________
By: _______________________________
Title: ____________________________
SWITCHTEL. INC.
By: _________________________
Its: _________________________
3
<PAGE>
[FORM OF NOTARY ACKNOWLEDGMENT] [SAMPLE: VARIABLE BY STATE AND TYPE OF ENTITY]
[CORPORATION]
STATE OF ___________ )
COUNTY OF _________ )
Before me, _______________, a Notary Public of said County and State,
personally appeared __________, with whom I am personally acquainted (or proved
to me on the basis of satisfactory evidence), and who, upon oath, acknowledged
himself/herself to be ____________ (or other officer authorized to execute the
instrument) of __________, the within named bargainor, a corporation, and that
he/she as such ______________ executed the foregoing instrument for the purposes
therein contained, by signing the name of the corporation by himself/herself as
________________.
Witness my hand and seal, at Office in ________________, this ____ day of
_________, 19__.
________________________________
Notary Public
My Commission Expires: _________________
This Document Prepared By:
_______________________________
_______________________________
_______________________________
After Recording Return To:
_______________________________
_______________________________
_______________________________
4
<PAGE>
EXHIBIT A TO LANDLORD'S
WAIVER AND CONSENT
PROPERTY DESCRIPTION
5
<PAGE>
EXHIBIT E-1
-----------
FORM OF
MORTGAGEE'S CONSENT
THIS MORTGAGEE'S WAIVER AND CONSENT ("CONSENT"), made and entered into this
____ day of ________, 199__, by ____________________, ("LANDLORD") in favor of
NTFC CAPITAL CORPORATION, a Delaware corporation ("LENDER").
BACKGROUND
A. Mortgagee holds liens on certain real property, being more
particularly described on EXHIBIT A attached hereto (the "PREMISES"), owned by
________________, ("LANDLORD"), pursuant to the mortgage described on EXHIBIT B
hereto (the "MORTGAGE").
B. Landlord leased a portion of the Premises to SWITCHTEL, INC. (the
"BORROWER") pursuant to a lease dated as of ___________, 199__ executed between
Landlord and the Borrower (as amended from time to time, the "LEASE").
C. Lender has extended and/or will be extending loans and other financial
accommodations to the Borrower for the purpose of financing the Borrower's
purchase and installation of the equipment (the "EQUIPMENT"), all or a part of
which will be located on a portion of the Premises.
D. As a condition to maintaining and/or extending such loans and other
financial accommodations, Lender has required, among other things, that the
Borrower grant to Lender security interests in the Equipment and certain other
assets of the Borrower, whether now owned or hereafter acquired (the
"COLLATERAL"), a portion of which Collateral is and may hereafter be located on
or about the Premises, and Borrower's rights under the Lease.
NOW, THEREFORE, in order to induce Lender to continue to extend financial
accommodations to Borrower, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Mortgagee hereby
agrees with Lender as follows:
1. Mortgagee agrees that Lender's security interests and liens in the
Collateral shall be superior to any title or interest which the Mortgagee may at
any time have therein, and, during the term of this Agreement, Mortgagee will
not assert against any of the Collateral any title or any statutory, common law,
contractual or possessory lien, including, without limitation, rights of levy or
distraint for rent, all of which Mortgagee hereby subordinates in favor of
Lender.
2. Mortgagee hereby agrees that none of the Collateral is subject to the
Mortgage and hereby disclaims any and all right, title, interest or claim in or
to the Collateral and any cash or non-cash proceeds of the Collateral. The
Collateral may be affixed to or used in conjunction with the Premises, but shall
remain the Borrower's personal property, subject to Lender's lien, at all times.
Mortgagee agrees not to remove any of the Collateral from the Premises without
giving Lender prior written notice.
3. Mortgagee agrees that, if Mortgagee should foreclose upon or take
possession of the Premises, Mortgagee immediately will so notify Lender, and
Lender may enter upon the Premises at any time or times within ninety (90) days
after Mortgagee's taking possession, to remove the Collateral therefrom, without
charge, except for reimbursement for any physical damage to the Premises caused
by
<PAGE>
such removal. Mortgagee will not hinder Lender's actions in enforcing its liens
and remedies with respect to the Collateral.
4. This Consent shall remain in full force and effect until all
obligations of Borrower to Lender have been paid and satisfied in full and
Lender has terminated its financing agreements with Borrower.
5. The provisions of this Consent may not be modified or terminated
orally, and shall be binding upon the successors and assigns of the Mortgagee,
and upon any successor owner or transferee of the Premises and shall inure to
the benefit of the Lender and its successors and assigns.
6. All notices shall be in writing and shall be mailed by first class
registered or certified mail, postage prepaid, as follows:
(a) If to Lender, to
NTFC Capital Corporation
220 Athens Way
Nashville, Tennessee 37228-1399
Attention: Legal Department
(b) If to Mortgagee, to
______________________________
______________________________
______________________________
7. This Mortgagee's Consent may be filed and recorded in the appropriate
locations.
8. This document shall in all respects be governed by and construed in
accordance with the laws of the State in which the Premises are located.
IN WITNESS WHEREOF, Mortgagee has executed this Mortgagee's Consent on the
date first above written.
MORTGAGEE:
_____________________________________
By: _________________________________
Title: ______________________________
[form of corporate acknowledgment]
<PAGE>
[SAMPLE: VARIABLE BY STATE AND TYPE OF ENTITY].
STATE OF _____________ )
COUNTY OF ____________ )
Before me, ____________________, a Notary Public of said County and State,
personally appeared _______________, with whom I am personally acquainted (or
proved to me on the basis of satisfactory evidence), and who, upon oath,
acknowledged himself/herself to be __________________ (or other officer
authorized to execute the instrument) of _____________, the within named
bargainor, a corporation, and that he/she as such ___________________ executed
the foregoing instrument for the purposes therein contained, by signing the name
of the corporation by himself/herself as ________________.
Witness my hand and seal, at Office in __________________, this ____ day of
________, 19__.
_________________________________
Notary Public
My Commission Expires: ___________________
<PAGE>
EXHIBIT A
PROPERTY DESCRIPTION
<PAGE>
EXHIBIT B
MORTGAGE
<PAGE>
EXHIBIT F
---------
FORM OF
CERTIFICATE OF FINANCIAL CONDITION
ECONOPHONE, INC., a New York corporation (the "BORROWER"), acting by and
through _______________, its Chief Financial Officer, provides this Certificate
in connection with that certain Amended and Restated Equipment Loan and Security
Agreement of even date herewith executed between NTFC Capital Corporation
("LENDER") and Borrower (the "LOAN AGREEMENT"), pursuant to which the Lender has
agreed to make loans to the Borrower in the maximum aggregate principal amount
of $5,000,000, as evidenced by two promissory notes issued by Borrower to the
order of the Lender. Borrower, hereby certifies to Lender:
1. Capitalized terms used herein and not otherwise defined herein are
used as defined in the Loan Agreement.
2. The financial statements and all other documents relating to the
Borrower's present condition provided to the Lender in connection with the Loan
Agreement have been prepared by the undersigned or under the supervision of the
undersigned, with due diligence and in full awareness of the reliance of the
Lender on the information contained therein in reaching its decision to make the
Loans. Such financial statements have been prepared in accordance with GAAP.
3. The Borrower believes that, as a result of the Loans and any
obligations incurred in connection therewith and the other transactions
contemplated by the Loan Agreement, it has not incurred and will not incur debts
beyond its ability to satisfy them as they mature, and will have a positive cash
flow after paying all of its anticipated indebtedness when due, including the
obligations due to the Lender under the Loans.
4. After giving effect to the Loans and the obligations incurred in
connection therewith and the other transactions contemplated by the Loan
Agreement, the Borrower anticipates that it will have sufficient proceeds from
its operating cash flow in the ordinary course of business, sufficient to pay
its interest expense and current maturities of long-term indebtedness when due.
The Borrower expects its cash flow to be sufficient to provide the cash needed
to repay existing long-term indebtedness as such matures.
5. Immediately after giving effect to the transactions contemplated by
the Loan Agreement and the other Loan Documents, the fair saleable value of the
assets of the Borrower will exceed the aggregate amount of all of the Borrower's
then outstanding indebtedness.
6. Based on the present and anticipated needs for capital of the business
conducted, or anticipated to be conducted in the future, by the Borrower, and
after giving effect to the Loans, the Borrower will not be left with
unreasonably small capital to finance the needs and anticipated needs of such
business.
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused the execution of this
Certificate this ___th day of March, 1997.
ECONOPHONE, INC.
By: ________________________________
Chief Financial Officer
<PAGE>
EXHIBIT G
---------
FORM OF STOCK PLEDGE AGREEMENT
(SEE EXHIBIT 10.9 THROUGH 10.11)
<PAGE>
EXHIBIT H
---------
(INTENTIONALLY OMITTED)
<PAGE>
Exhibit 10.4
FIRST AMENDMENT TO
AMENDED AND RESTATED EQUIPMENT LOAN AND SECURITY AGREEMENT
This First Amendment to Amended and Restated Equipment Loan and Security
Agreement, dated as of April 24, 1997 (the "First Amendment"), is among
Econophone, Inc., a New York corporation ("Borrower"), its wholly owned
Subsidiary American Telemedia, Ltd. and NTFC Capital Corporation, a Delaware
corporation ("Lender").
WHEREAS, Borrower and Lender have previously entered into an Equipment Loan
and Security Agreement dated as of May 28, 1996 and amended and restated and
joined in by American Telemedia, Ltd. as of March 27, 1997 (as amended and
restated, the "Loan Agreement"), pursuant to which Lender has agreed to loan
Borrower and American Telemedia, Ltd. up to Five Million and 00/100 Dollars
($5,000,000), subject to the terms and conditions stated in the Loan Agreement;
and
WHEREAS, Borrower has requested that Lender consent to the bridge loan to
Borrower by Morgan Stanley Group, Inc. or its assigns of up to Fifteen Million
Dollars ($15,000,000).
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Lender hereby consents to a waiver or an amendment to the certificate
of incorporation of Borrower in the form attached hereto as EXHIBIT A
permitting Borrower to incur the indebtedness evidenced by the Bridge
Notes and pursuant to the Note Purchase Agreement and related
documents to which it is or is to be a party, and to reduce the amount
of "keyman" life insurance Borrower is required to maintain with
respect to the death and long term incapacity of Mr. Alfred West to
Ten Million Dollars ($10,000,000). Lender hereby waives the Default
that has occurred and is continuing hereunder as a result of the
failure of Borrower to deliver to Lender on or prior to March 31, 1997
the audited financial statements of Borrower and its Subsidiaries for
the fiscal year ended December 31, 1996, provided however, that
Borrower must deliver to Lender the audited financial statements of
Borrower and its subsidiaries for the fiscal year ended December 31,
1996 on or before June 1, 1997.
2. Article I: DEFINITIONS is amended by inserting the following
definitions:
"Asset Sale": the conveyance, sale, lease, sublease, transfer or
other disposition (other than solely for security purposes) by
any of Borrower and its Subsidiaries to any Person other than
<PAGE>
Borrower or any of its wholly owned Subsidiaries of (a) any of
the shares of capital stock of Borrower or any of its
Subsidiaries, (b) all or substantially all of the property and
assets of any division or line of business of Borrower or any of
its Subsidiaries or (c) any other property or assets (whether
tangible or intangible) of Borrower or any of its Subsidiaries.
"Bridge Lender": individually and collectively, the holders of
Borrower's Bridge Notes evidencing amounts advanced under the
Note Purchase Agreement.
"Bridge Loan": that certain loan in an amount not to exceed
Fifteen Million Dollars ($15,000,000) pursuant to the issuance by
Borrower, and the purchase by initial holders thereof, of
Borrower's Bridge Notes.
"Bridge Note" or "Bridge Notes": individually and collectively,
those certain Senior Secured Increasing Rate Notes due April 24,
1998 issued by Borrower in the form of EXHIBIT B, identical with
each other except as to the identity of the initial purchasers
and the aggregate principal amount evidenced thereby, issued by
Borrower pursuant to the Note Purchase Agreement.
"Collateral Agent": the Collateral Agent for the holders of
Bridge Notes.
"1996 Flexible Incentive Plan": the stock incentive plan of
Borrower, pursuant to which options for 3,000,000 shares of
common stock of Borrower may from time to time be granted or sold
to key employees of Borrower and its subsidiaries in order to
retain or to create an incentive for such key employees.
"Note Purchase Agreement": individually and collectively, those
certain Note Purchase Agreements in the form attached hereto as
EXHIBIT C, identical with each other except as to the identity of
the initial purchasers and the aggregate principal amount of
Borrower's Bridge Notes to be purchased thereby, providing for
the sale on their respective purchase dates of Bridge Notes to
the initial purchasers named therein in an aggregate principal
amount not to exceed Fifteen Million Dollars ($15,000,000).
2
<PAGE>
"Pledgors": Steven West, Alfred West, and Gary Bondi.
"Voting Interests": shares of capital stock issued by a
corporation, or equivalent interest in any other person, the
holders of which are ordinarily, in the absence of contingencies,
entitled to vote for the election of directors (or persons
performing similar functions) of such Person, even if the right
so to vote has been suspended by the happening of such a
contingency.
3. Schedule 2.02 PAYMENT TERMS AND GOVERNING LAW is amended by deleting
the definition of "Tranche 2 Initial Payment Date" and substituting in
its place the following:
"TRANCHE 2 INITIAL PAYMENT DATE": the first (1st) Business Day
of the second (2nd) month to commence after the Tranche 2 First
Borrowing Date.
4 Section 2.04(b) MANDATORY PREPAYMENT is amended by deleting the text
thereof in its entirety and replacing it with the following:
MANDATORY PREPAYMENT. (i) Upon Lender's demand but at its
sole option, (a) if the NTI Purchase Agreement is terminated
prior to the Financing Termination Date, (b) if Borrower
fails to complete all the required purchases thereunder by
the Financing Termination Date, or (c) upon the occurrence
of any event pursuant to which the Preferred Stock may be
redeemed (other than any special optional redemption of the
Preferred Stock under Section 7(a) of Article Fourth of the
Amended Certificate of Incorporation), then in any such case
Borrower shall immediately prepay the loans in full,
including all principal, accrued interest and expenses, or
(ii) upon Lender's demand but at its sole option, upon
receipt by Borrower or any of its Subsidiaries of Net Cash
Proceeds (as such term is defined in the Note Purchase
Agreement on the date of this First Amendment) from any
Asset Sale (other than (1) Asset Sales effected in the
ordinary course of Borrower's or the applicable Subsidiary's
business, and (2) Asset Sales effected since April 24, 1997,
the aggregate fair value of the property and assets of
Borrower and its subsidiaries subject to such Asset Sale
does not exceed Two
3
<PAGE>
Hundred Fifty Thousand Dollars ($250,000)), Borrower shall
immediately prepay the loans (or such portion thereof) by an
amount equal to (1) the lesser of the aggregate principal amount
of all Advances then outstanding and (2) so long as any Bridge
Notes are outstanding, the product of (x) Net Cash Proceeds
multiplied by (y) a ratio, the numerator of which is the
principal amount of all Advances then outstanding and the
denominator of which is the sum of the principal amount of all
Advances then outstanding plus the principal balance then
outstanding under the Bridge Loan (prior to giving effect to any
redemption of Borrower's Bridge Notes as a result of the Asset
Sale), or (iii) upon Lender's demand but at its sole option,
Lender may require Borrower to prepay all or any portion of the
Obligations hereunder upon any repayment of principal of the
Bridge Loan, if at such time there exists and is continuing (or
immediately thereafter upon giving effect to such repayment there
would be) a Default or Event of Default (the "MANDATORY
PREPAYMENTS"). Borrower agrees that in computing Borrower's
compliance with SCHEDULE 7.15 for the purpose of determining
whether Borrower has complied with clause (iii) of the
immediately preceding sentence in connection with a repayment of
the Bridge Loan, for such period being measured, (I) in the
calculation of EBITDA, proceeds received by Borrower from the
receipt of money prepaid by customers for services subsequently
to be rendered and from any other transaction outside the
ordinary course of business that would otherwise constitute
operating earnings shall be excluded from operating earnings,
(II) in the calculation of Debt Service Coverage Ratio, Cash Flow
shall be reduced by proceeds received by Borrower from the
receipt of money prepaid by customers for services subsequently
to be rendered (other than prepaid card services in the normal
course of business) and from any other transaction outside the
ordinary course of business, (III) in the calculation of Debt to
net worth, Debt shall be increased by the amount of proceeds
prepaid by customers for services subsequently to be rendered and
from any other transaction outside the ordinary course of
business creating Indebtedness of Borrower or any
4
<PAGE>
Subsidiary, and (IV) for purposes of computing Debt Service
Coverage Ratio, the date of such repayment of the Bridge Loan
shall be treated as the last day of a fiscal quarter and for
purposes of computing EBITDA, Borrower's operations from the
start of the current fiscal year to the date of such repayment
shall be annualized.
5. Article 3: COLLATERAL AND SECURITY AGREEMENT is amended by creating
SECTION 3.10 COVENANT TO GIVE FURTHER SECURITY, the text of which is
as follows:
3.10 COVENANT TO GIVE FURTHER SECURITY Borrower hereby agrees
that, as soon as practicable, and in any event not later than May
24, 1997:
(a) Borrower will execute and deliver to Lender a security
agreement in form and substance reasonably satisfactory to
Lender, pursuant to which Borrower will grant to Lender valid and
perfected liens on and security interests in all of the property
and assets of Borrower (whether now owned or hereafter acquired
and whether or not existing on such date) with respect to which
it executes a security agreement in favor of the Collateral Agent
pursuant to Section 8.10 of the Note Purchase Agreement and not
constituting part of the Collateral, which security interest
shall a second priority lien and security interest therein,
subject only to Permitted Liens and in furtherance of the
foregoing, shall duly execute and deliver to Lender financing
statements under the Uniform Commercial Code of all jurisdictions
or such other documents that may be necessary or that Lender
deems desirable in order to perfect and protect the security
interest created under such security agreements, and provide
Lender evidence that all actions deemed necessary or desirable by
it, in order to protect and perfect the lien and security
interest created under such security agreements (or the intended
priority of such liens and security interest) have been taken or
will be taken in accordance therewith. Lender agrees that such
liens and security interests shall be automatically released upon
the repayment and satisfaction of the Bridge Loan and further
agrees that it shall have no right to exercise any rights or
remedies with respect to such liens and security interests in
connection with a mandatory prepayment upon the repayment and
satisfaction of the Bridge Loan
5
<PAGE>
required pursuant to Section 2.04(b)(iii) of the Loan Agreement
as amended hereby.
(b) Each Pledgor shall execute and deliver to Lender a Stock
Pledge Agreement or an amendment to the Stock Pledge Agreement to
which it is a party, in either case in form and substance
reasonably satisfactory to Lender, pursuant to which such
individual will grant to Lender, a valid and perfected lien on
and security interest in all of the shares of capital stock of
Borrower, or warrants, options or other rights for or to the
purchase or acquisition from Borrower of any of such shares, that
are owned or thereafter are acquired by such individual (whether
or not existing on such date), and all proceeds of such shares,
warrants, options or other rights, which comprise Initial Pledged
Interests and Pledged Interests (as defined in the Note Purchase
Agreement and Shareholder Pledge Agreements, respectively) on the
date of this First Amendment pledged to the Collateral Agent as
security for the Note Purchase Agreement and which is not pledged
or required to be pledged to Lender under the Loan Documents,
which lien and security interest shall be at least a second
priority lien and security interest, subject only to the lien and
security interest in such property granted to the Collateral
Agent, and in furtherance of the foregoing, each such individual
shall duly execute and deliver to Lender financing statements
under the Uniform Commercial Code of all jurisdictions that may
be necessary or that Lender deems desirable in order to perfect
and protect the security interest created under such Stock Pledge
Agreements or amendments thereto, and provide Lender evidence
that all actions deemed necessary or desirable by it, in order to
protect and perfect the lien and security interest created under
such pledge agreements or amendments, have been taken or will be
taken in accordance therewith.
(c) Each of Borrower and the Collateral Agent shall have entered
into an inter-creditor agreement with Lender in form and
substance reasonably satisfactory to Lender (as amended,
supplemented or otherwise modified in accordance with the terms
thereof, the "Inter-Creditor Agreement") (a) setting forth the
respective rights and responsibilities of each of Lender and the
Collateral Agent so that (1) the Collateral Agent on behalf of
the Bridge Lender will have a valid
6
<PAGE>
and perfected first priority lien on and security interest in all
of the Initial Note Documents Collateral, as such term is defined
on the date hereof in the Note Purchase Agreement, and a valid
and perfected second security lien on and interest in all of the
Collateral hereunder (subject only to Permitted Liens and
subordinate to the liens and security interest in such property
and assets granted to Lender, pursuant to and on the terms and
conditions set forth in the Loan Documents); and (2) Lender, on
behalf of itself and assignees, if any, of all or any portion of
the loans made pursuant to the terms of the Loan Agreement, will
have a valid and perfected first priority lien on and security
interest in all of the Collateral (subject, but not subordinate
to, to Permitted Liens), and a valid and perfected second
priority lien on and security interest in all of the Initial Note
Documents Collateral (subject only to the liens and security
interests of the Collateral Agent pursuant to, and on the terms
and conditions set forth in, the Note Purchase Agreement and the
documents executed in connection therewith), which arrangements
shall be acknowledged by Borrower and (b) addressing such other
matters as Lender shall reasonably request (including, without
limitations, the agreement of Borrower to take all such actions
to assist in effectuating such inter-creditor arrangement as are
requested by the Collateral Agent and Lender therein;
(d) Borrower will cause to be delivered to Lender signed copies
of one or more favorable opinions of special or appropriate local
counsel for Borrower and Alfred West, Stephen West and Gary
Bondi, as Lender shall reasonably request, addressed to Lender
and reasonably acceptable to it, as to the security agreements,
the Stock Pledge Agreements or amendments thereto, and the
Inter-Creditor Agreement referred to in paragraphs (a), (b) and
(c) of this SECTION 3.10, respectively, being the legal, valid
and binding obligations of Borrower or the applicable Pledgor,
enforceable against such party in accordance with their
respective terms, as to the creation and perfection (and, in the
case of capital stock of Borrower or any of its Subsidiaries and
intercompany Indebtedness, the priority) of the liens and
security interests created or purported to be created therein and
such other matters as Lender may reasonably request.
7
<PAGE>
6. Schedule 8.01 PERMITTED SPECIFIC INDEBTEDNESS is amended by deleting
the text thereof in its entirety and replacing it with the following:
(1) Indebtedness under that certain $350,000 "Instalment Note" made
by Borrower in favor of Israel Discount Bank of New York dated
July 15, 1994, and any amendments, modifications, extensions,
refinancings or replacements thereto not increasing the principal
indebtedness or payment terms thereof;
(2) Indebtedness under that certain $300,000 line of credit in favor
of Borrower made available by Israel Discount Bank of New York,
and any amendments, modifications, extensions, refinancings or
replacements thereto not increasing the principal indebtedness or
payment terms thereof;
(3) Indebtedness under that certain note in the amount of $31,316 for
the purchase of computer equipment that matures in March 1999,
and any amendments, modifications, extensions, refinancings or
replacements thereto not increasing the principal indebtedness or
payment terms thereof;
(4) Indebtedness under that certain promissory note in the amount of
$662,747 payable to the order of Sprint Communications Company,
L.P., and any amendments, modifications, extensions, refinancings
or replacements thereto not increasing the principal indebtedness
or payment terms thereof;
(5) Indebtedness under that certain agreement between Econophone Inc.
and Private Trans-Atlantic Telecommunications System, Inc. dated
December 15, 1994 ("PTAT-1 Agreement") in which Econophone Inc.
will acquire and operate facilities in the PTAT-1 cable in the
amount of $130,000; indebtedness under that certain amendment to
the PTAT-1 Agreement dated January 18, 1995 in which Econophone
Inc. will acquire and operate additional facilities in the PTAT-1
cable in the amount of $125,000; and indebtedness under that
certain amendment to the PTAT-1 Agreement dated December 27, 1995
in which Econophone Inc. will acquire and operate additional
facilities in the PTAT-1 cable in the amount of $224,000, and in
each case any amendments, modifications, extensions, refinancings
or replacements thereto in the ordinary course of business or
otherwise related to the purchase of
8
<PAGE>
additional capacity in connection with the Description of
Business set forth in Schedule I;
(6) Indebtedness under that certain agreement between Econophone Inc.
and Private Trans-Atlantic Telecommunications System (N.J.) Inc.
dated December 15, 1994 ("Backhaul Agreement") for a back-up
system to the PTAT-1 Agreement in the amount of $40,000;
indebtedness under that certain amendment to the Backhaul
Agreement dated January 18, 1995 for additional back-up systems
to the Backhaul Agreement in the amount of $40,000; and
indebtedness under that certain amendment to the Backhaul
Agreement dated December 27, 1995 for additional back-up systems
to the Backhaul Agreement in the amount of $80,000, and in each
case any amendments, modifications, extensions, refinancings or
replacements thereto in the ordinary course of business or
otherwise related to the purchase of additional capacity in
connection with the Description of Business set forth in Schedule
I;
(7) Indebtedness under that certain lease of software equipment in
the amount of $46,920, and any amendments, modifications,
extensions, refinancings or replacements thereto not increasing
the principal indebtedness or payment terms thereof;
(8) Indebtedness under that certain lease of computer equipment in
the amount of $65,916, and any amendments, modifications,
extensions, refinancings or replacements thereto not increasing
the principal indebtedness or payment terms thereof;
(9) Indebtedness under that certain lease of office-related equipment
in the amount of $41,386, and any amendments, modifications,
extensions, refinancings or replacements thereto not increasing
the principal indebtedness or payment terms thereof;
(10) Indebtedness under that certain lease of computer equipment in
the amount of $82,484, and any amendments, modifications,
extensions, refinancings or replacements thereto not increasing
the principal indebtedness or payment terms thereof;
(11) Indebtedness under that certain lease of office equipment in the
amount of $92,839, and any amendments, modifications, extensions,
refinancings or replacements thereto not increasing the principal
indebtedness or payment terms thereof;
9
<PAGE>
(12) Indebtedness under that certain lease of office equipment in the
amount of $17,570, and any amendments, modifications, extensions,
refinancings or replacements thereto not increasing the principal
indebtedness or payment terms thereof;
(13) Any Indebtedness referenced under Schedule 4.31 of this Loan
Agreement;
(14) Any Indebtedness related to the purchase or installation of
Additional Equipment or to the purchase of additional capacity in
furtherance of the Business Plan of Borrower;
(15) Any Indebtedness related to this Loan Agreement in the aggregate
principal amount of $2,000,000, and any amendments,
modifications, extensions, refinancings or replacements or
payment terms thereto;
(16) High Yield Notes;
(17) During the High Yield Period, Indebtedness described on pages
20-22 of the Memorandum Draft under the heading "Limitation on
Indebtedness" as permitted under the Indenture (as defined in the
Memorandum Draft);
(18) Indebtedness under the Note Purchase Agreement and the Bridge
Notes;
(19) Note payable to IDT in the amount of $836,620.26;
(20) Note payable to IDT in the amount of $175,000; and
(21) Indebtedness described in items 1, 2 and 3 of Schedule 8.10.
7. Schedule 8.02 PERMITTED SPECIFIC ENCUMBRANCES is amended by deleting
the text thereof in its entirety and replacing it with the following:
(1) With respect to property located in the United States:
(a) Any purchase money security interests related to Additional
Equipment;
(b) The lien of Israel Discount Bank of New York on all of
Borrower's property, equipment, inventory, fixtures, goods,
products of collateral and accounts evidenced by financing
10
<PAGE>
statements filed at the Secretary of State's Office and the
City Register's Offices of New York and Kings Counties on
September 9, 1993, September 28, 1993 and September 10,
1993, respectively.
(c) The lien of Primex Leasing Corporation on the Borrower's
Quikcard Thermal Transfer Printer evidenced by financing
statements filed at the Secretary of State's office and the
City Registers' Office of Kings County on January 26, 1995
and January 18, 1995, respectively;
(d) The lien of Sprint Communication L.P. on all accounts
receivable and proceeds of Borrower evidenced by a financing
statement filed at the Secretary of State's Office on
January 12, 1993;
(e) The lien of Master Lease Division of Tokai on Borrower's
lease of computer equipment evidenced by financing
statements filed at the Secretary of State's Office and the
City Registers' Office of New York County on April 1, 1996
and April 9, 1996, respectively;
(f) The lien of FINOVA Capital Corporation on certain office
equipment leased by Borrower evidenced by financing
statements filed at the Secretary of State's Office and the
City Registers' Office of Kings County on January 24, 1996
and January 26, 1996, respectively;
(g) The lien of Canon Financial Services, Inc. on Borrower's
lease of office equipment evidenced by a financing statement
filed at the Secretary of State's Office and the City
Registers' Office of Kings County on March 20, 1996 and
March 21, 1996, respectively; and
(h) The lien of Pitney Bowes Credit Corporation on Borrower's
lease of office-related equipment evidenced by a financing
statement filed at the Secretary of State's office on
January 16, 1996.
(i) Liens securing the Bridge Notes, provided that Lender and
the Collateral Agent have entered into the Intercreditor
Agreement in form and substance satisfactory to Lender on or
before May 24, 1997.
11
<PAGE>
(2) With respect to Collateral located in London, England, Brussels,
Belgium, and Paris, France:
(a) A Lien in favor of the Collateral Agent securing the Bridge
Notes, provided that such Lien is subordinate to the Liens
in favor of Lender therein and Lender and the Collateral
Agent has executed the Intercreditor Agreement in form and
substance satisfactory to Lender on or before May 24, 1997.
(3) During the High Yield Period, encumbrances described on page 72
of the Memorandum Draft under the heading "Limitation on Liens"
as permitted by the Indenture (as defined in the Memorandum
Draft), provided that no such encumbrances are on Collateral.
8. Section 7.01(c) COMPLIANCE CERTIFICATE is amended by deleting the text
thereof in its entirety and replacing it with the following:
(c) COMPLIANCE CERTIFICATES. Within sixty (60) days after the end of
each Calendar Quarter, Borrower shall deliver to Lender a
certificate dated as of the end of such period, signed on behalf
of Borrower by a Responsible Officer of Borrower: (i) stating
that as of the date thereof no Event of Default has occurred and
is continuing or exists, or if an Event of Default has occurred
and is continuing or exists, specifying in detail the nature and
period of existence thereof and any action with respect thereto
taken or contemplated to be taken by Borrower; (ii) stating that
the signer has personally reviewed this Agreement and that such
certificate is based on an examination made by or under the
supervision of the signer sufficient to assure that such
certificate is accurate; (iii) calculating and certifying
Borrower's compliance with the financial covenants set forth in
SECTION 7.15 hereof; (iv) certifying an attached aging schedule
of Borrower's accounts receivables and trade payables for the
period then ended; and (v) (1) listing the name of each Owner of
Borrower and the number of shares or other indicia of ownership
held by such Owner (including in such list the name and amount of
options, warrants, rights of conversion or other ownership
right), provided that Borrower need not identify by name Owners
whose ownership positions is less than five percent (5%) of the
voting shares of any class of securities or the beneficial owners
of Investor
12
<PAGE>
and (2) calculating and certifying that Borrower is in compliance
with the requirements of SECTION 8.15.
9. Section 7.01 REPORTING AND INFORMATION REQUIREMENTS is amended by
creating a Section 7.01(d) COMPLIANCE WITH BRIDGE LOAN REPORTING
REQUIREMENTS, the text of which is as follows:
Borrower shall immediately deliver to Lender a copy of all
reports, documents, notices, and communications delivered to, or
received from, Bridge Lender under the terms of, or in connection
with the Note Purchase Agreement, including, without limitation,
Section 8.1 thereof.
10. Section 7.07 INSURANCE is amended by deleting the text of Section
7.07(a) in its entirety and replacing it with the following:
(a) Borrower shall provide and maintain and cause to be maintained at
all times insurance in such forms and covering such risks and
hazards and in such amounts and with an insurance corporation
with a Best Rating of "A-" or above, licensed to do business in
the states where the Equipment and the Borrower are located, as
may be reasonably satisfactory to Lender, as shown on SCHEDULE
7.07 hereto, and otherwise as may be required by the Security
Documents.
11. Schedule 7.15 FINANCIAL COVENANTS is amended by deleting the text
thereof in its entirety and replacing it with the following:
(a) DEBT SERVICE COVERAGE RATIO. Borrower shall maintain a Debt
Service Coverage Ratio for the fiscal quarter ending June 30,
1997, and each fiscal quarter thereafter through the fiscal
quarter ended December 31, 1999, of not less than 1.10 to 1.00,
and for each fiscal quarter thereafter of not less than 1.25 to
1.00. For purposes of calculating Cash Flow for computation of
Debt Service Coverage Ratio, Borrower shall be entitled to
include (i) proceeds received from the sale of any equity
interest not required to be redeemed during the term of this
Agreement, (ii) amounts drawn under the Note Purchase Agreement
during such period and not repaid and unless the conditions of
Section 4 of the Note Purchase Agreement cannot be satisfied as
of the date of any requested borrowing thereunder, amounts
undrawn
13
<PAGE>
that remain available to Borrower under the Note Purchase
Agreement as of the end of such period and (iii) proceeds of any
Indebtedness which does not require principal payments on or
prior to, or within one year after, the Tranche 2 Maturity Date.
(b) MINIMUM CASH BALANCE. Commencing May 1, 1997, Borrower shall
maintain at all times a Cash balance of not less than $1,500,000, provided
that unless the conditions of Section 4 of the Note Purchase Agreement
cannot be satisfied as of the date of any requested borrowing thereunder,
Borrower may satisfy up to $500,000 of this required balance with amounts
undrawn that remain available to Borrower under the Note Purchase
Agreement.
(c) EBITDA. Borrower's EBITDA shall not be less than: for the fiscal
year ending December 31, 1997, ($7,500,000); for the fiscal year ending
December 31, 1998, ($5,000,000); for the fiscal year ending December 31,
1999, $3,000,000; for the fiscal year ending December 31, 2000,
$10,000,000; and for the fiscal year ending December 31, 2001, $10,000,000.
(d) DEBT TO NET WORTH RATIO. Borrower shall maintain, except during
the High Yield Period, a ratio of Indebtedness to net worth (calculated in
accordance with GAAP but excluding from the calculation of Indebtedness (i)
Subordinated Indebtedness and (ii) any Indebtedness which does not require
principal payments on or prior to, or within one year after, the Tranche 2
Maturity Date) of not greater than 3.00 to 1.00 for the fiscal quarter
ending March 31, 1997, and for each fiscal quarter thereafter. For
purposes of this calculation, the Preferred Stock shall not be included as
debt of Borrower.
11. Section 8.15 ISSUANCE OF ADDITIONAL CAPITAL STOCK is amended by
deleting the text thereof in its entirety and replacing it with the following:
Issue or sell or enter into any agreement or arrangement for the issuance
and sale of any shares of its capital stock (or other ownership or profit
interest therein), any securities convertible into or exchangeable for
shares of its capital stock (or other ownership or profit interest therein)
for any warrants, options or other rights for or to the purchase or
acquisition of any shares of its capital stock (or any ownership or profit
interests therein), except for (1) transfers and replacements of
outstanding shares of capital stock of Borrower; (2) the issuance and sale
of shares of common stock of Borrower to the holders of the Preferred Stock
upon any conversion thereof in accordance with the terms of Section 10.01
of Article Fourth of the Amended Certificate of Incorporation of Borrower;
and (3) the issuance and sale of shares of common stock of Borrower or
options to acquire such
14
<PAGE>
shares pursuant to, and in accordance with the terms of, the 1996 Flexible
Incentive Plan; provided, however, this restriction shall not be applicable
for so long as Lender has a first priority, perfected Lien pursuant to one
or more agreements substantially in the form of the Stock Pledge Agreement
on (i) 51% or more of the combined voting power of all outstanding Voting
Interests of Borrower as of the date of this First Amendment, and (ii) 40%
or more of the economic value of all shares of capital stock of Borrower
(excluding the Preferred Stock), all of the warrants, options or other
rights for or to the purchase or acquisition from Borrower of shares of
capital stock of Borrower, and all of the other ownership or profit
interests of Borrower, whether voting or non-voting, and whether or not
such shares, warrants, options, right or other interests are authorized or
otherwise existing on the date of this First Amendment. Borrower shall not
without Lender's prior written consent, issue any capital stock or other
ownership interests in Borrower that would cause a default under any Second
Amended and Restated Stock Pledge Agreement, as the same may be further
amended, restated or supplemented from time to time.
12. Article 8 NEGATIVE COVENANT is hereby amended by creating Section 8.16
Repayment of Bridge Loan, the text of which is as follows:
8.16 REPAYMENT OF BRIDGE LOAN. (a) Make any repayment of
principal under the Bridge Loan, whether at maturity, by redemption or
otherwise, without delivering to Lender at least five (5) days in
advance of such payment a certificate, signed on behalf of Borrower by
a Responsible Officer of Borrower stating that the Responsible Officer
has personally reviewed this Agreement and that such certificate is
based on an examination made by or under the supervision of the
Responsible Officer sufficient to assure that such certificate is
accurate and (i) setting forth the date for and the amount of the
scheduled payment of principal, (ii) calculating and certifying
Borrower's compliance or noncompliance with the financial covenants
set forth in SECTION 7.15 hereof immediately before, and after giving
effect to, the proposed payment of principal of the Bridge Loan, and
(iii) certifying whether as of the date thereof any Default or Event
of Default has occurred and is continuing, and whether upon giving
effect to such repayment any Default or Event of Default will have
occurred and be continuing.
(b) Borrower agrees that in computing Borrower's compliance with SCHEDULE
7.15 for the purpose of determining whether an Event of Default or Default
exists (or thereafter would exist), for such period being measured, (i) in
the calculation
15
<PAGE>
of EBITDA, proceeds received by Borrower from the receipt of money prepaid by
customers for services subsequently to be rendered and from any other
transaction outside the ordinary course of business that would otherwise
constitute operating earnings shall be excluded from operating earnings, (ii) in
the calculation of Debt Service Coverage Ratio, Cash Flow shall be reduced by
proceeds received by Borrower from the receipt of money prepaid by customers for
services subsequently to be rendered (other than prepaid card services in the
normal course of business) and from any other transaction outside the ordinary
course of business, (iii) in the calculation of Debt to net worth, Debt shall be
increased by the amount of proceeds prepaid by customers for services
subsequently to be rendered and from any other transaction outside the ordinary
course of business creating Indebtedness of Borrower or any Subsidiary, and (iv)
for purposes of computation of Borrower's Debt Service Coverage Ratio, the date
of such repayment shall be treated as the last day of a fiscal quarter and for
purposes of computing EBITDA, Borrower's statements to the date of such
repayment shall be annualized on a pro forma basis).
13. MISCELLANEOUS. Terms not otherwise defined in this First Amendment
have the meanings ascribed to them in the Loan Agreement. Except to the extent
expressly varied hereby, the remaining terms and conditions of the Loan
Agreement remain in full force and effect. This First Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
16
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
executed and delivered by its duly authorized officers, all as of the day and
year first above written.
ECONOPHONE, INC.
BORROWER
By:
---------------------------
Title:
------------------------
AMERICAN TELEMEDIA, LTD.
By:
---------------------------
Title:
------------------------
NTFC CAPITAL CORPORATION
LENDER
By:
---------------------------
Title:
------------------------
17
<PAGE>
Exhibit 10.6
THIRD AMENDMENT TO
AMENDED AND RESTATED EQUIPMENT LOAN AND SECURITY AGREEMENT
This Third Amendment to Amended and Restated Equipment Loan and Security
Agreement, dated as of July , 1997 (the "Third Amendment"), is among
Econophone, Inc., a New York corporation ("Borrower"), its wholly owned
Subsidiary American Telemedia, Ltd. and NTFC Capital Corporation, a Delaware
corporation ("Lender").
WHEREAS, Borrower and Lender have previously entered into an Equipment Loan
and Security Agreement dated as of May 28, 1996 and amended and restated and
joined in by American Telemedia, Ltd. as of March 27, 1997, and as further
amended by that First Amendment to Amended and Restated Equipment Loan and
Security Agreement dated as of April 24, 1997 and by that Second Amendment to
Amended and Restated Equipment Loan and Security Agreement dated as of June 26,
1997 (as amended and restated, the "Loan Agreement"), pursuant to which Lender
has agreed to loan Borrower and American Telemedia, Ltd. up to Five Million and
00/100 Dollars ($5,000,000), subject to the terms and conditions stated in the
Loan Agreement; and
WHEREAS, Borrower has requested that Lender amend the Loan Agreement to
delete any requirement of a pledge by shareholders of Borrower of securities or
other ownership interests in Borrower as security for Borrower's obligations to
Lender.
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Article I: DEFINITIONS is amended as follows:
a. The definition of "ORIGINAL STOCK PLEDGE AGREEMENT" is deleted in its
entirety.
b. The definition of "SECURITY DOCUMENTS" is deleted in its entirety and
the following substituted in its stead:
"SECURITY DOCUMENTS": this Agreement, the Consents, all
financing statements, all documents and instruments executed
and/or delivered by or on behalf of Borrower in favor of Lender
granting and perfecting liens and security interests on NTI
Equipment and related Software to be installed in London,
England, Brussels, Belgium, and Paris, France and any other
documents granting, evidencing, or perfecting any security
interest or Lien with respect to or securing any of the
Obligations.
c. The definition of "STOCK PLEDGE AGREEMENT" is deleted in its entirety
and EXHIBIT G to the Loan Agreement is removed.
1
<PAGE>
d. The definition of "VOTING INTERESTS" is deleted in its entirety.
2. ARTICLE 2: LOANS is amended by deleting the text of Section 2.04(a)
VOLUNTARY PREPAYMENTS in its entirety and substituting the following in its
place:
(a) VOLUNTARY PREPAYMENTS. No voluntary prepayments under the
Tranche 1 Note or the Tranche 2 Note shall be permitted. Mandatory
Prepayments, excess interest payments under Section 2.02(g) or
prepayments made from insurance proceeds pursuant to Section 6.03 or
with any condemnation proceeds may be made in accordance with and
subject to the terms, conditions and limitations hereof and shall not
be subject to a prepayment premium.
3. ARTICLE 2: LOANS is amended by deleting Section 2.11 STOCK PLEDGE
AGREEMENT in its entirety.
4. Schedule 5.02(c)(v) STOCK PLEDGE AGREEMENT is amended by deleting the
text thereof in its entirety and substituting "[INTENTIONALLY DELETED]" in its
place.
5. ARTICLE 8: NEGATIVE COVENANTS is amended by deleting Section 8.15
ISSUANCE OF ADDITIONAL CAPITAL STOCK in its entirety.
6. MISCELLANEOUS. Lender acknowledges the termination of the Amended and
Restated Stock Pledge Agreements executed by each of Alfred West, Steve West and
Gary Bondi as Owners of Borrower as of March 27, 1997, pursuant to Section 2.11
of the Loan Agreement. Terms not otherwise defined in this Third Amendment have
the meanings ascribed to them in the Loan Agreement. Except to the extent
expressly varied hereby, the remaining terms and conditions of the Loan
Agreement remain in full force and effect. This Third Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be
executed and delivered by its duly authorized officers, all as of the day and
year first above written.
ECONOPHONE, INC.
BORROWER
By:___________________________
Title:________________________
AMERICAN TELEMEDIA, LTD.
By:___________________________
Title:________________________
NTFC CAPITAL CORPORATION
LENDER
By:___________________________
Title:________________________
3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Amendment No. 1 to Form S-4.
/s/ ARTHUR ANDERSEN LLP
New York, New York
September 25, 1997
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
for
Offer to Exchange
13 1/2% Senior Notes due 2007
for all Outstanding
13 1/2% Senior Notes due 2007
-------------------------------------------------
ECONOPHONE, INC.
The Exchange Offer Will Expire at 5:00 P.M., New York City Time,
On , Unless Extended By
Econophone, Inc. (the "Expiration Date")
-------------------------------------------------
The Exchange Agent
for the Exchange Offer is:
THE BANK OF NEW YORK
By Registered or Certified Mail, by Overnight Courier or by Hand:
The Bank of New York
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
Attention: Shilpa Trivedi
or
By Facsimile:
The Bank of New York
Attention: Shilpa Trivedi
Facsimile Number: (212) 815-6339
-------------------------------------------------
Delivery of this Letter of Transmittal to an address other than as set forth
above or transmission of instructions via a facsimile transmission to a number
other than as set forth above will not constitute a valid delivery. The
instructions contained herein should be read carefully before this Letter of
Transmittal is completed.
<PAGE>
This Letter of Transmittal is to be used either if certificates of
Original Notes are to be forwarded herewith to the Exchange Agent or if delivery
of Original Notes is to be made by book-entry transfer to an account maintained
by the Exchange Agent at The Depository Trust Company, pursuant to the
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer--Book-Entry Transfer." Delivery of documents to a book-entry transfer
facility does not constitute delivery to the Exchange Agent.
Holders whose Original Notes are not immediately available or who
cannot deliver their Original Notes and all other documents required hereby to
the Exchange Agent on or prior to the Expiration Date may tender their Original
Notes according to the guaranteed delivery procedure set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures."
The undersigned must check the appropriate boxes at page 8 below and
sign this Letter of Transmittal to indicate the action the undersigned desires
to take with respect to the Exchange Offer.
2
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned acknowledges receipt of the Prospectus dated
(the "Prospectus") of Econophone, Inc. (the "Company"), and this
Letter of Transmittal (the "Letter of Transmittal"), which together describe the
Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount of
13 1/2% Senior Notes due 2007 (the "Exchange Notes"), for each $1,000 in
principal amount of outstanding 13 1/2% Senior Notes due 2007 (the "Original
Notes"). The terms of the Exchange Notes are substantially identical in all
respects (including principal amount, interest rate and maturity) to the terms
of the Original Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely transferable by holders thereof
(except as provided herein or in the Prospectus) and are issued without any
right to registration under the Securities Act of 1933, as amended (the
"Securities Act"). Capitalized terms used herein but not defined herein have the
meanings ascribed to them in the Prospectus.
Upon the terms and subject to the conditions of the Exchange Offer,
the undersigned hereby tenders to the Company the principal amount of the
Original Notes indicated in Box 1 below. The undersigned is the registered owner
of all the Original Notes being tendered by it, and the undersigned represents
that it has received from each beneficial owner of tendered Original Notes
("Beneficial Owner(s)") a duly completed and executed form of "Instructions to
Registered Holder from Beneficial Owner" accompanying this Letter of
Transmittal, instructing the undersigned to take the action described in this
Letter of Transmittal.
Subject to, and effective upon, the acceptance for exchange of the
Original Notes tendered herewith, the undersigned hereby irrevocably exchanges,
assigns and transfers to, or upon the order of, the Company all right, title and
interest in and to such Original Notes. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that said Exchange
Agent acts as the agent of the Company in connection with the Exchange Offer) to
cause the Original Notes to be assigned, transferred and exchanged. The
undersigned agrees that acceptance of any and all validly tendered Original
Notes by the Company and the issuance of Exchange Notes in exchange therefor
shall constitute performance in full by the Company of its obligations under the
Registration Rights Agreement and that the Company shall have no further
obligations or liabilities thereunder.
The undersigned hereby represents and warrants that the undersigned
accepts the terms and conditions of the Exchange Offer and has full power and
authority to tender, exchange, assign and transfer the Original Notes tendered
hereby and to acquire Exchange Notes issuable upon the exchange of such tendered
Original Notes, and that, when such tendered Original Notes are accepted for
exchange, the Company will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The undersigned and each Beneficial Owner will, upon request,
execute and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete and give effect to the
transactions contemplated hereby.
The undersigned represents that it and each Beneficial Owner
acknowledge that the Exchange Offer is being made in reliance on an
interpretation by the staff of the Securities and Exchange Commission (the
"SEC"), not issued to the Company or in connection with the Exchange Offer, to
the effect that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Original Notes
3
<PAGE>
may be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder that is (i) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired
Original Notes directly from the Company or (iii) a broker-dealer who acquired
Original Notes as a result of market making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are required in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes and as to broker-dealer
prospectus delivery requirements, subject to the provisions of the paragraph
below. See "Shearman & Sterling," SEC No-Action Letter (available July 2, 1993).
Any holder who tenders in the Exchange Offer for the purpose of participating in
a distribution of the Exchange Notes cannot rely on such interpretation by the
staff of the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Morgan Stanley & Co., Inc." SEC No-Action Letter (available
June 5, 1991), and "Exxon Capital Holdings Corporation," SEC No-Action Letter
(available May 13, 1988).
The undersigned hereby represents and warrants that (i) the Exchange
Notes or interests therein received by the undersigned and any Beneficial
Owner(s) pursuant to the Exchange Offer are being acquired by the undersigned
and any Beneficial Owner(s) in the ordinary course of business of the
undersigned and any Beneficial Owner(s) receiving such Exchange Notes, (ii)
neither the undersigned nor any Beneficial Owner(s) is participating, intends to
participate or has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes, (iii) the undersigned
and any Beneficial Owner(s) acknowledge and agree that any person who is a
broker-dealer under the Exchange Act or is participating in the Exchange Offer
for the purpose of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale of the Exchange Notes and any interest
therein acquired by such person and cannot rely on the position of the Staff of
the SEC set forth in the no-action letters that are discussed above, (iv) the
undersigned and each Beneficial Owner understand that a secondary resale
transaction described in the preceding clause (iii) and any resale of the
Exchange Notes and any interest therein obtained by the undersigned and in
exchange for the Original Notes originally acquired by the undersigned directly
from the Company should be covered by an effective registration statement
containing the selling security holder information required by Item 507 and 508,
as applicable of Regulation S-K of the SEC, and (v) neither the undersigned nor
any Beneficial Owner(s) is an "affiliate," as defined in Rule 405 under the
Securities Act, of the Company, or if either the undersigned or any Beneficial
Owner(s) is an affiliate, that the undersigned and any such Beneficial Owner(s)
will comply with the prospectus delivery requirements of the Securities Act in
connection with the disposition of any Exchange Notes to the extent applicable.
If the undersigned or any Beneficial Owner(s) is a broker-dealer, the
undersigned further represents that (x) it and any such Beneficial Owner(s)
acquired Original Notes for the undersigned's and any such Beneficial Owner's
own account as a result of market-making activities or other trading activities,
(y) neither the undersigned nor any Beneficial Owner(s) has entered into any
arrangement or understanding with the Company or any "affiliate" of the Company
(within the meaning of Rule 405 under the Securities Act) to distribute the
Exchange Notes to be received in the Exchange Offer and (z) the undersigned and
any Beneficial Owner(s) acknowledge that the undersigned and any Beneficial
Owner(s) will deliver a copy of a prospectus meeting the requirements of the
Securities Act in connection with any resale of Exchange Notes. By so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with the resales of Exchange Notes
received in exchange for Original Notes where Original Notes were acquired
4
<PAGE>
by such broker-dealer as a result of market-making activities or other trading
activities. The Company intends to make the Prospectus (as it may be amended or
supplemented) available to any broker-dealer for use in connection with any such
resale for a period of 180 days after the expiration date of the Exchange Offer.
The Exchange Offer is not being made to, nor will tenders be accepted
from or on behalf of, holders of the Original Notes in any jurisdiction in which
the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction or would otherwise not be in
compliance with any provision of any applicable security law. For purposes of
compliance with state blue sky laws, the undersigned represents and warrants to
the Company that the state in which each Beneficial Owner's principal business
office is located or the state of each Beneficial Owner's principal residence is
one of the states which is listed on Schedule A attached hereto. The undersigned
hereby represents and warrants that the information set forth in Box 2 is true
and correct.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Conditions of the Exchange
Offer." The undersigned recognizes that as a result of these conditions (which
may be waived, in whole or in part, by the Company), as more particularly set
forth in the Prospectus, the Company may not be required to exchange any of the
Original Notes tendered hereby, and in such event, the Original Notes not
exchanged will be returned to the undersigned at the address indicated below.
The undersigned acknowledges that, prior to the Exchange Offer, there has been
no public market for the Original Notes or the Exchange Notes. The Company does
not intend to list the Exchange Notes on a national securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the Exchange Notes will develop or as to
the liquidity of or the trading market for the Exchange Notes. The undersigned
understands and acknowledges that the Company reserves the right in its sole
discretion to purchase or make offers for any Original Notes that remain
outstanding subsequent to the Expiration Date and, to the extent permitted by
applicable law, purchase Original Notes in the open market, in privately
negotiated transactions or otherwise.
The undersigned understands that tenders of the Original Notes pursuant to
any one of the procedures described in the Prospectus under the caption "The
Exchange Offer" and in the instructions hereto will constitute a binding
agreement between the undersigned and the Company in accordance with the terms
and subject to the conditions of the Exchange Offer.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Original Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Original
Notes not properly tendered or if, in the sole judgment of the Company, the
Exchange Offer would violate any law, statute, rule or regulation or an
interpretation thereof of the SEC staff. The Company also reserves the right to
waive any irregularities or conditions of tender as to particular Original
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in this Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects are final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Original Notes must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of Original Notes, nor shall any of them incur any liability for failure
to give such notification. Tenders of Original Notes will not be deemed to have
been made until such irregularities have been cured or waived. Any Original
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or
5
<PAGE>
irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent to the tendering holder of the Original Notes,
as soon as practicable following the Expiration Date.
All authority herein conferred or agreed to be conferred shall not be
affected by, and shall survive, the death or incapacity of the undersigned and
any Beneficial Owner(s), and every obligation of the undersigned or any
Beneficial Owner(s) shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned and any Beneficial Owner(s). The
undersigned also agrees that, except, as provided in the Prospectus and set
forth in Instruction 3, below, the Original Notes tendered hereby cannot be
withdrawn.
Certificates for all Exchange Notes delivered in exchange for tendered
Original Notes and any Original Notes delivered herewith but not exchanged, and
registered in the name of the undersigned, shall be delivered to the undersigned
at the address shown below the signature of the undersigned, unless otherwise
indicated on page 8.
6
<PAGE>
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF ORIGINAL NOTES
TENDERED HEREWITH" BELOW AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE
TENDERED THE ORIGINAL NOTES AND MADE THE REPRESENTATIONS DESCRIBED HEREIN AND IN
THE PROSPECTUS.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
_____________________________________________________________________________
_____________________________________________________________________________
Signature(s) of Holder(s)
Date: _______________________
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) of Original Notes. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, please set forth the
full title of such person.) See Instruction 4.
Name(s):_____________________________________________________________________
_____________________________________________________________________
(Please Print)
Capacity (full title):
Address: ______________________________________________________________________
(Including Zip Code)
Area Code and Telephone No.:___________________________________________________
Taxpayer Identification No.:___________________________________________________
GUARANTEE OF SIGNATURE(S)
(If Required - See Instruction 4)
Authorized Signature:__________________________________________________________
Name: _________________________________________________________________________
Title: ________________________________________________________________________
Address: ______________________________________________________________________
_______________________________________________________________________________
Name of Firm: _________________________________________________________________
Area Code and Telephone No: ___________________________________________________
Date: ________________________
7
<PAGE>
/ / CHECK HERE IF TENDERED ORIGINAL NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________ / / The Depository Trust
Company
Account Number: _______________________________________________
Transaction Code Number: ______________________________________
/ / CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): __________________________________________________
Name of Eligible Institution that Guaranteed Delivery:
If Delivered by Book-Entry Transfer:
Account Number: _______________________________________________________
/ / CHECK HERE ONLY IF EXCHANGE NOTES OR UNEXCHANGED ORIGINAL NOTES
DELIVERED HEREWITH ARE TO BE SENT TO SOMEONE OTHER THAN THE
UNDERSIGNED, OR TO THE UNDERSIGNED AT AN ADDRESS OTHER THAN THAT SHOWN
ABOVE.
Mail Exchange Notes to:
Name:________________________________________________________
(Please Print)
Address:_____________________________________________________
_____________________________________________________
Tax Identification Number: __________________________________
Social Security No.: ________________________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name: _______________________________________________________
Address:_____________________________________________________
_____________________________________________________
8
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
A holder that is a participant in The Depository Trust Company's
system may utilize The Depository Trust Company's Automated Tender Offer Program
to tender Original Notes.
List in Box 1 the Original Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, information should be listed
on a separate signed schedule affixed hereto.
- --------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF ORIGINAL NOTES TENDERED HEREWITH
<TABLE>
<CAPTION>
Name(s) and Address(es) Aggregate Principal
of Registered Holder(s) Certificate Amount Represented Principal Amount
(Please fill in) Number(s)* by Original Notes Tendered**
<S> <C>
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Original Notes. See
Instruction 3.
- --------------------------------------------------------------------------------
BOX 2
BENEFICIAL OWNER(S)
State of Principal Residence
or Principal Place of Business Principal Amount of Tendered
or Each Beneficial Owner of Original Notes held
Tendered Original Notes for Account of Beneficial Owner
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer
1. Delivery of this Letter of Transmittal and Certificates; Guaranteed
Delivery Procedures.
Certificates for all physically delivered Original Notes or
confirmation of any book-entry transfer to the Exchange Agent's account at a
book-entry transfer facility of Original Notes tendered by book-entry transfer,
as well as a properly completed and duly executed copy of this Letter of
Transmittal or facsimile thereof, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address set
forth on the front page of this Letter of Transmittal on or prior to the
Expiration Date (as defined in the Prospectus).
The method of delivery of this Letter of Transmittal, the Original
Notes and any other required documents is at the election and risk of the
holder, and except as otherwise provided below, the delivery will be deemed made
only when actually received by the Exchange Agent. The method of delivery of
this Letter of Transmittal and all other required documents to the Exchange
Agent is at the election and risk of the holder. Instead of delivery by mail,
it is recommended that holders use an overnight or hand delivery service,
properly insured. In all cases, sufficient time should be allowed to assure
delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal should be sent to the Company.
Holders who wish to tender their Original Notes but whose Original
Notes are not immediately available or who cannot deliver their Original Notes
and all other required documents to the Exchange Agent on or prior to the
Expiration Date or comply with book-entry transfer procedures on a timely basis
may tender their Original Notes pursuant to the guaranteed delivery procedure
set forth in the Prospectus under "The Exchange Offer--Guaranteed Delivery
Procedures." Such holders' tender may be effected if:
(i) such tender is made by or through an Eligible Institution
(as defined below);
(ii) on or prior to the Expiration Date, the Exchange Agent has
received from such Eligible Institution (a) either a properly
completed and duly executed Letter of Transmittal (or a facsimile
thereof) or a properly transmitted Agent's Message and (b) a Notice of
Guaranteed Delivery, substantially in the form included herewith (by
facsimile transmission, mail or hand delivery), setting forth the name
and address of such holder of Original Notes and the amount of
Original Notes tendered, stating that the tender is being made thereby
and guaranteeing that within five business days after the date of
execution of the Notice of Guaranteed Delivery, a Book-Entry
Confirmation or the certificates relating to the Original Notes in
registered form and all other documents required by this Letter of
Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(iii) a Book-Entry Confirmation or the certificates relating to
the Definitive Registered Notes, and all other documents required by
this Letter of Transmittal, are received by the Exchange Agent within
five business days after the date of execution of the Notice of
Guaranteed Delivery.
<PAGE>
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Original Notes for exchange.
2. Beneficial Owner Instructions to Registered Holders.
Only a holder in whose name tendered Original Notes are registered on
the books of the registrar (or the legal representative or attorney-in-fact of
such registered holder) may execute and deliver this Letter of Transmittal. Any
Beneficial Owner of tendered Original Notes who is not the registered holder
must arrange promptly with the registered holder to execute and deliver this
Letter of Transmittal on his or her behalf through the execution and delivery to
the registered holder of the "Instructions to Registered Holder from Beneficial
Owner" form accompanying this Letter of Transmittal.
3. Partial Tender; Withdrawals.
If less than the entire principal amount of Original Notes evidenced
by a submitted certificate is tendered, the tendering holder must fill in the
principal amount tendered in the box entitled "Principal Amount Tendered." A
newly issued certificate for the principal amount of Original Notes submitted
but not tendered will be sent to such holder as soon as practicable after the
Expiration Date. All Original Notes delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
Original Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date. For a withdrawal to be
effective, (i) a written notice of withdrawal (sent by facsimile, registered or
certified mail, or overnight courier or by-hand) must be timely received by the
Exchange Agent or (ii) the appropriate procedures of The Depository Trust
Company's Automated Tender Offer Program must be complied with. Any such notice
of withdrawal (a) must (i) specify the person named in the Letter of Transmittal
as having tendered Original Notes to be withdrawn (including the principal
amount of such Original Notes), (ii) specify the certificate numbers of the
Original Notes to be withdrawn, (iii) specify the principal amount of Original
Notes delivered for exchange, (iv) include a statement that such holder is
withdrawing his or her election to have such Original Notes exchanged and (v)
specify the name of the registered holder of such Original Notes, and (b) must
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees) or be
accepted by evidence satisfactory to the Company that the person withdrawing the
tender has succeeded to the ownership of the Original Notes being withdrawn. The
Exchange Agent will return the properly withdrawn Original Notes promptly
following receipt of notice of withdrawal. If Original Notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at The Depository Trust Company be
credited with the withdrawn Original Notes or otherwise comply with the
procedures of The Depository Trust Company. All questions as to the validity,
form and eligibility (including time of receipt) of such withdrawal notices
shall be determined by the Company in its sole discretion and whose
determination shall be final and binding on all parties. Any Original Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Properly withdrawn Original Notes may be
retendered by following one of the procedures described above at any time on or
prior to the Expiration Date.
4. Signature on this Letter of Transmittal; Written Instruments and
Endorsements; Guarantee of Signatures.
2
<PAGE>
If this Letter of Transmittal is signed by the registered holder(s) of
the Original Notes tendered hereby, the signature must correspond with the
name(s) as written on the face of the certificates without alteration or any
change whatsoever.
If any of the Original Notes tendered hereby are owned of record by
two or more joint owners, all such owners must sign this Letter of Transmittal.
If any of the Original Notes tendered hereby are registered in several
names, it will be necessary to complete, sign and submit as many separate copies
of this Letter of Transmittal as there are different registrations of Original
Notes.
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include a
book-entry transfer facility whose name appears on a security listing as the
owner of the Original Notes) of Original Notes listed and tendered hereby, no
endorsements of certificates or separate written instruments of transfer or
exchange are required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of the Original Notes listed, such Original Notes
must be endorsed or accompanied by separate written instruments of transfer or
exchange in form satisfactory to the Company and duly executed by the registered
holder, in either case signed exactly as the name or names of the registered
holder or holders appear(s) on the Original Notes.
If this Letter of Transmittal or any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporation or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written
instruments of transfer or exchange required by this Instruction 4 must be
guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal or notice of withdrawal need
not be guaranteed by an Eligible Institution, provided the Original Notes are
tendered: (i) by a registered holder of such Original Notes; or (ii) for the
account of an Eligible Institution.
For purposes of this Letter of Transmittal, an "Eligible Institution"
shall mean any firm that is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
a commercial bank or trust company having an office or correspondent in the
United States.
5. Transfer Taxes.
The Company shall pay all transfer taxes, if any, applicable to the
transfers and exchange of Original Notes to it or its order pursuant to the
Exchange Offer. If a transfer tax is imposed for any reason other than the
transfer and exchange of Original Notes to the Company or its order pursuant to
the Exchange Offer, the amount of any such transfer taxes (whether imposed on
the registered holder or any other person) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted herewith, the amount of such transfer taxes will be billed
directly to such tendering holder.
3
<PAGE>
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Original Notes listed in this Letter of
Transmittal.
6. Mutilated, Lost, Stolen or Destroyed Original Notes.
Any holder whose Original Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
7. Acceptance of Tendered Original Notes and Issuance of Exchange Notes;
Return of Original Notes.
Upon satisfaction or waiver of all of the conditions of the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Original
Notes properly tendered and will issue Exchange Notes promptly after acceptance
of the Original Notes. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted tendered Original Notes when, as and if the Company has
given oral or written notice thereof (oral notice being promptly confirmed in
writing) to the Exchange Agent. If any tendered Original Notes are not exchanged
pursuant to the Exchange Offer for any reason, such unexchanged Original Notes
will be returned, without expense, to the undersigned at the address indicated
above. Book-entry interests in Original Notes will be credited to an account
maintained with The Depository Trust Company as promptly as practicable.
4
<PAGE>
Schedule A
5
<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF
ECONOPHONE, INC.
13 1/2% Senior Notes due 2007
The undersigned hereby acknowledges receipt of the Prospectus dated
, (the "Prospectus") of Econophone, Inc. (the "Company"),
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that
together constitute the Company's offer (the "Exchange Offer") to exchange
$1,000 in principal amount of its 13 1/2% Senior Notes due 2007 (the "Exchange
Notes") for each $1,000 in principal amount of its outstanding 13 1/2% Senior
Notes due 2007 (the "Original Notes"). Capitalized terms used herein but not
defined herein have the meaning ascribed to them in the Prospectus.
This will instruct you, the registered holder, as to the action to be
taken by you relating to the Exchange Offer with respect to the Original Notes
held by you for the account of the undersigned.
The aggregate face amount of the Original Notes held by you for the account
of the undersigned is (fill in amount):
$__________________________ of the 13 1/2% Senior Notes due 2007.
With respect to the Exchange Offer, the undersigned hereby instructs
you (check appropriate box):
/ / To TENDER the following Original Notes held by you for
the account of the undersigned (insert principal amount
of Original Notes to be tendered, *if any):
$______________ of the 13 1/2% Senior Notes due 2007.
* The minimum permitted tender is $1,000 in principal
amount of Original Notes. All other tenders must be in
integral multiples of $1,000 of principal amount.
/ / NOT to TENDER any Original Notes held by you for the
account of the undersigned.
If the undersigned instructs you to tender the Original Notes held by
you for the account of the undersigned, it is understood that you are authorized
(a) to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
Beneficial Owner (as defined in the Letter of Transmittal), including, but not
limited to, representations to the effect that (i) the undersigned's principal
residence or principal business office is in the state of (fill in state)
which is listed on Schedule A attached to the
Letter of Transmittal, (ii) the undersigned is acquiring the Exchange Notes or
interests therein in the ordinary course of business of the undersigned, (iii)
the undersigned is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the distribution
of the Exchange Notes, (iv) the undersigned acknowledges and agrees that any
person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the Exchange
<PAGE>
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale of the Exchange Notes
or any interest therein acquired by such person and cannot rely on the position
of the Staff of the Securities and Exchange Commission ("SEC") set forth in the
no-action letters that are discussed in the section of the Prospectus entitled
"The Exchange Offer -- Procedures Applicable to All Holders" and the Letter of
Transmittal; (v) the undersigned understands that a secondary resale transaction
described in clause (iv) above and any resale of the Exchange Notes and any
interest therein obtained by the undersigned in exchange for the Original Notes
originally acquired by the undersigned directly from the Company should be
covered by an effective registration statement containing the selling security
holder information required by Items 507 and 508, as applicable, of Regulation
S-K of the SEC, and (vi) except as otherwise disclosed in writing herewith, the
undersigned is not an ''affiliate,'' as defined in Rule 405 under the Securities
Act, of the Company, (b) to agree, on behalf of the undersigned, as set forth in
the Letter of Transmittal; and (c) to take such other action as may be necessary
under the Prospectus or the Letter of Transmittal to effect the valid tender of
such Original Notes. If the undersigned is a broker-dealer, the undersigned
further (x) represents that it acquired Original Notes for the undersigned's own
account as a result of market-making activities or other trading activities, (y)
represents that it has not entered into any arrangement or understanding with
the Company or any "affiliate" of the Company (within the meaning of Rule 405
under the Securities Act) to distribute the Exchange Notes to be received in the
Exchange Offer and (z) acknowledges that it will deliver a copy of a Prospectus
meeting the requirements of the Securities Act in connection with any resale of
Exchange Notes.
2
<PAGE>
SIGN HERE
Name of Beneficial Owner(s): __________________________________________________
Signature(s):__________________________________________________________________
Name(s) (please print): _______________________________________________________
Address: ______________________________________________________________________
______________________________________________________________________
Telephone Number:______________________________________________________________
Taxpayer Identification or Social Security Number: ____________________________
Date: _________________________________________________________________________
3
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
With Respect to
ECONOPHONE, INC.
13 1/2% Senior Notes due 2007
This form must be used by a holder of the 13 1/2% Senior Notes due 2007
(the "Original Notes") of Econophone, Inc. (the "Company") who wishes to tender
Original Notes to the Exchange Agent pursuant to the guaranteed delivery
procedures described in "The Exchange Offer--Guaranteed Delivery Procedures" of
the Prospectus dated _______________ (the "Prospectus") and in Instruction 1 to
the Letter of Transmittal. Any holder who wishes to tender Original Notes
pursuant to such guaranteed delivery procedures must ensure that the Exchange
Agent receives this Notice of Guaranteed Delivery prior to the Expiration Date
of the Exchange Offer. Capitalized terms not defined herein have the meanings
ascribed to them in the Prospectus or the Letter of Transmittal.
To: The Bank of New York, Exchange Agent
By Registered or Certified Mail, by Overnight Courier or by Hand:
The Bank of New York
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
Attention: Shilpa Trivedi
or
By Facsimile:
The Bank of New York
Attention: Shilpa Trivedi
Facsimile Number: (212) 815-6339
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject
to the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Original Notes specified below pursuant to the guaranteed delivery procedures
set forth in the Prospectus and in Instruction 1 of the Letter of Transmittal.
The undersigned hereby tenders the Original Notes listed below:
================================================================================
CERTIFICATE NUMBER(S) (IF KNOWN) AGGREGATE PRINCIPAL
OF ORIGINAL NOTES AMOUNT TENDERED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
Name of Tendering Holder:
Signature(s):
--------------------------------------------------------------
Name(s) (please print):
----------------------------------------------------
Address:------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone Number:
---------------------------------------------------------------
Date:
----------------------------
<PAGE>
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of the Letter of
Transmittal, together with the Original Notes tendered hereby in proper form for
transfer and any other required documents, all by 5:00 p.m., New York City time,
before the fifth business day following the Expiration Date.
- --------------------------------------------------------------------------------
SIGN HERE
Name of firm (please print):
----------------------------------------------------
Authorized Signature:
-----------------------------------------------------------
Name (please print):
------------------------------------------------------------
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone Number:
---------------------------------------------------------------
Date:
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DO NOT SEND TENDERED ORIGINAL NOTES WITH THIS FORM. ACTUAL DELIVERY OF TENDERED
ORIGINAL NOTES MUST BE MADE IN ACCORDANCE WITH, AND BE ACCOMPANIED BY, AN
EXECUTED LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS.
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date. The
method of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and risk of the holder, and
the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. Instead of delivery by mail, it is recommended
that the holder use an overnight or hand delivery service. Facsimile
transmission is permissible, provided, however, that receipt is confirmed by
telephone and an original is delivered by guaranteed overnight courier. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedure, see the section set forth in
the Prospectus entitled "The Exchange Offer--Guaranteed Delivery Procedures" and
Instruction 1 of the Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the tendered
Original Notes referred to herein, the signature must correspond with the
name(s) written on the face of the tendered Original Notes without alteration or
any change whatsoever.
<PAGE>
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any tendered Original Notes listed, this Notice of
Guaranteed Delivery must be accompanied by appropriate bond powers, signed as
the name of the registered holder(s) appears on the tendered Original Notes.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, office of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders also may contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
